Government moves ahead with controversial ‘localisation’ plans for some products in South Africa

Trade and industry minister Ebrahim Patel says the government’s industrialisation and localisation policies aim to build and upgrade domestic production to supply domestic and foreign markets, support broader economic development and promote employment growth.

Patel has faced criticism in some sectors after the government announced plans to designate more products under the 100% local content category to support SMMEs in the local manufacturing sector. It has also considered blocking some imported products that are not 100% local.

Responding in a written parliamentary Q&A this week, Patel said that the localisation is not just a policy of his department but has ‘resounding support’ among South Africans who recognise the need to industrialise the local economy.

“It is the policy of the administration and follows the commitment in the manifesto of the ruling party to stronger localisation as a pillar of its industrial policy. The commitment to localisation is included in the Economic Reconstruction and Recovery Plan of government,” he said.

“The approach on localisation has also been unanimously endorsed by the business, labour and community representatives at Nedlac. They represent a large number of firms and entrepreneurs, workers in different sectors of the economy and organisations made up of representatives of various community interests.”

Patel said an agreement made at Nedlac provides a quantitative target and a list of sectors and products. In these circumstances, the consultations on the South African approach to localisation were at the appropriate level at which consultations on policy matters usually take place, namely with social partners and with other government policy-makers, he said.

He said that localisation was not an initiative unique to South Africa and that other countries had introduced similar policies.

“It is what governments do to enable achievement of national objectives, and indeed there is today a growing consensus on the value of carefully targeted and well-implemented industrial policy measures.”

He added that the localisation policies are consistent with South Africa’s international trade obligations and that the very purpose of the new African Continental Free Trade Agreement is to reduce the over-reliance by countries on the continent on imports of manufactured products from elsewhere in the world.

Criticism 

The Free Market Foundation (FMF) says the government needs to put its localisation plans on ice or risk hobbling economic recovery over the coming months and years.

The think tank warned that these policies would lead to more isolationism. Instead of implementing policies that serve to act as further barriers to trade, South Africa should be at the forefront of using the momentum afforded by the new Africa Continental Free Trade Area (AfCFTA), it said.

“The trade area will allow the country to both lower as many of its own duties and trade barriers as possible while encouraging other countries to do the same.

“Of highest importance for South Africa specifically is the improvement of its ports’ performance, and allowing private investment in both port and rail infrastructure – free from government political interference.”

The think tank said that government could achieve localisation in two ways:

• Through government subsidies provided for local businesses; or
• Through imposing more tariffs on imported goods.

“The first increases the probability of inefficient economic activity and possible corrupt behaviour,” the FMF said.

“Businesses and products that would fail when subject to normal market forces are sheltered. Further, central planners and bureaucrats become subject to increased lobbying by businesses – usually, the biggest can muscle out any small-to-medium competition.”

The second way is that politicians decide which imported products represent an ‘unfair’ threat to local goods and producers.

By imposing more tariffs, they distort consumers’ everyday choices and ensure that they pay more for products they could otherwise obtain for less.

In the South African context, consumers are already under massive strain due to the government’s economic freedom and prosperity-killing policies over the years, the FMF said.

“The effects of South Africa’s implementation of increased state-interference and centralisation policies are clear for all to see: a 44.4% unemployment rate,” said FMF deputy director Chris Hattingh.

“We need to encourage the inflow of as much financial as well as skills capital into the country. At the moment, with its localisation plans, the government is sending out the exact opposite message to the world. Now is not the time for central planners to tinker with trade – it must be allowed to flow as freely as possible.”

The FMF said that nay recommendation that any possible benefits of government-enforced localisation are not worth the anti-investment, anti-job opportunity effects that such an endeavour will incur.

“The potential benefits of the AfCFTA are great. But these will remain elusive if countries such as South Africa pursue protectionist and isolationist policies.

“Localisation regulations can assuage emotional concerns in the short-term, but they make very little economic sense over the long-term. The FMF recommends that the DTIC urgently reconsider its localisation plans, in the interest of the country’s future economic growth prospects.”

Read: The garage pie is making a comeback – and it’s much bigger