SA would do well to heed IMF’s anti-protectionism warning
SA would do well to heed IMF’s anti-protectionism warning
If South Africa is to address the extremely worrying levels of unemployment in the country, warnings from the International Monetary Fund (IMF) must be heeded. However, CHRIS HATTINGH points out that these warnings are currently being ignored.
That the South African economy faces myriad challenges has been well-documented. Whether the political will exists to change course from a position of state controls and interventions towards more economic freedom and dynamism remains to be seen; at this point in time, it remains highly unlikely.
To seriously address the unemployment crisis (general unemployment, under the expanded definition, currently sits at over 47%, while the youth unemployment rate is over 74%) we need to achieve an average of between five and eight percent growth for the next five years. Unfortunately, and contrary to a warning from the IMF, it appears that government remains committed to policies and ideas (such as localisation) that will only inhibit transformative growth.
In December 2021, the IMF warned that South Africa would not create lasting growth or employment without removing obstacles to investment and reducing the government’s need to borrow. Bear in mind that the more government borrows, and the more debt and interest it needs to repay, the greater portion of taxes and economic activity it will consume.
With just over 18 million people reliant on social grants as of 2019/20 (according to the Centre for Risk Analysis), and lower numbers of taxpayers, it is incumbent upon government to restrain its appetite. It must realise that it cannot try to redistribute the country into growth and prosperity. Everything must be done to encourage investment here rather than creating more disincentives.
Some of the reforms highlighted by the IMF include the removal of existing regulatory barriers to private investment, as well as increasing efficiency in sectors such as electricity and transportation. Regarding South Africa’s localisation and industrial policies specifically, it “should not be used as a blunt instrument to serve protectionist views and vested interests, which could hinder industrial development and harm competitiveness,” as stated by the IMF.
When economic freedom is reduced – as has been the case in South Africa over the last 15 years – it becomes more difficult to create new sources of wealth and jobs without massive involvement and interference by the state. This increases the possibility for inefficient economic decisions and creates more avenues for cronyism and corrupt activities.
In this environment, the only way for people to “get ahead” in life is by having the necessary access to politicians, and/or the requisite political influence. By implementing localisation and in the process establishing that some businesses will receive subsidies while others will not, government will simply increase the stakes for further corrupt activity in the future.
Given its precarious economic situation, protectionist measures such as localisation are some of the last policies that South Africa should be contemplating, never mind implementing. The country requires as much foreign investment (both in terms of capital and skills) as possible, along with the easy flow of goods and services to spur economic activity and job creation. Implementing higher tariffs and other barriers to trade will achieve little in this regard.
When pursuing any new policies that may deter the flow of goods and services and increase the cost of doing business, the risk of inflation is another potentially harmful result to consider. Rising inflation is a significant possibility in 2022; by increasing importation costs, localisation will only add to this, leading to higher prices of even the most basic goods and resulting in negative impacts on lower-income consumers.
The IMF expects that the South African economy will have grown by about 4,6% in 2021 – lower than the National Treasury’s forecast of 5,1%. Bear in mind that this would have been from the very low base of pre-lockdown growth rates, the devastation caused by riots in July 2021, and “normal” government-imposed inefficiencies like our backward labour laws.
One of the best ways to attain higher growth would be to ease the flow of goods and investment, by speedily implementing and enforcing the Africa Continental Free Trade Area. This unprecedented continent-wide trade agreement could spur massive growth… if governments adhere to it in both spirit and policy formation. Countries with as much economic weight as South Africa could undermine the agreement, which would be to the detriment of both their own citizens and neighbouring states.
While localisation measures may create some jobs in the short-term, they will inevitably lead to protected and brittle businesses and industries in the long-term. Government would be better able to attain the kind of long-term growth the country needs by implementing the IMF’s recommendations, strengthening property rights, and ensuring that private sector investment in South African port operations happens as quickly and smoothly as possible.
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