Localisation can bring about structural change and place South Africa on a firmer footing
Localisation has received a lot of attention in this publication over the past few months. Some have dismissed it as something that is costly and makes it difficult for firms to source imported products, or as a major inhibitor to accessing export markets for anything from raw chrome to scrap metal. For many who hold this view, interfering in any market is anathema. Recent articles have gone further, to suggest a commitment to localisation, as held in the Economic Reconstruction & Recovery Plan (ERRP), is akin to sabotaging the African Continental Free Trade Area agreement in its embryonic stages.
Alarm aside, many of these views fail to recognise, as one colleague suggested recently, that “industrial policy” is no longer a swear word, nor is trade policy focused on liberalisation and efficiency alone. It has now widened to focus on firm-level and national resilience. The disruption of global supply chains and the rising cost base of manufacturing in China has made clear the “concentration risks” of locating all production and value addition in one pole of the world.
Furthermore, it has sharpened the focus on what Raul Prebisch and Hans Singer observed after World War 2 the vulnerability of price-taking commodity producers in the developing world to downward shifts in primary commodity prices. While prices may be good now, they are not always so.
Why then, should we bother with manufacturing or industrial policy? Or localisation? Largely because manufacturing exhibits increasing returns to scale. It also, as the localisation policy suggests, “stimulates growth in ancillary industries like packaging, logistics and transport”. Viewed in this way, localisation is not about displacing the market and global value. Rather it is about changing, as the localisation policy recommends, “the terms of the engagement to one where we are no longer mainly an exporter of raw materials” — where we are no longer a colonial economy defined by “pit to port” accumulation paths.
Economic history reminds us in multiple episodes that development is closely linked to such shifts to higher value-added activities in the global matrix of production. I make the example in my recently published book, The Economy on Your Doorstep, about how such value-added potential could change, for instance, the Eastern Cape, from a dominant raw milk producer to a dominant processed cheese and powdered milk producer for export, unlocking capital investment, employment and productivity improvements.
These shifts do not happen through divine market forces or “spirits” but through incentives and disincentives that encourage investments in productive and value-adding activities in areas with latent comparative and competitive advantage. It is these actions that seem a bridge too far into the Kremlin for many in the commentarial.
In committing to reducing the non-oil import bill by a fifth over the next five years, social partners at the National Economic Development and Labour Council are not playing truant with the economy but recognise that a critical step-change is required to facilitate structural shifts that unlock such foregone value.
When many identify the constraints to manufacturing growth as the cost of supply-side logistics, energy supply and other similar challenges, they highlight what even the proponents of localisation accept. However, where many depart from the “hands-off” approach is in the naive belief that weakening our productive base in pursuit of premiums in a good commodity-price environment is in the common interest.
Rather than essentialising the constraints to re-industrialisation (as a reason not to pursue any value-added activities), localisation aims to unlock short- and medium-term interventions that move in tandem with long-term plans to secure our energy supply and transform our network industries. All while building capability in new industries.
To forgo these opportunities in defence of the interests of a few is to substitute temporary advance for long-term structural change.
• Cawe, a development economist, is MD of Xesibe Holdings and a part-time special adviser in the trade, industry & competition ministry. He writes in his personal capacity.
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