Rethink growth, jobs and the DTIC

20 November 2024

The Centre for Development and Enterprise (CDE) today called for an overhaul of industrial policy to move it away from protectionism and towards a focus on maximising exports. A new approach to master plans, tariff-setting and competition policy is urgently required.

CDE’s new report in its AGENDA 2024 series, ACTION SEVEN: Rethink growth, jobs and the DTIC shows how the Department of Trade, Industry and Competition (DTIC) has failed to achieve its goals to re-industrialise the economy and makes a number of recommendations to remedy this.

“The President and NEDLAC partners acknowledge that existing policies have failed to deliver and that fresh thinking is needed,” said CDE executive director Ann Bernstein.

“South Africa needs a new approach, and the government of national unity (GNU) creates an opportunity to change the country’s course for the better,” she added.

The statistics are alarming:

- From 1960 to 2023 the manufacturing sector’s contribution to GDP fell from 20 per cent to under 13 per cent.
- Employment in manufacturing declined from 1.8 million in 2001 to less than 1.6 million in 2023.
- Only 20 per cent of South Africa’s manufacturing firms export at all, with the number of firms exporting manufactured goods falling from 42 000 to 36 000 between 2015 and 2022. Of these, more than half export less than 5 per cent of their output.

CDE recognises that some reasons for this poor performance are outside the DTIC’s control: the decline of the mining sector has had a knock-on effect on manufacturing, the quality and availability of infrastructure (such as electricity supply and logistics) has declined, competition from imports has increased, and ill-conceived empowerment polices have dented our manufacturing and export capabilities.

Nevertheless, in the context of this challenging environment, the efforts of the DTIC 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 South Africa down an increasingly protectionist path,” said Bernstein.

The DTIC’s focus on protectionism, master plans and a selective, interventionist approach to regulating firms, especially in the realms of competition policy, have been counterproductive. Such policies have overwhelmingly taken the form of import-replacement, known colloquially as ‘localisation’.

“The problem with localisation policies is that they undermine the likelihood of South African firms becoming sufficiently competitive to expand their share of the world’s demand for goods,” said Bernstein.    

This is for three reasons:

- Protectionist policies mean that South African firms do not face competition from foreign firms, so they have less incentive to increase productivity as quickly as is being achieved in other countries. They therefore fall behind.
- Tariffs generally disincentive exports. Why would you export frozen poultry at the world price (minus international transport costs), when you can sell the same product locally at a price that includes a 62 per cent tariff? This is the anti-export bias of tariff protection.
- Local firms are inhibited from importing new technologies by the same protectionist policies that reduce competitive pressures on them.

“South Africa should not be following a Trumpian, beggar-thy-neighbour path of protectionism, which will be the death knell for our economy in an ever-globalising world. Far from protecting South African manufacturing employment, localisation policies are accelerating firms’ loss of competitiveness, with a negative impact on employment,” said Bernstein.

All of these weaknesses and more are contained in the DTIC’s master plan approach which is predicated on its view that the South African economy is composed of a number of sectors and sub-sectors.

While there are circumstances in which this approach is appropriate for framing policy, a sectoral view can also create blind spots since firms in a particular sector can 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.

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 effect of these policies will be broader than just exports. Inevitably, these gains would spill over to firms supplying the domestic market. Thus, 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 DTIC  to create an environment in which firms can become more productive and more competitive:

1. Reform the tariff system

- Establish an independent evaluation process for all tariff applications by firms seeking some form of protection, and ensure that these evaluations consider the full economic costs of protection on protected industries’ customers, not just the benefits that the protected firms will enjoy.
- Regularly review all tariffs and their supposed benefits, all of which must have sunset clauses, which automatically compel their phase-down after a defined period, unless strong motivations can be shown for extending the sunset clause.
- Eliminate all tariffs applying to goods not made by any South African firms.

2. Review the DTIC’s major industrial subsidy programme

- Set up an independent review of the support provided to the vehicle industry. This is the largest subsidy programme in the country and costs the economy tens of billions each year in higher vehicle costs. The findings of the review should be released for public debate.

3. Move from masterplans to productivity councils

- Replace the existing master plan approach by setting up productivity councils as designed and requested by groups of firms. The focus must be on helping firms, often organised according to the logic of value chains, to improve competitiveness and move into export markets.

4. Change the focus of competition policy

- Competition policy must return to its foundational goals – preventing large firms from engaging in the anti-competitive behaviour that would distort those markets. Public interest interventions and full scale ‘market inquiries’ should be kept to a minimum. 

5. Adopt a new role for the DTIC: Promote business and markets in government and society

- Within government generally, in the economic cluster of ministers, and in communications with the public, the DTIC should seek to shape the debate to ensure other departments do everything required to promote the expansion of businesses.

“The DTIC needs to reform its trade policies, shift its industrial policies towards promoting exports, and harness the competitive pressures that well-functioning markets can provide. It should also become an effective advocate for business and markets, within government and across society,” said Bernstein.

“Such an approach would help remove obstacles to firm entry, survival and expansion. The DTIC’s aim should be to create the environment in which firms can become more productive and to harness the competitive pressures of markets,” she added.

Issued by Rifoloe Benjamin on behalf of CDE, 20 November 2024