State projects have to serve economy
Concerns on current account deficit are growing
SA IS going to have to abandon its statist and ideologically driven industrial policy if we are to have any hope of tackling our rapidly growing current account deficit. The release of the fifth Industrial Policy Action Plan (Ipap) last week came as falling international commodity prices threatened to push our already ailing domestic mining sector into crisis.
Concerns about SA’s growing current account deficit have been one of the main reasons behind the rand’s more than 8% plunge against the dollar this year and lower commodity prices are likely to make the situation worse. On top of lower export revenues, foreign capital flows — on which SA has been heavily dependent to keep the current account under control — are far less robust than they have been in recent months and will continue to shrink as the US economy recovers.
Improved growth in the US economy is in large part behind the recent run on gold, and commodity prices are expected to struggle as the dollar continues to strengthen. Despite worse than expected US nonfarm payroll data released on Friday, there is an expectation that the US economy is on the path to recovery and that the Federal Reserve’s quantitative easing programme — which has benefited commodity prices and emerging market equities — may come to an end sooner rather than later.
While the outlook for commodity prices in the long run is positive — when other global players such as China, India and Europe start to recover — in the short to medium run, weak demand and low prices will add to the deficit and drive the rand lower, which in turn is likely to drive inflation, result in ratings downgrades, and ultimately retard economic growth.
It is within this context that the Department of Trade and Industry must formulate industrial policy that not only boosts industrial growth, but does so with macroeconomic consequences in mind.
In the immediate term it will be extremely hard for SA to avoid the consequences of the commodity sell-off and the shift out of emerging market equities into developed market equities — in particular the US market. However, in the long term changes to industrial policy will improve SA’s economic performance and enable the economy to weather changes in the global economic environment better.
At the launch of the latest iteration of the Ipap, Trade and Industry Minister Rob Davies singled out the vehicle manufacturing sector as an indicator of the current policy’s success, but it has also emerged that incentive schemes operating in the industry were responsible for about 40% of last year’s national trade deficit. This is a classic example of state intervention leading to unexpected consequences that arguably cause more harm than good.
The focus on mineral beneficiation — long a stalwart of the government’s developmental agenda — is perhaps the biggest stumbling block of the current industrial policy. Beneficiation in itself is a fine idea, but we cannot afford to prop up or develop industry where there are established and more efficient competitors.
For example, the announcement by the Department of Trade and Industry last month that international investors were interested in establishing a joint-venture steel mill in SA is highly questionable given that local producers have spare capacity and imports are flooding in. To make matters worse, the department said any such agreement would contain strong conditions to ensure that the government would wholly control the project.
While there are certainly circumstances in which a project such as this could be beneficial to the domestic economy, we have far too often seen the government embark on costly industrial projects that ultimately serve an ideological or political agenda rather than the economy at large. The failed empowerment deal between the government and Imperial Crown Trading over access to iron-ore mining rights springs to mind.
If the core goal of SA’s industrial policy is to increase exports and boost job creation, we should focus on developing sectors in which SA already has a natural competence or endowment, the most obvious of which is mining. To this end, industrial policy must take steps to improve industry responsiveness to changes in the international environment — most importantly, price.
Other commodity-heavy economies such as Australia have fared considerably better than SA because they have been able to adjust output to take advantage of prevailing conditions. Despite lower commodity prices, Australian operations have been able to increase production and maintain revenue levels.
Comparatively speaking, restrictive labour policies and political uncertainty mean that South African operations are reluctant to invest in new operations and step up production. This inflexibility has been blamed for the country failing to capitalise on the commodity supercycle, and could yet be the reason behind an unsustainable current account deficit and prolonged weak economic growth.
Other industries, such as agriculture, which are dependent on a large, unskilled labour force, should also be targeted — especially in the short to medium run. Even if SA is able to begin building a skilled workforce, there will still be large numbers of unskilled workers who are able to contribute to the economy.
Most importantly, the department needs to address the policy dissonance arising from exposing producers to imported goods that are heavily subsidised by their country of origin, while at the same time trying to force the likes of ArcelorMittal SA to abide by set prices.