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Finance
Fostering a more competitive business climate in the new decade
Economist Moin Siddiqi says that further work needs to be done to make sub-Saharan African countries more competitive on par with other emerging markets and achieve optimal growth potential.
Thriving market economies are underpinned by competitive forces, which ensure the most efficient allocation of resources, thereby boosting efficiency gains. Empirical studies indicate a positive correlation between open competition and a firm’s dynamics resulting in higher investment, productivity growth and greater innovation (technological capability) – the essential criteria to bolster the competitiveness of domestic industry to compete in global markets.
Competitive systems having proper government regulations enhance economic growth and welfare through lower prices of consumer items, services and raw materials, thus increasing disposable incomes and job opportunities as firms expand. Conversely, consumer welfare and longer-term growth suffer where market distortions exist – reflected in discriminatory practices, unfair pricing and rent extraction imposed by monopolies (i.e. dominant firms) in crucial sectors.
Looking at the state of product market competition in sub-Saharan Africa (SSA), the region ranks significantly low on the World Economic Forum’s (WEF) local competition intensity index. More than 70 per cent of African countries rank among the bottom half of economies globally in terms of domestic and foreign competition indicators (see Table 1). High trade barriers mainly account for minimum foreign competition, while market domination by a few large firms, plus various regulatory barriers to entry, hinder domestic competition.
De-monopolising markets During the 1980s, product market Table 1: Local competitiveness intensity index on selected African countries
2019 rankings (1-141) economies National Product market Trade Business competitiveness * competition # openness / dynamism ~ Angola 136 137 127 138 Botswana 91 97 78 104 Cameroon 123 86 123 112 Cote d'Ivoire 118 99 83 84 Ethiopia 126 136 124 131 Gabon 119 129 132 128 Ghana 111 80 89 102 Kenya 95 72 103 51 Mauritius 52 51 6 38 Nigeria 116 84 102 79 Senegal 114 79 104 99 South Africa 60 70 77 60 Rwanda 100 48 94 46 * Defined as the set of institutions, policies and factors influencing the level of productivity. # Distortive effects of taxes and subsidies on competition and market domination by a few business groups and the extent of competition in services - mainly network sector (telecoms, utilities, postal, transport, engineering and retail business). / Prevalence of non-tariff barriers (e.g. health and product standards, technical and labelling requirements) that limit the ability of imported goods to compete in domestic markets, trade tariffs applied by a customs authority on imported goods and border clearance efficiency. ~ The cost and time to start a business and other administrative formalities.
Source: The Global Competitiveness Report 2019.
reforms were undertaken by some African countries, which entailed the transfer of production from stateowned enterprises (SOEs) to private firms and reduction of price controls, as well as partial trade liberalisation, followed by financial liberalisation in the 1990s. Market deregulation, chiefly in telecoms, electricity and agriculture were initiated as part of economic restructuring in early to mid-2000s. The reform momentum has stalled in the last decade, with SOEs still dominating many SSA markets, especially in the utilities and transportation sectors. According to the OECD-World Bank Product
Market Regulations database, Kenya, Senegal and South Africa were highly restrictive in terms of access to network and services sectors, while some two-thirds of SSA countries surveyed by the World Bank (2016) reported considerable price controls.
Trade barriers in SSA (tariffs and non-tariff) have declined significantly over the last two decades, but remain quite high compared to emerging-anddeveloping (E&D) regions. Such barriers limit open competition from foreign goods and indirectly affect domestic efficiency by restricting the availability of intermediate inputs or making them more costly for local manufacturers.
Consumer welfare The lack of competition has wider socio-economic costs, reflected in higher prices of essential items and lower private consumption. A global comparison of pricing levels indicates that prices for most goods/services are on average one-fifth higher in Africa than in other regions at a similar level of development. These include food/beverages, clothes/footwear and medicines –items carrying a bigger weight in the consumption basket of low-andmiddle-income households.
Low product market competition also hurts African manufacturers since prices for intermediate inputs used in production, such as raw materials, machinery/ equipment and utilities (electricity and water) are significantly higher relative to other E&D regions. The World Bank estimated that cement prices are, on average, around183 per cent higher in Africa than the world prices.
Company-level competition indicators, such as profitability and markups – the divergence between product price and output cost –indicate substantial corporate market power in SSA, including the two largest economies (Nigeria and South Africa). Profitability and markups vary considerably across sectors – the highest in ‘nontradable’ sectors like hospitality, retail/wholesale trade, information and communication, construction, transportation and financial intermediation. On average, markups are reportedly lower in the light manufacturing sector, especially textiles/apparel, leather and paper products.
Thus, sectoral market structures characterised by ‘oligopoly’ (where few firms account for total industry sales) tend to earn abnormal profits thanks to fewer competitors –suggesting that increased influx of firms could reduce corporate market power and contribute to lower prices of consumer and intermediate goods, thereby improving welfare and competitiveness of local economies.
Raising competition level “An adequate competition policy framework is essential to protect consumer welfare and derive the expected developmental benefits from product market reforms such as deregulation and privatisation. Enforcement of a robust competition policy framework comprises the development of antitrust laws, setting up independent and wellfunctioning institutions and judicial support,” stated the International Monetary Fund (IMF).
There has been almost a ‘threefold’ hike in the number of SSA countries adopting competition laws from 12 in 2000 to 31 by 2019 (IMF data). These antitrust laws based on advanced economies cover merger and acquisition (M&A) control, dubious business practices and the abuse of corporate power, and are regulated by competition agencies in respective jurisdictions. The Competition Commission of South Africa (CCSA) is the most
Oil exporters
0.51
0.82
Other resource-intensive
Non-resource-intensive
0.45
0.69
0.42
0.64
Emerging & Developing economies excl. SSA
0.39
0.57
Mark-up * Profits #
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9
* Markup is defined as the log ratio of sales to the cost of inputs. # Profitability is defined as the difference between revenue and the cost of inputs relative to revenue.
Source: IMF staff estimates based on the World Bank Enterprise Survey.
active antitrust body in Africa. In 2017-18, it prohibited 12 mergers, finalised 193 enforcement cases and levied US$22mn in penalties (CCSA data). It employs more than 130 technical staff.
The progress on bolstering competition and preventing unfair practices in the majority of SSA countries, however, remains patchy. In essence, antitrust laws (alone) cannot provide a universal remedy or magic bullet to enhance business development. A workable antitrust framework requires ‘holistic’ reforms that embrace complementary policies – trade, foreign direct investment (FDI) and fiscal as well as capacity building, i.e. efficient institutions to enforce laws.
A comprehensive strategy entails chiefly an independent regulatory body with adequate funding and qualified staff to pursue anticompetition cases, strong contract enforcement and rule of law, cutting barriers (red tape) to firm entry and exit, greater openness to trade and FDI and prudential macro-policies, as well as improving the ease of doing business, where Africa lags other regions.
According to the World Bank (2016), around one third of SSA countries with a competition law had enforcement agencies controlled by another government body, potentially undermining their independence. The resources allocated to competition agencies are mostly limited, with few reporting self-financing from paltry penalties. Excluding South Africa, most agencies employed just 10 technical staff and on average, reported two cases per year, with the notable exception of CCSA, which investigated some 500 cases per year (World Bank data).
The competitive investment climate is facilitated by fiscal and procurement policies and customs administration systems. For example, preferential treatment (subsidies, tax breaks) and government procurement favouring selective sectors increase the dominant position of recipients, whether privately or state-owned. Likewise, inefficient customs administrations impact external trade. “Fiscal policies and tax and procurement systems also need to be carefully designed so that competition is not distorted,” advised the IMF.
Supranational competition agencies will be needed to mitigate risks from large pan-African firms in multiple countries in the context of increasing regional trade, integration and investment liberalisation envisaged by the African Continental Free Trade Agreement (see African Review August 2019). The small size of domestic markets, plus higher fixed costs of operating major sectors (telecoms, transportation and utilities) imply natural monopolies or cartels may arise to reap economies of scale and/or to limit foreign competition in their markets – thus preventing a ‘level playing field.’
Conclusion As Africa starts the new decade of challenges and opportunities, regional governments need to attract more private investment and ensure open competition as well as deepening trade and financial integration. Such agendas require the acceleration of development strategies to: 1. Build physical and digital infrastructures (SSA has the world’s lowest internet penetration) 2. Invest in human capital (education, training and health) –a prerequisite for nurturing a skilled workforce 3. Reduce barriers to cross-border trade to facilitate more goods, services, talents and resources flowing freely among countries 4. Make strong legal/regulatory structures that encourage private sector activity in the important sectors (energy, transport and agriculture) and 5. Create an efficient financial services industry plus increased access to credit for industry. Work still needs to be done to make SSA countries more competitive to be on an equal footing with other emerging markets and achieve optimal growth potential. ■
