Antitrust and the Informal Sector in South Africa

Dennis Davis, William E. Forbath, Lucie E. White & Julia Dehm –

This is the second post in a two-part series about law and political economy in the South African context. The series reports on a collaboration among leading ‘heterodox’ economists, left-wing sociologists, high level government policymakers, and legal scholars, advocates and activists aimed at “thinking large” about reconstructing the nation’s political economy.

The way out of South Africa’s present crisis lies not only in institutional reform, the topic of the first part of this two-part series, but also in structural and redistributive economic reforms.

Participants in our conversation offered a number of potentially transformative economic proposals, ranging across taxation and public investment, land reform, industrial policy, and sustainable agriculture. Of the various pathways of development we discussed, two seemed especially striking to the participants from the U.S.

Robust Antitrust and Competition Law

The first such  pathway – encouraging small and medium sized firms via competition law – was striking in the way it tracked conversations on the U.S. left today about weaning antitrust from “consumer welfare,” and renewing its original aims by taking on today’s monopolies and oligopolies, with the goals of securing space for competitive, medium-sized firms, and of safeguarding the polity itself, as well as the market, against the oligarchic power of big capital.

Several participants underscored that South African competition law is now primarily focused on redressing abusive or coercive behavior. The focus on behavior, they pointed out, fails to address the ways in which the structure of certain markets and the domination of big, oligopolistic firms can operate to stifle equitable growth, shaping markets, politics and society at large in deeply problematic ways.

Others, though, including convener Dennis Davis, who chairs the South African Competition Commission, observed that South African competition law has a richer sets of touchstones than “consumer welfare,” American-style – touchstones that recall something of the original inspiration for antitrust law in the USA. Thus, South African law supplies some tools for creating more space for small and medium producers to take their place in a democratic and equitable economy. These provisions also may help prevent the domination of the polity itself by outsized corporations. Thus, Davis observed, South African competition law has shown a concern for the impact of corporate mergers and acquisitions on workers and communities, as well as concerns for the social effects of oligopolistic domination of specific sectors.

Davis recounted a recent case involving a merger and acquisition on the part of Walmart, which had led to retrenchment and discharge of several hundred workers. The settlement of the matter before the competition law commission required the fired workers’ reemployment. More interestingly, Walmart also was constrained to agree to two commitments involving its supply chains. It bound itself to take a certain percentage of what it sold from local manufacturers, and to distribute the latter’s products abroad.

In another case, involving Coca-Cola, another participant described how the company’s “real power worked through its distribution network,” and a settlement required that one-fifth of space in Coca Cola branded refrigerators in South Africa’s townships be available for locally produced drinks, such as milk.   Putting these statutory touchstones to work to address outsized firms’ and sectors’ oligopolistic structures more directly remains a work-in-progress.

The Distributive Potential of the Informal Sector

The second proposal concerned the ways that so-called “informal” economic sectors can enhance equitable growth. One idea was to foster vastly more small-scale producers and traders to produce and market more goods like bread and furniture:

Go to rural India or almost any other country; and in every village you’ll see a small bakery…Try to buy bread in rural South Africa…and that bread – I am 100% sure – is made in a large industrial factory by one of three firms who have colluded for a long time [and have fashioned needless, vast] distribution channels… [In South Africa,] the informal sector is so small because the formal sector is so big…there’s simply no space for a small person to bake bread.” 

Law is one key factor in explaining what one participant dubbed the “informal economy gap” – the puny scale and scope of South Africa’s informal sector and the meagerness of the jobs and income it generates, compared to other middle-income countries. Consider the local government regulation of parking lots.  One participant remarked:

Why does this parking lot look different from a parking lot in Indonesia? Or India? It’s because there are not people selling anything, right? We have this notion of economic development which is about keeping the informal sector away…But [my] idea is to put the informal sector front and center as an engine of growth and employment…and we just don’t have that. And I think there is a sequence of policy interventions that can be undertaken.

Unleashing informal sector potential requires the “smart” reform of the entire regulatory context, both to remove barriers and to provide needed infrastructure, training, and other public goods. For instance, rigid licensing requirements, or local rules preventing informal vendors from selling their wares outside malls could be rescinded or reformed. Many such economic activities could be decriminalized. Private sector conglomerates that are threatened by small-scale competition would have to be cabined and constrained, or, even, broken up (a prospect we are about to take up).

In addition to removing such barriers, small-scale entrepreneurs must have access to the material and social capital and trade skills required to be productive economic players. Thus, one skeptical interlocutor in this conversation objected that

When you have someplace like India…people are inheriting a lot of things from their parents who are involved in the informal…[or]…small business sector. A lot of that is inherited whether it’s the social capital in terms of knowing how to run an enterprise [and] the networks or the institutions or the assets or even just knowing the [open urban space] in Delhi where you’ve got a shop [or stall] that you inherit. And I think to [ignore how] Apartheid smashed all of that for most people [and to think you can] just start spontaneously and do it [is naïve and destined to fail].

But others demurred, insisting that social and economic policy combined with civil society associations can overcome the indisputable facts that in many other developing economies, such assets are passed down across generations, and that one of the enduring legacies of Apartheid follows from the deliberate dispossession and deskilling of blacks and other disfavored peoples.

In addition to building local and regional markets for small scale local production, another untapped strategy for expanding small to medium scale production is to target government procurement contracts to this sector. Participants noted that even though current procurement regulations list considerations of equity and public interest as criteria for awarding contracts, such considerations are routinely ignored. For example, participants highlighted the fact that contracts for laundry for public hospitals in Johannesburg currently go to a “top 40 listed company”:

It’s laundry.  It’s not software.  It’s a semi- to unskilled service; yet, we find the public sector procurement system [giving] contracts…to formal, corporate entities, and [not to] micro-enterprises or the informal sector.  It [may not be] deliberate…but there’s something in the way public sector procurement works that isn’t redistributive enough… And there are remedies. You can find ways in which you…ensure that [some portion of the big firm’s] contract value goes to micro-enterprises or to have an enterprise development program and so on. [After all,] public sector procurement is the largest purchaser in the economy, and [should] become a key route through which you can pursue a more jobs-rich [and broad-based and equitable] growth strategy.

In this way, government procurement could help create jobs, diversify the economy and support the entry of smaller businesses into the market. Participants stressed that the success of such strategies depends not only on enacting policy, but also on monitoring implementation.

The Path Ahead

Our White Paper summarizing our conversation concludes in a way that reveals something of the   urgency, poignancy, and ambiguities of the “peaceful” path of legal/political-economic reform in South Africa:

“The task now is to continue this dialogue so that the political economy which must ground the lawyers’ ‘transformative’ social and economic rights claims can be voiced by the peopled so starkly disfavored in South Africa’s current regime. It is only in this sort of hard and gradual work that these people can access the endowments they deserve, the state acquire desperately needed capacities, the economy gain new options, and the democracy find its way toward a renewed Constitution. [Justice Yacoob] in the Grootboom case reminded us of the urgency of this project when he wrote:

The issues here remind us of the intolerable conditions under which many of our people are still living. The respondents are but a fraction of them. It is also a reminder that unless the plight of these communities is alleviated, people may be tempted to take the law into their own hands in order to escape these conditions. The case brings home the harsh reality that the Constitution’s promise of dignity and equality for all remains for many a distant dream.

Dennis Davis is Judge at the High Court of Cape Town, Judge President of the Competition Appeal Court, and a Professor at the University of Cape Town. William E. Forbath is the Lloyd M. Bentsen Chair in Law and Associate Dean for Research at the University of Texas, Austin School of Law. Lucie E. White is the Louis A. Horvitz Professor of Law at Harvard Law School.  Julia Dehm is Lecturer at the La Trobe Law School; she was a postdoctoral fellow at the Rapoport Center for Human Rights and Justice at UT Austin, during the first stages of this collaboration.

 

 

One response

  1. Pingback: Visions of Radical Reform in South Africa: Toward a New Constitutional Economy « Law and Political Economy

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