For decades, the development of emerging economies has been dependent on the success of specific industries with a limited number of players. The existence of these oligopoly structured economies, where a few market players retain a majority share if not the whole market share, has led to wealth concentration which has resulted in perpetual inequality. India’s telecommunication industry has the world’s second largest mobile market which accounts for about 6.5% of total GDP. With a population of about 1.3 billion and an estimated 84% mobile subscription rate, 90% of the market is owned by three major players each with a share above 20%. The same is seen in South Africa where 89% (2019) of the the total telecommunications market share is split between three players, with Vodacom leading with the biggest share of 42.6%. The banking sector is also dominated by four banks owning about 83% of the market. With developments in regulation in order to improve the soundness of the financial system, there has been very little room for new entrants into this industry. Additionally, these banks also own fund managers and insurance companies through their holding companies, which further concentrates control. Though Capitec’s innovative approach to capture the unbanked South African market has paid massive dividends, this is the only new major bank since 1994. The Capitec case is also quite peculiar considering the capital and management support the founders received upon inception. The legalities that surround entry into key economic industries remain a big barrier for majority of South African entrepreneurs. There is also a positive correlation between being in the “inner circle” or rather having access to key networks and the probability of success.
Global value chains concentrate wealth which results in the exacerbation of inequality
You might be thinking, banking is such a bad example to argue the dominance of few major players because of the capital intensive nature of the industry and the extensive regulatory framework. The above-described theme however is consistent across sectors. For example, the food retailing industry has less starting capital requirement and is less regulated, as a result, one would expect more market participants. Currently, Shoprite Holdings (Including the Checkers chain) holds the largest market share, followed by Pick ‘n Pay and then Massmart (Game, Makro). Though we see more representative stores, the ownership of these remains within the same holding group. According to the world development report, global value chains contribute extensively to increased productivity and incomes, creating better jobs and reducing inequality. This assertion is however fundamentally contradictory as Benjamin Selwyn rightly pointed that "the use of comparative advantage trade theory which predicts mutual gain in theory does not necessarily match reality". Global value chains concentrate wealth which results in the exacerbation of inequality. The concentration of market power by oligopolies and the decreased competitiveness results in price action that disadvantages consumers and is not good for job creation.
In a 2018 Mail & Guardian article titled “why the dominance of big players is bad for South Africa’s economy”, the author postulates that in order to make room for emerging small medium enterprises, we need policies that will break up historical monopolies and oligopolies. This is an uncomfortable statement for gatekeepers, but South Africa needs such change.
Recently, the newly appointed South African finance minister spoke at the Sunday Times Investment Summit expressing the need for reforms that enable investment particularly by local firms. Such investment needs to however have a real transformative consequence; that is, a vertical flow of funds and projects that give entrepreneurs resources for success. The growth of small businesses is a necessary catalyst to solution the unemployment crisis and in the long run, inequality. But the real question is, do the owners of capital desire to see equitable distribution of wealth?
In South Africa, we currently face a problem of training without opportunities to absorb the skilled. The country is not creating jobs fast enough for the skilled population. Similarly, making capital available and providing training for small businesses without access creates a sustainability problem, leading to stagnation and in most cases, failure. Though the transformation and empowerment agenda has been embedded in the South African identity, businesses have found a way of working around regulation, keeping themselves out of trouble without necessarily committing to real transformation. Of course, great strides have been taken since the introduction of policies such the BBBEE. However, over time, these policies have become redundant; creating gatekeepers and limiting access for entrepreneurs and businesses with potential. Because of this lack of access, black businesses are left to primarily do business with the public sector, which in its own comes with its challenges and we will refrain from dwelling on these for the purpose of the argument.
Due to the unemployment statistics, we are confronted by a very difficult but necessary reality of looking at our transformation mandate and more so, its implementation outcomes. The BBBEE policy as established by the ANC government to address apartheid induced inequalities, has undoubtedly achieved a lot over the years. Without the government’s intervention a lot of past legacies would still be prevalent in South Africa today. BBBEE rewards entities with transformation scores based on their achievement in the core areas of black ownership, management control, skills development, enterprise and supplier development, and socio-economic development. Data shows that companies have done comparatively well in the last three areas but seem to lag tremendously on black ownership and management control, which is where the real transformation lies. Without progress in these two areas of transformation, black businesses remain dependent and cannot exist without the constant help of these already established entities. Even so, achievement of management control and black ownership through a share scheme in a group of companies which has been in existence for long does not deliver much of the desired result. A 2020 report by the BBBEE commission raises concerns of lack of reporting by eligible entities and that even for the categories where entities are doing well such as enterprise and supplier development, reporting entities are still not able to transform the value chain by developing sustainable black owned businesses. We need the establishment of new businesses in order to create jobs and contribute to the advancement of our economy through innovation. If transformation is seen as a compliance item, then our equation is wrong. Business needs to want to create opportunities that lead to the establishment and growth of businesses even if those business are in the same line operations as their own. When this happens, we all share in the common social benefit. The focus of this contribution is not to dwell on the transformation agenda , but the subject is necessary to illustrate how far off we are from the goal and to bring to light the loopholes that exist in current reforms.
Regulation is necessary as far as it promotes economic progression and protects consumers. It does however need to be enabling and not impede on the progress of local businesses, more especially the small and medium enterprises. In many instances, the existence of regulatory demands creates unnecessary bottlenecks that do not do much for progress but rather continues to protect the interests of a select few.
How can we think about inclusivity that gives control to entrepreneurs and empower them for success?
In addition to lack of capital and mentorship, entrepreneurs lack access to networks.
Business Incubators should not only be training centres, but should also open up networks to channels of distribution. In order for any small business to scale, access to markets through mainstream value chains becomes incredibly important.
We need to coordinate and facilitate the forming of ecosystems that support entrepreneurs.These ecosystem are not only networks of showcasing products or services, but also channels of information.
To ensure that small and medium-sized businesses have equitable opportunities to participate in the economy, the competition commission should provide the necessary support as per its mandate.
On the public sector side, there is a need for a central tender depository. This will ensure that all tendering businesses go through the same vetting process before they reach adjudication stage. Vetting centres will ensure that the submitted expressions of interest to tender meet the minimum requirements as set by the requirements document and that the tendering entities are qualified to carry out the assignment. To ensure independence, the vetting centres should not have ties with government departments.
Finally, looking at medium to long term investments, the production of goods and services needs to move closer to the consumer in order to support local production houses and to minimize supply disruptions like those observed during the July unrest ( we will expand on this point in our Group Pod session, details to follow).