Localization isn’t a free lunch, but it does level the…
Localization, according to one argument, is economically myopic. It ignores the high but diffuse costs that society must pay even as it creates small but highly concentrated benefits for firms whose output will increase.
In many cases, this argument is valid. However, localization was never meant to be undertaken at all costs. The market remains the price setter and the product can only demand space in the market at a competitive price. Localization is more about finding the ideal balance between supply and demand, dealing with the many wrongs responsible for the massive deindustrialisation of South Africa’s manufacturing base.
Localization alone can never lead to industrialization, and neither can import substitution, but a fair trade situation must be created, free from corruption and illicit import transactions.
The steel industry has fought unsuccessfully for a long time to stop imports of galvanized corrugated sheets entering the country at around R3,000/tonne, while scrap metal sells for almost R5,000/tonne. Local selling prices to the public for this same product are between R28,000/tonne and R54,000/tonne and in some cases very thin gauges with zinc coatings well below standard render the product quality much lower. How can you maintain a crafting base against these odds?
The main problem with any version of a localization policy is the assumption that it is a kind of free lunch: demand is transferred from imported products to locally produced products for the benefit of local businesses, their employees (current and potential) and owners. Of course, to the extent that positive externalities are associated with local production, it will also directly benefit the national economy. But the alleged free passage from imports to local products raises some questions.
Quoting Professor David Caplin: “When products are designated for local procurement, these products were not the buyer’s first choice because, if they had been the first choice, the policy would not have been necessary. . But if local products are not the first choice, there must be a reason for it. Are they more expensive? Are they inferior in any way? There must be a cost to choosing the local product rather than the imported product; otherwise, the location policy would be meaningless.
The scenario sketched out by the professor is valid, and we do have the “free lunchers” among us. Therefore, localization can only succeed if there is a sustainable justification to promote local manufacturing.
The local steel industry is part of the backbone of an industrial economy. It has a significant economic multiplier effect (five to six times) as well as the ability to enable and develop skilled local capacity. The steel sector offers highly skilled and well-paid jobs, above the average of most other mining, construction and manufacturing sectors.
The argument that manufacturing capacity in South Africa is unduly protected, making product offerings uncompetitive, is a blanket statement that in many cases is not valid. The South African Iron and Steel Institute (Seisi) compared the local prices of structural steel offered by steel mills with those of the equivalent imported Chinese steel, excluding duties and taxes, to see if the local steel cost is problematic or inflates the manufacturing cost. What we have found is that the local offer matches well with that offered by the most competitive region in the world.
South Africa is also no exception in terms of customs duties. Most steel-producing countries have taken significant steps to protect their steel sector from imports, in accordance with internationally agreed WTO rules. Normal tariffs on steel imports are observed in more than 150 out of 200 countries worldwide and in almost all major steel producing countries. A total of 135 countries have an average duty of 10% on South African exports to them, including China, which has a 5% duty on imports of South African steel.
We agree that the structure of a location policy should not allow local suppliers to raise prices in a way that is not aligned with equivalent offers elsewhere in the world. Instead, the efficiency of local manufacturing should be improved to avoid sustaining inefficiencies in the manufacturing process.
The push towards localization could also have a strategic intent, and even when this is the case, the development of the manufacturing industry should be accompanied by an adjustment plan towards competitiveness. However, reducing efficiency incentives should not have the effect of separating the domestic firm from competitive pressures. On the contrary, global competitiveness is the only way to maintain sustainability due to relatively weak domestic growth.
Designating certain products as having to be purchased from local manufacturers does not mean paying a higher price for these products or obtaining inferior quality goods. Moreover, it should not create the possibility that the price and quality gap between local products and imports will widen because local companies are no longer subject to the discipline of foreign competition. On the other hand, innovations and quality improvements from foreign manufacturers should always be included in the development plans of local manufacturers.
Seisi is aligned with Anthony Altbeker when he says: “Perhaps the most important thing about localization politics is that South Africa’s poor economic performance over the past 13 years has nothing to do with an alleged “overpropensity” to import and everything to do with a range of self-inflicted policies and wounds to governance. These include our inability to keep the lights on, our decaying infrastructure, costly and inefficient container terminals at our ports, the deepening financial crisis, increasing levels of lawlessness and the inability of our educational system to produce a sufficient number of qualified workers.
It is essential to recognize that the Ministry of Trade, Industry and Competition has sought to strengthen the localization policy by emphasizing the development of industry to ensure higher levels of competitiveness. Its approach is supported by the companies that benefit from it and will be followed for their success.
South Africa is fortunate to still have a manufacturing footprint after the economic challenges of the last 10 years. However, it is on the verge of being lost and the choice to keep it or lose it forever is up to all South Africans.
It would be disastrous for South Africa if it did not provide a level playing field for its steel production, steelmaking and industrial capacity, thereby limiting the sector’s contribution to the country’s growth and development. The goals of demand growth, increased employment, increased wealth and supply certainty in the steel industry are laudable and of lasting benefit to South Africa. DM/BM