SA's Motor Industry—Once Again

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.

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.