The conversation has to change from jobs to competitiveness or no jobs will be created. We need to stop talking about free stuff to creating value or there will soon be no free stuff to give. South Africa is going through the longest sustained period of protectionism (increasing the duties and other barriers to imports) since 1994, without any sign of this yielding the kind of absorption of labour we would expect. Despite our ever-increasing duties and President Ramaphosa promising us R100bn in new investments, this simply isn’t materialising. But why, with all of the protectionism in place, are companies not beating down the doors to give us their money? Competitiveness, or the lack thereof, is a big part of the problem.
We have to be the only country in the world who provides electricity subsidies on the scale we do and yet still manage to be generating less electricity than we did 10 years ago, at a considerably higher price (Ok, maybe also Venezuela). The world (rightly) complains about Chinese subsidies, but at least these subsidies yield economic growth. Our subsidies seem to result in a weird regression, where the more money we put in, the less we get out. Our eye-watering SAA subsidies, don’t drive down the prices of flying tourists into SA, but instead still leave SAA an expensive option to travel with.
When countries subsidise utilities and infrastructure, the idea is that these subsidies will make the downstream sectors more competitive. Those sectors will make more stuff better and cheaper, which will drive economic growth. The Chinese do this in a very direct way, in large part because their tax system, such as it is, doesn’t allow for more subtle forms of subsidization. When Amazon however, goes looking for a location for its new headquarters, the different American states start a bidding process of state-level tax subsidies, to bring the investment to that particular state.
South Africa subsidises our automotive sector, with the thinking that this will drive up employment in that sector, creating the artificial sense of how competitive South Africa is as a car manufacturer. Don’t feel bad though. Just about every country producing cars has duty protection plus some sort of subsidy programme in place. If you don’t then the automotive producers won’t set up shop in your country. Australia did away with both subsidies and duties for its auto sector and now has no car production at home at all. Is this a bad thing? If you are one of the workers who lost their jobs in the sector then of course this is terrible, but has the result been very expensive cars, now that locally produced cars are not available? No. There is a lot of competition in the market, keeping the prices manageable.
However, the Australian story is telling because Australia was not a competitive producer when compared to its neighbours such as Thailand, where labour costs per unit produced were significantly lower. And these low-cost producers were right on their doorstep. Australia was never going to export its cars to its South East Asian neighbours competitively, without significantly larger subsidies and it could never compete locally with these cars once the duties were dropped (a particularly brutal blow was struck to the local industry when the 2004 Thailand – Australia Free Trade Agreement came into force, giving Thailand duty-free access for Thai-produced cars into Australia. Australia received the same benefit into Thailand but never moved any significant volume).
Recently, South Africa has made a move to investigate and/or impose duties further and further upstream in all sorts of industries, something which is generally considered to be a bad idea. When duties are imposed upstream, the effect is to make the upstream product more expensive. No matter the logic applied to arrive at the decision to increase these duties, no matter how many jobs may be saved, the inevitable outcome of upstream duties is higher prices. This is particularly true in South Africa, where our manufacturing base is small and our upstream industries are almost always monopolies or duopolies (think of ArcelorMittal, Columbus Stainless Steel, Sasol, Hulamin and so on). When the only source of competition is removed from the market, the price of the raw material can rise at least to the extent of the duty increase. This higher cost is then passed along to the next company downstream. If the company next in line now has lower duties than its upstream supplier, there is the very real risk that they will now be less competitive against imports. The result is that the imports of the next item downstream moves up and they apply for additional protection and so we go down the line, inflating the cost of everything in a particular value chain. Our government is aware of this risk, which is why we now have a (sort of) regulated price on steel, where ArcelorMittal have an ability to increase their prices, but this is capped at a particular level.
At the heart of this problem though is a lack of competitiveness of our local producers. Their subsidised electricity is not only expensive, it’s also unreliable and becoming more expensive every year. Our often-violent unions and a public education system, which is really an engine for ignorance, makes labour costly. Our most skilled people are beating a path out of the country as fast as they can carry their Louis Vuitton bags to the airport, while we make it difficult to import those skills into South Africa. And now our key raw materials are going through a slow but steady process of becoming more expensive as duties are ratcheted up further and further upstream.
Barring a few exceptions, South Africa is not a competitive producer and we are trying to frantically compensate for this with higher duties and subsidization. Neither of these create industries, which function competitively, but rather place a band aid over a serious wound. In the case of both duty increases and subsidies, we transfer money from consumers, inefficiently, through government, to shareholders of manufacturers. These may provide a short-term very expensive stopgap, but they will never result in a thriving, successful economy.