More state intervention will result in a stagnant economy


Chris Hattingh | Deputy Director | Free Market Foundation | Member of the advisory council Initiative for African Trade and Prosperity | Senior Fellow at African Liberty | mail me | 

Congress of South African Trade Unions (COSATU) General Secretary Bheki Ntshalintshali’s thought-provoking, in-depth piece advocating the ostensible strengths of the government’s localisation plans refers (‘Ideologues do the jobless a disservice by turning localisation into a swearword‘, January 9).

Ntshalintshali highlights the desire for reindustrialisation and job creation as goals of localisation. But while localisation may result in some short-term gains, pursuing policies of an ultimately protectionist bent will not unlock greater foreign direct investment or bring about sustainable, integrated supply chains. It will instead entrench vested interests and cronyist practices and undermine both the spirit and potential of the Africa Continental Free Trade Area (AfCFTA).

Policies that make people’s lives more difficult than they are

SA has tried the ideas and policies of state control and redistributionism, to devastating effect: an over 47% unemployment rate (on the expanded definition), and an over 74% youth unemployment rate. The economy was already on a very weak footing before COVID-19 due to ever-higher taxation rates, a huge public sector wage bill, failing state-owned entities and a policy environment that discourages private and informal business formation and wealth creation.

If GDP growth breaches 5% in 2022 that would be remarkable, but to make real progress we need 6%-9% growth per annum for the next five years. We have tried the route of less economic freedom and we are now burdened with the consequences. Only by pursuing more freedom, lower taxation and a more limited government can we achieve truly transformative growth.

With inflation likely to increase through 2022 there will be more pressure on low-to-middle income consumers. Goods will be more expensive, and as a result of years of government monetary policy the Rand is not as strong as it once was. Thus, any new policies under contemplation need to be judged from the lens of whether they could add more inflation.

Localisation, because it increases the cost of materials and goods, is perhaps the most likely culprit that will further burden the already beleaguered South African. It would surely be unconscionable for the government to implement a policy that makes people’s daily lives even more difficult than they are.

The imposition of higher tariffs on imported components and products

At the launch of a Centre for Development & Enterprise report, ‘The Siren Song of Localisation’, executive director Ann Bernstein pointed out that the ‘country has been battling with stage four load-shedding over the past few weeks. Our problems are not the result of importing too much from the rest of the world. They are home-grown. Imposing local content procurement rules is not going to fix them‘.

The economic lessons contained in Bernstein’s words, and indeed in the entire report, need to be digested and adopted, most crucially in the trade policy sphere.

Many analysts, commentators, policymakers and bureaucrats are working through Part 1 of the Zondo commission report. While we should all be grateful for the work of the commission — and protect and reward those whistle-blowers who risked their careers and lives to shed light on corruption — what we should not lose sight of is the fact that when you mix government with the economy to ever higher levels you increase the incentives for corruption. When the only way to ‘get ahead’ is by having the requisite political pull, you will always ensure that more unscrupulous actors are drawn towards the state.

Because localisation necessarily requires the imposition of higher tariffs on imported components and products, as well as subsidies and other forms of state support for ‘desired’ locally-manufactured goods (it is unclear why bureaucrats and politicians ostensibly know better what consumers demand than the consumers themselves), it opens up yet more avenues for increased state control over various parts of the economy.

Corporates and manufacturers with the necessarily large and expensive compliance departments will have the influence and scope to ensure their operations continue unabated. But most small-to-medium businesses won’t be able to deal with the compliance paperwork (and may well be forced to close, resulting in more unemployment), or will desperately seek an agreement with a bigger business that could absorb them.

The possibility of cronyism and corruption

Regardless, increased state involvement in the economy concentrates more power in large corporate and political hands, ensures more concentrated and less competitive markets, and increases the possibility of cronyism and corruption.

The government would do much better to capitalise on SA’s economic strengths and trade potential by, for example, speeding up the establishment of a truly independent Transnet Ports Authority, abandoning the state-enforced monopoly in electricity generation and distribution that is Eskom, implementing the prescripts of the AfCFTA, and putting pressure on other African states to follow.

Even the most strident of pro-localisation voices would be hard-pressed to convince South Africans that, absent cheap and reliable electricity, such master plans would bring about meaningful reindustrialisation. Instead of potentially undermining the country’s trade footing, the government can do a lot better by focusing on the removal of its regulatory and legislative barriers, which have contributed to the country’s economic malaise.

SA does produce excellent products, and more jobs could be created here. But without the necessary level of investment, it is unlikely that transformative and sustainable opportunities will materialise — such investment will only come in an environment that is entrepreneur-friendly — and free from as much regulation and red tape as possible.

Business Day columnist Claire Bisseker has pointed out that the fixed investment ratio dropped to 13% in 2021, and that fast-growing countries have a ratio of 25% or higher (‘A new year in which SA will have nowhere to hide’, January 10).

In conclusion

Ntshalintshali uses the word ‘ideologues’ to describe those who have expressed doubt or criticism of localisation plans. He is perfectly correct, of course. Everyone has a particular ideology or philosophy that colours their worldview (whether they recognise it or not), and that informs what role they believe the state should play.

Even pragmatism is an ideological position, properly understood. Those who push for ever more state intervention in the economy — and people’s decisions and lives — are committed ideologues of a different stripe.

Ntshalintshali and the almost 2 million members of COSATU will be better served by a growing economy, not one that is stagnant and always reliant on state subsidies. SA can build more resilient and inclusive supply chains, with all the associated job opportunities, but only through a path of integration and growth in a wider context.



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