DO SA’s competition policy makers miss the point when they become preoccupied with trying to catch big companies doing bad things? This was one of the questions raised at a workshop last week at which economists made the most of a new data set on South African companies and their behaviour that the South African Revenue Service (SARS) and Treasury have extracted from tax records (anonymised, of course).
Whatever the ructions inside or outside SARS, its researchers have pressed ahead with a project that complements the invaluable annual Tax Statistics publication. The project uses income tax (corporate and personal), value-added tax and customs duty records to shed light on firms’ behaviour, providing more information, at much lower cost, than can the sample surveys Statistics SA and other agencies conduct. The Treasury’s Landon McMillan describes it as "an opportunity to delve deeper into firms and understand what they do so we can design policy better".
The numbers presented last week were created from records of more than 600,000 firms (although only about 400,000 of these are non-dormant) over the six years to 2014 and academic and Treasury economists have started using them to look at a range of questions, from how small businesses have responded to tax incentives, to what drives firms to invest, to whether those who import more also export more — and whether small firms are more productive than large ones (they aren’t).
It’s all quite preliminary, but the trends are intriguing. Even when the findings might seem obvious to most people in business, some are not — and all raise issues policy makers should be thinking about. Not least of these is the work on mark-ups in manufacturing that Prof Johannes Fedderke of the University of Pennsylvania and his South African colleagues, Nonso Obikili and Nicola Viegi, have conducted.
There’s a long-standing dispute among economists about whether South African manufacturers’ mark-ups (the price they charge relative to their costs) are excessive by international standards. If that is the case, it would be bad for productivity and economic growth, and might contribute to SA’s structurally high inflation.
(On one estimate, SA could add up to two percentage points to its growth rate if manufacturing mark-ups were cut to China’s levels.)
The SARS data show that manufacturing mark-ups are indeed higher than in other countries whose tax authorities collect similar data. The sector average here is almost 80% — two to three times the average in the US, and higher than Finland, which is an economy more akin to SA’s.
One cause that’s been suggested is that SA’s manufacturing sector tends to be highly concentrated, with a few large firms dominating many sectors (beverages, chemicals and vehicles are among the worst). But while the SARS data showed concentration levels are high and rising, this did not explain the high mark-ups. Nor did the skills distribution and labour force — nor even any lack of entrepreneurship. Encouragingly, new players do enter the market.
To their great surprise, however, Fedderke and co found that it was not the large firms charging the high mark-ups — it was the smaller ones. That indicates, they argue, that the problem is not that dominant firms keep out entrepreneurs, but that the barriers to entry are so high that small players find it difficult to get in — and, once they are in, they have to charge large mark-ups to cover the cost.
If that’s the case, competition policy, which Fedderke says has so far tended to focus on "big bad guys doing bad things", may be misplaced, and there should be much more focus on those barriers to entry.
Unfortunately, that’s as far as the research goes — so more is needed. One barrier is the need for costly investment in fixed assets — suggesting more might be gained by opening access to capital for small guys than by attacking big guys. But the regulatory state itself may well be the main barrier. The Organisation for Economic Co-operation and Development puts SA’s intensity of regulation among the highest globally.
The environment for manufacturing may be particularly tough, given strict rules and regulations, not to mention the constraints and costs associated with electricity and transport. Large firms can cope with the costs and the compliance; smaller firms and new entrants surely find it much harder, and costlier.
Policy makers seeking to create a more competitive and productive economy ought to be jumping at the chance the new SARS data provide to find out how firms really behave. But although one might have expected the departments of trade and industry and economic development to send teams of industrial and competition policy folk to last week’s workshop, they were, sadly, nowhere to be seen.
• Joffe is editor at large