During the recent parliamentary debate on the department of trade and industry budget its minister, Rob Davies, attacked me in my absence, suggesting that I live “in cloud cuckooland”. Thus he dismissed, without argument, some points I had raised about the Industrial Policy Action Plan — points that deserve more serious attention.
The department implements the action plan. Any industrial policy carries an economic cost. So, in adopting an industrial policy the government must ensure that its benefits outweigh its costs. In the short and medium term the plan is pie in the sky, with free dough for everyone. In the long term anything is possible. The economic costs of the plan are clear, but its benefits are speculative.
Imposing local product preference in public procurements will increase the cost of government services. Benefits would flow if the plan fulfilled its promise to assist local industries against cheaper international competition, but only if this incubated them until they became viable in international terms so that long-term benefits offset these costs. But no such assessment has been made as a precondition for preferential procurement.
The same applies to high tariff barriers and the prohibition on importing specific goods. This also leads to our paying a higher price for such goods and it favours industries that provide no guarantee of their longer-term viability.
An industrial policy should guarantee that the country as a whole would make the additional money needed by the citizens to raise their overall living standards — and by the government to support the vast social programmes it has rightly committed itself to. Failing this in the medium and long term the policy would merely transfer money from the family aggregate, mainly consisting of middle-class taxpayers, to industrialists to maintain their profit margins while the country spiralled downwards to poverty.
A typical example is the automotive industrial policy, which forces us to pay almost twice the international market price for our vehicles and prohibits importing cheaper, used, roadworthy vehicles. Higher prices are the consequence of direct government subsidies that we pay through our taxes and high import duties; these enable the auto industry, acting as a cartel, to raise prices to the level of the cost of foreign import after such duties and taxes on the duties. This means that we pay an indirect and regressive tax directly into the pockets of manufacturers every time we buy a vehicle.
The absurdity of this goes as far as government imposing a 100% import duty, which after VAT becomes a 114% duty, on tyres and other car accessories that we do not manufacture here.
The excessive cost of vehicles cuts across not only all families’ budgets but also the cost of doing business, for each business relies on vehicles. The reason given to justify this is the maintenance of employment levels in the industry.
I was raised in Italy and I have seen this movie. It ends in the realisation that it is all about maintaining the industrialists’ profit levels. At least in Italy the government stole from the middle class to maintain the profit levels of rich Italians, while in South Africa our families are subsidising foreign industrialists.
For 40 years Fiat blackmailed the Italian government with the threat of retrenching workers unless it received subsidies and tariff barriers to protect it against competition from better and cheaper non-Italian vehicles. When the European Union halted this nonsense Fiat restructured, produced better vehicles, found its own market niche globally and kept employment levels stable.
The same applied to the Italian textile industry, which was kept alive by subsidies until the Italian government realised that this was not sustainable. It accepted Italy might lose its textile industry and ended subsidies. Instead of dying, however, the Italian textile industry reorganised itself and found its global market niche.
In South Africa we are subsidising a non-viable textile industry, which forces us to pay almost twice as much for our clothes as we should, while also preventing us from importing used clothes.
The Industrial Policy Action Plan should ensure that only what can become viable in the long term is kept alive artificially in the short and medium term. But it does not. The plan is extending the welfare state, which benefits 15-million South Africans and is bound to be extended beyond them to the industrialists and the wannabe new rich as well. This gravy train will destroy the middle class now financing the welfare state.
Such an approach is reflected in the instructions given to the Industrial Development Corporation to assist companies merely on account of financial distress. The economic perversion of this policy plays out in different ways, including the fact that in trying to remain self-funding the corporation is transforming itself into an industrial cartel committed to creating economic, regulatory and market conditions favourable to the industries it assists or holds equity in. This leads to an unnecessary increase in the price of such products, with the middle class again bearing the cost of endlessly financing their survival.
About 400 enterprises receive export subsidies. There is no assessment of whether, or when, they will be able to export such products without subsidies. Subsidies are as addictive to industries as drugs to people — until they are removed industries have no reason to adjust.
I have repeatedly requested that studies be conducted to determine whether these economic policies generate greater employment than libertarian policies do. A simple example makes the point across the board. Vehicles are a major cost for families and businesses — were the cost halved, more money would be available for consumer spending, which would lead to greater demand for local products and thus greater employment, while the overall costs of doing business would decrease, thus increasing productivity and employment.
The policy action plan relies on Brazil as a developmental model. Brazil protected its industries from international competition so they would become competitive over time. Most of its industries never reached that goal, or that of exporting, but it does provide products on par with international competition or slightly below. This was possible because Brazil has an internal market of 190-million people, a significant number of whom are consumers.
South Africa, by contrast, has an internal market of 45-million people, with possibly as few as five million consumers — and they are subjected to one of the heaviest tax burdens in the world. This does not allow us to manufacture any widget of significance on par with what we can import. It sets no path towards incubating industries that could, in the long term, produce internationally competitive products. Davies should address these issues more seriously than he did in Parliament.
Mario GR Oriani-Ambrosini is an Inkatha Freedom Party MP and the party’s spokesperson on trade and industry