Reading the World Bank report titled “Unlocking SA’s potential”, which made the case for an export-led industrial and trade strategy, left me feeling it was analytically inadequate at best, and problematically partial to a particular economic and social paradigm at worst.
This is quite different to the plurality one has started to expect from the bank’s microeconomic reflections on our context. My observations of the report can be categorised in three areas — the insightful, self-evident and the more contentious.
I believe most would agree with the insightful microeconomic observations. For instance, that the SA export structure is characterised by an absence of small firms. So too can we agree that meaningful consideration of the distributional costs of tariff amendments and other measures is an important part of how we ought to proceed.
Market structure matters too. So I agree that “fierce (and at times unfair) import competition” has led to industrial firms exiting in key tradable sectors, while hollowing out our productive base. I also agree that the focus on productive services and expanding knowledge-intensive service exports has to be a key frontier of SA industrial policy. The World Bank is similarly correct in saying weak and uneven state-owned enterprise productivity in network industries has (alongside other challenges) weakened our export performance in traditional areas. All good.
Yet it is in the less self-evident areas of policy that the report loses me because I had expected it to reflect on how SA at this juncture, faced by universal and peculiar challenges, can and ought to respond, and presciently plan for a turbulent reshaping of global production networks and value chains and contested global distribution of economic power. That an export-led strategy may be suitable is correct, but to what degree such a strategy may confront the geopolitical headwinds of the world as it is, is glossed over.
Two examples bear this out. The report critiques the bid by SA social partners (government, business, labour and communities) at the National Economic Development & Labour Council to reduce non-oil imports by a fifth. It fashions how this would be achieved as a judicious mix of jingoistic import substitution and some form of medieval autarky. Why do I say this? — considering the economic modelling used to suggest that local content and the use of tariffs are bad.
The computable equilibrium model assumes, "(that) increases in tariffs on imports of all non-fossil fuel commodities” is what is meant by localisation. Wilfully or naively, this assumption is carried through to imply indiscriminate changes to tariffs across the board. This is made synonymous with the economic reconstruction & recovery plan’s pursuit of localisation, then carried over as “evidence” when it is not.
No country would pursue blanket tariff increases across the board, precisely because of the social costs of moving from strong (in some countries, near total) import intensity of final household, firm and government consumption towards autarky. Moreover, some imports are needed as intermediate inputs into producing stuff here at home, and others (such as palm oil to make soap) are needed because we cannot produce them locally due to our climatic conditions.
Put simply, “vertical specialisation” (the import content of exports) exists, and the Organisation for Economic Co-operation & Development itself maps the import content of SA’s exports as far higher than most single commodity-reliant exporters, precisely because of the relative span and diversity of our industrial undertakings relative to other developing countries.
To beat the data and model policy changes that are absolutist is to tell the story you want, rather than the reality as it is. It is to also unobjectively engage with our policy instruments as they are, rather than as the report imagines them to be.
The International Trade Administration Commission (Itac) issues scores of rebates, offsetting customs duties, across different industrial sub sectors precisely because SA trade policy recognises the balance required between imports and the need for machinery (we even issue permits for second-hand imports of agricultural and mining machinery), or component imports duty free for instance, to enable industrial value addition and exports on more cost competitive terms.
It is precisely this disengagement with rebates, and in the case of exports drawback provisions on imported materials used in the making or processing exported goods, that is concerning. The transmission mechanism assumed by the report for the negative affect of these imagined blanket tariff changes on output growth, imports and exports is even more bizarre.
On page 36 it says: “The increased cost of imports makes domestic production more expensive, which reduces it directly and GDP declines”. In a world where SA had no rebates (which we have had for a century or more) or all tariff lines were to be increased to their bound rates, this would be an insightful and theoretically sound reasoning.
Rather than engage the real-world policy instruments, whose guidelines have been enunciated in numerous gazettes over the years (freely available online), the report makes an assumption that makes for neat mathematics but limited real-world insight. It also disparagingly suggests that Itac’s recommendations, rather than being informed by the balance of evidence and relevant policy considerations, is singularly fixated with localisation “at all costs”.
Lastly, there is an assertion important to respond to regarding the institutional capability of Itac. The report suggests that because no published applications in one chosen year were rejected, and that tariff and trade defence support have been extended to the steel and poultry sectors, that “the commission has been increasingly willing to support greater protection for SA industries”. This reading of the recent path of Itac decisions reflects a deep misunderstanding of what has actually happened.
This is then used as basis for a sweeping recommendation. The reality is that any reading of the decisions taken by the commission over the past two decades shows some rejections of Itac recommendations or instances where the ultimate decisionmakers (the ministers of trade and finance) have rejected the commission’s recommendations. So too is the assertion of “increasing willingness” not informed by any reading of the act that enables Itac’s work and the need to anchor this work in not only in independent and professional judgments and discretion, but also the policy domain within which we operate.
At a more fundamental level the World Bank’s advice to the new “sheriff in town” at Meintjies Street signals limited engagement with existing or latent trade barriers to export growth (aside from climate barriers, maybe). Silences aplenty. The carbon adjustment taxes, unscientific trade barriers in agriculture, section 232 tariffs on steel, growing unilateralism and other similar barriers that confront and constrain any export-led strategy are not spoken to, aside from a passing reference to tariff barriers in our Southern African neighbourhood.
The report frames its assertion of the inadequacy of our industrial policy toolkit by dabbling in “imagined differences” rather than in real engagement with the blind spots (and there are many) of our policy effort.
In telling us to analyse or, more presciently, co-ordinate better across “cross-government priorities”, the report shares sanguine observations. Yet it seems the world is a lot less optimistic a place than just better trade facilitation can fix. In the throes of rising protectionism, a global subsidy race and super power conflict in the technological terrain, with trade restrictions as an operative and frequently deployed tool, I may have been naive to expect more — more than just the alluring shadows of our own imagined and real missteps.
• Cawe is chief commissioner at the International Trade Administration Commission. He writes in his personal capacity.
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