This Selected Economic Issues paper examines economic developments in South Africa during 1993–94. After a cumulative fall of 3.5 percent between 1989 and 1992, GDP at market prices grew by 1.1 percent in 1993. The major contribution to growth came from the turnaround in the inventory cycle, with positive investment in inventories recorded for the first time since 1989. Private consumption expenditure remained subdued in 1993, rising by only 0.5 percent; by contrast, public consumption grew by 1.8 percent in 1993.


This Selected Economic Issues paper examines economic developments in South Africa during 1993–94. After a cumulative fall of 3.5 percent between 1989 and 1992, GDP at market prices grew by 1.1 percent in 1993. The major contribution to growth came from the turnaround in the inventory cycle, with positive investment in inventories recorded for the first time since 1989. Private consumption expenditure remained subdued in 1993, rising by only 0.5 percent; by contrast, public consumption grew by 1.8 percent in 1993.

VI. Corporate Control and Monopoly in South Africa

1. Introduction

The large South African corporate groups have unusual, but not unique, equity structures known as pyramids. Pyramids delink control and ownership of equity in a manner analogous to dual class--voting and nonvoting--shares, and hence allow minority shareholders to control much more equity than they own. These structures facilitate control by a relatively small number of shareholders of large parts of South African equity: the controlling shareholders behind largest five groups in South Africa control (as opposed to own) over 75 percent of the equity quoted on the Johannesburg Stock Exchange.

Pyramids are the subject of lively debate in South Africa. They are accused of aggravating-- if not inducing--monopoly problems in goods markets. The argument is that firms with the same controlling shareholders collude, that the small number of controlling shareholders facilitates collusion, and that the interaction between groups in a variety of markets facilitates the discipline of collusive agreements between them. A populist critique attacks the dominance of a tiny and wealthy shareholder elite. In their defense, it is claimed that pyramids successfully address fundamental principal agent problems in corporate control by shifting the balance of power between shareholders--as principals--and managers--as agents--decisively in favor of shareholders, precisely by concentrating shareholder power. Furthermore, it is argued that the elite group of controlling shareholders achieve and maintain their control only because they are, and are reputed to be, effective monitors of managers. Hence, their dominant position is in the interest of all, including non controlling shareholders, and it could not persist if that were not so.

The ANC has actively promoted the idea of “unbundling” the main business groups. Section 3.8 on competition policy in the White Paper on Reconstruction and Development declares an intention to introduce “legislation systematically to discourage the system of pyramids where it leads to over-concentration of economic power and interlocking directorships.” The intention appears to be to distinguish benevolent from malevolent pyramids (or parts thereof) on a case-by-case basis, and to act against the latter.

This chapter reviews corporate control issues as they arise in South Africa. It argues that, a priori, concentration should not be equated with the exercise of monopoly power; the small size of goods markets relative to optimum operating capacity of modern plant makes it inevitable that many sectors will have few suppliers. However, this does not necessarily mean that the exercise of monopoly power is rife, and the prime source of what monopoly abuses there are is unlikely to lie in the peculiarities of South African equity structures. Instead, the exercise of monopoly power in goods markets is much more likely to derive from the relatively closed and protected nature of the economy, which reflects, in part, the regimes of trade and exchange controls which discourage entry. It is therefore in these areas that competition policy should focus, not in the area of corporate control. Steps to strengthen both the technical capacity of the Competition Board and its legislative basis are clearly desirable since both are lacking currently, but these should be seen as supplementary to the main thrust of competition policy, not as its central components. Finally, policy toward pyramids should not be motivated by their links to monopoly problems--because the two issues are usually unrelated--but by a view of the corporate control structures that would strike the appropriate balance between shareholders and managers. This is not easy to determine, and there is no international consensus on the appropriate balance or on how to strike it, and practice varies widely.

2. The construction of pyramids

Pyramids consist of holding companies that are stacked on top of one another. Company “A” at the top of a pyramid owns 51 percent of company “B,” which owns 51% of company “C,” and so on down the pyramid. This allows company “A” to exercise control over a company “Z” at the bottom, because it has a controlling interest in all the companies in between, but it may receive only a small share of dividends paid by Z. At each level in the pyramid, minority shareholders hold the remaining stock. Thus, pyramids are analogous to nonvoting shares, voting trusts, and some long-term debt; 1/ they formally delink ownership (or receipt of dividends) from control.

All the main groups in South Africa--including the Anglo-American/De Beers group, the Rembrandt group, Anglovaal, Liberty Life, “The Old Mutual,” and SANLAM--are characterized by such pyramid structures. In none of these cases are the groups composed of simple pyramids; instead, they exhibit a maze of interlocking relationships. All these groups have highly diversified holdings, commonly ranging far beyond their core (or original) sectors. An example of one such pyramid, that of Anglo-American, is presented in Figure 1.



Citation: IMF Staff Country Reports 1995, 021; 10.5089/9781451840919.002.A006

Source: Gerson (1992).

Pyramids allow individual founding members of companies to retain control despite their companies’ need for equity finance beyond the capacity of the founders to provide. To do this, however, other investors must be persuaded to take non controlling stakes in the pyramid; without their willing cooperation, pyramids cannot be constructed. Controlling shareholders with a track record of generating high returns to equity have little difficulty persuading investors to take non controlling stakes in their pyramids, and so tend to own relatively small portions of the equity in the pyramids they control.

Gerson 1/ suggests that the pattern of shareholder ownership and control on the Johannesburg Stock Exchange reflects these factors. In a study of some 190 South African industrial companies, he finds that the greater the personal wealth of controlling shareholders, the smaller their individual share in the equity of the firms that they control. He suggests that the wealth of the controlling shareholders is a proxy for their reputation and monitoring skill. By implication, therefore, minority shareholders are more willing to take stakes in pyramids controlled by skillful and reputable (wealthy) controlling shareholders, than they are in pyramids controlled by other shareholders.

Hence, the key argument in defense of pyramids (or equivalently, dual class shares or long-term debt) is that they reflect a sensible market response to a fundamental scarcity: that of capable and motivated corporate supervisors. Pyramids facilitate the wide exercise of these skills, precisely because they cede control to “skilled” shareholders, and this concentration of shareholder control reinforces the representation of shareholder interests in their dealings with management. Finally, pyramids disperse the benefits of skilled shareholder control beyond the limits that might otherwise be imposed by the wealth of such shareholders in a system where control and ownership were directly linked. The actions of non-controlling shareholders are critical in making these mechanisms work--it is they who identify and finance capable corporate supervisors.

But claims of a darker side to pyramids are made frequently, including the claim that they facilitate collusion in goods markets. 2/ These issues are taken up below, first by a review of the available evidence concerning the severity of monopoly problems in general, and then by a consideration of how corporate control issues relate to these problems.

3. Monopoly in South Africa

It is plain--notwithstanding the somewhat contradictory impression of concentration given by the different concentration indices 3/--that a substantial number of goods markets in South Africa are dominated by a single supplier, or by a few suppliers.

This evidence is summarized in Table 22. The table shows that it is typical for a small number and for a small proportion of firms in any given sector to account for 80 percent of domestic production. High concentration ratios are also suggested by the gini coefficients. 4/ Furthermore, the table shows that with the exception of machinery, transport equipment and the residual category “other manufacturing,” imports typically account for a small portion of final sales. Concentration is also evident in finance, where four banking groups dominate the banking market. The overall impression--that South Africa tends to exhibit high degrees of concentration in goods and financial services markets, with a limited role for imports in offsetting that tendency--is clear.

Table 22.

South Africa: Concentration and Trade

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Source: Belli P., 1993.

Source: Industrial Development Corporation of South Africa Limited, January 1992.

These data should, however, be interpreted with caution. At most, the evidence in Table 22 might indicate where monopoly pricing is most likely--where there are a small number of domestic producers and where the share of imports in final sales is small. 1/ But they do not indicate where it is occurring: markets where entry and exit costs are low--contestable markets--may well have single incumbents, but the threat of potential entry may prevent them from pricing monopolistically. The extent of monopoly pricing can only be gauged by an examination of the contestability of markets on a case-by-case basis. 2/

The difficulties in identifying where monopoly pricing is occurring are underscored by a related debate about why firms become dominant in their sectors. A study of South African manufacturing firms between 1972 and 1985 suggests that dominant firms often enjoy their status because they are the lowest cost producers. 3/ The inference drawn is that antitrust action against dominant firms might not be in the interest of consumers, because such action might penalize the most efficient firms. But firms with cost advantages are the most likely of all to set monopoly prices; they can credibly threaten a price war to drive out actual or potential rivals, certain that they will win it, precisely because of their cost advantage. This renders such markets uncontestable, so such incumbents can set monopoly prices with impunity.

Hence, the evidence of high concentration and low shares of imports in final demand does not prove that monopoly pricing is rife, and the evidence that incumbents tend to be least cost producers does not mean that concerns about monopolistic pricing can be dismissed. The insights of modern industrial economics make plain that monopolistic pricing can only be identified by detailed case studies, and that even then, the results are unlikely to be unambiguous. The extent of abuse of monopoly power in goods markets in South Africa should remain an open question, notwithstanding the commonly held presumption that it is widespread and severe, and the sometimes glib dismissal of such views.

4. Monopoly and corporate control

It is also commonly believed that abuses of monopoly power--such as they are--have their roots in the corporate governance structures. This proposition is deceptively intuitive. Clearly, same-sector firms in the same pyramid can collude effectively, since their common controlling shareholder can coordinate their activities. Moreover, the fact that there are so few controlling shareholders means that collusion between pyramids is eased, since there are relatively few parties to any collusive agreement. And since pyramids interact in so many goods markets, any collusive agreements can be effectively disciplined. If monopoly and pyramids are linked in this way, then the negative correlation that Gerson finds between individual wealth of controlling shareholders and their stakes in the pyramids they control may (partly) reflect their skill at organizing cartels, rather than their more innocuous sounding superior supervisory skills.

There are three difficulties with this train of thought:

First, the fact there are a number of well established and highly diversified groups means that there are potential new entrants into any goods market. Thus, a key precondition for the contestability of the whole range of goods markets is met in South Africa.

The second difficulty is that even if pyramids were banned, there are a variety of financial instruments that might be substituted for them, including non voting shares, and some long term debt instruments. If the aim of banning pyramids was to ensure a close correspondence between ownership and control, thought would have to be given to how to prevent these pyramid substitutes from simply replicating the effects of pyramids.

The third difficulty is the most fundamental: it is unclear that problems with the exercise of monopoly power would be any less severe if pyramids were banned--and ownership was strictly linked to control--but where nothing else was different. Clearly, controlling minority shareholders could not formally exist, but minority shareholders in companies throughout the world exercise effective control simply because they are the largest and best coordinated group among the shareholders. But even leaving this possibility aside, a pyramid could in principle be converted into a conglomerate: the holding companies in the pyramid could each be converted into independent profit centers in the conglomerate; all the shareholders in the pyramid could have their claims converted into claims on the conglomerate; and the pyramid’s controlling shareholder could become a manager/shareholder of the conglomerate. In this conversion, the “captains of industry” would no longer be a small number of controlling shareholders, as under the pyramid system, but a small number of managers of the highest levels of conglomerates. It is unclear that their capacity to exercise monopoly power--such as it is--would be affected at all by this change.

Such a conversion from pyramids to conglomerates might, perversely, actually increase the amount of equity under the sway of the “captains of industry". Minority shareholders might be more willing to back managers than to back controlling shareholders because they could exercise greater control over the former than the latter. Hence, individual conglomerate managers might be given managerial control over a greater stock of equity than controlling shareholders. On the other hand, controlling shareholders, faced with the possibility of being outvoted as conglomerate managers, might be less willing to invest as high a share of their own personal wealth in a conglomerate as in a pyramid which they control. They might therefore play a less active role in monitoring the company. This might temper the willingness of minority shareholders to invest more with conglomerate managers than with pyramid controlling shareholders.

Hence, while it is easy to tell stories linking pyramids to monopoly, it is unclear that legislative action against pyramids and their close substitutes would reduce the exercise of monopoly power, precisely because that power may be equally exercised in the counterfactual case. Furthermore, while the link may be construed in theory, there is no evidence that they are the principal cause of the abuse of monopoly power in South Africa--such as it is--and none of the other countries with pyramids in any way specifically motivate or focus their antitrust policy on pyramids. 1/

5. Competition policy

The key institution implementing competition policy in South Africa is the Competition Board. It was established under the Maintenance and Promotion of Competition Act of 1979, and it reports to the Ministry of Trade and Industry. Its remit focuses on restrictive practices, acquisitions, and the exercise of monopoly power, with the onus on the parties to an acquisition or a restrictive practice to prove that they are not causing injury. There are gaps in the legislative basis of the Board--for example, it has no jurisdiction over vertical integration, and the definitions used in the Act can too readily be challenged in the Courts--and the penalties it can impose are minimal. These include scope for the Minister to reduce tariffs on goods in which domestic producers are exercising monopoly power, and a maximum penalty of R 100,000, but they exclude any liability for damages to injured parties.

Its key problems in practice, however, are the limited capacity of the Board to fulfill its brief--it has a small number of staff relative to its caseload and they frequently confront highly skilled teams from the companies they are pursuing--and the sometimes less than sympathetic stance adopted by the Courts to the Board’s cases. Given these constraints, it has acted with vigor, particularly recently.

But it is clear that even a strengthened Competition Board will not be able to carry the full burden of competition policy unaided, and it should not be expected to do so. Instead, competition policy should consist of the following components:

  • * First, a reduction in trade protection directly attacks monopolies and cartels in the tradable sector, whatever the corporate governance structures underlying them. 1/ Open trade, among other benefits, substantially reduces the likelihood that dominant domestic producers will have cost advantages over actual or potential entrants, including foreign producers. The commitments made under the Uruguay Round of the GATT mark useful steps in this direction. 2/

  • * Second, reform of those aspects of the capital account regime that discourage foreign direct investors can help address such monopoly problems as might arise from pyramids, by increasing the potential number of controlling shareholders. The liberalization of controls on residents would also allow domestic groups to expand their core operations abroad, instead of being forced to make domestic investments and acquisitions, often outside their core operations. 3/

  • * Third, antitrust institutions should pay particular attention to the non tradable sector, since competition there cannot be spurred through trade reform.

  • * Fourth, the role of the Competition Board should not simply be construed as being to pursue firms which abuse their dominant market positions. The Board should also monitor the institutional features of markets--such as labor legislation, bankruptcy procedures, trade protection, and licensing requirements--and identify where these are undermining “contestability.” Where it identifies institutional impediments to contestability, it should bring these to the attention of government and work for their removal.

  • * Finally, the utilities and public sector enterprises raise particular problems for antitrust policy. If the former are to be privatized, then establishing a competitive industrial structure for the privatized industry is critical. This may require the establishment of market regulators, particularly where the utilities constitute natural monopolies.

South Africa has announced significant changes to its external trade regime and has benefited from the lifting of financial sanctions. Both of these will strengthen competitive pressures in goods markets. Competition policy should motivate further steps in these areas, which should be taken when and as they are feasible. This, combined with action to strengthen the Competition Board and appropriately structured privatization, should form the core of competition policy in South Africa.


  • Belli P. et al.South Africa: A Review of Trade Policies”. World Bank Discussion Paper No. 4. 1993.

  • Fourie F.C. v N. and A. Smith.Concentration, tariff protection, and industrial performance in South AfricaSouth African Journal of Economics 61, 3 1993.

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  • Gerson J.The Determinants of Corporate Ownership and Control in South Africa1992. DPhil Thesis submitted to the University of California.

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  • Leach D.F.Absolute vs Relative concentration in Manufacturing Industry 1972-85”. South African Journal of Economics 60, 4. 1992a.

  • Leach D.F.Concentration and Profits in South Africa: Monopoly or Efficiency?South African Journal of Economics 60, 2. 1992b.

  • “Draft Mineral and Energy Policy Discussion Document” prepared by the Mineral and Energy Policy Workshop 12-13 November 1994.


An example would be debentures: dividends paid to debenture holders are proportionate to profits, but holders of this stock have no voting powers.


For example, Mineral and Energy Policy Workshop 1994, pp. 15-16.


If these were close to zero, they would indicate that all firms in each sector were roughly equal sized. Since they are all much closer to 1000, they indicate that a few large firms dominate production in most sectors.


Such sectors include beverages, rubber, chemicals, paper, and basic metals.


Furthermore, most South African markets are small relative to the optimal capacity of modern manufacturing plant--South Africa’s GDP is roughly half that of Belgium--so the a small number of suppliers in any given market, especially in the mining sector, is hardly surprising.


For example, Belgium reformed its antitrust legislation in 1993 to make it conform with the EU norm but felt no need to make special provision for the pyramid structures of its corporates. Sweden has been tolerant of monopolies and pyramid structures, especially in agricultural processing and distribution and in finance, but has addressed issues of monopolistic pricing indirectly through trade and capital account reform since the mid-1980s, not through action against pyramids.


This conclusion is supported by South African research, which finds a link between trade protection and concentration. See Fourie and Smith (1993).


These are described in this issues paper, in Chapter I, Section 5.


GENCOR--South Africa’s second largest mining house--announced an “unbundling” package in May 1994 which was partly motivated by the desire to shed local non mining operations in favor of expanding its foreign mining operations.