Cyril’s industrial reboot will not drive economy to success

President Cyril Ramaphosa’s State of the Nation address revealed a new direction in economic policy: “import substitution industrialisation”: producing goods locally where possible. The approach was most effective from 1933-1945, during South Africa’s first modern manufacturing boom. The era featured an average 8% annual gross domestic product growth, more economic balance, and even improved racial equity in wages. 

The need for local sovereignty is today even greater, given the deindustrialisation-driven jobs bloodbath underway. But Pretoria’s residual economic schizophrenia is remarkable, especially thanks to wasteful subsidies for Special Economic Zones (SEZs).

READ MORE: The fable of SA’s special economic zones

Substituting imports for exports, according to Ramaphosa, will occur through a clothing and textiles master plan featuring “commitments by retailers to buy goods locally… Government has already begun to act vigorously against illegal imports.” Likewise, the poultry master plan requires “a new poultry import tariff adjustment to support the local industry”. Ramaphosa also promised master plan support to two other sectors devastated by ultra-cheap foreign competition — sugar and steel — in coming weeks. 

But true to the neoliberal agenda, Ramaphosa also lauded trade, promising to “undertake a fundamental overhaul of the Durban port, the third largest container terminal in the southern hemisphere”, in spite of opposition from residents in Wentworth and Chatsworth to the R250-billion scheme, and Transnet’s corruption that, in 2019, derailed port expansion. 

Moreover, continued Ramaphosa, “Thanks in large measure to the auto master plan, we sold more cars to the rest of the world last year than ever before. We launched a new auto SEZ hub in Tshwane.” But the subsidies (more than R30-billion annually) that made this possible are unsustainable, and cars are a major contributor to climate change. 

Those arguing instead for a low-carbon, continental and inward orientation point to a profound problem and a sterling opportunity: the rapacious world economy featuring United States President Donald Trump’s ongoing trade sanctions and inclement European carbon taxes on long-distance transport; and the new African Continental Free Trade Area (ACFTA), which will be run from Addis Ababa by a South African, Wamkile Mene. 

Last week, US trade czar Robert Lighthizer added South Africa to a list of countries that, according to a mid-2019 Trump tweet, are wrongly self-described as “developing countries to avoid WTO [World Trade Organisation] rules and get special treatment. No more!!! Today I directed the US Trade Representative to take action so that countries stop CHEATING the system at the expense of the USA!” 

Another reflection of US imperial arrogance is Trump’s ongoing threat to withdraw further Africa Growth and Opportunity Act trade benefits (worth R34-billion) if Ramaphosa signs into law the Copyright Amendment Bill. That law would give citizens “fair use” protection against intellectual property lawsuits by multinational corporations — the same protection enjoyed, ironically, by US citizens.

As for ACFTA, in May Ramaphosa will host what will surely be the year’s most contentious conference, to “finalise the rules that define what is a ‘Made in Africa’ product, the tariff lines that will be reduced to zero over the next five years, and the services sectors that will be opened up across the continent”.

These new developments, added to ongoing world economic turmoil and climate crises, should give pause to the government’s high-carbon, export-oriented Special Economic Zones strategy. Three of these zones reflect the country’s crises of growth and development: the long-established Coega Development Corporation in Nelson Mandela Bay, the rapidly-emerging Dube Trade Port north of Durban, and the planned Musina-Makhado Energy-Metallurgical Special Economic Zone in Limpopo. 

In 2014, SEZ legislation provided tax cuts and other incentives to lure investors, a model of development influenced since the early 2000s by China. But since then, the world has witnessed worsening “deglobalisation”: a decline in rates of trade, a 21% withering of global value chains (in part thanks to 3D printing technology that diversifies local production capacity), and falling levels of genuine foreign direct investment (FDI). 

Phantom FDI confuses local economists: the term refers to parasitical intra-company loans that benefit from South Africa’s high international interest rates that artificially bulk up Pretoria’s figures, allowing the impression of greater multinational corporate confidence.

Industrial Development Zones (IDZs) preceded Special Economic Zones as a growth strategy. The first, Coega was initiated in 1999. Before that, 1980s-era “deconcentration points” were deliberately located outside of the main metropolitan areas, mostly on the border of apartheid Bantustans. Incentives for low-cost, labour-intensive manufacturing aimed to slow urban migration. Once national subsidies were withdrawn during the 1990s and imported East Asian clothing, textiles, footwear, appliances, electronics and other light industrial goods demolished local manufacturing, the deconcentration points collapsed. 

Meanwhile, the gateway legacy of British colonialism in the region, plus a protected market for other European and US firms’ regional branch-plant operations, meant little value was added to exports. South Africa was, and still is, largely a commodity export-driven economy with the exception of the vehicle industry. 

In spite of the hype and subsidies supporting IDZs/SEZs over the past two decades, they have contributed negligibly to growth, redistribution and employment, all of which are worse than even in the apartheid era. Worse, a carbon-intensive focus prevails in the zones. Coega and the Dube Trade Port have become home to major Chinese and Indian car factories (albeit semi-knockdown in character at this stage, with less electricity entailed in parts manufacturing than in other such plants). 

In the bushveld between Musina and Makhado (Louis Trichardt), a China-dominated zone will include yet another mega-power plant for new smelters, one nearly as large as Medupi and Kusile — in spite of the area’s low-grade coal and severe water shortages for plant cooling. 

Rhetoric at the 2018 Forum on China-Africa Co-operation (Focac) promoting such schemes is based on a purported “new” South-South development strategy in which Africa serves Beijing’s geostrategic and economic imperatives. Through Focac and Beijing’s Belt and Road Initiative, China will intensify its role as Africa’s largest trade and investment partner. In South Africa, major Chinese credit and supply arrangements are in place, for example the China Development Bank’s two $5-billion loan commitments to Transnet and Eskom when the faltering enterprises were run by Brian Molefe, in 2013 and 2016 respectively. 

But those relationships ultimately financed corruption: China South Rail locomotives meant for coal export — while feeding bribes into the Gupta empire — in the case of Transnet, and Eskom’s Kusile power plant where faulty Hitachi boilers were built because of backhanders to the ANC’s Chancellor House investment arm. Such deals often fall apart, for example in the case of Standard Bank’s 42% write-down of a joint venture with the Industrial and Commercial Bank of China last year, or the much-hyped Hebei Steel factory that never materialised. 

With Chinese growth slowing to 5.3% this year — a 40-year low — desperation initiatives will continue, both alleviating China’s domestic over-capacity through what is termed “going out” and displacing both China’s massive industrial pollution. The Belt and Road Initiative will route more trade through Chinese-built ports, carrying goods on Chinese rail, road and bridge infrastructure, in the process creating deep interdependence. China’s ruling classes now generate most income from their SEZ export sectors. And territorial disputes in the South China Sea, in which the US military is harassing Beijing’s expansionist island-building, reinforce China’s need to establish corridors to Europe through its own western territories in part to avoid reliance on vulnerable maritime trade. 

If the Belt and Road Initiative lessens Chinese dependence on the US market, then more power to Beijing. But as economic deglobalisation proceeds, the Chinese emphasis on climate-destroying, export-led growth won’t serve Africa’s interests — not when ACFTA offers much more optimistic potentials for restoring the continent’s inward-oriented manufacturing potential.

The authors are political economists at the University of the Western Cape

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Patrick Bond
Guest Author
Lisa Thompson
Lisa Thompson is a political economist and public-sector reform analyst at the University of the Western Cape

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