Introduction
For some time now, the creation of a hundred black industrialists has been on the government’s agenda. It was discussed at the National Broad Based Black Economic Empowerment Summit in October 2013. Last month, the Deputy Minister of Trade Industry, Mzwandile Masina, announced that it was to be done in the next three years.
Certainly, manufacturing needs a boost. Setting each index at 100 on 2005, the progress made by 2013 was as follows:
GDP at market prices 126.9
Value added in manufacturing 115.8
Exports, excluding gold 114.2
Imports 146.4
Our neo-mercantilist Department of Trade and Industry frets constantly about the significant and increasingly negative balance of trade in manufacturing,[1] though a better bench mark would be value added at world (rather than domestic) prices. At the moment, we have a large negative trade balance, at a time when the economy is growing slowly. Faster growth would widen it. So export-oriented manufacturing growth is what we need.
Will the hundred black industrialists help to get it? That depends on government policy. At present, policy has the following components:
Amend the Preferential Procurement Policy Framework Act (PPPFA)
This Act establishes that, for large contracts, ninety per cent of government tender scoring should depend on price and ten per cent on opportunities for the historically disadvantaged. The balance shifts to eighty and twenty for small contracts. The desired amendment would lower the weight on price and increase it for black economic empowerment. The Treasury has been resisting change on the good grounds that it will exert upward pressure on the prices the government must pay for goods and services, with adverse consequences for the beneficiaries of public expenditure. Proponents of this change want it applied to our (struggling) state owned enterprises as well.
Increase the local content of goods and services purchased
Regulations were passed in 2011 to empower the Department of Trade and Industry to impose local content requirements in particular sectors of the economy if producers wish to sell to the government. Eight sectors have been designated and more are to come. Furthermore, the government may, for specific tenders in other sectors, impose a local content requirement. The South African Bureau of Standards has specified how local content is measured and will, for a fee, verify the level of local content in goods and services for producers who want to tender for government contracts. A target figure of 75% local content for all government procurement, to be achieved over the next five years, has been announced by the Deputy Minister.
This flies in the face of a general principle in the World Trade Organization’s Revised Agreement on Government Procurement that measures regarding government procurement should not be prepared, adopted or applied so as to afford protection to domestic suppliers, goods or services. True, South Africa has not acceded to the Agreement. True also, there are some exceptions for developing countries, but they are circumscribed especially for upper middle income countries, such as South Africa. But these measures impede the freer trade that the WTO works towards. And they put up costs, by constraining production choices.
Launch an incentive scheme which will specifically focus on black industrialists
Here the proposal is barely more than a heading. The Industrial Policy Action Plan notes that perceived returns may be lower and risks may be higher than in other sectors. Nonetheless, it is desirable to promote black owned and managed manufacturing enterprises. The plan states:
This requires work towards developing and designing an industrial financing instrument with a strong set of binding conditionalities that will focus on black entrepreneurs who have a long-term commitment to establishing new manufacturing entities or taking over existing ones.
It is yet to be announced how long term commitment is to be gauged and what the binding conditionalities will be.
Old wine, old bottles
Is this package new or is it an update of familiar themes? In fact, it amounts to a prolongation of import substitution policy, now nearly a century old, and much loved by inward looking nationalists. Import substitution policies:
- create a rent for producers, now specifically black producers, at the expense of consumers, and impose efficiency losses – yet another rent in a rent-ridden economy. Although not spelt out in so many words, this rent is intended to underpin rapid accumulation by industrialists;
- push up prices, widening the gap between world prices and domestic prices and making South Africa less competitive. The result is more of what we have seen: slow growth of exports, and a balance of trade constraint on growth. At its worst, there can be negative value added, as was the case in thousands of now ruined factories spread across the former Soviet Union and Eastern Europe. In such cases, it would have been better to do nothing;
- make export orientation much more difficult.
New wine, new bottles
In order to escape the rut we are in, a different approach is needed.The World Bank has recently pointed one out.[2] It entails:
- increasing domestic competitiveness, by opening local markets to domestic and foreign entry;
- alleviating infrastructure bottlenecks, especially electricity, transport and information and communication technology;
- promoting deeper regional integration in goods and services within Africa.
All three of these policies require a change in outlook. The first needs a reorientation away from protectionism towards an appreciation of what foreign trade and investment can do for the country. The second requires greater efficiency of state owned enterprises, which number about 715,[3] and much more private sector involvement in their spheres of operation. And the third requires a more sustained effort to participate in African growth, currently considerably higher than our own.
If new industrialists can do more efficiently what state monopolies and private sector oligopolies do inefficiently, if they can improve manufacturing competitiveness by their entry and if they are supported by the state to export in ways which conform to World Trade Organization rules, then bring it on. Let a hundred black industrialists bloom!
References
[1] See, for instance, the Industrial Policy Action Plan, 2013/14 to 2015/16: Figure 7
[2] World Bank, South Africa Economic Update: Focus on Export Competitiveness, 2014
[3] Presidential Review of State Owned Enterprises, Vol 1: 3
Charles Simkins - charles@hsf.org.za
Senior Researcher
Helen Suzman Foundation
