Donald MacKay: Why import protectionism fails: lessons from South Africa
Donald MacKay
The story goes something like this. You protect your factories against imports, mainly by way of import duties and / or subsidies, until they become competitive and then those competitive businesses will export. This gives us both import replacement and export driven growth, except it doesn't.
In 1841 the economist Friedrich List published "The National System of Political Economy", placing all economies along a continuum from exporting minerals and basic agricultural products to becoming globally competitive manufacturers.
In the first phase there would be no import duties because there was no industry to protect. Then, as the economy industrialised, modest tariffs would be imposed to protect these infant industries (List coined the term infant industry). Duties would be raised so that these firms grew bigger and dominated the local market. They would now also be producing more complex products until eventually they imported raw materials and exported large volumes of complex locally made goods.
In this final phase, duties would no longer remain as the companies were now globally competitive. It's a wonderful model and would be perfect if it actually worked. It doesn't. It is the theory which underpins import replacement as a strategy for economic growth, the path South Africa is on and it doesn't end well.
Most of the applications for more protection come from highly concentrated sectors like glass, steel and aluminium. It turns out that once companies receive protection it is very difficult to prise it away from them. 93% of all products which attract a tariff have not had their duty rates reviewed in more than 20 years.
PG Group is the only local manufacturer of float glass and the biggest user of the anti-dumping instrument in South Africa. Their float glass business is protected with normal tariffs of 10% plus anti-dumping duties of up to 27% against Indonesia, China, Saudi Arabia, UAE, Egypt and India.
If protecting companies really did push up exports over time, it would be reasonable to see exports of float glass rising, but this is simply not the case. In 2010, years before the anti-dumping duties were imposed, exports were eight times higher than they are now. This makes sense. Why would you want to sell outside your very high levels of protection? As the duties rose, so the exports dropped as the company instead sold at higher prices locally. PG Group is over 100 years old, so don't think they just need time to become competitive.
If employment is our goal, we need to focus on being export competitive, rather than trying to replace imports. A new report from Economics Research Southern Africa (Ersa), by Professor Lawrence Edwards and his team, drives home this point.
"The conclusion is that it is the failure to grow exports, particularly labour-intensive exports, and not the rise in imports that can largely explain the low (and negative) contribution of trade to employment growth in South Africa."
Our glass exports, like many of our non-mineral exports, are focused on the Southern African Development Community (Sadc) region, but although important, Sadc doesn't develop those competitive muscles like elsewhere in the world. This is usually the moment where the automotive industry is wheeled out as an example of how competitive we are globally with complex manufactured goods, but this is misleading.
According to National Treasury, the taxpayer ploughs R35 billion per year into the auto manufacturing sector (which employs around 110 000 people). This merely demonstrates that if you give people enough free money for long enough, they can sustain significant exports, but in an almost bankrupt country, this is not a model which scales terribly well. Take away the support and we will immediately stop making cars.
As South Africa reconsiders its industrial policy space, we need to focus on where the greatest returns are and there is very little evidence this will be found in import replacement. The Ersa team agree with me, noting
While the focus on boosting exports is appropriate, the emphasis on industrialisation through localisation is misplaced. The view reflects a deep-seated perception that the decline in the contribution of the manufacturing sector to employment and output growth arises from import competition with tariff liberalisation having contributed significantly to de-industrialisation. This is a misunderstanding of the long-term drivers of deindustrialisation in South Africa.
South Africa is a small stagnant economy unable to drive the demand required to give us the growth that will create the jobs so sorely needed. Driving up prices locally (yes that is what import duties do), will simply divert productive spending to less productive rents. Government paying more so they can buy locally produced goods will not fix the problem either, for the same reason.
These protectionist actions are attempts to compensate for our low levels of productivity, rather than as a driver to improve competitiveness. No country ever became more competitive being exposed to less competition. Back to Professor Edwards again.
Localisation policies that create protected inefficient manufacturing industries will merely accelerate the long-term deindustrialisation of the economy. Tariffs and protection through preferential procurement may provide temporary relief, but unless the policy results in competitive firms, any gains will be short-lived (equivalent to moving up the steps on a downward escalator).
This is the moment to slaughter those sacred cows of low productivity and focus on what works, not what sounds nice.
Donald MacKay is founder and chief executive of XA Global Trade Advisors. MacKay has been advising local and foreign companies on global trade issues for more than two decades. X handle: XA_advisors; email: donald@ xagta.com; website: xagta.com. The views in this column are independent of Business Report and Independent Media.
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