Promoting Competition Could Lift South African Growth & Boost Poverty Alleviation

February 2, 2016

PRETORIA, February 2, 2016 In times of weak growth and limited fiscal resources government policies that promote greater domestic competition and improve the regulatory environment could lift growth and support poverty alleviation, says the South Africa Economic Update released by the World Bank today.

The report’s forecast for real GDP growth is at 0.8 percent in 2016, down from 1.3% 2015 and the lowest rate of growth since 2009, weighed by a combination of external and internal factors. They include weaker commodity prices, lower Chinese demand and rising US interest rates as well as policy uncertainty, infrastructure gaps and a severe drought at home.  Growth is forecast at 1.1 percent in 2017. Overall, South Africa is projected to remain largely below the average growth rate of 4.5 percent for Sub-Saharan Africa in 2016–2017. Against this backdrop, poverty in South Africa is set to rise as incomes fall, placing the National Development Plan goals of the eradication of extreme poverty, reduction in joblessness and doubling of incomes by 2030 further out of reach.

The outlook calls for fundamental policy action to turn the economy around. Policies that can fast-track infrastructure investment, slash the regulatory burden, enhance flexibility in markets, raise education standards and promote competitiveness have the potential to restore confidence and ignite investment and growth”, says Guang Zhe Chen, World Bank Country Director for South Africa.

The report’s special focus section examines the potential for Promoting Faster Growth and Poverty Alleviation through Effective Competition Policy.

A simulated scenario in which South Africa reduces regulatory restrictiveness of professional services sectors suggests that the value added of industries which use these professional services intensively would increase by between $1.4 - 1.6 billion. “This is equivalent to an additional 0.4 - 0.5 percentage points of GDP growth and shows the potential of such reforms to stimulate faster sustainable growth and improved competitiveness at little expense to the state budget”, says World Bank Program Leader, Catriona Purfield.

The report highlights the cases of two key input sectors - cement and telecommunications - to examine how competition enforcement and an effective regulatory environment can help promote competitiveness and faster economic growth.

In the cement sector, the busting of a regional cartel, followed by the first entry of new firms in 80 years, lowered cement prices, whilst generating investment and creating jobs. Prices in the cartelized cement markets are estimated to have fallen by 7.5-9.7 percent higher once this cartel was broken.  

The case of the telecommunications sector shows how competition hinges on the broader regulatory environment beyond competition enforcement. Competitive bidding and efficient spectrum assignment policies could expand spectrum availability that has created challenges for small network providers looking to enter the market, and has left operators facing significant capacity constraints, contributing to a slowdown in broadband speeds and slow deployment of high-speed services. Timely actions by a well-resourced sector regulator and effective policy direction on spectrum licensing will be key in boosting competition and improving market outcomes.

The forthcoming spectrum licensing process provides an opportunity to get the regulatory environment right up front by ensuring an open and transparent framework for existing firms and new entrants to bid for this capacity”, says World Bank Senior Competition Economist, Tania Begazo. Adding that there is a need for South Africa, which has had much success in using competition enforcement powers to detect anti-competitive behavior, to effectively coordinate and strengthen the comparative roles of the Competition Authorities, the sector regulator, and the policy-maker.

In addition to the growth-enhancing effects of competition, tackling cartels in basic food products can generate savings for consumers. In the case of four cartels in maize, wheat, poultry, and pharmaceuticals – products which make up 15.6 percent of the consumption basket of the population’s poorest 10 percent – helped generate a 0.4 percentage point reduction in the overall national poverty rate. This shows how competition policy can help stretch the cash transfers to the poor from the budget. 

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