Competition and Productivity Growth in South Africa¶

Literature › Works

Philippe Aghion; Matias Braun; Johannes Fedderke (2006). Competition and Productivity Growth in South Africa. CID Working Paper No. 132, Center for International Development, Harvard University (South Africa Growth Initiative). Center for International Development, Harvard University.


Type	working paper
Scope	Post-1994 South African economy
Method	econometric
Period studied	1970–2004
Regions	South Africa, cross-country comparison (UNIDO c.115 countries; Worldscope 56 countries)
Themes	manufacturing industrial policy, labour markets wages, business and state, methods data sources, inequality poverty unemployment
Citation key	`aghion2006`

Argument¶

The paper argues that South African manufacturing has persistently higher mark-ups (pricing power) than comparable industries worldwide. It finds no declining trend in the differential, including after the 1990s. Using a Schumpeterian 'escape competition' model as its framework, it estimates that higher lagged mark-ups are associated with lower productivity growth and lower employment. It concludes that competition policy that lowers mark-ups should raise productivity growth and employment. The argument rests on three panels (UNIDO industry data, TIPS three-digit data 1970-2004, Worldscope listed-firm data) and on price-cost margins, Lerner-index proxies and Hall-Roeger mark-up estimates.

Evidence and method¶

UNIDO International Industry Statistics 2004 (27 manufacturing industries, more than 100 countries, since the mid-1960s); the TIPS three-digit manufacturing database for South Africa, 1970-2004 (28 industries, 784 observations); Worldscope firm-level data for listed companies in 56 countries since the early 1980s (SA sample of 96 firms, 760 observations); import-penetration data from Mayer and Zignano (2005) used as an instrument.

Findings¶

Headline estimate: lower mark-ups would raise productivity growth substantially. (p. 4)

a ten percent reduction in SA mark-ups would increase productivity growth in SA by 2 to 2.5% per year
Listed-firm profitability in South Africa is more than double that elsewhere. (p. 4)

is more than twice as large in South Africa than it is in other countries
The TIPS panel yields a large aggregate manufacturing mark-up over 1971-2004. (p. 16)

Results indicate the presence of an aggregate mark-up for the manufacturing sector over the full sample period of 54%.
The reported decline in pricing power is not robust; pricing power is stable or non-declining. (p. 16)

evidence of declining pricing power in the South African economy is not robust
At sector level, mark-ups rose in most industries by the final decade (1995-2004). (p. 17)

for 16 sectors the mark-up increases, for seven it declines, while for four sectors there is little change
Cross-country industry panel: higher lagged margins strongly reduce productivity growth. (p. 19)

A 10% increase from the mean margin of 0.24 on the 115-country sample implies a decrease in productivity growth of 2.4% per year.
South African industry-level magnitude is somewhat smaller but still large. (p. 19)

A similar change on margins in South Africa is associated with a decline of 1.6% per year, which would reduce the median growth from 1% to -0.6%.
Instrumenting margins with import penetration is weak, so causality is only partly established. (p. 20)

Table 15 shows that import penetration is not a particularly good instrument for margins
Higher pricing power is associated with lower manufacturing employment. (p. 22)

a 0.1 unit increase in LPROXY results in a reduction in employment of 3400 workers
The labour adjustment coefficient indicates that a large share of manufacturing labour acts as a fixed cost. (p. 24)

of between 2.84 and 3.43, depending on which lag structure is adopted
Post-1996 South African manufacturing data are unreliable because the manufacturing censuses stopped. (p. 12)

after having collected manufacturing censuses on a bi-annual basis since 1917, South Africa simply ceased doing do since 1996