MICHAEL HARRIS: Nurturing SA’s services economy

In July the Competition Commission released its provisional report on the market inquiry into online intermediation platforms. The findings highlight the tension that exists between promoting domestic competition and building a base for global competitiveness. 

SA enjoys meaningful comparative advantages in its services sector. Favourable time zone, proficiency in English, the price and availability of skills, ICT infrastructure and the rule of law combine with the expertise in banking, legal and accounting that the country’s mineral-led development has required.

The result is a deep and diverse tertiary sector that belies the size of the economy. These capabilities are an important reason foreign investment has favoured SA, and they are a significant source of export potential. 

Services are a broad category, but technology, e-commerce, financial and business services, the industries that drive the digital flows of knowledge, products, data and money, lie at the core of this advantage. Elsewhere in the economy, geographic isolation imposes significant frictional costs on SA’s product exports. This is true of agriculture, mining and manufacturing, but the same constraint also affects other services such as tourism, since the country is a long-haul destination for most global travellers.

In addition to isolation, SA must also grapple with the “small market” challenge. The economically active adult population is small and income inequality means purchasing power is concentrated in a narrow band of consumers. Competition for these consumers is intense, and over time these features have encouraged market concentration. This concentrated market structure is what the Competition Commission typically seeks to influence on the basis that it is inimical to innovation, consumer welfare and new entrants, especially previously disadvantaged ones.  

Digital services

Yet the lesson of the internet age is that in the case of technology-enabled services there are outsize returns to scale. This is because cross-border competition is theoretically frictionless and the sector’s digital services being disrupted are dominated by large incumbents. To successfully innovate and compete in this context is capital intensive and requires significant institutional capacity.  

The market inquiry may therefore suffer from framing that is both too broad and too narrow. In the broad sense, local platforms are being assessed alongside dominant global players such as Google and Booking.com. In the narrow context, a business such as Takealot is being attributed market power it does not have because it in fact competes with major store-based retailers locally and operates under the threat of market entry by a dominant global player in the form of Amazon.

This creates a false equivalence between operations of vastly differing scale, and while tactics such as pricing parity, self-preferencing and subsidisation may justify scrutiny, they should also be seen through the broader frame of the markets in which these services are actually required to compete. The small business upliftment achieved by the intermediation model should also not be downplayed. If SA wants a local e-commerce alternative once Amazon enters the market, it should be working to strengthen the incumbent positions.

While the inquiry deals solely with the domestic market, the outcomes and direction of competition policy in this area are important for two reasons. First, the relationship between the country’s domestic and global services industries is fundamental. A strong, innovative domestic sector is necessary to incubate a growing position in the global services market. Second, the accumulation of scale is important for overcoming the small market problem. For example, if local e-commerce organisations hope to export disruptive digital services to the rest of Southern Africa, they will first need to establish sustainable positions at home. 

Overcoming the constraints of isolation and market size will be fundamental to SA’s future trade competitiveness. The scale of the challenge is one reason an export manufacturing orientation has never emerged. While the services sector can be a driver of growth, each element of the country’s advantage must be actively cultivated. The ability to scale and innovate and, in doing so, create positive ecosystem effects that drive growth, create jobs and generate foreign earnings, is a central part of this effort.

• Harris is a partner at management consultancy Letsema.