Competition in context: the limitations of using competition law as a vehicle for social policy in the developing world.

Author:Hazel, Diane R.
Position:V. Case Study of South America through VII. Conclusion, with footnotes, p. 312-351
 
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  1. CASE STUDY OF SOUTH AFRICA

    South Africa serves as one of the best examples of a developing country that has incorporated public interest considerations in a competition law. (212) South Africa was one of the first countries to include industrial policy objectives in its competition law and did so in an effort to remedy the economic and welfare effects resulting from the apartheid legal regime. By global standards, South Africa has been fairly successful in its competition enforcement initiatives; a number of cases illustrate how such public goals and factors have been applied in practice.

    1. Apartheid in South Africa

      Apartheid was the national policy in South Africa for more than forty years. (213) Under apartheid, a small white minority governed and owned almost all of the business enterprises, while the law barred non-whites from most segments of the economy. (214) The state also played a significant role, both as producer and regulator, and apartheid policies built several important industries under state ownership. (215) Over time, South Africa's trading partners--and the world at large--began to reject the policies adopted by the South African government and refused to engage with it. (216)

      South Africa's isolation from the rest of the world was compounded by trade protection policies and exchange controls, which constrained local firms' ability to grow beyond South Africa. (217) Consequently, successful South African firms had no other option but to invest their returns in other sectors of the South African economy because they could not access foreign markets, (218) leading to the growth of diversified conglomerates that effectively dominated the South African economy. (219) This conglomerate structure also resulted in the formation of a number of holding companies that exercised effective control over subsidiaries with extremely low ownership stakes. (220)

      In many ways, apartheid led to the creation of two economies in South Africa, and many question whether South Africa is actually economically underdeveloped. (221) Unlike much of the rest of Africa, South Africa began the process of industrialization over a century ago after the discovery of diamonds and gold, which is exemplified today by its roads, railways, hospitals, and other infrastructure. (222) But during apartheid, the South African economy operated under a dual structure: the white population operated in a formal economy with developed infrastructure while the non-white population's economic activity was predominantly informal. (223) The dual nature of the national economy created extreme disparities of wealth, and the discriminatory policies ensured that the indigenous majority only benefitted partially, if at all, from any developments. (224) Further, the introduction of free market conditions did not dissipate the market dominant minority's control but actually exacerbated the white minority's dominance to the detriment of the black majority. (225)

    2. Political Background Leading to Adoption of South Africa's Competition Act

      The apartheid regime came to an end with South Africa's first democratic elections in 1994. (226) When the African National Congress ("ANC") took power in 1994, it initiated a number of economic reforms, including a reassessment of South Africa's competition challenges and the efficacy of the existing law. (227) Prior to independence, the Maintenance and Promotion of Competition Act No. 96 of 1979 served as South Africa's competition law. (228) It was widely accepted, however, that the Competition Board's enforcement of the Maintenance and Promotion of Competition Act was ineffective. (229)

      The ANC, upon taking power, sought to create and sustain an adaptive economy characterized by growth, employment, and equity. (230) Addressing the extent of market power and concentration became a key issue of the overarching policy debate, and competition policy became a key component of the 1994 Reconstruction and Development Programme. (231) Many in South Africa viewed competition law as a mechanism to change the excessive concentrations of private economic power underpinning the apartheid regime. (232)

      Through the Department of Trade and Industry, the ANC outlined several strategies for effective transformation of the country, which were incorporated into different legislations. (233) The Department tabled its proposed guidelines on competition policy in November 1997 in a 37-page document titled "Proposed Guidelines for Competition Policy: A Framework for Competition, Competitiveness and Development" ("Proposed Guidelines"), which the Cabinet approved and released for public comment. (234) These Proposed Guidelines attempted to reconcile the application of competition policy within the national policy objectives of competitiveness and development. (235) Paragraph 2.4.12 of the Proposed Guidelines exemplifies the country's focus on broader social and industrial policy objectives:

      Competition policy seeks to incorporate the interests of consumers, workers, emerging entrepreneurs, and other corporate competitors and to protect the ability of our large corporations to penetrate international markets, just as we allow foreign investors to do business in South Africa in the interests of enhancing overall efficiency and growth. (236) As these Proposed Guidelines show, developmental concerns--such as addressing poverty and unemployment--were as much a part of the competition policy discussion as was the promotion of competition and economic efficiency. (237) It became clear that a competition law would only be politically possible if it addressed public interest concerns that reflected the specific development challenges entrenched by the previous era. (238) Thus, any discussion of economic efficiency had to be tempered by a strong emphasis on development. (239) Everyone involved in the negotiation process also recognized that no major piece of socioeconomic legislation would pass muster without incorporating job creation and black economic empowerment into the overall objectives of the policy and statute. (240) In addition, powerful interest groups sought to defend their particular interests and lobbied for protections of those interests in the law. (241)

      The Proposed Guidelines served as the basis for further negotiations with the National Economic Development and Labour Council ("NEDLAC"), a statutory body comprised of representatives from government, organized labor, organized business, and the community. (242) Once tabled at NEDLAC, the Proposed Guidelines underwent a process of consultation and negotiation. (243) NEDLAC subsequently concluded an agreement on competition policy in May 1998. (244) A bill was then sent to the Cabinet, which then proceeded through the parliamentary process. (245) Parliament passed the Competition Act (Act No. 89 of 1998) in September 1998. (246) The inclusion of social and industrial policy objectives in South Africa's Competition Act generated much controversy in the international competition community. (247)

    3. Public Interest Factors in South Africa's Competition Act

      In crafting South Africa's Competition Act, the legal drafters drew heavily from the Canadian competition legislation for merger control and the Australian competition legislation for prohibited practices. (248) But as discussed, the Competition Act also attempted to balance economic efficiency concerns with broader socioeconomic equity and development priorities. (249) The Explanatory Memorandum accompanying the Act stated that the overriding objective of competition policy is the promotion of competition in order to advance economic efficiency, international competitiveness, and adaptability as well as the market access of small, medium, and micro-enterprises ("SME"), creation of new employment opportunities, and the diversification of ownership in favor of historically disadvantaged South Africans. (250) Accordingly, South Africa saw the more even spread of ownership and SME promotion as important to ensuring long-term, balanced sustainable development. (251) These industrial objectives feature strongly in the Preamble of the Competition Act as well as other provisions relating to exemptions and mergers.

      For example, Section 2 of the Competition Act states that the "purpose of this Act is to promote and maintain competition in the Republic" and then lists the various objectives of the law, including:

      (c) to promote employment and advance the social and economic welfare of South Africans;

      (d) to expand opportunities for South African participation in world markets and recognise the role of foreign competition in the Republic;

      (e) to ensure that small and medium-sized enterprises have an equitable opportunity to participate in the economy; and

      (f) to promote a greater spread of ownership, in particular to increase the ownership stakes of historically disadvantaged persons. (252)

      These overarching objectives illustrate that South Africa's concerns extended beyond simply efficiency and consumer welfare. Instead, South Africa believed that the Competition Act could contribute to increasing employment, ensure SMEs compete on equal footing, and promote ownership among "historically disadvantaged persons." Section 3(2) defines "historically disadvantaged persons" as the "individuals, associations, juristic persons of individuals who before the 1993 Constitution were disadvantaged by unfair discrimination on the basis of race." (253)

      In addition to the objectives listed in Section 2 of the Competition Act, the law also incorporates public interest factors when considering an exemption application. Under Section 10, the South African Competition Commission may exempt an agreement or practice if the agreement or practice meets certain objectives, including the promotion of the ability of small business, or businesses controlled or owned by historically disadvantaged persons, to become competitive. (254) Other factors...

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