Former president Jacob Zuma. Picture: AFP
Former president Jacob Zuma. Picture: AFP

Size matters for firms and production. For SA firms, that size is related to age.

One positive way in which size matters is in the scale of production. Another is the discretion it affords firms, for example by allowing them to finance large-scale investments using funds retained from profits. Therefore it does not necessarily follow that large firms, considered a hallmark of imperfect competition, are wholly detrimental to the presence of other firms and the economy.

Why then would concentration remain a concern if the resultant discretion deployed ultimately indirectly serves a greater good? It is even more puzzling given the proliferation of small firms, because if conditions were that hostile, there would be limited entry. Over time these new entrants should erode the market power of their larger counterparts.

However, there are two reasons for concern. Large SA firms have arguably not been productive for almost half a century. Large size confers on them the power to dictate the social agenda, allowing them to survive despite incompetence.

Isolation from the world (and again from competition) during apartheid meant firms could grow into the vacuum left by international firms that either exited wholesale or circumscribed their activity in SA. In this scenario, firms turned what was a tendency to diversification into a tendency to conglomeration.

Second, apartheid nourished a specific type of firm. Holding companies, which had stakes in businesses rather than engaging in any production directly, served as a shortcut to the indigenisation imperative of the state. These are a rent-seeking class of firms involved in arbitrage. It was incidental that they held physical assets required for production, rather than the situation now when, given financialisation, those assets are more liquid. What mattered was that these companies were not involved in seeking profit through production and, in this way, indirectly growing the economy.

At independence, SA companies found themselves facing competition for the first time in their history. This is why so much was at stake in the negotiation of an economic contract with the new state. BEE was a natural extension of the rent-seeking behaviour that began midway through the 20th century, and arguably as early as the turn of the 20th century in the aspirations of the Broederbond. A new indigenisation imperative could now meet a political imperative, but again at the expense of a production imperative. However, the ownership context had changed dramatically since the assets in question are essentially primarily liquid.

Even accounting for new industries, it seems there are more firms in general. There are not as many as we think if we take account of these influences. On the one hand, there has been a further proliferation of holding companies. This rent-seeking behaviour earns quite good income, but does not contribute to increased output. These firms do not constitute the type of new entrants required to level the playing field.

On the other hand, the tendency to conglomerate reversed as large firms that had become unwieldy divested their non-core assets. These assets created spin-off firms, which raised the number of firms but only by chopping up and redistributing capacity rather than creating new capacity. Being spawned from large firms, they retain a series of formal and informal relationships with them, allowing the legacy of large firms to remain widespread. This makes it easy to discourage entry into industry even if the firms in that industry are neither large nor at a competitive advantage.

These factors collectively constitute one way to explain the stranglehold on growth in SA that perplexes economists. They suggest that economic capacity and so trend growth has fallen as the economy has liquefied, since existing companies have effectively been chopped up into a lot of little pieces rather than new companies emerging in addition to these.

What is astounding is how large SA companies are able to persist without effectively being able to run successful businesses. Rather, they have chosen to manipulate the public purse for their private gain.

One example is the hijacking of the presidency as an institution. In Jacob Zuma’s case, this played out in the rampant looting of the state, and as is increasingly apparent, was perpetuated by domestic and international companies alike.

MultiChoice offers another example. Naspers lost its privileged relationship with the apartheid state and has failed to recreate it with the current state, as demonstrated by the recently alleged manipulation of rule makers and breaking the rules. When faced with real competition from a global player, Netflix, it chose to demerge MultiChoice, thus avoiding real direct competition, making it a problem for MultiChoice and its new investors as an independent entity. Ultimately, then, Naspers’s value can primarily be ascribed to its role as a shareholder of Tencent.

The redomiciling of SA companies burnt by their failures abroad tells the same consistent story. Faced with the threat of competition, SA corporates run away from it rather than cede the impunity with which they have historically been allowed to operate in this economy.

Any competition is untenable since it means there is no room for error for a company that is both not competent and protected from the consequences of its mistakes by being allowed the time and space to repeatedly and indefinitely fail until such time it can arbitrarily succeed. So SA corporates have dug their claws deeper into the state, which is easy enough given its extent of decay and the bargain-basement price at which its soul has been put on the market.

There are old casualties: the economy, the unemployed and the poor. There are also now new casualties: the youth don’t stand a chance of employment in an economy that is shrinking even if they hold up their end of the bargain and complete their education. That solution does not lie in the direction we seem to be searching, which suggests that change is only possible if it does not dislodge the cabal of obsolete firms at the pinnacle of the state agenda. One day, mercifully, change will be forced by the sheer size of the growing army of the excluded.

• Mbeki is an economics lecturer at the school of economic and business sciences at Wits University.