Patel’s attempts to grow industrial sector of economy didn’t work
By Donald MacKay
Danish political economist Torben Iversen notes that “labour-intensive, low-productivity jobs do not thrive in the context of high social protection and intensive labour-market regulation, and without international trade countries cannot specialise in high value-added services. Lack of international trade and competition, therefore, not the growth of these, is the cause of current employment problems in high protection countries”.
The outgoing Trade, Industry and Competition Minister Ebrahim Patel, would almost certainly disagree with him, despite the abundant evidence to the contrary.
The well-intentioned master plans and public interest interventions in the merger space are Patel’s attempt to grow the industrial sector of the economy, raising the levels of employment in those sectors. It didn’t work.
The clothing and textile sector, the sector whose union Patel led for years, saw employment halve from 2009 to 2023. There is no doubt a few companies and individuals made a lot of money, but the sector as a whole remains distressed. The sectoral master plan, implemented in 2019, has done nothing to reverse this.
The steel sector sees ArcelorMittal South Africa (Amsa) facing the closure of its Newcastle operations, in part at least because of the interventions in the scrap metal sector.
According to Patel, the Industrial Development Corporations’s investments in the mini-mill sector, which produces 20% of the steel sold in South Africa, is more than R14 billion. Amsa, which produces 50%, has a market capitalisation of R1.5bn. This makes sense to nobody except the mini mill shareholders and the policy formulators.
The automotive sector is held up as South Africa’s great success story, and certainly it is impressive, but unless the government keeps handing more than R30bn per year in subsidies to the sector, we will not be making cars here. The electric vehicle white paper, published at the end of last year, will likely need to see these subsidies increase. Despite the early promises, making cars in South Africa has not seen the rise of any other sectors producing goods of comparable complexity.
The combination of subsidies and import duties have created a number of sectors completely dependent on government for their survival. This doesn’t mean these sectors are unable to thrive on their own, but this will be really difficult with the labour laws, empowerment policies and localisation requirements they need to meet to benefit from the government’s largesse.
The master plans have sensibly brought together industry, labour and government, in a sort of mini Nedlac at a sectoral level, to try to develop strategies to grow these sectors. But just like at Nedlac, the people who have a voice are carefully controlled, with large portions of the sector often deliberately precluded from involvement. The result has been a move away from predictable policies to a Trump-like system, where every engagement is an arm wrestling match with Lord Shiva.
Secrecy has been normalised though the master plans, where competitors sit in a room, lobbying the minister for policy changes that affect the whole industry, the bulk of whom don’t even know there is a room. No minutes are kept and it’s not possible to observe the meetings, even if you’re impacted, without an invite.
We’ve seen designation (minimum local content levels in designated sectors when supplying government bodies) implemented. More secrecy. Sectors can lobby to be designated, but competitors impacted by the potential designation have no access to the process.
No gazette is published to notify interested parties that the investigation is afoot, no information is available to interested parties and no report is published once the decision has been taken. Even the International Trade Administration Commission (Itac) recently refused to issue board reports on matters where the minister refused to implement their recommendations. This was eventually reversed.
In the time Patel was in office, Itac import duty change investigations moved from taking an average of five months to complete a decade ago, to an average of 28 months. The oldest current open investigation is now more than five years old. This appears to be because of the incredibly intrusive process introduced to pressure companies to sign reciprocal agreements. The agreements shift the process from the regulatory environment, where such decisions normally live, to commercial contracts containing terms far beyond the scope of the regulations.
This move from a predictable process (you can read the regulations), to a secretive and thus unpredictable process, outside of the regulations, has reduced the use of tariff instruments by the private sector from 13 private sector investigations initiated in the first half of 2003, to two private sector investigations in the last six months of 2023. The pain has been equally inflicted, with local manufacturers asking for duty reductions on raw materials receiving the same slow responses and contracts to sign as manufacturers asking for duty increases.
It’s perhaps unfair to personalise this too much because when Patel leaves that portfolio in the next few weeks, we should not forget that he had the strong support of the President.
Despite localisation, designation and a host of other policies not yielding a positive economic outcome, I have no reason to think the direction of travel is going to change in a hurry, which doesn’t bode well for our economy.
It’s worth pondering the words of Michael Munger, an economist at Duke University, who said, “there is a bias in public policy debates toward doing something, rather than nothing, even if doing nothing might be the right thing to do”. Let’s hope Minister Patel’s successor does the right kind of nothing.
Donald MacKay is the founder and chief executive of XA Global Trade Advisors. He has been advising local and foreign companies on global trade issues for more than two decades. X handle: XA_advisors; email: donald@xagta.com; website: xagta.com.
Donald MacKay will answer one reader’s query on a problem they are facing as regards importing or exporting. Please email brletters@inl.co.za
* The views in this column are independent of “Business Report” and Independent Media.
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