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Addressing market power in a small, isolated, resource-based economy: the case of steel in South Africa

South Africa has long been characterised as an economy that has built a comparative advantage in a range of resource-based intermediate products. While South Africa has significant cost advantages in many of these products, they are generally also characterised by large-scale economies. This means high levels of concentration and concomitant market power, especially given high transport costs and a lack of regional competition. The paper examines issues related to how government can address the implications of these economic characteristics and points to difficulties in applying off-the-shelf competition and regulatory solutions derived from industrialised countries. It takes the steel industry as an exemplar of these issues. The paper highlights the historical role of the state and the effects of market power on the development of relatively labour- intensive downstream manufacturing. From this discussion it draws out challenges for policy, and suggests an agenda for research. 1. BACKGROUND South African has long been characterised as an economy that has built a comparative advantage in a range of resource based intermediate products (e.g. Fine & Rustomjee: 1996, Joffe, A. et al: 1995). These industries are typically characterised by a small number of large, scale-intensive firms, that produce intermediate products or services based on processing the feedstocks of South Africa's primary resource endowments. They dominate substantial parts of the secondary and tertiary sectors of the economy, particularly the metals, chemicals, and electricity sectors. It is also significant that a number of the dominant firms in these sectors are, or have been, state owned enterprises (SOE's) or derive much