State brings economy to ‘almost unfixable point’
XA Global Trade Advisors CEO Donald MacKay says business is being ‘kneecapped’ by the government
● Donald MacKay, CEO of XA Global Trade Advisors, says the government’s attempts to boss the economy have brought it to a point where it “feels almost unfixable”.
“It is terrifying to see the state the economy is in,” says MacKay, whose company has released a report on the costs to industry of trade, industry & competition minister Ebrahim Patel’s tariff policy and, more specifically, his “tardiness” in making critical customs duty decisions which have enormous investment implications.
His attempts to extract impossible commitments from businesses applying for urgent tariff relief have resulted in crippling delays and uncertainty, making it “very hard” for them to attract investment or make investment decisions on which their profitability and survival depend.
Confusion around the process started with his politicising of the International Trade Administration Commission (Itac) in SA, “which legally is meant to be independent but which is quite directly being impacted by what the minister wants”, says MacKay.
Itac investigates tariff relief applications and makes recommendations to the minister on how to proceed.
“Then everything goes dark. We’ve no idea what happens.
“Either he’s sitting on it or the investigations are getting lost in a large and intimidating inbox.”
Delayed customs duty decisions have cost the fiscus R1.25bn in revenue and counting, MacKay says.
Anecdotal evidence suggests that in many cases the delays are linked to socalled reciprocal agreements companies applying for relief are expected to sign.
“This is a daunting document for most directors to sign off on. There are some quite frightening commitments you’re being asked to tie yourself into for a three-year period.”
They include investment, price control and employment commitments. These get them tied into the government’s idea of social compacting, which in the industrial policy space takes the form of master plans.
“We have an almost infinite number of these master plans.
“Coupled with these reciprocal agreements they appear to be trying to generate economic growth by contracting people into behaviour that the government wants.
“Rather than creating a set of incentives which would drive people’s behaviour, we’re instead trying to tie them legally into a path that government believes is the way to make things happen.
“So you commit to employment or to not retrenching people, and somehow that manifests as a lower unemployment rate which we can all see hasn’t been the case.”
The government wants investment but on its own terms.
“Investment in itself seems to be unacceptable; it needs to have certain characteristics.
“We saw this with Grand Parade attempting to offload Burger King and then Patel coming in and saying their buyers were not black enough.”
Patel is applying the same concept to localisation, says MacKay.
“He’s saying if you want to do this deal you have to buy certain things from the domestic industry. That has become quite detailed.”
Patel’s interpretation of President Cyril Ramaphosa’s “social compact” is to get the steel industry or chicken industry into the room “and then we’ll all agree on what is going to happen, how you’re going to export, what you’re going to invest”.
This has led to considerable pushback in some sectors, leaving many master plans unsigned or signed but struggling to be implemented.
What Patel is attempting to do with his master plans was tried in 2007 when then trade & industry minister Rob Davies started his 10 industrial policy action plans, each announced as a major success while GDP continued to fall and unemployment to rise.
“All Patel has done is inserted a lot more detail, but the underlying thinking hasn’t changed.
“Except it comes with a much heavier hand if you’re not seen to comply with what the minister wants.”
Ramaphosa talks about unleashing investment and growth but Patel’s master plans and reciprocal agreements are having the opposite effect, he says.
“If one looks at the economic data there is very little evidence any of this is working. We must be very cautious to not consider media releases or master plan documents as evidence.
“Endless announcements that we’ve increased duties on a product or removed duties on another and we’ve saved all these jobs, created 500 jobs here and 200 there, are misleading.”
Contrary to the president’s talk about cutting red tape, Patel is “endlessly inserting more and more rules and conditions to transact, which is a synonym for red tape”.
Patel may be kneecapping the economy but MacKay doesn’t think removing him would change things.
“The underlying philosophy is still ultimately one of government deciding what the private sector should do. And I don’t see how that ever works.”
The DTIC [department of trade, industry & competition] is an “anachronism”, he says.
Instead of focusing on how to grow business it spends its time formulating economic policy in “the very fine-grained way they’re attempting to do”, which hasn’t worked anywhere.
If the government were serious about fixing the economy it would focus on the things that make a difference to business, such as getting them electricity, making sure railway lines are not stolen and that the ports function optimally.
“If those things work there’s little reason to think that industry needs government to tell it what to do.
“If they don’t work how would these fine-grained interventions make a difference?”
If the country’s trade policy were focused on improved productivity, bringing down the cost of doing business in a meaningful way — “I don’t mean in media releases but in real action ”— and making it easier to do business, a lot of the other problems would sort themselves out, MacKay says.
The most damaging effect of the government’s insistence that it can fix the economy by ensuring that people who are part of the economy behave in a way dictated by the government is the one we’re unable to measure, he says.
“The people who just decide: ‘I’m not even going to go through the process of Itac, I’m just not going to make the investment’ or ‘I’m just going to shut the plant down’ are far more problematic because they’re invisible to us; they’re just another investment that didn’t occur.
“Eventually, you don’t have the raw material to build an economy any more. That’s a hard problem to fix once you’ve created it.”
Rather than creating a set of incentives which would drive people’s behaviour, we’re instead trying to tie them legally into a path that government believes is the way to make things happen