The release of the dti's latest Industrial Policy Action Plan (IPAP) has put the motor industry in the spotlight once again. The dti continues to claim the industry as its greatest industrial policy success. However a recent news report draws attention to IPAP data showing that this sector alone accounts for about 40 percent of the country's trade deficit, and asks what this means for the success of the dti's policies. If government support has created an internationally competitive motor industry, as claimed, why does it show such a large trade deficit?
The implicit answer, supported by a number of online reader comments, is that the industry is not internationally competitive. This is consistent with my own analysis over the years—the ability of MIDP and other government policies to attract investment and promote exports reflects, not the industry's competitiveness, but rather the value of government incentives.
The MIDP was recently replaced by the APDP. This tweaked some of the details of public support for the industry—production subsidies are now given to domestic sales as well as exports; the dti can now hand out cash investment incentives on a more discretionary basis. But the magnitude of public support has not diminished; and it is determined largely in consultation with the major firms who tell the government how much support they require to overcome the high costs of investing and producing in SA. In other words, the type and magnitude of public support depend on how uncompetitive these firms are in SA.
The danger now is that the dti will seek to solve this sectoral trade deficit "problem" in ways that will increase the burdens on consumers and taxpayers, and further diminish SA's manufacturing competitiveness. A simple "solution," for instance, would be to impose local content requirements on the industry and restrict imports through higher tariffs or other measures—in other words, return SA to the bizarre and highly costly policies of the Apartheid era.
The government could, and almost certainly will, employ more subtle subsidies and incentives to serve its motor industry clients. A tender document just released by the DPE, for instance, solicits advice on how Transnet and Eskom can be used to increase motor industry profitability. Reducing Transnet and Eskom costs would certainly be good for the entire economy. But to give special privileges to the motor industry (which already benefits from special Transnet pricing deals on its exports) would perpetuate the failures of the current policies that seek to improve competitiveness by subsidizing uncompetitive firms and industries.
Showing posts with label motor industry. Show all posts
Showing posts with label motor industry. Show all posts
09 April 2013
25 March 2013
Subsidies, Bailouts and Markets
I read with relish the report of Leon Louw's recent blast at the never-ending bailouts of South African Airways (SAA). Mr. Louw, Executive Director of South Africa's Free Market Foundation (FMF), demonstrates how these subsidies distort competition, raise costs and prices, divert resources from more efficient and growth-promoting activities, and are especially burdensome to the poor, from whom the bailouts divert public support. The FMF performs a great public service through well-reasoned commentaries of this sort.
Of course, it is not just state companies and agencies that benefit from public subsidies. Direct government support and regulation are viewed by some as necessary for South African industrial development. The consequences of this approach can be similar to the effects of bailouts of state enterprises.
In this regard, Mr. Louw's remarks reminded me of a brilliant commentary by another FMF member, on the impacts of industrial policy in South Africa's motor industry. In a prize-winning letter to Business Day in 2005 Jim Harris explained how the MIDP (Motor Industry Development Program, recently rechristened as APDP) supports a few companies, but punishes consumers and retards the country's long-term economic development. His remarks were controversial and attracted fierce reactions from some fellow FMF members—at least those associated with the motor industry.
Mr. Harris' letter signalled the start of a vigorous public debate about MIDP that, if nothing else, clarified the nature and magnitude of the subsidies enjoyed by the industry. As with the bailouts of SAA, the MIDP and related subsidies protect a few heavily dependent companies at the expense of consumers, jobs and the poor.
I have been unable to find any follow-up on the FMF website to Jim Harris' early foray into South Africa's most important industrial policy. It would be useful for the FMF to complement the comments on bailouts to state enterprises (and on the US bailout of General Motors) with a discussion of the massive and continuing subsidies to firms in the South African motor industry and other selected sectors.
Of course, it is not just state companies and agencies that benefit from public subsidies. Direct government support and regulation are viewed by some as necessary for South African industrial development. The consequences of this approach can be similar to the effects of bailouts of state enterprises.
In this regard, Mr. Louw's remarks reminded me of a brilliant commentary by another FMF member, on the impacts of industrial policy in South Africa's motor industry. In a prize-winning letter to Business Day in 2005 Jim Harris explained how the MIDP (Motor Industry Development Program, recently rechristened as APDP) supports a few companies, but punishes consumers and retards the country's long-term economic development. His remarks were controversial and attracted fierce reactions from some fellow FMF members—at least those associated with the motor industry.
Mr. Harris' letter signalled the start of a vigorous public debate about MIDP that, if nothing else, clarified the nature and magnitude of the subsidies enjoyed by the industry. As with the bailouts of SAA, the MIDP and related subsidies protect a few heavily dependent companies at the expense of consumers, jobs and the poor.
I have been unable to find any follow-up on the FMF website to Jim Harris' early foray into South Africa's most important industrial policy. It would be useful for the FMF to complement the comments on bailouts to state enterprises (and on the US bailout of General Motors) with a discussion of the massive and continuing subsidies to firms in the South African motor industry and other selected sectors.
11 December 2009
Making a Mockery of Competitiveness
One of the few genuine innovations in South Africa's APDP, the motor industry support program that will replace the MIDP, is a requirement of a minimum scale of operations in order to qualify for the program's very generous financial benefits. Although the details of the program still have not been gazetted, we understand that in order to qualify vehicle assemblers will have to produce a minimum of 50,000 vehicles per year. The idea is to encourage international competitiveness by achieving some economies of scale in production.
The scheme does raise some questions.
1. Why is it necessary for the government to instruct global auto firms on efficient scales of production? (It is not; but under MIDP and APDP it is not necessary to be competitive in order to make big profits by producing in South Africa.)
2. Will production of 50,000 vehicles per year provide sufficient scale to compete with true international major league plants? (Generally not; competitive plants elsewhere produce at least 100,000 per year.)
3. And of course one might wonder how firms will try to get around the new requirement in order to continue to take advantage of the large subsidies made available by the government (and paid for through the "generosity" of South African vehicle consumers and taxpayers) without ramping up production.
But at least the new requirement appears to be a feint in the direction of encouraging some competitiveness on the part of the local industry.
An announcement by the government-operated East London Industrial Development Zone (ELIDZ) provides an answer to the third question. ELIDZ has told the press that it will soon announce the signing of several tenants in a new "multi-OEM assembly plant" it will build in the zone. What is the purpose of such a plant? To enable companies sharing the facility to produce at volumes of 10,000 vehicles per year, or even as low as just a few thousand and still qualify for the APDP benefits that are contingent on meeting the 50,000 per year volume target. It apparently will "work" as long as the total of all vehicles produced by all tenants reaches 50,000 per year.
How will this encourage increased competitiveness, the stated goal of the new policy? It will not. In fact it will simply replicate the highly inefficient pattern of small scale production of multiple models and other automotive products under one roof that was encouraged by protection in pre-MIDP days and by continued protection and MIDP benefits since then.
19 November 2008
A "New" Program of Auto Industry Support
It's been a long time coming. But in early September the dti finally announced the general architecture of its revised MIDP, now called the Automotive Production and Development Program (APDP). The official announcement is sketchy. Public support of the industry will be extended until at least 2020; the program will be "production neutral" (i.e. it will subsidize both exports and production for the local market) and so will be more WTO-compatible.
Other than that, the details, magnitude and impacts of the program will be very difficult for most observers to fathom. Two major studies commissioned during the three-year review process have not been released for Parliamentary or public scrutiny. The Industrial Development Corporation (IDC) conducted a "cost-benefit analysis" of the proposals for the dti, but that is also being kept under wraps.
Of course there will be few mysteries or surprises for the motor industry. The program was designed in close consultation with them by two teams of dti consultants and by the dti itself. This is what the dti calls "stakeholder consultations." But what about other important stakeholders -- Parliament and the consumers and taxpayers they represent, and who ultimately pay for these and other industry support programs?
Broader stakeholder discussion and understanding require much wider dissemination of information and analysis. Justin Barnes and Anthony Black, who have been involved with the MIDP since its beginning, shed some light on the thinking behind the new program in an opinion piece.
This was the cue for a short article of my own, in which I draw out some implications of their observations and fill in a few blanks with my own estimates of the costs and magnitude of the subsidies provided under both the old and the new programs. The costs have been and almost certainly will continue to be high; catalytic converters -- canned platinum -- have received as much export support as automobiles; despite an apparent decrease in some of the rates, overall rates of subsidy for both exports and locally sold production will increase rather than decrease under the new program; the new incentives are likely to create a barrier to entry for new producers.
At least some of these consequences are unintended. But whether intended or unintended, appreciated or not appreciated, they are certainly not what has been advertised by industry advocates.
When policy design and assessments are done behind closed doors, in consultation primarily with only the direct beneficiaries of the programs, questions are bound to be raised. From the information available in this case it appears either that the industry is not competitive and is unlikely to become so, at least for a very long time; and/or that consumers and taxpayers are being taken for a ride by giving unnecessary subsidies. In either case the argument for continued support appears to rest on very weak foundations.
A box in a recent OECD report on South Africa singles out the dti's support of the motor industry to illustrate the dangers of the "capture" of policy makers in the design and implementation of industry-specific industrial policy programs.
This is not to deny the role or importance of industrial policy. But industrial policy needs to be based not just on the influence of powerful industry lobby groups or on the inclinations or dreams of policy makers; it needs to be based on sound economic analysis. To avoid the dangers of capture, it also requires institutions and processes that are transparent and accountable. Policy reviews need to be made public; alternatives need to be presented and properly assessed in terms of their overall economic impacts. And industrial policy needs to be based on a recognition of the capabilities of the policy-making authorities to do the ongoing monitoring and assessment that are represented as a key part of the dti's own Industrial Policy Action Plan.
17 July 2007
Unsafe at any Speed: MIDP and SACU
In three articles headed the wheels may come off South Africa's Mail and Guardian draws on a recent paper by Matthew Stern and myself to explain problems with customs revenue sharing in the Southern Africa Customs Union (SACU).
The articles cleverly explore the links between SACU's new revenue sharing formula, South Africa's Motor Industry Development Program (MIDP) and the recent boom in car sales in South Africa, to illustrate how the new formula turns all previous interests in SACU trade policy on their heads. By fattening the government budgets of the four small and less developed SACU members (Botswana, Lesotho, Namibia and Swaziland—the "BLNS countries" in SACU-speak) the formula has turned these countries into avid supporters of a program designed to subsidize South African motor industry producers at the expense of South African and BLNS consumers. The cost of the program to BLNS consumers is now dwarfed by the (far more than) offsetting revenue transfers to BLNS governments (to the tune of 23 percent of GDP in the case of Lesotho and 12 percent in Swaziland). And now poor South African consumers/taxpayers are saddled not only with high priced motor vehicles but also with the burden of huge fiscal transfers to the BLNS.
South Africa's National Treasury, quite naturally, is bemoaning not only the size of the revenue transfers, but also the difficulties they will create in reaching agreement on badly needed rationalization of the SACU tariff structure. Under the new SACU arrangement, tariff rate decisions are meant to be decided collectively by all members. Having been turned into the greatest supporters of South Africa's protectionist trade policies, the BLNS countries are unlikely to favour tariff reductions that threaten their fiscal windfalls. Before complaining too much, however, South Africa should look at its own central role in promoting agreement on this new revenue formula.
Among the cutest parts of the M&G articles is an illustrative calculation of the amount of revenues transferred to the BLNS whenever a South African buys a new imported car. Based on an import duty rate of 25 percent and an assumed transfer of about half of these revenues to the BLNS, the article shows that the purchaser of a new "Volvaru" that cost a dealer R200 000 would pay just over R25 000 to the BLNS, of which about R5 000 would go to the government of Swaziland and R4 100 to Lesotho.
In fact the numbers are much worse than that. The import duty on cars is now 30 percent, not 25 percent. And, according to our estimates of last year, the share of duty collections going to the BLNS is about 88 percent, not 50 percent. This means that a South African buyer of the above-mentioned "Volvaru" would contribute about R52 000 to the BLNS, of which over R11 000 would go to Swaziland and R7 400 to Lesotho (and greater amounts to the governments of Botswana and Namibia).
This tale leaves South African consumers and taxpayers with much to ponder. The consequences of the MIDP and of the new SACU arrangement are surely much different than whatever might have been expected by those who designed them; and their combined impact is far worse than either of them individually. Two bad policies do not make a good one.
The articles cleverly explore the links between SACU's new revenue sharing formula, South Africa's Motor Industry Development Program (MIDP) and the recent boom in car sales in South Africa, to illustrate how the new formula turns all previous interests in SACU trade policy on their heads. By fattening the government budgets of the four small and less developed SACU members (Botswana, Lesotho, Namibia and Swaziland—the "BLNS countries" in SACU-speak) the formula has turned these countries into avid supporters of a program designed to subsidize South African motor industry producers at the expense of South African and BLNS consumers. The cost of the program to BLNS consumers is now dwarfed by the (far more than) offsetting revenue transfers to BLNS governments (to the tune of 23 percent of GDP in the case of Lesotho and 12 percent in Swaziland). And now poor South African consumers/taxpayers are saddled not only with high priced motor vehicles but also with the burden of huge fiscal transfers to the BLNS.
South Africa's National Treasury, quite naturally, is bemoaning not only the size of the revenue transfers, but also the difficulties they will create in reaching agreement on badly needed rationalization of the SACU tariff structure. Under the new SACU arrangement, tariff rate decisions are meant to be decided collectively by all members. Having been turned into the greatest supporters of South Africa's protectionist trade policies, the BLNS countries are unlikely to favour tariff reductions that threaten their fiscal windfalls. Before complaining too much, however, South Africa should look at its own central role in promoting agreement on this new revenue formula.
Among the cutest parts of the M&G articles is an illustrative calculation of the amount of revenues transferred to the BLNS whenever a South African buys a new imported car. Based on an import duty rate of 25 percent and an assumed transfer of about half of these revenues to the BLNS, the article shows that the purchaser of a new "Volvaru" that cost a dealer R200 000 would pay just over R25 000 to the BLNS, of which about R5 000 would go to the government of Swaziland and R4 100 to Lesotho.
In fact the numbers are much worse than that. The import duty on cars is now 30 percent, not 25 percent. And, according to our estimates of last year, the share of duty collections going to the BLNS is about 88 percent, not 50 percent. This means that a South African buyer of the above-mentioned "Volvaru" would contribute about R52 000 to the BLNS, of which over R11 000 would go to Swaziland and R7 400 to Lesotho (and greater amounts to the governments of Botswana and Namibia).
This tale leaves South African consumers and taxpayers with much to ponder. The consequences of the MIDP and of the new SACU arrangement are surely much different than whatever might have been expected by those who designed them; and their combined impact is far worse than either of them individually. Two bad policies do not make a good one.
09 May 2007
South Africa's MIDP
South Africa's Motor Industry Development Program (MIDP) has been one of my favorite topics recently. The Department of Trade and Industry (DTI) and the motor industry have been remarkably quiet as the country awaits the release of the MIDP Review (due sometime last year) and the government's future policy framework for this industry.
However, an industry representative was reported yesterday as saying that government support of the industry is "below par" relative to other countries and will have to be improved in order to make the industry competitive.
How much support has the MIDP given the industry? Answers to this basic question are difficult to obtain. I have estimated that typical subsidies to motor vehicle and/or components manufacturers range from 260 to over 650 percent of the size of MIDP-supported investments.
Support to the motor industry from export subsidies and import duties has almost certainly exceeded R100 billion over the life of the program so far. The cost to consumers has been similar. How can an industry that relies on such levels of support expect to become "competitive"? Surely the solution is not to give even more subsidies.
Australia, after whose program the MIDP was initially modelled, is entering the final phase of its "Automotive Competitivness and Investment Scheme." This program provides modest production and investment-linked subsidies and a phase down of its import tariff from 10 percent at the moment to 5 percent in 2010. The South African tariff is still 30 percent—a long way to go before encouraging competitiveness.
For more on this, including a link to the news story in question, see the Features page of my website.
However, an industry representative was reported yesterday as saying that government support of the industry is "below par" relative to other countries and will have to be improved in order to make the industry competitive.
How much support has the MIDP given the industry? Answers to this basic question are difficult to obtain. I have estimated that typical subsidies to motor vehicle and/or components manufacturers range from 260 to over 650 percent of the size of MIDP-supported investments.
Support to the motor industry from export subsidies and import duties has almost certainly exceeded R100 billion over the life of the program so far. The cost to consumers has been similar. How can an industry that relies on such levels of support expect to become "competitive"? Surely the solution is not to give even more subsidies.
Australia, after whose program the MIDP was initially modelled, is entering the final phase of its "Automotive Competitivness and Investment Scheme." This program provides modest production and investment-linked subsidies and a phase down of its import tariff from 10 percent at the moment to 5 percent in 2010. The South African tariff is still 30 percent—a long way to go before encouraging competitiveness.
For more on this, including a link to the news story in question, see the Features page of my website.
Subscribe to:
Posts (Atom)
