Supply chain shocks are own goals that weaken the state
Since the disruptions of the Covid-19 pandemic the world’s big economies have been concerned with how best to keep goods, raw materials and other production inputs flowing.
Governments of these economies and the private sector have become more preoccupied with resilience to shocks and the efficient functioning of supply chains.
The US president’s economic advisory council describes resilient supply chains as able to “easily adapt, rebound or recover” when hit by economic shocks. Shocks can either be idiosyncratic — specific to a particular geography or firm — or systemic (Covid-19).
SA has not been immune to supply chain challenges. But there are huge differences between what’s happening locally and elsewhere, especially in the big economies. The differences primarily relate to the source of current supply chain shocks. The biggest source of the disruption to the movement of goods to and from SA remains factors that are specific to the country — own goals. And they have gradually become worse.
These include the failure of the rail network, primarily the coal and iron ore lines, and inefficiencies at the ports. All of these are systemic, meaning they hit all firms that rely on coal equally, as well as iron ore lines and the country’s ports. They hit their customers, too, making local mines unreliable suppliers.
Where the dysfunctionality of coal and iron ore lines are specific to sectors, the effect of the breakdown of the ports, specifically Durban, is felt economywide. Most importantly, there is nothing the mines can do. Coal must be moved from the Mpumalanga coal fields to Richards Bay, and iron ore from the Northern Cape mine to Sishen. If the coal rail line isn’t working for whatever reason — sabotage, collapsed infrastructure because of a lack of maintenance, or because an angry rhinoceros is standing on the rail line — the coal exporters are stuck.
They have tried trucking the coal to Richards Bay, with clogging of roads to the port the result. The port has its issues, too, leading to a blockage at that end. The iron ore miners have similar difficulties.
Extractive industries are in a bind here. All else being equal, a manufacturer of goods would consider moving a production facility closer to the ports. A miner has no such luxury — mines are built where the mineral resources are, and their produce must be moved to customers elsewhere in the world.
The systemic nature of these challenges means their resolution requires the government to step in, even more so given that rail and port facilities are operated by a state-owned entity. But the government is as weak as its own companies, like Transnet and Eskom.
The capacity of the government, at national, provincial and municipal levels, has weakened considerably. Hence the effort, which some resist for ideological reasons, to bring in private sector money and expertise. But that, too, calls for a state that can regulate the private sector.
As the US’s economic advisory council notes, economic literature shows that the resilience of supply chains is possible only when firms “rely on a broader diversity of input suppliers”. SA has no such luxury, especially when it comes to coal and iron ore.
A country’s ability to move goods, within its borders and between itself and other countries, matters for the effective functioning of an economy. Blockages to the movement of goods that aren’t resolved quickly can translate into higher consumer prices, hoisting inflation and ultimately the cost of borrowing.
Also, the failure to restore the efficient functioning of transport and port networks puts industrial development strategy at risk. As the Centre for Economic Policy Research noted recently, “mainstream policymakers viewed global supply chains as engines of industrial competitiveness in advanced economies and industrialisation in emerging markets”. The European economic think-tank said that is no longer the case.
That spells trouble for SA’s economic ambitions. It means a firm that 10 years ago might have considered the country a possible location for a portion of its production would today not even think about SA.
Politicians are quick to point at existing firms that remain in the country. But they ought to scratch the surface. They will find that some of these firms have done calculations of the costs of shutting down local facilities and moving them elsewhere.
SA might still come off better today, but as the collapse of rail, port and road infrastructure continues, the rise in those costs will make the option of closing SA facilities and moving them elsewhere that much more attractive.