The intensity of the debate about the suitable economic model for SA has hit fever pitch, and the fact that most of the population is excluded from meaningful participation in the economy is adding fuel to the fire.
A key question is whether there is excessive concentration in the economy and whether it is ultimately at the expense of economic growth and employment. It is in this context that "monopoly capital" has entered the national discourse.
The word "white" has since been added to give it strong political overtones, although former president Thabo Mbeki has warned against the use of "white monopoly capital" as "an abuse of a phrase which was used in scientific economic literature".
Monopoly capital deals with, among other things, the abuse of market power to maintain high prices, the propensity to underinvest and the creation of artificial high barriers to entry, thereby keeping innovation and new competitors out.
We reviewed some of the consumer-facing sectors represented on the JSE using the Herfindahl-Hirschman index (HHI), a commonly accepted measure of market concentration. The US justice department considers a score of less than 1,500 to be a competitive market, 1,500-2,500 to be moderately concentrated and greater than 2,500 to be a highly concentrated market.
Our choice of sectors was driven by the ease of availability of data and those industries that represent a meaningful proportion of consumer spending: banking, life insurance, short-term insurance, private hospitals, mobile telephony and food retail. Collectively, these industries make up more than 50% of personal consumption expenditure in SA.
The table shows the cumulative market shares of the top five companies and the accompanying industry HHI scores for the chosen subset of consumer-facing industries. It is clear from the market share data that there is a high degree of concentration in many consumer-facing industries in SA.
Taken together, there appears to be enough evidence to suggest there is a level of concentration in the economy that is of at least moderate concern
The important question is whether this has been harmful to consumers. In other words, do the market players exercise excessive market influence?
We would have to conclude no, as inferred from the HHI scores. Outside of mobile telecoms, there are no one or two competitors in any of the industries that are dominant, which means there is a fair amount of competition despite the relative concentration measured by market shares.
The more difficult questions to answer relate to the effect of barriers on entry, propensity to innovate and rates of reinvestment and what this has meant for overall economic growth and employment.
There have been three new entrants to this subset of industries that have achieved outsized success in penetrating the industry and disrupting the incumbents — Outsurance, Discovery and Capitec. Together, they have a market value of greater than R220bn.
On the surface, this would suggest market concentration is not an impediment to new competition. However, all three had strong financial backers (First Rand Group and PSG) to provide them with access to capital, networks and credibility. As an aside, given the political overtones surrounding the debate, it would be remiss not to look at who these "monopoly capitalists" are.
A brief look at the JSE data reveals that about 20%-25% of the JSE’s top 100 is still controlled by individual or family shareholders. Control in this instance is defined as a high level of influence including more than 25% of the voting rights.
Taken together, there appears to be enough evidence to suggest there is a level of concentration in the economy that is of at least moderate concern.
The question is, how does SA create a level playing field and an enabling environment for new competition?
Access to capital is not the real obstacle, because SA has a deep and sophisticated savings pool. There will be capital for good ideas.
One lever would be for structured state support for high-quality new entrants into key industries. Put simply, this is using the state’s significant procurement budget to support these businesses throughout the evolution of their life cycle. As it turns out, these policies exist and it all comes down to execution; less talking, more doing.
• Gobodo is strategy leader, quality, Investec Asset Management.
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