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SA’s industrial policies should focus on Africa

By Mike Schussler

Mike Schussler, economist and FairPlay expert panel member.

Never in our lifetime have we seen an economic cataclysm on the scale delivered by COVID-19.

The decline is unfolding across the globe, and we’ll only grasp its full extent in months and years to come. SA’s latest unemployment figure of 42% adds a very tangible, human level to the decline, demanding reflection on industrial and trade policies. The world was already moving into a protectionist frame of mind before COVID-19, with the USA and China engaged in a mini trade war, and the UK in Brexit, as it untangles itself from the world’s largest trade bloc. We’ve felt here it in xenophobic attacks.The world is increasingly inward-looking and countries are considering populist ways to allay their citizens’ fears. Indeed, fear rather than opportunity is driving much of the agenda as countries look after their own first.

So how does South Africa react to all these threats when our own manufacturing volumes haven’t been this small as a percentage of GDP for decades? COVID-19 took our manufacturing back to 1962 levels as a share of GDP… The mining sector is at a five-year low; and transport and communication at three-decade lows as a percentage of GDP. Even the normally robust internal trade sector is at two-decade lows. Clearly South Africa needs to adjust industrial policy and trade policy where possible. The bigger question is not why we should, but rather what the policy should do for the country.

To start with, one doesn’t want too much government intervention, but we must acknowledge that it’s often important. For instance, the Poultry Industry Master Plan and its roadmap to achieving stability, sustainability and growth for this strategic industry is the result of a collaboration between government, the private sector and labour. The poultry industry employs some 110 000 people directly and indirectly with the potential to employ a lot more. Clearly, the first step is to work out a framework for identifying industries that can help move South Africa forward. The first fact to take into account is the industry’s job creation potential and its supply chain. How many jobs can be created in its supply chain, from farm to factory to consumer? Can it operate in job-scarce areas, for example, in rural areas? The motor industry, for instance, received an R18 billion annual benefit a decade ago, yet it probably created no more than 35 000 jobs directly. Do the math and you’ll see that government paid a subsidy of R540 000 per direct job per year. In today’s terms, those figures would double…

Agriculture or the clothing industry could generate more work and at a way lower cost to the government per job. Many of these new workplaces could be in rural areas too. Secondly, the industry must already be producing on a significant scale; with the potential to expand with minimal interventions. It may, for example, need short-term trade protection to get production to the next level. The industry would also need a cost base that puts it in the lowest quantile internationally in terms of production costs. A quick overview shows us that poultry, wine, milk and non-traditional agriculture are all there. Clothing can get there with the right help, as can some service sectors.

However, traditional heavy industries have been lost, both due to escalating electricity prices and power interruptions; but also because they’re capital intensive in a savings-poor country with high rates. This must be the most important factor to consider, as being a low-cost producer will give SA a good starting point with goods and services that are already competitive. It will also help keep other parts of the SA cost base lower, which is important because lower food prices mean workers’ rands stretch further. A third factor: does the industry have the potential to export to our neighbours, or can it get there using the African Free Trade agreement? The focus should therefore be on Africa and the Middle East.

What jumps to mind are beer, wine and spirts; meat and poultry products; small appliances and even some clothing. A report by the Malabo Montpellier Panel shows that the increased demand for animal-sourced foods – dairy, eggs, and meat – has been driven by a growing African middle class. This market gap is over $1 billion a year and growing. SA and Egypt provide 30% of the total meat and grown food on the continent, while SA farmers are already filling gaps in some neighbouring countries.

We need to tie into Africa more closely. SA has more food and a better packaging industry, for example, than any of our neighbours. Our retailers already have an African footprint and we could get help with making border crossing more efficient to benefit all of Africa. Basic foods and beverages, paper and packaging – basic goods which people need daily – could help our neighbours and our own people. Food security and security of supply during periods of world upheaval are another consideration. Steel, for example, can be stored for long periods, unlike most food products. Medicines can be imported, but it would be prudent to produce some important medications locally. We need to choose the industries that already export: petroleum products, machinery, chemicals and prepared foodstuffs lead the way already. Vehicle exports are in fifth place only, which suggests that government subsidies helped here, but failed to create much employment.

If we were to focus more on developing the export market for processed food and drink, we could link that back to agriculture and packaging. We’d need our border posts to operate faster and round the clock – more efficient border operation could add about 3% to the SADC GDP within 5 years.

Government could help these industries with a little protection but, more importantly, open up our neighbourhood. And we should educate South Africans that we need our neighbours. COVID-19 made the world more inward-looking, but not at the expense of neighbours. You just need to look at the EU, the 10 ASEAN countries, and North America, to see that internal trade blocs are not suffering the same levels of decline as trade between continents..

So yes, South Africa should take advantage of opportunities where possible, but it should also help to protect our own efficient operators and support them to grow in scale, and to form partnerships with our continental neighbourhood. Predatory trade practices by global producers have significantly harmed domestic African markets in sectors such as poultry production; and should constantly be monitored.

In considering options within Africa one could start with measures that are less complicated politically, such as, for instance, creating a SACU-area passport-free zone. A final key pillar of South Africa’s industrial policy should be to consider whether an initiative has the power to strengthen our bonds with Africa, and whether its benefits will also enrich Africa. Simply put, we are an African economy that offers clear benefits for the continent, and that insight has to be central to our trade and industrial policy.

Africa needs us and we need Africa, and in the same way other continents have capitalised on neighbourly bonds to build prosperity, our future should be pan-African.

  • First published on 14 October 2020. Mike Schussler is an economist and FairPlay expert panellist

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