Africa-Press – South-Sudan. THE PRICES OF several goods, including intermediate inputs such as cement, steel reinforcement bars, urea fertiliser, and broadband internet, are higher on average in the world’s poorest countries, including many in Africa.
This is important for two main reasons: higher prices for intermediate goods can slow economic growth; and this evidence runs counter to the general tendency for prices to rise with national income – a cornerstone of modern international macroeconomics.
Why we are seeing this unexpected pattern in price levels across different countries is not certain.
One reason could be these higher prices reflect higher costs of production, or that higher prices might instead reflect a higher markup, as seen in markets with fewer firms and less competition.
In a recent paper, my co-authors and I distinguished between these hypotheses by looking at the case of Portland cement using an empirical industrial organisation model.
According to our data, on average, 1,3% of GDP is spent on cement, making it vitally important to most economies.
The model shows that the differences in marginal costs and markups contribute roughly to an equal share of the average difference in prices across economies.
In 2011, Africa stood out as having the highest average US dollar cement price of any continent – the highest average marginal cost, and the highest average markup – at about 50%.
By 2017, the average price of cement in Africa had fallen by one-third, due to a three-fifths decline in marginal cost and a two-fifths decline in markup.
This brought the average price of cement in Africa much closer to other continents.
A variety of economic forces can explain why markups on cement remain high in Africa. Higher markups might be explained by higher barriers to entry or by widespread cartel conduct across the continent.
Less than 10% of cement consumption is sold under a known cartel in the average African economy, while in Europe it is more than 90%.
Taken at face value, this data suggests that Africa has less cartels than other continents. But this data is not conclusive because cartels in Africa are perhaps less known due to less effective antitrust policies, leading to fewer investigations.
The model allows us to formally test whether firms in Africa appear to be systematically colluding, potentially due to less effective antitrust policy.
Given supply and demand, we estimate that prices on the continent are consistent with imperfect competition, but not joint profit maximisation by a cartel.
Africa is in the middle of other continents in terms of procedures to start a new business. Africa has more procedures compared to Europe and North America, but fewer than Asia or South America.
This suggests entry barriers might play a role in higher prices. Using the model, we identify fixed costs from actual firm entry decisions and find them to be economically significant and in line with figures reported in industry publications.
These costs are positively related to the number of procedures to start a business, but overall are not systematically higher in Africa compared to other continents, confirming that Africa does not have extraordinarily high barriers to entry.
A final hypothesis is that higher markups in African economies reflect a small market size unable to sustain more than a few competitors.
Having excluded the other hypotheses of cartel conduct, or excessive entry costs, our evidence suggests that limited demand, determined by the small average population of many African countries, can account for high markups in prices in African markets.
Overall, though this evidence comes from a single industry, it has important implications for understanding economic development in Africa.
In contrast to theories suggesting Africa’s lower-income per capita is explained by ‘oligarchies’ led by major producers that use political power to erect excessive entry barriers against new entrepreneurs, our results are consistent with an alternative theory in which minimum efficient scale is the same across continents, and market size plays a comparatively more important role in accounting for differences in economic development.
Our findings have important policy implications.
Although we do not argue against further antitrust or pro-competitive policies, our results imply that governments need to focus on increasing the size of the market to lower prices of key intermediated goods, rather than only changes in regulation.
* Tristan Reed is an economist at the World Bank.