SA must ditch Trumpian protectionism to create jobs
The emergence of the government of national unity (GNU) marks the most significant political shift in South Africa in the past three decades. But what does it mean for our economy and the prospects of millions of unemployed South Africans? And what about the future of manufacturing – a key creator of jobs in our country?
South Africa’s decline in manufacturing is alarming. From 1960 to 2023 the manufacturing sector’s contribution to GDP fell from 20% to under 13%, while employment in manufacturing declined from 1.8 million in 2001 to less than 1.6 million in 2023.
There are many reasons for this: the decline of the mining sector has had a knock-on effect on manufacturing, the quality and availability of infrastructure (such as electricity supply and logistics) has declined, competition from imports has increased, and ill-conceived empowerment polices have dented our manufacturing and export capabilities.
While the decline cannot all be blamed on any particular department or entity, the efforts of the Department of Trade, Industry and Competition (dtic) to promote manufacturing have largely been harmful rather than helpful. Indeed, there is now acknowledgement that previous efforts by the dtic to re-industrialise South Africa have failed.
The president, Nedlac and TIPS, a think tank closely aligned with the dtic, have expressed concern about the outcomes produced by the “master plans”, a core instrument of industrial policy developed by the dtic. However, apart from statements that sound like calls to ‘double down’ on the existing dtic approach, there has been little sign of fresh thinking, or calls for significant reform.
The core problem is the focus on replacing imports with local production – an approach that has led South Africa down an increasingly protectionist path.
Localisation and other protectionist measures mean that South African firms do not face competition from foreign firms, so they have less incentive to increase productivity as quickly as is being achieved elsewhere. They therefore fall behind and become more reliant on protection. To compound the problem, local firms are inhibited from importing new technologies or becoming part of global value chains by these same trade restrictions.
Tariffs generally disincentivise exports. Why would you export frozen poultry at the world price (minus international transport costs), when you can sell the same product locally at a price that includes a 62% tariff? This is the anti-export bias of tariff protection.
South Africa should not be following a Trumpian, beggar-thy-neighbour path of protectionism, which will be the death knell for our economy in an ever-globalising world. Opportunities to grow and dramatically raise employment levels are much larger for firms entering global markets than those confined to the small, mostly saturated local market. Far from protecting South African manufacturing employment, localisation policies are accelerating firms’ loss of competitiveness, which negates any hope that manufacturing firms will increase their employment levels.
All of these weaknesses and more are contained in the dtic’s masterplan approach which is predicated on the view that the South African economy comprises a number of sectors and sub-sectors. While there are circumstances in which this approach is appropriate for framing policy, a sectoral view can also create blind spots since firms in a particular sector can vary greatly in size, age, profitability and region. What often binds firms in a single sector together is a shared interest in trying to limit foreign firms’ access to their customer base, reinforcing the tendency of the master plan approach to generate protectionist proposals.
A far more sensible approach would be to focus on the needs of firms looking to expand their exports. Exports should be regarded as the most important metric to assess the competitiveness of firms and of the impact of policy interventions.
By making exports the goal of industrial policy, policymakers are forced to focus on the key elements that drive competitiveness, particularly input costs and productivity. The effect of such an approach will be broader than just exports. Inevitably, these gains would spill over to firms supplying the domestic market. Thus, the focus on exports would also help ensure that domestic firms are better able to compete against imports as well.
CDE has recommended crucial ways in which firms can become more productive and more competitive, starting with the reform of the tariff system. There should be an independent evaluation process for all tariff applications by firms seeking some form of protection, with these evaluations considering the full economic costs of protection on protected industries’ customers and downstream firms, not just the benefits that the protected firms will enjoy. Tariffs should be reviewed regularly and have built in sunset clauses. All tariffs applying to goods not made by any South African firms should be eliminated.
Importantly, we need to move away from masterplans and replace them with productivity councils as designed and requested by groups of firms. The focus must be on helping firms, often organised according to the logic of value chains, to improve competitiveness and move into export markets.
Competition policy must return to its foundational goals – preventing large firms from engaging in the anti-competitive behaviour that would distort those markets. Public interest interventions and full scale ‘market inquiries,’ which tend to raise risks and increase the barriers to market entry, should be kept to a minimum.
Finally, the dtic must adopt a proactive stance in promoting business and markets. Across government—particularly within the economic cluster and in public communications—the dtic should lead the conversation, ensuring other departments prioritise actions that drive business growth and expansion.
It is puzzling that, despite the President’s acknowledgement of policy failures and an injection of pro-market thinking into the Cabinet, there has been so little discussion about reforming government’s efforts to promote industrialisation. A fundamental overhaul of master plans, tariff-setting, and competition policy is critically needed if we want an economy that grows faster and creates many more jobs.
Bernstein is executive director of CDE. This article draws on a new CDE report, ‘Rethink Jobs, growth and the dtic’, which is the seventh report in CDE’s Agenda 2024: Priorities for a new government series.
This article was published on News24