Trade and Industry Policy: internal capacity development programme

Meeting report

The Chairperson welcomed five MPs – Mr F Jacobs (ANC), Mr H Kruger (DA), Mr G Hendricks (Al-Jama’ah), Ms B Mathulelwa (EFF) and Mr T Myeni (ANC) – from the Portfolio Committee on Small Business Development as well as Mr Pumelele Ndamase who is the Chairperson of the Economic Development, Environmental Affairs & Tourism in Eastern Cape Provincial Legislature. Parliament assists with internal capacity building and there is an opportunity to invite external stakeholders from universities and NGOs to capacitate the Committee on economic development policies. This was the first capacity building workshop. In the future there will be panels and debates for further discussion. 

An alternative economic strategy for South Africa’s economic reconstruction
Dr Nthabiseng Moleko from the Stellenbosch University Business School said the Committee needs to ask the right questions about what must be done to get South African out of its low-growth track.

Her premise was that South Africa needs an alternative plan. The current economy policy is inadequate, and this is not necessarily due to COVID-19. The pandemic deepened the existing economic challenges and has not been the sole cause of the current crisis.

Dr Moleko noted strategic interventions needed in the South African economy  related to the unequal distribution of wealth, the chronically high unemployment rate especially amongst the youth, and the lacklustre growth rate that is in decline. National Treasury has not adequately responded to these challenges, and there needs to be a post COVID-19 recovery plan not reliant on current monetary policy imperatives. A cohesive effort to enhance economic activity involves creating jobs, generating income tax, empowering small and medium-sized enterprises (SMEs) by creating complementary trade and industrial regulation policies. Labour and trade policies need to address youth unemployment.

Economic policies over the past 25 years have targeted less than 6% growth but recently this changed to 1.9%. The Accelerated and Shared Growth Initiative for South Africa (AsgiSA) had shown promise in its policy imperatives but has not been enough to address unemployment. What do we need to do to reach the same levels of growth seen in the mid-2000s? Compared to other emerging markets, South Africa’s distribution per capita has decreased in terms of quality of life due to outcomes from its economic policies.

The Committee needed to re-evaluate the policies within the economic cluster. How will they affect growth, unemployment, and inequality? There needs to be a compounded average growth of 6%, and unemployment rate dropping by 12% by 2030. Treasury lacks vision on dealing with employment, generating labour demand, and fails to coordinate value chain. Insufficient capital labour strengthening has failed to occur (see presentation for more details).

Discussion
The Chairperson noted that Dr Moleko is unavailable for a discussion due to lecturing commitments and suggested Members send through their responses to the Committee Secretary.

Reflection on South Africa’s Industrial Policy  
Dr Neva Makgetla, Senior Economist at Trade and Industrial Policy Strategies (TIPS), discussed the origins of the country’s industrial policy. The fundamental industrial policy is currently not working which is targeting specific industries and value chains. Sustainable outcomes need to be prioritised by managing the private sector within a mixed economy. She took the Committee through the historical context of industrial policies in Europe, and what the key instruments were for enabling 18th century growth. In East Asia, the industrial policies focused on corporatism, infrastructure development and targeted skills development and ideal export deals. State policies without contestation controlled the rate of growth and areas of focus within national infrastructure development.

How do we produce realistic measures to create policies that address problems? Showing causality with evidence within policy making comes with time constraints and limited time to create viable solutions. South Africa’s industrial policy is heavily influenced by historical influences. This includes creating opportunities for the population’s minority, land expropriation for mining and farming, predictability for foreign capital and local oligarchs, and tariffs to promote import-substitution manufacturing and IDC to provide industrial financing. Due to Anglo-Saxon style rule of law, a strong auto industry, Apartheid fostered ideal conditions for certain types of investment and development. However, the outcomes led to South Africa becoming one of the most unequal economies in the world. The majority of the country are ill-equipped with their skills to be self-employed, and spatial Apartheid made it harder for people to find and keep paying jobs. The over reliance on mining as a source of income created instability and metal prices fell during the early 1980s.

Dr Neva Makgetla noted the four socio-economic objectives since 1994. She said that the missing middle is an issue not clearly defined in policy. What is the end state for industrial production, prospects for small businesses, ownership of productive assets and ecosystem of market services? How much resources is government willing to put in? 0.125% of the current budget is being put into the Department of Small Business Development, indicating a lack of prioritisation. The current instruments prioritise industry interests such as tax incentives for auto, industrial finance through the IDC, trade and trade promotion, and the Master Plan process (see presentation for more details).

Discussion
Mr M Dangor (ANC, Gauteng) asked if there is a possibility for a subsidised apprenticeship system from the state to small industries to encourage employment and training. Secondly, on the risk to banks, could the IDC create a fund through another bank to take on these needed risks?

Mr M Mmoiemang (ANC, Northern Cape) requested clarity on the details in the section on GDP outcomes. He asked about the role of policy makers in addressing structural challenges in the economy. The comparative analysis between primary, secondary and tertiary sectors in Dr Moleko’s presentation showed how they are occupied in contributing to growth. He noted the intervention by the ruling party to look into the role the state played in the mining sector. 13 countries were visited as different case studies to understand how the state could intervene in the mining sector in South Africa. The focus should be on the role and the involvement of the developmental state in key sectors such as the mineral complex. One of the key issues raised by both Dr Moleko and Dr Makgetla was the role of resource-based industrialisation for job creation. There is the potential for upstream and downstream fiscal economic linkages that could be used as a game changer. He asked Dr Makgetla if enough had been done based on the case studies of 13 countries. Sweden and Malaysia emphasised technical training and technological development as a way for added advantage within the mineral sector. Have we utilised the lessons from these case studies? However, South Africa’s economic impact was impacted by the effects of Apartheid such as the ability to utilise the agricultural sector effectively and the limitations it placed on the majority’s access to land. There are also concerns with obtaining security for private sector investments. Land expropriation has the potential to scare away future investors. How do we balance historical economic factors with contemporary concerns?

Mr H Kruger (DA) from Portfolio Committee on Small Business Development raised concerns on outcomes for informal and formal small business formation. He asked for an update since the data reflected is from 2017. He asked if Dr Makgetla saw the increase in informal business as an outcome of red tape and regulatory burdens? Most businesses may be going underground to avoid red tape. Secondly, does corruption explain the flattening of the curve of formal business? A lot of small businesses that collaborate with municipalities are engaging in corruption. Only those businesses that accept the terms of corrupt officials are given contracts, and those that do not are excluded. It is rare to receive a contract from government or municipalities without giving a proverbial “brown envelope”.

Ms B Mathevula (EFF, Limpopo) referred to the central role that a state bank plays in the development of South Africa’s economy. As policymakers, what can be done to ensure a state-owned bank? Services should provide enterprise and housing financial support as a matter of pursuing development and not just profit.

Mr T Brauteseth (DA, KwaZulu-Natal) explained that he is a pragmatic social democrat. Any modern country should succeed, but also care for its people and the common good. South Africans and those who reside legally in the country need to be empowered. Being empowered means people earn money, spend it back into the economy, pay tax, buy property and keep the monetary cycle going. This provides government with funds to provide public services such as transport and electricity. He emphasised that he is not only interested in the idea of profit, but in the betterment of all. He gave the example of a small grocery business owner in Durban during COVID-19 lockdown. The business needed to register with the Companies and Intellectual Property Commission (CIPC) in order to become an essential service provider. However, the business was a sole proprietorship and there was no space for that on the CIPC website. This issue has still not been resolved on the website. Audited financials needed to be done, along with extensive support to register the grocery business. Structural burdens are placed on small businesses with sole proprietorship without any support given by CIPC. Without being registered, small businesses are excluded from receiving additional funding with no support during lockdown and no assistance from local municipalities. CIPC needs to prioritise support to small businesses and not just large companies. The close corporation option used to assist small business but that option has since become dormant.

Mr Brauteseth said the other issue is why has BBBEE failed in South Africa? [audio cut due to lost connection].

Dr Makgetla response
Dr Makgetla addressed Mr Dangor’s question by asking how do we develop and fund the idea of an apprenticeship programme? This requires looking at post-school development, however, pre-1994 development has remained unaddressed. The education system needs to be fixed.

The question of the role that policy makers should play is addressed through understanding risk management. South Africa’s industrial policy is biased towards not changing the current state of capitalism. This is underpinned by corruption and the robbing of state resources. The state needs to be responsive to making gradual qualitative change. There has been no favourable delivery of outcomes except to previous benefactors.

Dr Makgetla discussed the benefits of state ownership, namely, that the state can cover depreciation and capital costs, and there is more money to expand. However, continual loss is unsustainable. The disadvantages are that State Owned Enterprises (SOEs) can remain largely unaccountable and can be used to influence government decisions. On state owned enterprises, she brought up the example of Zambia and state-owned mines. The state lacked the capacity to manage the mines and contracted external management from Anglo-American which ended up costing Zambians more. So what are alternative instruments and ways of influencing government? This goes beyond receiving pushback from business. There was meant to be red tape legislation to prevent excess profits from mining. However, this has never been implemented. On the Expropriation Act, interest is enabled by the Constitution, yet there has been a lack of structure on how these legal instruments can be used to create an inclusive society. What is the potential, the costs, and strategy? The structure of private ownership should also be challenged,  along with questioning if state ownership is the only solution. The focus on and exaggeration of the amount of state land is due to the fear of private land expropriation.

Dr Makgetla replied that a state-owned bank can present its own challenges. A state bank needs to be clear about what it can do differently from other banks. The idea of a state-owned bank making lending money more accessible can lead to potential loss. Most people do not have the ability to pay back loans and making loans more accessible may create write-offs which negatively impacts the state. Further, this may lead to high levels of personal bankruptcy. If banks are to be risk-averse, this may be difficult without careful planning. People may still not be able to afford to get a loan due to a lack of income.

Small business structural problems in South Africa cannot be solely attributed to corruption. Although it exists, along with redlining, there are other factors such as lockdown effects and the location of the business. 20% of small businesses do not have electricity. People cannot get loans and are unable to access markets due to the prohibition on selling within certain areas. Small business was structurally banned within South Africa’s historical economic policies, and the ecosystems to support their needs do not exist. In the case study of India, an informal infrastructure within small businesses exist due to the inheritance of skills, production, resources, sources of inputs and customers over time within families. In contrast this infrastructure does not exist in South Africa due to Apartheid policy and its legacy. The lack of access to markets, skills and established business inhibits small business growth in South Africa.

On business management, the number of small formal businesses has technically grown. She will send the updated statistics from 2019. The number of formal and informal businesses has increased, with the latter increasing up to 1.7 million. The decision to go into informal business is from a survivalist mentality and not necessarily due to formal business red tape.

On how policy works around investor concerns, there is a need to be dispassionate. What do I want, what do they want, how do we reach an agreement and if we do not, what is the potential damage that could be created? Going between loving and hating investors creates inconsistencies, and a decision should be made on key motivating factors on how to best manage business interests. Is expropriation needed? Can our interests and goals be met without expropriation? Rational decision making is needed along with systematic procedure.

Ms Thobile Mawelela, TIPS Economist, added that another reason for an increase in small businesses is due to market access. The state has not done enough to deal with the anti-competitive behaviour from large businesses. There is potential room to facilitate the entrance of small business into crucial sectors of the economy.

The Chairperson thanked Dr Makgetla and Ms Mawelela for their responses. He noted that there are ideological differences amongst political parties, and this affected the way Members view different policy positions. This will make it difficult to reconcile differences, especially from the facilitators. Some issues are for debate, which can be brought up during plenaries. Without suppressing the responses, it is important to remember that political party positions on issues most likely will not change during this discussion. This is more about gaining clarity on the challenges in trade and industry policy and the economy.

Further questions
Ms B Mathulelwa (EFF) raised a point about the transfer of wealth from the minority. This should fundamentally  focus on commanding the economy and include minerals, banks, energy production and telecommunications. The state should retain ownership of central transport and logistics modes such as Transnet, SASOL, Mittal Steel, Eskom, Telkom and all harbours and airports.

Mr G Hendricks (Al-Jama’ah) said that te National Development Plan (NDP) is not sufficiently remedial.

Ms Mathevula said that the state will need to embark on massive infrastructure projects to facilitate rapid industrialisation and it requires developing the road networks in rural areas, industrial zones and metropolitan areas. This should be carried out by a state-owned construction company and Transnet.

Mr G Hendricks stated that an interest-free state bank would helpful during the current crisis.

Ms Mathevula made the point that government has failed to establish five functional economic zones in the past 25 years. What must be changed within Special Economic Zones (SEZs) so that they can create jobs? This includes creating more than 14 000 jobs.

Mr Dangor stated that the tax boycotts have had a negative impact.

Ms  Mathulelwa spoke Zulu [2:20-2:26]. She challenged the Chairperson’s statement that Members are sharing their political party positions. They are also offering solutions to the problems being discussed. We cannot get out of the problems without having our own solutions. The national airport that needs to be rebuilt for the economy. It is a fact that the majority of South Africans do not own anything, not even our own plot of land. When we give solutions, it is a fact that as South Africans we need to own our own things. Government should own things so it cannot be blamed for not having capacity to own mines. We should be able to generate our own income, and this can be done only by land expropriation without compensation. South Africa depends on others for generating profit and nothing is owned therefore expenditure is high. What are you expecting Members bring to the table as policy when this is the reality of the current economic crisis?

Mr Mmoiemang said that there was no reference to the economic recovery plan in the discussion. There have been different voices expressing concerns about the current economic plan. Namely that labour, business and government are not working together cohesively to create social impact. Business South Africa made a presentation to the National Economic Development and Labour Council (NEDLAC) about our economic recovery plan. There is a sense that our plan does not have a timeline or targets and needs to be clarified beyond strategies and outcomes. He asked what the presenters thought of the economic recovery plan from an academic perspective.

Ms Mathevula asked for more information on the development of state corridors that will link with the continent in trade and industrialisation. It is important to create capacity for South Africans to  consume goods and services that are produced on the continent. What role is South Africa playing to contribute to these linkages?

The Chairperson noted Ms Mathevula’s question  and stated that the next presentation will answer her question, as it will deal with regional and continental trade agreements. He raised a question on the economic recovery plan. Dr Moleko was concerned that the service sector is leading the South African economy. The President unveiled an economic recovery plan that focused on infrastructure. Would this plan achieve target levels similar to and beyond the service sector’s output? Is it not possible to review AsgiSA and improve on its existing frameworks?

Dr Makgetla response
Dr Makgetla noted that there is an underpinning question to all the discussion points. What do we want to do going forward for South Africa’s reconstruction? This requires two phases. The first is getting the prevalent pandemic challenges under control. Hospitality, entertainment venues, public transportation and tourism cannot open during this time and be safe. They need new business models, as the earlier models prioritise profits but are not safe. Until the pandemic is under control, the lobbying by these sectors means they open up but put the country at risk for another wave and create greater economic costs.

There is not a reconstruction plan but rather a focus on reducing the factors that increase the cost of doing business. Most of the work done on infrastructure is done in bulk through private public partnerships, as infrastructure cannot solely be built by those who cannot pay for it. State subsidies are then provided but this has the potential for failure as private businesses who utilise these do not have the incentive to deliver. Alternatively, there is not investment from private business anyway.

There are plans to extend broadband, transport and Eskom, but how will these actions lead to creating a more inclusive and dynamic economy? Key strategies include transforming the workplace; equilibrating the wage pay scale so that it is more equitable; supporting small businesses; and providing desirable land that can enables economic engagement. Transforming the education system is vital as many schools do not have access to technology such as computers which festers continued inequality. There is a cutting of public spending per person in education. Statistics show 6% lower spending per learner compared to 2019. State schools in rich areas are still able to raise their fees, while schools in poor areas cannot. This perpetuates inequality.

Another issue is the legacy of spatial apartheid. Is there a strategy to address this? What is the plan to economically empower areas that were previously homelands? So in the workplace, education, asset ownership and spatial legacy, are there strategies to address these challenges so visible changes can be seen in the economy?

The scale of the problem is never addressed due to fear of taking the risk and managing it. A qualitative change is needed, and what programmes need to be prioritised for economic reconstruction? Modern economies are complex, with major external stakeholders having a say in the country’s economy. What is possible to allow for the best possible outcomes in the long term? Case studies of leaders like Bolsonaro in Brazil and Trump in the US show that promising one big plan that can fix everything is potentially risky. Policy promises need to ensure at least some aspects that will be successful. We need radical change, but in a way that can be mapped out and justified without relying on results seen in other countries.

The Chairperson thanked the two presenters for the opportunity to raise issues brought forward in policy oversight over departments.

African Continental Free Trade Agreement: briefing by Trade Law Centre (Tralac)
Ms Trudi Hartzenburg, Tralac Executive Director, gave an update on the current status of negotiations and implementation of the African Continental Free Trade Agreement (AfCFTA)and on the institutions created to manage negotiations and regional communities and opportunities for South African traders and investors.

AfCFTA integrates the 50 official African states within the African Union. Only Eritrea has not signed the agreement, and integrating unequal partners is a time-consuming and difficult process. Changes cannot be made overnight and will take time to realise the potential of a new free trade agreement. Complementary initiatives need to take place to boost intra-African trade which according to world standards is low. AfCFTA is a flagship project of the AU. There is international interest in ratifying this agreement, due to potential benefits and competition with continental and regional markets. Legal instruments have been created since 2015, and foundational requirements such as tariff concession negotiations, rules of origin negotiations, and trade and service negotiations. The trade and goods services agenda is often the central area for negotiations, and there are five identifiable aspects: financial, transport, communication, professional and tourism services. The ratification process is important as sovereign states acknowledge being bound to the terms and conditions of AfCFTA. The negotiations and implementations are essentially driven on a national level, and from 1 January 2021, trade was officially launched. The AU Commission has been negotiating the process, yet the pandemic has changed negotiations to take place online. The current negotiations can be divided into three phases:
Phase 1: Goods and Priority Service Sectors
Phase 2: Investment, Competition and Intellectual Property. This is relevant to points Dr Makgetla raised on market and SME participation against dominant foreign-owned multinational companies on the continent.
Phase 3: E-commerce. This will run concurrently with Phase 2 negotiations to be completed by end of 2021.

Alongside these initiatives is Agenda 2063, which is the blueprint for Africa’s continental development. This requires synergy from all sides in order for the programmes to be complementary. Trade deals with third parties are currently being negotiated and it defines third parties as any sovereign state that has not agreed to AfCFTA. The institutional linkages mean that AU and AfCFTA connections are imperative to making it work, along with regional economic communities listed within AfCFTA (see presentation).

Discussion
The Chairperson thanked Ms Hartzenburg and noted that the Select Committee has a programme on ‘Trade Policy Negotiations and Cooperation’ that specifically deals with looking at AfCFTA.

Mr Dangor said implementation would require external cooperation agreements on banking and financial services to enable trade. The challenge is that foreign entities will object to these agreements due to other concerns. The African initiative may be dissuaded by US or French policies due to different aims within implementation.

Secondly, Mr Dangor said implementation would require road infrastructure to transport goods and services. The AU appointed South Africa and Libya to have the opportunity to build regional roads between the two countries. After challenges in Libya, Egypt took on the role. This programme is important to help facilitate regional and continental connection from North to South, and East to West.

The Chairperson asked why the AU cannot intervene in the trade-related disputes between Kenya and ECOWAS? Secondly, on rules of origin – if China comes to manufacture products in an African country, would the products be considered as originally from the African state or from China?

Tralac response
Ms Hartzenburg replied that the financial services sector on the continent is very fragmented and agreed that foreign financial institutions are often used for payments between two neighbouring African countries. This is a major challenge due to a lack of foreign exchange due to numerous African currencies. The African Export-Import Bank is launching a payment and settlement system, to be piloted in April 2021. This is to facilitate cross border payment using local currencies without needing foreign based institutions to process transactions. This will be a game changer for large scale traders, and for small scale traders due to participate. However, there are vested interests in keeping payment clearances abroad within the international markets.

Ms Hartzenburg replied that transport infrastructure is critical. Infrastructure remains fragmented. Weak connections can explain the lack of interest in capitalising on continental trade opportunities. The extra time, effort and resources to trade continentally often means it is cheaper to trade globally. These are complementary issues that needs to be addressed within AfCFTA. The regulatory infrastructure is also important as it needs to facilitate competitive access. This is why the trade and goods services negotiations are important.

Ms Hartzenburg addressed the Chairperson’s points. The role of the AU is important, yet there are trade-related challenges which they often do not address. Examples include the issues within the Economic Community of West African States (ECOWAS) or trade challenges between Kenya and Uganda. Countries like Botswana may close their borders to protect their local farmers. However, regional communities like the Southern African Customs Union (SACU) and the Southern African Development Community (SADC) do not have tribunals. Within the Eastern African Court of Justice, certain parties can contest agreements made between government and external stakeholders such as the US. However, government is often averse to litigation, and would rather find diplomatic solutions through consultation and mediation. Dispute settlement may however be a favourable solution to provide legal certainty to traders and investors, and consumers. Secondly, the issue of rules of origin is a big concern, due to foreign imports playing a large role in the African economy. The rules may need to be structured and implemented effectively. At a country’s  border post, a company’s consignment of goods will need to be thoroughly checked to know its origin. This will require cohesive customs and border management implementation. If this is not done carefully, goods that do not adhere to AfCFTA may sneak into the market and undermine efforts. What needs to be done to enhance governance and capacity to implement the agreement effectively? At border posts this is important through custom officers and health and technical standards need to be adhered to. A cohesive and coordinated border post customs process needs to be implemented, as there are over 12 agencies that work at each border post.

The Chairperson thanked the presenters and the members of the Select and Portfolio Committees, and the meeting was adjourned.