/ 9 September 2011

Door closing on SA’s gateway status

The South African government is waking up to the possibilities of the regional market. This is expressed in Trade ­Minister Rob Davies promoting the trilateral Free Trade Agreement encompassing the Southern African Development Community, the Common Market for Eastern and Southern Africa, and the East African Community as representing a ­historic opportunity to integrate markets “from Cape to Cairo”.

Invoking Cecil John Rhodes’s colonial enterprise underpins the notion of South Africa being a “gateway” to African markets and was given renewed impetus by President Jacob Zuma during the recent summit of Brics countries — Brazil, Russia, India, China and South Africa — in China. Yet it is seldom substantiated.

In our view it could entail three linked possibilities. First, multinational companies could use South Africa as a hub for regional headquarters, utilising our superior services infrastructure to co-ordinate their regional activities. Second, multinationals and South African corporates could take advantage of our relatively advanced transport and distribution networks. Third, companies could use South Africa as a sourcing hub.

Attracting regional headquarters could have positive spin-offs, such as branding South Africa and ­providing pressure to upgrade its supportive network infrastructure. It is not likely to lead to major income or employment benefits for the country. Our chronic crime problems, bureaucratic challenges and some policy failures, such as the difficulty to secure work permits, constitute strong headwinds to attracting skilled foreign personnel to South Africa.

The second possibility would have positive spin-offs for South Africa, particularly for transportation, logistics and distribution companies. We have relatively strong corporate capabilities in this area and the ­revenues generated constitute export receipts. These activities also create employment, even if they may not constitute “decent jobs” in Cosatu’s firmament. The challenges revolve around the rapidly escalating costs of maintaining and developing physical infrastructure in South Africa.

The sourcing possibility is most interesting because it involves ­adding value in South Africa. More domestic production, linked to expanding exports, would generate sustainable jobs and foreign exchange. It would also suck in ­complementary services such as transport, distribution, finance and other areas in which South Africa has competitive strength.

Unfortunately, self-inflicted policy obstacles to securing this beneficial outcome are mounting. Take the trilateral Free Trade Agreement negotiations, in which South African lobby groups and the department of trade and industry should clearly be on the offensive rather than hunkered down in their industrial-policy trenches.

South Africa stands to gain much from a rapid liberalisation process stretching all the way up the east coast of Africa, via Nairobi and Addis Ababa, to Cairo. Instead, the department seems to be slowing it down to a cumbersome and politically charged tariff-line-by-tariff-line negotiation, while avoiding a broader services-liberalisation agenda.

This approach, if pursued to its logical conclusion, will take a ­decade or more to deliver a result — if at all. This cautious approach arises from our domestic trade policy stance, which advocates maintaining or raising already high industrial tariffs in “strategic sectors”.

Trade protection increases the prices of food, textiles, apparel and other consumer goods. Because these price increases are borne disproportionately by the poor, the policy is socially unjust. It also increases input prices for exporters, and thus works as indirect export taxation. And trade protection causes an appreciation of the rand because demand for foreign currency is reduced when import prices rise and imports are diminished. This appreciation hurts exporters and import-competing firms again.

Changes for the better are not on the horizon. The department promises selective tariff liberalisation but delivers tariff escalation: processed goods are more highly protected than unprocessed goods. This is meant to improve export performance, because inputs are cheaper than before and thereby enhance exports. But this promises only short-term benefits.

Protection from foreign producers of processed goods represses structural change and prevents productivity gains, which are mostly created by means of import competition. Productivity gains are necessary to develop “decent jobs”. In the medium and longer term, technology and human capital-intensive export industries suffer through tariff escalation. It also causes South Africa to behave like the industrialised world.

By mimicking the West’s discriminating trade policy, South Africa distorts trade with less developed countries, particularly fellow Africans, because it forces them to specialise in unprocessed goods and prevents them from developing skills in processed goods.

In the long run, that may reverberate politically too — and undermine the trilateral Free Trade Agreement. The foundation for this approach is that the government wants to pick “winners” and thereby create long-term comparative advantage; its idea of a developmental state is one that drives industrialisation.

The department, in the South African Trade Policy and Strategy Framework of 2010, refers explicitly to the theory of strategic trade policy to justify picking and even creating strategic sectors. Yet models of strategic trade policy are so restrictive and demanding with respect to the knowledge government requires that one can plainly exclude the success of any such approach in South Africa.

Meanwhile, in the labour-intensive textiles and apparel sector, the government seems bent on destroying whatever wage advantage towns such as Newcastle in KwaZulu-Natal may enjoy. It turns a blind eye to factory closures even as the jobless queues in that depressed region grow.

Furthermore, network services such as electricity, communication and transport are becoming expensive as their quality declines — which again hurts exporters. The government is addressing transport and electricity bottlenecks through massive expenditures, but the price is now becoming apparent. Add to this the likelihood of medium-term tax increases (arising from a proliferation of fiscal measures designed to promote social inclusion) and potentially ruinous labour market ­revisions currently before Nedlac, and South African goods may become priced out of regional markets.

Everywhere we look we encounter growing doubt about South Africa’s economic management. This encompasses business scepticism concerning the emphasis on state-driven development in the government’s new growth path; worries over what appears to be an increasingly interventionist attitude to foreign direct investment in South Africa and recourse to the competition authorities to act as a quasi-inward investment regulator; tolerance of an extremely destabilising one-sided “debate” about nationalisation; and resultant concerns over who is ­actually driving economic policy.

We detect a growing feeling in the international and domestic investor community that South Africa is not getting it right, whereas better opportunities are emerging elsewhere on the subcontinent. The trickle of foreign direct investment previously destined for South Africa but now diverted to the likes of Nigeria and Kenya is unlikely to become a flood any time soon.

But, if current trends continue, then in five to 10 years’ time the reality may be very different. What happens to the gateway strategy then? How will South Africa keep the door open while others roll out the welcome mat in other parts of Africa?

Ultimately it may prove to be this factor, more than domestic pressure, that pushes government economic-policy responses in the direction of delivering a more investor-friendly and therefore growth-oriented policy environment. Meanwhile, the fiddling continues while Rome burns.

Peter Draper is a senior research fellow at the South African Institute of International Affairs; Andreas Freytag is chair of economic policy, Friedrich Schiller University of Jena, Germany, and a senior research associate at SAIIA