Policy madness: SA’s industrialisation policies have slowed economic growth

Albert Einstein once famously said, ‘Insanity is doing the same thing over and over again and expecting different results.’ Does this relate to South Africa’s localisation policies?

As government doubles down and more “aggressively” pursues localisation policy, the Small Business Institute (SBI) and researchers SBP (Small Business Project), funded by Exxaro, looked at the data to see how well South Africa has been served by the localisation policies during the three planning “eras” of Gear, AsgiSA and the NDP. Have we effectively seen the same results over and over again, suggesting we might want to try something different?

We used existing data to evaluate the consequences of industrialisation policies on key sectors (primary, secondary and tertiary) of the economy over the past 25 years. We then looked at the impact of the successive policies at provincial level, since localisation is predicated on being local. Finally, we looked at whether the government’s localisation policies had a positive effect in growing small businesses in the formal economy, essential to expand the localisation effort.

During each era, the South African economy has demonstrated GDP growth, though slowing considerably. However, GDP growth is felt to different extents in various layers of industry of the economy. It is simplistic to deduce that because GDP growth increased, the economy improved. GDP contribution changes more correctly provide the indicators for measuring policy effects where they are felt — at the business level, by key industry.

Our findings demonstrate that in the aggregate, the impact and consequences of the various industrialisation policies pursued by the government show only North West and Limpopo with positive GDP contributions in the primary sectors of agriculture and mining.

Overall, policy to advance agriculture and mining has failed throughout the full two-decade period for these industries. There has been a total decline of all secondary industries in all provinces, especially manufacturing, construction and energy production. The contribution changes of the tertiary industries are muted for the period, showing the absence of effective policies to accelerate their stimulation.

The data also tell us that while the Asian Crisis in 1998, the global financial crisis of 2008 and the “China effect” on global GDP growth dynamics and China’s increasing trade dominance in Africa and elsewhere cannot be ignored, the sub-Saharan peer comparison is a demonstration that South Africa’s economy is in considerable distress and has been so for the past decade. It cannot be argued that externalities are the source of the country’s economic stagnation, Covid-19 aside.

We next looked at GDP per capita dynamics and disparities between provinces.

South Africa is classified as an upper middle-income country. Commencing at a GDP per capita value level substantially above other upper middle-income countries in 1994, and almost at the same value level as the world measure, we’ve experienced static or recessive growth since. Over the 20-year period, middle-income countries from their low base in 1994, at about $4,500 per capita, are presently almost equal to South Africa at around $12,482.

Based on their trajectory, it can be concluded that these countries will outperform South Africa in terms of GDP per capita within the next two years.

GDP per capita performance is a socioeconomic measure for economic performance and the consequent impact on the wellbeing of citizens. On a global level, as well as relative to middle and upper-income countries, South Africa is failing its citizens economically.

Regional disparities by province are also important since they can signal failures in policy implementation, provincial neglect, or that provincial strategies need to be reviewed to boost the GDP provincial contributions, especially for formulating appropriate localisation policies.

Gauteng and the Western Cape are top performers; the two lowest provinces, the Eastern Cape and Limpopo, are almost 50% poorer than the richest province, demonstrating considerable economic inequality.

The development strategies and the promises of an enabling environment for small business we’ve heard from government for almost three decades have, in fact, resulted in the exact opposite of the intention, diminishing the number of formal small businesses operating in the economy.

GDP growth and GDP per capita measurements are indicative that the fundamental underlying assumptions guiding the NDP require fresh thinking. If policy fundamentals are flawed, so too will be the outcomes.

The next important truth we uncovered is that small businesses are disappearing at an alarming rate in South Africa; this was the case even prior to Covid-19. New business entry into the category is not sufficient to offset the exit of established businesses over the entire period our research investigated.

The total number of companies with up to R1-million in taxable income has been stagnant for the period of 2004 to 2018 — 14 years.

Government’s policy instruments to achieve SME growth are primarily focused on public procurement set-asides for the smaller size firms, namely micro enterprises, based on racial ownership quotas. But what has always been missing in the policy debate is how we foster the upper band of small firms (described as those that formally employ up to 50 employees) and the larger, medium-sized firms (50 to 250 employees), which are most likely to create employment.

Now, tightening up local content requirements have been introduced to verify that 80% to 100% of production costs are local inputs for an increasing number of products and services (up to 200) to access government contracts. It could be that this marks the decline into Einstein’s definition of insanity.

Favouring “priority” sectors to access government procurement is proposed without understanding that many firms have no aspirations of supplying government, let alone the importance of an enabling environment that is conducive for all firms in the sector specified — and operating in the economy as a whole — to form, grow and create more jobs.

Furthermore:

  • There is no evidence to date of any progress on the effectiveness of set-asides.
  • Giving a bigger weight to the non-price elements of bid submissions is coming at a time when the public purse is stretched and resources such as power generation are failing.
  • Aggressive localisation policy relies on the assumption that there is a sufficient number of targeted productive small businesses willing to access new government contracts.
  • The DSBD emphasises “support” programmes, which have been provided by the government for years to little effect.
  • Trade protection will be costly in the short term because scarcity raises prices, affecting not only the producers, but also consumers, while child hunger exploded in vulnerable households in South Africa in 2020.
  • The DSBD is considering coercing further changes in various private supply chains so as to enhance SME production through expanded supply from small enterprises, irrespective of the costs of production and whether small enterprises will have, or currently have, the capability to achieve volume, especially for retail markets.
  • Pressing for further localisation without contemplating the failure of local economic development programmes and dysfunctional municipalities.

The development strategies and the promises of an enabling environment for small business we’ve heard from government for almost three decades have, in fact, resulted in the exact opposite of the intention, diminishing the number of formal small businesses operating in the economy.

This can also be attested by the economic analysis in our paper, which illustrates the policy failures in primary, secondary and tertiary industries. Small firms operate across all sectors of the economy — the devastation shown in the primary and secondary industries in particular over the past decade has a knock-on effect on the survival and sustainability of SMEs.

Localisation requirements should be sector and context specific, taking into account the availability of skills and demand within the sector, the potential for achieving market scale at competitive prices and the cost of any additional government support or protection to the local industry.

Localisation policy relies on the assumption that there is a sufficient number of targeted productive small businesses willing to access new government contracts. And yet policy thus far has failed.

It might be time to review, reassess and try a new course. DM/BM

SOURCE

https://www.dailymaverick.co.za/opinionista/2021-04-22-policy-madness-sas-industrialisation-policies-have-slowed-economic-growth/

 

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