The following provides a summary of chapter 2 of the Economic Assessment of South Africa published on 15 July 2008.
Competition-friendly regulatory reform would contribute to stronger productivity performance…
South Africa’s relatively strong average labour productivity is a direct consequence of a prolonged process of capital deepening under apartheid. This trend was accompanied by relatively slow growth of total factor productivity (TFP), in an environment of weak competition, extensive public sector involvement and trade isolation. Greater trade openness has led to increased competitive pressures and helped improve productivity performance over the recent past, but a large gap still remains. There is strong international evidence that a competition-friendly regulatory environment can help to lift living standards in the long run through increases in labour productivity growth.
Strengthening competition can contribute a great deal to the achievement of improved resource allocation and technical efficiency. Robust competition in product markets improves firms’ performance by stimulating capital deepening, innovation and better corporate management. Empirical work for South Africa confirms the pro-productivity effect of competition, and surveys of South African enterprises point to anti-competitive barriers and practices as a major impediment to innovation. As the estimation of an OECD product market regulation (PMR) indicator shows, South Africa’s product market is very restricted by international standards, with high mark-ups and concentration in many sectors and relatively extensive state involvement in the economy (Figure 1). These findings highlight the potential contribution of competition-enhancing regulatory reforms to South Africa's long-term economic prospects. The support for such reforms, clearly expressed in AsgiSA, should therefore be translated into a comprehensive policy strategy: given the complementarities that exist among different elements of regulatory reform, the creation of a broad, coherent and systematic framework for the conduct of regulatory policy would generate synergies between different product market reforms. More vigorous competition, by depressing excessive margins, would also help contain inflationary pressures which are expected to remain severe for some while to come. Policies to strengthen domestic competition and increase openness to trade and direct investment thus promise substantial payoffs in a range of areas.
Figure 1. Aggregate product-market regulation indicator
… and would also help improve labour market outcomes
The fact that employed workers are on average productive and well-paid compared to those in other middle-income countries while an extremely large part of the labour force is excluded from employment altogether is in part a function of weak product market competition in some sectors. The weakness of competition makes it possible for large incumbent firms to set high prices and make excess returns, which in turn makes it possible for them to pay wages above the competitive level without going out of business. It also makes strikes or other forms of withheld effort more costly for firms, making them more willing to pay a premium over the market-clearing wage rate. This fact provides a link between the issue of low labour utilisation and product market regulation. Although empirical evidence for South Africa is limited, the existence of large incumbent firms with monopoly power tends to be associated with lower output and employment and higher prices in the affected sectors. The erosion of excess returns accruing to incumbent firms would therefore be expected to result in higher output and a shrinkage of the wage premium enjoyed by employees of these firms. This would lead to increased employment in these sectors, as well as in other sectors using the output of industries with weak competition (such as monopolised network industries) as inputs.
The Policy Brief (pdf format) can be downloaded in English. It summarises the OECD assessment. The complete edition of the Economic Assessment of South Africa 2008 is available from:
For further information please contact the South Africa Desk at the OECD Economics Department at firstname.lastname@example.org. The OECD Secretariat's report was prepared by Geoff Barnard and Christian Gianella under the supervision of Andreas Wörgötter. Research assistance was provided by Corinne Chanteloup.