NEVA MAKGETLA: Government needs to rethink trying to save dinosaurs

Policymakers are always under pressure to rescue large, well-established firms and industries that have no prospect of real recovery — a practice that can ultimately doom economic development.

In SA, there is a particular temptation to rescue dinosaurs because large, historic and long-privileged companies dominate much of the economy. Even when their products can no longer compete, they retain world-class lobbying capacity. To manage the pressure requires stronger guidelines on when the government and consumers should be asked to ante up.

A few examples suggest the challenges. The leading example, of course, is Eskom. The government took nearly a decade to come to grips with the reality that disastrous missteps at Medupi and Kusile meant that even with extraordinary price increases and subsidies, Eskom can no longer supply the country by itself. In consequence, load-shedding in 2023 was twice as high as in 2022, and eight times as high as 2021.

Sluggish GDP growth in 2023 — less than 1% for the year, well behind the population increase — was largely down to the reluctance to accept that Eskom’s monopoly over the electricity supply had in itself become a key drag on economic growth.

Similar challenges emerge from the industry master plans. The original idea was that the government would focus on priority industries that could drive industrialisation and job creation. Instead, two of the 10 published master plans respond to crises in poultry and sugar, which together account for 0.5% of GDP and exports, and just more than 1% of employment. In both cases, the plans seem focused more on boosting demand through trade protection and localisation agreements than on improving competitiveness.

The 2019 poultry master plan maintained extraordinarily high tariffs on chicken, a staple food for working-class families, but did virtually nothing to lower input prices or upgrade productivity. From 2019 to 2023, chicken imports fell more than local poultry production increased; the price of chicken climbed 2.6% above consumer inflation; and chicken consumption per person fell by more than 10%. For background, the poorest 60% of households consume 55% of chicken, compared with 30% of beef.

In sugar, most imports come from Eswatini, ruling out tariff protection. Instead, the master plan included three-year local procurement commitments by retailers and downstream manufacturers in return for price restraint from sugar producers. When the deal ended in 2023, the growers raised prices by 20% (according to the producer price index) and imports promptly rebounded.  

For a more forward-looking industrial policy, the government needs to take a long, cold look at the costs and benefits of supporting established companies, no matter how persuasive (that is, often desperate and/or misleading) their lobbying. Is this a temporary setback or have the producers been surpassed by emerging technologies or products? Will the benefits of saving them outweigh the costs, either through huge external benefits to society or because they can recover if given time and affordable assistance?

The public sector needs to build its capacity to answer these questions objectively, irrespective of the pressure brought to bear by industry stakeholders.

Ultimately, industrial policy is in trouble when it starts by asking how to bolster demand for industries in distress. Rather, rescue efforts have to begin by identifying the main cost drivers for the industry and whether they can be addressed, whether they are raw materials, infrastructure, skills, technologies or debt.

If an industry cannot become competitive, the government should provide support only in a few rare cases. These include to subsidise necessities for working people; to maintain livelihoods on a mass scale, either directly or in downstream industries; or to ensure local production of genuinely strategic inputs.

If an industry can’t or won’t cut costs and doesn’t meet those criteria, industrial policy should take a leaf from the climate crisis and support a just transition. That means providing assistance for the affected workers and communities to find new livelihoods, rather than placing more burdens on SA’s already stretched economy.

• Makgetla is a senior researcher with Trade & Industrial Policy Strategies.