Localisation has become a mantra of the government in the recent past, and the decision by the Treasury is really just an extension of existing policy in various government departments to foster and support the idea.
The most explicit justification for the policy came from a policy statement made by the Department of Trade, Industry and Competition (DTIC) in May this year. The document says: “This strategy – called localisation – is about building local industrial capacity for the domestic market and for export markets. It is not a turn away from engaging in global markets, but it is about changing the terms of the engagement to one where we are no longer mainly an exporter of raw materials.”
The document notes that the SA manufacturing sector has underperformed the overall economy since the start of the democratic era in 1994. “In 1994, manufacturing represented 19.2% of the South African economy, declining to 11.8% in 2020.”
SA has an “overpropensity” to import goods that could otherwise be produced in South Africa, the document states, and it supplies a graph to justify this statement. Already, we see a problem.
The graph shows a whole bunch of countries where imports are a lower proportion of GDP than SA, with Brazil and the US at the top of the list. Their merchandise imports are about 10% of GDP, compared with ours, which are about 25%. The problem is that SA’s level is almost exactly the global average, which the document actually specifies. In other words, the DTIC is propounding a policy to change something where South Africa is not by any means an outlier.
In the case of cement, SA does in fact have a set of long-standing local suppliers, including the biggest player PPC owned essentially by the Public Investment Corporation, and Sephaku owned by Nigerian company Dangote. PPC’s share price bounced on the news about the ban on foreign cement, and it has been on a tear for the past few months. The local industry, not surprisingly, loved the idea, with the industry body, Cement & Concrete SA, saying the ruling would protect a “vitally important” sector.
So it seems that the government, the industry and shareholders are all happy about the plan. What could possibly be wrong with the idea? Actually, everything.
It’s not like SA is the first country to think of these techniques. Recently, then US president Donald Trump went on a massive localisation campaign, imposing enormous tariffs against Chinese-manufactured products. As I have pointed out before, Trump’s policy ended in failure; the trade differential between China and the US was worse when he left office than when he entered it.
The reason for this is that exporters don’t just sit there and do nothing when their exports are threatened. I recall reading about a Chinese bicycle producer who said his company had moved production to Vietnam “before Trump had stopped speaking”.
The global economy is an integrated affair, and localisation tends to isolate a country from the global economy.
That isolation becomes a self-perpetuating cycle, because the more you remove yourself from the global economy, the more difficult it becomes to regain a position within it. And it becomes more difficult because these industries that you have protected – and isolated – tend to innovate less.
The other problems are more obvious. Localisation tends to raise costs, and that inadvertently hurts other industries. More expensive cement means fewer houses, for example. The result of higher prices is, of course, also higher inflation.
There is also a reputational issue, and this is where SA is failing now. Localisation tends to discourage investment because it introduces the risk of arbitrary government action. For the industry it benefits, obviously it helps. But there is no way to balance that against investment that might have happened but didn’t because foreigners are now all of a sudden being prejudiced. Just as businesses don’t fail to notice a country is prejudiced against them, foreign governments don’t fail to notice either – and they tend to take retaliatory action.
So what are the alternatives? This is the biggest irony because there are thousands, but they all fall under the rubric of innovation and competition. South Africa needs to develop its competitiveness, innovation and internationalism. And this is really not as hard as it seems; every 18 years, half of the companies on the S&P 500 are newcomers. With a little effort, some of those could be South African. After all, a South African born entrepreneur is completely turning both the car industry and the space industry on their heads.
Things change fast, but you have to want it, and work for it – and not get bogged down in developmental ideas supported by troglodytes. DM168
Tim Cohen is editor of Business Maverick.
This story first appeared in our weekly Daily Maverick 168 newspaper which is available for R25 at Pick n Pay, Exclusive Books and airport bookstores. For your nearest stockist, please click here.