SA should overhaul its industrial policy to move it away from protectionism and towards a focus on maximising exports.
This would require a new approach to the master plans implemented by the department of trade, industry & competition (DTIC) as well as towards tariff-setting and competition policy.
The Centre for Development and Enterprise (CDE) made these recommendations in its latest report, “Rethink Growth, Jobs and the DTIC”, the seventh of its reports on how the government of national unity should address the priorities facing it. The report focuses on how to strengthen manufacturing firms.
It highlights what it says are alarming statistics, namely that from 1960 to 2023 the manufacturing sector’s contribution to GDP fell from 20% to under 13%; employment in manufacturing declined from 1.8-million in 2001 to less than 1.6-million in 2023; and only 20% of manufacturing firms export at all, with the number of firms exporting manufactured goods falling from 42,000 to 36,000 in 2015-22. Of these, more than half export less than 5% of their output.
CDE recognised that some of this poor performance could be attributed to a number of factors outside the department’s control but said its efforts to promote manufacturing have largely been harmful rather than helpful.
“Policy choices are not premised on maximising export growth, but on trying to replace imports with local production — an approach that has led SA down an increasingly protectionist path,” said CDE executive director Ann Bernstein.
The problem with the department’s import-replacement policy, known as localisation, is that it “undermines the likelihood of SA firms becoming sufficiently competitive to expand their share of the world’s demand for goods”, said Bernstein. This had a negative effect on employment.
Exports should be regarded as the most important metric to assess the competitiveness of firms and of the impact of policy interventions.
— CDE executive director Ann Bernstein
The department’s master plan approach — there are master plans for clothing and retail, sugar, steel, agriculture, agri-processing and furniture — was deficient in that it was predicated on a sectoral view of the economy that the CDE said could create blind spots since firms in a particular sector could vary greatly in size, age, profitability and region.
“What does bind firms in a single sector together, however, is a shared interest in trying to limit foreign firms’ access to their customer base — and this reinforces the tendency of the master plan approach to generate protectionist proposals,” the CDE said. The master plans had delivered some protection from foreign competition but done nothing to raise the level of manufactured exports.
“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,” said Bernstein. “The focus on exports would also help ensure that domestic firms are better able to compete against imports as well.”
CDE’s report contains several recommendations for the department to create an environment in which firms can become more productive and competitive.
These include a reform of the tariff system, a review of the department’s major industrial subsidy programme, a switch from master plans to productivity councils, a change in focus of competition policy and the adoption of a new role for the department.
All tariffs on goods not made by any SA firms should be eliminated.
An independent review should be conducted of the support provided to the vehicle industry, SA’s largest subsidy programme, which CDE said costs the economy tens of billions of rand annually in higher vehicle costs.
The existing master plan approach should be replaced by setting up productivity councils, the focus of which must be on helping firms, often organised according to the logic of value chains, to improve competitiveness and move into export markets.
Competition policy should focus on preventing large firms from engaging in anticompetitive behaviour that would distort markets. Public interest interventions and full scale “market inquiries” should be kept to a minimum.
The department’s role should be to promote business and markets in government and society.
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