Trade, industry & competition minister Ebrahim Patel is on a mission to spur SA’s re-industrialisation armed with a new localisation policy that requires firms to substitute 20% of imports with locally made goods within five years.
Business, clutching at any straw that could haul them out of the Covid swamp, has embraced the policy enthusiastically on the basis that it could stimulate domestic demand by R200bn annually.
An accord on localisation has been struck at the National Economic Development and Labour Council (Nedlac), an initial 42 products identified for import substitution and R240m raised from the private sector to appoint technical experts to drive the plan. Thirty CEOs have agreed to personally champion it.
The fact that SA’s import intensity at 25.1% of GDP exceeds the global average of 21.8% seems to have clinched the case for the government. The department of trade, industry & competition’s policy statement on localisation says SA’s “overpropensity” to import makes it vulnerable to supply shocks, means it takes longer to get necessary goods, results in domestic firms being international price-takers and, ultimately, results in fewer jobs.
“A focus on localisation is therefore at the heart of the government’s strategy to create sustainable jobs and build the economic base for long-lasting prosperity,” it concludes.
Case closed. Only, it seems the empirical work to support the feasibility of the 20% target was never undertaken by the government. To fill this void, research was commissioned by organised business from local consulting firm Intellidex. Released last week, it finds that a one-size-fits-all 20% target is unrealistic because the right conditions do not exist in most sectors.
The department concedes that the high cost structure of SA’s energy and logistics sectors and a lack of critical infrastructure and skills have held back localisation in the past and that until addressed “the full success of localisation efforts will not be realised”.
That’s a gross understatement. The Intellidex report warns that prices could be up to 20% higher if firms are forced to localise before the right conditions are in place. This depends on the pace of the government’s economic reform efforts, which have so far been glacial.
But not only does the report conclude that the 20% target is unfeasible, maximising localisation is also the wrong policy goal. The real focus should be on raising the whole economy’s competitiveness and creating jobs, it says, even if it means allowing in cheap imports. Localisation should be only a secondary objective.
And there’s the rub: the policy is wrong-headed and the government and business have gone about it backwards, starting with the announcement of a target and then doing the empirical research to support it — only to find that localisation will take time and investment and involve hard trade-offs. (Essentially, without first building new capacity, SA will produce goods of lower quality or prices will shoot up, or both. So, Patel can strong-arm the system but there’ll be negative consequences if he pushes too fast.)
It is sadly typical of the government to announce a new policy goal without first doing its homework to find out whether it is feasible and, in the process, gloss over the root causes of the failure of previous policies and the economy’s inability to grow. It is also sadly typical of business to rush to support ill-considered government policy, only to backtrack once realising it has the potential to do great harm if wielded in a rigid, prescriptive manner.
“Prescription” is, of course, Patel’s middle name. The fear is that he will be tempted to raise import tariffs to artificially boost the localisation drive should it fail to move fast enough.
Even the Reserve Bank is becoming squeamish. For the first time in recent memory, it included “import tariffs” in its latest monetary policy committee (MPC) statement in the list of items that threaten SA’s inflation outlook. Pressed for an explanation during the post-MPC investor session last week, the Bank confirmed that this was because policy seemed slanted in a more protectionist direction. Hey-ho!
• Bisseker is a Financial Mail assistant editor.
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