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Competition, Industrial structure and Economic Growth

8 February 2013
Publication Type: Working Paper

This paper takes as its starting point established findings on industrial conduct as measured by pricing power in South African industry. The South African findings are contrasted with recent results derived from firm-level data from China and India. A stark contrast emerges between China, with low
mark-ups of price over marginal cost of production, and South Africa and India with high mark-ups. Given the impact of pricing power on productivity growth, we show that lack of competitive pressure in the manufacturing sector, contributes one important explanation of why China has a relatively large, while South Africa and India have a relatively small manufacturing sector. We also provide an estimate of foregone employment opportunities due to the presence of pricing power has carried for South Africa. We provide a framework in terms of which the impact of success of potential policy intervention in the labour market can be assessed, given the findings on industrial structure. Returning to Chinese firm level data, we also examine whether there is a case to be made for differential policy treatment of established, new entrant, and struggling firms – and find that there is little evidence to support such a claim. For China we find that state intervention in the manufacturing sector has primarily served to suppress pricing
power. We conclude with reflections on competitive pressures in other sectors of the economy, as well as final inferences on desirable policy interventions designed to stimulate growth and employment creation.

Series title: Working paper 330
1 February 2013
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