In this series for Daily Maverick, Executive Director of the Centre for Development and Enterprise, Ann Bernstein, makes the case for a policy agenda that is substantially different from what we have seen over the past 15 years.

It is drawn from AGENDA 2024: Priorities for South Africa’s new government, which is based on the centre’s extensive policy work and recent collaboration with experts, business leaders, former public servants, and others across our society. The project sets out to answer the most important question facing South Africa: What can a new government do to get the country back on track after 15 years of stagnation and decline?

The eighth article in the series focuses on how to solve the challenges facing the country’s state-owned enterprises (SOEs). Read Part One, Part Two, Part Three, Part Four, Part Five, Part Six and Part Seven.

South Africa is grappling with economic decline and rising unemployment. Much needs to be done to overcome this. While industrial and trade policy choices are only some among many issues that must be addressed, policies pursued by the Department of Trade, Industry and Competition over the past 15 years have done more harm than good.

This is especially true of policies whose stated goal was to expand manufacturing, but which have coincided with its staggering decline: as a percentage of GDP, manufacturing has fallen from 20% in 1960 to less than 13% in 2023, while employment numbers have declined from 1.8 million in 2001 to 1.6 million in 2023.

The sector is also globally uncompetitive. Only 20% of South African manufacturing firms export at all, and over half of these export less than 5% of their output. A small fraction of firms dominate the country’s exports, reflecting a lack of diversity and competitiveness in the export market. South African firms, in other words, are failing to tap into global demand, particularly in higher-value, technology-driven goods.

This performance – both in output and in relation to exports – is worse than that of most peer countries, and has its roots in factors that include the decline of mining (a source of demand for many manufacturing firms) and, especially, infrastructure deficiencies (especially logistics and electricity).

Our decline also reflects policy choices. In particular, policy choices that have resulted in South African firms being over-reliant on protection from foreign competition. While these protect the domestic market to some extent, they hinder firms’ competitiveness by undermining the incentives to become more productive.

The Department of Trade, Industry and Competition’s strategy over the past 15 years has leaned heavily on localisation. This focuses on protecting local industries from foreign competition through tariffs, subsidies, and preferential procurement policies. The goal is to safeguard jobs, but it leads to higher prices for consumers and for downstream industries, making South African products less competitive globally.

For instance, South Africa’s heavily subsidised automotive industry operates behind high tariff walls, making vehicles more expensive domestically and adding to already-high transport costs that affect every value chain.

Protectionism

Protectionism hampers technological adoption and productivity growth. Protected firms face less pressure to innovate and improve efficiency, lagging in productivity compared with their international counterparts. This is enormously problematic in manufacturing because global firms’ productivity is improving all the time.

Localisation also directly increases the cost of importing advanced technologies, which reinforces the productivity deficit of domestic firms.

Given all this, a pivot is desperately needed, one that emphasises export-orientation rather than import-substitution. Such an approach would entail a reassessment of the factors driving productivity, the importance of competition and the huge benefits that would be enjoyed by firms that could enter the global marketplace.

How could we do this?

First, we need the Department of Trade, Industry and Competition to embrace an export-focused industrial policy. Every strategy needs to be reviewed to assess whether it is sufficiently export oriented, and, where this is not the case, how it could be reinvented.

Second, we need to review all existing tariffs. The most profound failure of the existing system is that when authorities consider a firm or industry’s request for additional protection, they barely (if at all) consider the costs of the policy to consumers and downstream users. That is how you end up with 60% tariffs on chicken. This approach has to be revisited in toto.

Most tariffs have been on the books for decades, and in many cases their continued necessity has never been reviewed. This needs to change. And any new tariffs need inbuilt sunset clauses so that firms that benefit know that their protection is time bound. This ensures they will use temporary protection to build their capabilities.

Third, we need to move beyond the failed system of master planning that the Department of Trade, Industry and Competition has championed, but for which there is no real evidence of any meaningful success.

Master plans are inherently biased to lead to protectionist policies. They are premised on a conviction that optimal policy making should focus on sectors.

This, however, is a misconception: it is true that firms in the same sector face some similar challenges, but those firms also differ from each other in numerous ways, and policymakers should rethink this sector-focused approach.

Master plans

Instead of master plans focusing on the steel industry, for example, the Department of Trade, Industry and Competition should be thinking about the different needs of small business, for example, or of new businesses or of exporting firms or of firms based in Johannesburg or Gqeberha.

These lenses all offer the department better, more productive ways of thinking about what business needs if it is to expand. And they are much less likely to result in special pleadings from firms that want to be protected from foreign competition.

Our fourth proposal goes further. Instead of thinking about the output of these activities as “master plans”, the department’s goal should be to establish productivity councils. These councils, ideally proposed and managed by private sector firms, would focus on value chains rather than sector divisions, addressing cross-cutting issues such as infrastructure, logistics, access to finance and skills development. Or anything else where collective work could lead to the reduction of an obstacle to higher productivity and greater competitiveness. They would meet regularly, constantly updating their approach rather than delivering a document that lies on a shelf.

For example, a council on dairy products might bring together stakeholders from farming, logistics, and retail to streamline processes and improve productivity. Similarly, councils could be established for digital services, given their potential for high-value export growth, especially within Africa.

Fifth, the Department of Trade, Industry and Competition needs to rethink how it has engaged with the competition authorities, particularly its interventions into mergers and acquisitions.

Far too often, these “public interest” interventions have sought to impose industrial policy goals – protecting jobs, increasing local content and extending black economic empowerment – into the adjudication of whether a particular business deal will result in a reduction of competition in a market.

This creates undesirable distortions in ordinary business transactions, raising costs, imposing delays and reducing the attractiveness of South Africa as an investment destination.

Instead, the department should channel scarce resources toward investigating actual anti-competitive practices. This change would ensure a fairer marketplace where firms are incentivised to innovate and improve productivity, benefiting the broader economy.

Finally, for South Africa to succeed, the Department of Trade, Industry and Competition must adopt a more active role as an advocate for business and markets within the government. Rather than micro-managing firms or sectors, it should focus on creating a conducive business environment by advocating for infrastructure improvements, regulatory reform, and efficient market dynamics.

Fostering growth and competitiveness

This would involve working closely with other departments, particularly those in the economic cluster and with local governments, to ensure that policies across the government help foster business growth and competitiveness.

South Africa’s economic challenges are complex, but by prioritising export-led growth, reforming tariff policies, and fostering a business-friendly environment, the department could help set the country on a path to faster growth and increased employment.

These changes can’t happen overnight, but by addressing foundational issues and refocusing on growth-driven policies, manufacturing could be revitalised. The time for a bold reimagining of South Africa’s industrial policy is now. The goal is clear: a competitive, export-ready economy that fosters prosperity and improves the lives of all. DM

Ann Bernstein is executive director of CDE. This article draws on a new CDE report, ‘Rethink growth, jobs and the DTIC’ which is the seventh document in CDE’s Agenda 2024: Priorities for South Africa’s new government series.