SA Stimulus framework raises concerns over competitiveness of industries

The framework for South Africa’s response to the international economic crisis, indicated that ‘rescue packages’ will be set up to address vulnerable sectors, such as clothing, textiles and footwear, mining and the auto and capital equipment sectors, however, trade expert Peter Draper has raised concerns over the document’s potential threat to competitiveness in these industries.

South African Institute of International Affairs development through trade project head, Draper, noted that the largest part of the package put forward by the framework was subsidies, with developmental financial institutions being mandated to develop responses for favoured sectors.

The South African response framework document, constructed by business, labour, government and community representatives, was put forward to the Presidency in February, and said that the sector strategies would be established with “the urgent and focused use of a combination of trade, industrial and social policy measures”, to boost employment creation.

“While on the one hand I am sympathetic to this where trade and project financing dries up owing to the global crisis, on the other hand, I am deeply sceptical about the capacity of government (broadly defined) to identify worthy recipients and ensure taxpayer money is not wasted,” said Draper.

Importantly, he also raised concerns about the potential long-term implications, since such measures may render such companies uncompetitive.

Another concern raised by Draper, was that of possible increased State control over the economy, if the government, through the Industrial Development Corporation, took up larger equity stakes in companies, this could have implications for governance.

Draper feared that this could even further undermine South Africa’s long-term competitiveness, as well as placing a question mark over the World Trade Organisation (WTO) legality of such measures.

PREFERENTIAL PROCUREMENT

“The review of preferential procurement legislation should be undertaken with urgency,” stated the framework.

It further added that all the social partners, including parastatals, would encourage local procurement of supplies, services and other requirements wherever possible to maintain and increase local output and employment levels.

This, it notes, applies particularly to the large procurement programmes attached to major public and private investment projects where cooperation amongst social partners can be employed to promote local suppliers.

Draper explained that this would not be a breach of South Africa’s international commitments, or violate the country’s WTO commitments, as South Africa is not a signatory to the relevant WTO agreements.

However, “preferential procurement undoubtedly shields companies from competitive pressures, so I would favour a time limit on any such measures. As a middle income developing country with a narrow tax base and hugely escalating social expenditures, I doubt we could sustain an ambitious procurement policy for very long,” Draper stated.

TRADE MEASURES

The framework pointed out that “trade measures will be used to address import surges, dumping, and to address the short-term crisis of vulnerable sectors. These will include fast-tracking of investigations and recommendations by the International Trade Administration Commission (Itac), and that Itac initiates more investigations”.

“The trade-measures identified are loosely specified, so it is difficult to comment,” said Draper.

“I am not in favour of increasing tariffs – this may not violate our WTO commitments, but would reduce competitive pressures at a time when the currency is depreciating. That would not position our economy well for the inevitable upturn,” he adds.

The parties involved in drawing up the framework acknowledged the problem of customs fraud and illegal imports and “are concerned that as a result of the global economic crisis, the level of illegal imports may increase”.

They further agreed that “urgent attention be given, and additional capacity be devoted to official enforcement capacity, including the South African Revenue Service (SARS), to further improve their effectiveness and impact”.

To this end, it was agreed to strengthen risk management and invoice-analysis systems, and set up dedicated units for vulnerable sectors (commencing with the clothing sector) and support high-profile arrests and prosecutions of offenders, to combat lawlessness within the import regime.

It was not, however, made clear to what extent SARS would be involved or engaging with price controls.

“There is clearly a transfer pricing problem,” said Draper, noting the larger issue at hand, “but the right way to address this in my view, is to lower tariffs, thus reducing the incentive to engage in such practices,” he adds.