Sometimes products were designated for local procurement even though there were no local suppliers, the report found. File photo.
Sometimes products were designated for local procurement even though there were no local suppliers, the report found. File photo.

New CDE report finds localisation policy will raise costs and it’s the wrong priority for the country

By BR Reporter Time of article published Nov 19, 2021

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LOCALISATION will raise costs, reduce competitiveness and domestic competition and was an anti-export strategy and the wrong priority for South Africa, according to the Centre for Development and Enterprise (CDE)

The independent policy analysis and advocacy organisation’s executive director Ann Bernstein said significant stakeholders in the economy – the government, business and organised labour – had endorsed some version of the idea that localisation was essential for economic growth in South Africa. “But the strategy is misguided,” Bernstein said at the release of a new report.

The report noted that proponents of localisation saw it as a driver of economic growth because demand for imported goods was redirected to local firms making the same products.

“This is a beguiling proposition, but there is no such thing as a free lunch. While the Minister of Trade, Industry and Competition will tell you about the firms that did well as a result of localisation, he will never talk about the costs that are imposed on that firm’s customers and on all of us,” she said.

Professor David Kaplan, a contributor to the report concurred that when products were designated for local procurement, it meant they were not the buyer’s first choice. “There must be a reason for that. Are they more expensive? Are they inferior in some way? There must be a cost to choosing the local product over the imported product, otherwise there would be no point to the localisation policy.”

Bernstein noted that sometimes products were designated for local procurement even though there were no local suppliers. “The chief executive of Transnet, Portia Derby told media recently that Transnet spend an inordinate amount of time trying to get permission from Treasury to buy imported rail tracks because no one makes them in South Africa.”

Professor Lawrence Edwards, another contributor to the report, noted that localisation reduced the incentive for firms to be efficient, keep prices down and innovate with new products or processes.

According to Edwards, protecting local firms from foreign competition and guaranteeing them the whole of the local market, created a risk where one ended up supporting very inefficient firms.This was an especially large risk in South Africa because industries were highly concentrated and there were few firms competing to supply any specific product.

CDE’s report criticises industry masterplans that have been championed by the Department of Trade, Industry and Competition and by business. “These masterplans make numerous recommendations that would shield local firms from foreign competition, raising costs for down-stream users and for consumers.”

Bernstein said localisation was an exceptionally misguided strategy that both reduced competition in the local economy and reduced exports.

“South Africa is a big exporter of motor vehicles but it imports most of the parts that go into those cars. In a world of complex, interlinked supply chains, you can’t reduce imports without reducing exports, too.”

She said the country had been battling with stage four load-shedding over the past few weeks. “Our problems are not the result of importing too much from the rest of the world. They are home-grown. Imposing local-content procurement rules is not going to fix them. In many respects localisation will make SA’s economic problems worse."

The think tank said the localisation strategy undermined the country’s economic approach and the president’s priorities as it would increase costs, make the economy less competitive and innovative, favour existing dominant firms, make it harder for new entrants, lead to slow infrastructure delivery and make the SA Reserve Bank task of moderating inflation even harder.

“This policy should not be a key pillar of our economic recovery strategy,” Bernstein said.

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