New CDE report warns that government’s localisation strategy is undermining South Africa’s economic prospects
Following a recent expert roundtable on localisation, leading policy think tank, the Centre for Development and Enterprise (CDE), has called on government to put an end to this costly policy.
The roundtable discussion is reflected in a new CDE report: The Seven Sins of Localisation: Can South Africa afford this costly policy?
“All the evidence suggests that if we are to achieve growth and create the jobs we need, we must move towards greater global integration, not greater self-sufficiency,” said Ann Bernstein, executive director of CDE.
Bernstein asks two important questions:
• “Why is government committed to a policy of localisation when it is clear that it acts as a brake on investment and growth?
• And why is organised business endorsing this approach, as it did when it was party to a Nedlac agreement that, while unenforceable, envisages a 20% decline in non-fuel imports over a five year period?”
At CDE’s roundtable there were strong voices in favour of localisation, and people who were earnestly looking for ways to make the policy work in the difficult circumstances in which the country, and especially the manufacturing sector, finds itself.
However, from the discussion as a whole, it was difficult to escape the conclusion that the way localisation is being implemented in South Africa today ensures that the policy is having a detrimental economic impact.
“There are growing concerns, even from people who largely favour it, that localisation is imposing significant costs on a cash-strapped state and is one key factor in preventing faster economic growth,” said Bernstein.
“We must put an end to localisation policies that only serve to undermine our competitiveness and deepen our unemployment crisis,” she added.
Localisation should be understood as a set of enforceable requirements and other mechanisms seeking to ensure that domestically produced goods are purchased in preference to imports. This applies both to the state and the private sector. It is reflected in preferential procurement rules for government and industrial masterplans.
The evidence that experts presented at CDE’s roundtable made it clear that localisation policy, as practised in South Africa, will ultimately hinder local production. Participants were able to discern seven ‘sins’ of localisation that serve to weaken our economy instead of strengthening it:
1. The policymaking process is neither transparent nor evidence-based
The first ‘sin’ is the lack of transparently produced data and research relating to localisation. Some of the figures used by government do not seem based on reality at all – in some cases there are local content requirements despite a lack of local industrial capacity to meet them.
For example, under the original terms of Bid Window 5 of the Renewable Energy Independent Power Producers Programme (REIPPP), the localisation requirement for solar panels was 100 percent, even though South Africa only had two solar panel producers who were unable to cope with demand.
2. Conditionalities pose a threat to investment
Additional costs, delays and inefficiencies resulting from localisation policy negatively affect investor confidence. By forcing private bidders under the REIPPP to commit to local content requirements, for example, the costs for bidders are raised as is the overall costs of energy generation, with major knock-on effects for the entire economy.
3. Import substitution is biased against exports
Localisaton strategies result in the deployment of tariffs to raise the costs of imports and channel demand to local producers who require protection from foreign competition. These tariffs act as a tax on South African exporters who must use more expensive inputs, making them less competitive in global markets. Contrary to the aims of the Department of Trade, Industry and Competition, the nature and scope of South Africa’s protectionist policies hamper our ability to export manufactured goods.
4. Restricting imports reduces competition
If localisation serves to artificially keep domestic manufacturers in business, one is left with inefficient firms that likely would not survive on a level playing field. Such firms will pass on inefficiencies to consumers in the form of higher prices, lower quality products, or both.
5. Excluding foreign knowhow constrains innovation
When producers are protected from foreign competitors, they have less incentive to innovate and will find it both difficult and largely unnecessary to enter new growth areas. This lack of incentive to innovate and expand means that countries that adopt these policies are liable to lag behind more entrepreneurial places in a fiercely competitive global marketplace.
6. Forced localisation threatens trade relations and may violate international obligations
South Africa’s basket of localisation policies appear to be in violation of South Africa’s international legal commitments, including those of the World Trade Organization’s General Agreement on Tariffs and Trade, the EU-SADC Economic Partnership Agreement and the African Continental Free Trade Agreement. The EU has so far opposed and legally challenged localisation policies in a number of countries in which they have been applied, suggesting that the possibility of future challenges to South Africa’s localisation framework exists.
7. Localisation locks us into the wrong path
Localisation is becoming self-reinforcing, pushing us down a path that will be difficult to exit once we are on it. Rising protection will lead to rising inefficiency, which will generate ever more calls for protection, cutting us off further from global markets. This process is also inherently corruptible and open to rent-seeking behaviour – especially dangerous in an economy as concentrated as South Africa’s, and with our history of ‘state capture’.
“Rather than trying to compel local manufacture of products, government should be working to shape a business environment that attracts and rewards investment as a result of strong competitive pressures. We call on government to rethink its adherence to this expensive policy,” said Bernstein.
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ABOUT THIS REPORT
The full report on CDE’s expert roundtable, “The Seven Sins of Localisation: Can South Africa afford this costly policy?”, can be accessed here.
ABOUT THE CENTRE FOR DEVELOPMENT AND ENTERPRISE
CDE is an independent policy research and advocacy organisation. It is South Africa’s leading development think tank, focusing on critical development issues and their relationship to economic growth and democratic consolidation. Through examining South African realities and international experience, coupled with high-level forums, workshops and roundtables, CDE formulates practical policy proposals outlining ways in which South Africa can tackle major social and economic challenges.