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Picture: 123RF
Picture: 123RF

Industrial policy is typically either focused on import replacement (the SA model) or export-led policy (Asian tigers). These are not mutually exclusive ideas, but the primary focus is different.

The first assumes that by removing import competition we will build companies that are globally competitive and then export. The other says we need to focus first on export markets and do all we can to be globally competitive, and the local market will benefit from that improved competitiveness.

I don’t believe anyone in SA is proposing “the most laissez-faire policy”, as suggested by Philippa Rodseth on these pages and echoed by Jake Morris (“Keep ideology out of growth debate”, December 17, and “Import substitution works for other countries, but somehow not for SA”, January 9). As someone who firmly believes an export-led approach is essential, let me explain why I believe the alternative will lead to misery.

First, it already has. We have had import replacement as a formal government policy since May 2020 and as a less structured policy since 2007 with the publication of the first Industrial Policy Action Plan, and we are hardly shooting the lights out. By its very nature, import replacement reduces competition in the market. Companies do not become more competitive in the face of reduced competition, and we are not an exception.

I don’t believe anyone would advocate for the wholesale removal of tariffs, though this is how the export-led strategy is painted. However, we should not impose tariffs and then never review them (93% of all tariff codes with a duty of more than zero have not had their duty levels reviewed in more than 20 years). We should not subsidise without end (SAA, clothing, automotive and scrap metal). When the support can simply be budgeted for every year we discourage companies from investing in innovation.

SA is an unproductive country, with insufficient energy, poorly educated workers and broken port, rail and road infrastructure. Import replacement gives cover to politicians who don’t want to address the bad policies that have created this economic malaise. When you focus on exports these cannot be ignored. Import replacement allows the imposition of duties or giving of subsidies as an alternative to reform.

Import replacement is an attempt to pick winners, in a world in which picking winners in almost any pursuit is extremely difficult. The way this works in reality is that master plan committees are selected to ensure only the “right” people are in the room (the steel industry master plan). We rob Peter to pay Paul (clothing master plan and its assault on the other Southern African Customs Union states).

Import replacement gives cover to politicians who don’t want to address the bad policies that have created this economic malaise.

Much of our protection goes to large raw material monopolies (steel, glass) and no attention is paid to improving the competitiveness of the industries. I was in a meeting recently where a trade, industry & competition department official stated that she felt a 20%-25% price premium on locally procured product by the government was acceptable.

It is not. The many potential suppliers in that room obviously loved the idea, but if the government will pay 20% more on its procurement bill what happens to all the other services that then can’t be delivered?

You want a duty changed, even the removal of the duty on a product not made locally? Stand in line and wait for more than two years, on average, for a decision. You will be required to sign a reciprocal agreement, committing you to employ more people, invest more and give progress feedback to the minister every six months for three years. If you are really unlucky (solar panels), you will wait 66 months for a decision on your application and still not get it.

Government procurement? Designation investigations are opaque. No-one knows who applies or which sectors are being investigated, and no record of the decision is published. You just wake up one day to find you can no longer supply the government because your competitors lobbied behind your back and now your manufacturing process no longer fits the criteria for local manufacture (cement).

Lessons

Yes, we should look and learn from the Asian Tigers, but we should also learn from the far greater number of import replacement failures. Argentina until a minute ago, and most of South America from the 1930s onwards. Pakistan, India and SA until 1995, and again since 2007, most of Africa since the ’60s and Russia right now, though largely because of sanctions. Britain in the ’70s.

Morris correctly notes that “competitiveness is complex and depends on more than import tariffs. Factors such as economies of scale, labour rates, productivity, skills availability, public infrastructure and other government trade and industrial support play a major role”. Yet these issues don’t receive attention because import replacement gives cover to bad policies.

I am not proposing, nor do I believe anyone is, that we throw the doors open, but our localisation is mostly protecting legacy industries at the expense of small downstream producers. These are the country’s most powerful lobbies. For as long as companies can obtain evergreen protection they will lose interest in innovation.

Here are my suggestions for immediate implementation:

  • Remove import duties on all products not made locally.
  • Amend our tariff regulations so that decisions have to be made within 18 months. There is no scenario in which anyone is better off with a decision that takes five years.
  • Open up the process of designation. No more secret investigations.
  • Industry to select their representatives for master plan committees. Do not refuse access to people who disagree with the chosen message.
  • Publish minutes of all master plan meetings. No more secret meetings with subsets of certain industries to agree on special deals (scrap metal).
  • Base tariff decisions on economics — do not pre-decide based on lobbying.
  • Force duty reviews every five years, even if the decision is to retain the duty. Likewise for all subsidy programmes.
  • Take full public comment for these reviews and publish the outcomes.

• MacKay is CEO of XA Global Trade Advisors.

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