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Competition, Industrial Structure and Economic Growth

Literature › Works

J. W. Fedderke (2013). Competition, Industrial Structure and Economic Growth. ERSA Working Paper 330. Economic Research Southern Africa (ERSA).
Type working paper
Scope Post-1994 South African economy
Method econometric
Period studied 1970–2009
Regions South Africa, China, India
Themes manufacturing industrial policy, business and state, labour markets wages, inequality poverty unemployment, comparative theory, methods data sources
Citation key fedderke2013

Argument

The paper argues that high, persistent mark-ups of price over marginal cost in South African manufacturing, which are high relative to China and the rest of the world, suppress productivity growth and help explain why manufacturing is small relative to services. Using Roeger-type mark-up estimates and published estimates of the mark-up's effect on productivity growth, it simulates counterfactuals in which lower pricing power would have given a much larger manufacturing sector, higher GDP and more employment. It cautions that, given labour-market rigidity, lower mark-ups would shift the effective policy emphasis toward wage restraint and would bring manufacturing job losses, which may explain why policy has not pursued competition. Chinese firm data are used to argue against special mark-up protection for new entrants and to show that state equity holdings lowered mark-ups.

Evidence and method

Previously published mark-up estimates for SA manufacturing (Fedderke et al 2007; Aghion et al 2008, 2012); Worldscope listed-firm data for 56 countries 1980-2004; Chinese National Bureau of Statistics firm panel 1998-2007 (373,558 firms); Indian Prowess panel 1991-2010 (6,242 firms); SA national accounts sectoral shares and SARB output and employment series; unemployment rates from Banerjee et al 2008; industry concentration ratios (CR4, CR10) and Rosenbluth index; World Development Indicators.

Findings

  • SA manufacturing mark-ups are high, roughly twice the US level in the 1970-97 estimates. (p. 5)

    the average mark-up of price over the marginal cost of production for South African manufacturing sectors, for the 1970-97 period, was found to be between 77% and 79%

  • A 10-percentage-point rise in the mark-up costs 1-2 points of annual productivity growth. (p. 17)

    an increase in the mark-up of 10 percentage points, would result in an annual productivity growth loss of between 1 and 2 percentage points.

  • Counterfactual: lower mark-ups would raise GDP substantially over four decades. (p. 20)

    even under the moderate mark-up reduction scenario, aggregate GDP is found to be 21 % higher, while under a reduction of mark-ups to Chinese levels, the implication is that GDP would have been 50% higher.

  • Simulated unemployment would have been far lower, though the paper notes the simulation holds employment in other sectors unchanged. (p. 22)

    the narrow unemployment rate would have peaked at approximately 13% in 2000 and would have declined to 10.5% (simulated) rather than the observed value of 26.7% by 2005.

  • Reducing mark-ups without labour-market reform would cost manufacturing jobs, offering a political-economy explanation for policy inaction. (p. 25)

    job losses would range between approximately 185,000 and 242,000, equivalent to 13% and 17% of average total manufacturing employment for the 1989-2003 period

  • Chinese new entrants do not have lower returns than established firms, so there is no case for special support. (p. 33)