‘SA’s industrialisation plans aren’t yielding great results’

The international trade environment is moving towards deglobalisation, greater reliance on subsidies for domestic industries, and an increased focus on “industrialisation”.

South Africa introduced an Industrial Policy Action Plan (Ipap) in 2007. Since then, and despite the umpteenth annual iteration of Ipap, economic growth has declined from an average of 3,5 percent to far below 1 percent.

“Government interventions are not generating positive economic output,” says Donald MacKay, director at XA Global Trade Advisors. He was speaking during the session on the future of trade for SA at the annual Tax Indaba in Sandton.

“We are intervening in the wrong way.”

Levelling the playing field comes at a cost

Conceptually, the idea of supporting a particular sector to grow employment may be a valid perspective — but MacKay says there are “sacred cows” in each industry.

For example, government “inserts” bargaining councils into some sectors but not others. Many of these bargaining councils add an enormous competitiveness burden to the industry. Government then “compensates” the industry by loading high duties on competitive imports.

“We make the imports as uncompetitive as the domestic industry, and then we have an equilibrium. The problem with that is you never get good at the thing that you should be getting good at.”

We tie ourselves to a legacy system, he adds.

Government interventions tend to be vertical but ignore horizontal problems such as dysfunctional railways and ports, crumbling road infrastructure, or the electricity crisis.

The priority should be to fix these problems, but it is not the “sexy thing” to do.

“So whatever industrial policy we plug on top of the problems simply becomes less likely to yield the benefits that we want to achieve,” says MacKay.

Cherry-picking not the way to go

Growth Diagnostics director Francois Fouche says SA should be significantly less obsessed with trying to pick the ideal trade partners at industry policy level or the industries it thinks will be winners.

“We should be far more focused on creating an environment that is conducive to becoming internationally competitive,” he says.

“We really have to face our own domestic conditions and environment that we have created, especially for manufacturers.”

The country does not really have trade challenges; instead, it has “domestic production capability” challenges created on its own account.

“Government prescribes who can participate in the economy, who can trade with whom, and what and how goods should be produced,” says Fouche.

He advocates for a less interventionist, more enabling environment where businesses can produce their goods and get them to the ports and those who want to buy their products. This will yield far greater success than the rhetoric currently going around in international trade discussions.

“The recent Brics summit and the new members of the alliance will not work miracles for the country’s trade account. It is not a natural grouping that makes a lot of sense,” says Fouche.

He describes it as “a rather loose arrangement that gathers momentum from time to time”. South Africa mainly trades with China and, to a smaller extent, India, but hardly with Russia, Brazil or any of the new members (Argentina, Ethiopia, Egypt, the United Arab Emirates, Saudi Arabia and Iran).

In fact, Saudi Arabia has had a trade ban on meat imports from SA for the last two decades and has only now indicated that it will set a process in motion to have it lifted.

André Erasmus, tax executive at ENSafrica, says besides the US, China is Africa’s biggest trading partner in terms of imports and exports. He is also sceptical about new trade relations developing out of Brics and the new member states.

Traditional markets

Meluleki Nzimande, partner at Webber Wentzel, notes that one will rarely find commercial agreements taking place in a vacuum. Generally, some form of political arrangement grows and then translates into formal (trade or other) arrangements.

The African Union has “birthed” the African Continental Free Trade Area (AfCFTA). The trade agreement has been finalised “relatively” quickly compared to other agreements. It has already been ratified by 47 of 53 countries.

However, inter-continental trade is hampered by non-tariff blockages, such as the lack of infrastructure and different legal and import and export regulations.

“The strength that the continental agreement will bring is regulatory harmonisation and the standardisation of border measures,” notes Nzimande.

South Africa is already competing against imports from China into Africa. It also competes for foreign direct investments against large economies like Kenya and Nigeria. Most of the investments are coming from China, says Erasmus.

“We have to look at our traditional trading partners like the US and the European Union, where the majority of our trade comes from. Africa is obviously a big and growing market, but if we want to have a healthy trade balance, we have to focus on the traditional markets,” he says. — Moneyweb.