Monopolies contribute to high inflation

ECONOMISTS on Friday supported South African Reserve Bank governor Tito Mboweni’s statement that flaws in the economy were keeping inflation high. They said monopolies in the private and the public sectors were part of the problem but identified a range of other factors that were keeping inflation high.

After announcing a one percentage point cut in the bank’s repo rate, to 7,5 per cent, on Thursday, Mboweni spoke of ‘structural rigidities’ in the economy and highlighted cartel and monopoly pricing practices in certain sectors such as the steel industry.
The term ‘structural rigidities’ refers to arrangements in the economy that limit its flexibility and therefore its ability to respond to changing conditions. This rigidity reduces efficiency and adds to the cost of production – costs which are passed on to consumers.
Against the backdrop of sustained inflationary pressure, Mboweni warned there would probably be no further ‘significant’ rate cuts. Consumer inflation, at 8,4 per cent in April, remained well above the bank’s three to six per cent target range – despite the fact that producer price inflation had fallen sharply to less than three per cent year on year in April. The failure of consumer prices to fall back within the range reduces the scope for further rate cuts.
Mike Schussler, the economist at Economists.co.za, said: ‘Many sectors of the economy are very concentrated. By that I mean a handful of companies make up well over 50 per cent of market share and they have the ability to exercise market power.’
He said a sign that firms were abusing this power could be seen when a strengthening rand failed to reduce the price of imports at the retail level – ‘for instance the price of motor vehicles’.
The public sector is a major culprit. ‘There is only one railways provider, one major gas pipe, one major electricity supplier and one water provider,’ said Schussler, who called for more transparency on pricing practices so the public could be aware of the factors that determined prices.
Nicky Weimar, a senior economist at Nedbank, said Mboweni’s points were valid.
‘Telkom effectively has a landline monopoly and Eskom has virtually a monopoly on electricity generation.’
Telkom, previously a state utility, was partially privatised in the late 1990s but was given a landline monopoly that ended recently. It is still the dominant player. By keeping broadband prices high, Telkom has put upward pressure on a wide range of prices for more than a decade.
State-owned power utility Eskom has asked for a 34 per cent interim tariff increase to finance its capital expenditure programme and has warned that more increases lie ahead.
Weimar said more competition was needed to force companies to be efficient. ‘Lowering tariffs in the 1990s reduced inflation because it forced industries to become more price competitive.’
Christelle Grobler, an economist at the University of Stellenbosch’s Bureau for Economic Research, identified other problems, including South Africa’s ‘rigid labour market, coupled with active and politicised labour unions’.
Strikes and protest action brought double-digit wage increases in many sectors.
Grobler said skills shortages also ‘put pressure on the cost of labour’.
-Business Report