While localisation is being punted by the government and some in the private sector as a beacon of hope to grow the economy and support SMMEs, a report by the Centre for Development and Enterprise (CDE) strongly disagrees. The document titled: “The Siren Song of Localisation: Why localisation policy will not lead to industrialisation” was released on Tuesday.
It says that those who advocate for going local, see it as a driver of economic growth. This is because the demand for imported goods is shifted to local firms manufacturing products. However, CDE director Anne Bernstein, who contributed to the report, said that localisation was a misguided strategy.
“It (localisation) both reduces competition in the local economy and reduces exports,” she said. “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 complexly interlinked supply chains, you can’t reduce imports without reducing exports too,” she pointed out.
Bernstein believes that localisation undermines the country’s economic approach and the priorities set out by President Cyril Ramaphosa to reinvigorate the economy. “It will increase costs, make the economy less competitive and innovative, favour existing dominant firms, make it harder for new entrants, slow infrastructure delivery and make the South African Reserve Bank’s task of moderating inflation harder,” she warned.
“This policy should not be a key pillar of our economic recovery strategy.” Localisation would also raise costs, Bernstein said. “It is an anti-export strategy and the wrong priority for South Africa,” she said. Also, the country’s problems were homegrown, and localisation would have dire consequences on the economy. “The country has been battling with stage four load shedding over the past few weeks,” she said.
“Our problems are not the result of importing too much from the rest of the world. Imposing local content procurement rules is not going to fix them.” University of Cape Town School of Economics Professor Emeritus David Kaplan, who contributed to the report, said localisation had to be considered carefully.
“When products are designated for local procurement, it means that they were not the buyer’s first choice. There must be a reason for that,” he said. “There must be a cost to choosing the local product over the imported product, otherwise there would be no point to the localisation policy.”
University of Cape Town Professor Lawrence Edwards, who also contributed to document, said that localisation posed an especially large risk for South Africa because industries were highly concentrated, and only a few businesses were competing to supply any specific product.
“Protecting local firms from foreign competition and guaranteeing them the whole of the local market creates a risk that you end up supporting very inefficient firms,” he said. South Africa’s localisation plan aims to reduce imports by at least 20% by channeling government procurement to locally produced goods.
Trade and Industry Minister Ebrahim Patel recently said that that his department had identified more than 40 products that would net the country as much as R200 billion if their production was ringfenced.