Walmart meets the developmental state

The leading role in the economy given to the state in a developmental state is hardly reconcilable with an independent competition policy. Competition policy implies a commitment to the market system with a view to improved market functioning and not its replacement. In contrast, the developmental state’s attitude towards the market is rather ambiguous.

The Asian developmental states such as Japan and Korea followed a policy of limiting domestic competition in order to be more competitive in international markets. Cartels (such as the keiretsu in Japan) and the formation of conglomerates (e.g. the Korean chaebol) and oligopolies were actively encouraged.

A possible inefficient application of economic resources was counteracted by the discipline of international competitiveness. The creation of national champions with the ability to compete in international markets was an important objective, in the same way as, for instance, in the French developmental state.

If one looks at the approach of the South African government, which typifies itself as a developmental state, towards Walmart’s obtaining a majority interest in Massmart, the picture becomes somewhat confusing.

The manner in which competition policy has always been applied in South Africa, was to actively promote competition and not tolerate cartels. A number of high-profile cases about price fixing and the division of markets among competitors sent out a strong message. As far as foreign investments were concerned, the takeover of ABSA by Barclays was approved with the expectation that it would encourage competition in the banking sector, although it is an open question whether this has indeed realised.

South African competition policy also supports the premise of ASGISA and the New Growth Path that insufficient competition in important sectors of the South African economy results in higher costs, which has a detrimental effect on South Africa’s international competitiveness. In principle, the government’s opposition to the Walmart/Massmart transaction contradicts this premise. In the light of the increasing presence of South African retailers in Africa, greater competitiveness in the industry is a commendable purpose to strive towards. With a view to the important role played by retailers in consumer inflation, greater competitiveness between them will also contribute to the lower interest rate structure envisaged in the New Growth Path.

On the other hand, the government wishes to protect the manufacturing sector against international competition by forcing local retailers, in particular Massmart, to support South African suppliers. This translates to an acknowledgement that the South African manufacturers concerned are not competitive – it is feared, in particular, that they will be swamped by Chinese suppliers – but also that they will not be placed under pressure to adapt.

It is ironic that South Africa wants to pursue this path at a time when China’s continued hegemony of the global manufacturing sector, especially regarding basic goods, is being questioned for the first time. Labour costs in China are systematically rising in tandem with workers’ power to claim a greater portion of the improvement in their productivity for themselves, forcing the Chinese manufacturing sector to move upwards in the value chain.

It is estimated that 85 million job opportunities in basic manufacturing will be vacated in the next few years as China withdraws from these sectors – and Walmart, the biggest client of the Chinese manufacturing sector, will also be affected. The question is who will benefit from this. If South Africa can appropriate a mere 5% of these job opportunities its unemployment problem could for the most part be solved.

A more acceptable approach to Walmart’s entry into South Africa would therefore be to see it as an opportunity to introduce the South African manufacturing sector into the Walmart supplier network, inter alia by utilising the benefits of AGOA. Walmart’s offer of paying R100 million into a fund that would enable smaller local suppliers to comply with its requirements, must therefore be welcomed.

Local manufacturers will in that way achieve access to a much larger market, which would lead to greater specialisation and benefits of scale and will be advantageous to the growth potential of the economy. The possibility for the South African manufacturing sector to play the central role in economic development and job creation, as envisaged in the Industrial Policy Action Plan and the New Growth Path, will be greatly enhanced. Limiting it to the local market by protective measures, on the other hand, will force it into stagnation.

Furthermore, the sectors targeted by the Industrial Policy Action Plan are exactly those types of sectors that will increasingly be entered by China as it moves up in the value chain. Imagining that the local manufacturing sector will be able to continue existing behind a wall of protection is no more than false security – there is simply no place to hide.

The most important implication of government’s opposition to the Walmart/Massmart transaction is, however, of an indirect nature. It demonstrates a negative, static approach to the development of the economy, where the emphasis is on maintaining the status quo instead of seizing new possibilities.

There is overwhelming proof that a more dynamic economy that is willing to adapt to change will perform better over the long term. By allowing part of the economy that is not competitive to cease to exist, space is created for new, viable growth areas to appear. The current debt crisis in the European periphery is, in effect, to a large extent the result of a lack of competitiveness in the countries concerned, which is hampering their recovery.

So, we have to be thankful that the Competition Tribunal had the courage of its convictions to go against its political principal by approving the Walmart/Massmart transaction. But is it too much to ask that it will lead to an ideological rethink?

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