16 May 2013

The Motor Industry, Industrial Policy and SA's Trade Deficit

South Africa's motor industry alone accounts for about 40 percent of the country's trade deficit. In a recent post I suggested that this is evidence of the sector's lack of international competitiveness. The industry is able to survive in SA only as a result of massive subsidies, ranging from import taxes and controls, to tax incentives, and direct cash handouts.

But focus on the trade deficit asks not about the underlying competitiveness problem but rather what would happen to sectoral imports and exports if government support were reduced. This looks at the trade deficit as a sectoral issue rather than a broader macroeconomic phenomenon.

One of my early reports on MIDP illustrates the risk of this approach by showing that replacing imports or increasing exports through subsidized domestic production is a very costly way to earn foreign exchange.

I estimated that in 2005 vehicle exports were being subsidized at a rate of about 30 percent of domestic value added and production for domestic sale at a rate of at least 60 percent. At these rates, each R100,000 of vehicle exports was costing South Africa R130,000 of domestic resources. That is, earning $100 of foreign exchange through vehicle exports was costing South Africa $130. Similarly each $100 of foreign exchange saved through sourcing vehicles domestically rather than through imports was costing at least $160.

Reducing the trade deficit through subsidies to a non-competitive motor industry is very costly indeed.

Is the APDP any better? I have estimated that in the final year of MIDP vehicle exports were being subsidized at a rate of 17.3 percent of local value added and production of vehicles for domestic sale at a rate of 62.5 percent. By my estimates the APDP has increased the export subsidy to 27.7 percent and the import substitution subsidy to 71.7 percent. At these increased rates we might hope to see some reduction in the motor industry trade deficit. But the cost will be even higher than it has been in the past.

What does the dti make of this? Viewing everything from the perspective of its industry clients, it looks at the trade deficit and most other longer term development problems as sectoral issues. Rather than examining and dealing with underlying structural and regulatory barriers to development, it asks its industry clients how large and what type of subsidy they require to overcome the problems of investing and producing in South Africa.

At my last count, the government was giving subsidies of well over R10 billion per year to a few auto firms, and imposing a cost on consumers of close to R20 billion per year. Over its first decade MIDP subsidies came close to R100 billion. The government continues to "negotiate" with the big auto firms about improving their competitiveness. The dance goes on and the subsidies continue. We will certainly see new forms of support. This has not produced a competitive industry and it has not solved any real or imagined trade deficit problems.

Unfortunately the motor industry is not an isolated case. The textile and garment industry receives large subsidies, mostly paid for by consumers, even as much of it disappears or migrates to Swaziland and Lesotho. The dti has recently revived a failed policy from decades ago by releasing a list of 10 "special economic zones," defined by product and province, that it wishes to support.

The lesson for investors is that success in South Africa is enjoyed by cozy monopolies and those with access to generous government support in the form of subsidies and barriers to competition. This is good for some investors, but not for South African development. Longer term growth depends on the creation of an environment in which investors can and do compete, domestically and internationally.

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