Think tank the Centre for Development and Enterprise (CDE) has called for an overhaul of industrial policy to move it away from protectionism and towards a focus on maximising exports.

The organisation on November 20 said a new approach to master plans, tariff-setting and competition policy was urgently required.

“Everybody knows there's something wrong. President Cyril Ramaphosa and the National Economic Development and Labour Council (Nedlac) partners acknowledge that existing policies have failed to deliver and that fresh thinking is needed.

“South Africa needs a new approach and the Government of National Unity (GNU) creates an opportunity to change the country’s course for the better,” CDE executive director Ann Bernstein said during a virtual presentation of the CDE’s new report in its ‘Agenda 2024’ series, titled ‘Action Seven: Rethink Growth, Jobs and the dtic’.

The report outlines the ways in which the Department of Trade, Industry and Competition (dtic) has failed to achieve its goal of re-industrialising the economy. It provides several recommendations aimed at addressing these shortcomings.

Bernstein highlighted several concerning trends in the manufacturing sector. Between 1960 and 2023, the sector’s contribution to GDP declined from 20% to less than 13%, while employment in manufacturing dropped from 1.8-million in 2001 to under 1.6-million by 2023.

Additionally, only 20% of South Africa’s manufacturing firms engage in exports, and the number of firms exporting manufactured goods decreased from 42 000 to 36 000 between 2015 and 2022. More than half of these firms export less than 5% of their production.

“Nedlac issued a major report on 30 years of democracy and what the GNU should be thinking about, and they [called for] a comprehensive review of South Africa's trade and competition policies.

“Most master plans have either failed or achieved slow progress and . . . they only apply to a very small fraction of the economy. They have had little impact. They have done nothing to raise the level of manufactured exports, and they also could divert attention and resources away from larger scale initiatives that could be more inclusive of all those people left out of our modern economy,” Bernstein said.

The CDE acknowledged that several factors contributing to this poor performance lie outside the dtic’s control, including the decline of the mining sector, deteriorating infrastructure such as electricity supply and logistics and increased competition from imports. Ill-conceived empowerment policies have further hindered the manufacturing and export sectors.

However, Bernstein argued that the dtic’s policy choices had exacerbated the situation rather than mitigated it.

She criticised the department’s approach, stating, “Policy choices are not premised on maximising export growth, but on trying to replace imports with local production – an approach that has led South Africa down an increasingly protectionist path.”

This focus on localisation and protectionism, supported by master plans and selective regulation, had had counterproductive results, Bernstein argued.

She explained that localisation policies failed to make South African firms competitive in global markets.

“South Africa's manufacturing has declined much faster than almost all comparable countries. A fundamental rethink is required. Localisation is not a growth strategy. We should focus on expanding exports, and we should remove the obstacles to making this country a much easier place [and] a much lower cost place in which to do business,” she said.

Bernstein cited three main reasons for this: protectionist policies reduce firms' incentive to increase productivity; tariffs discourage exports due to the anti-export bias of tariff protection; and localisation policies hinder firms from adopting new technologies by reducing competitive pressures.

“South Africa should not be following a Trumpian, beggar-thy-neighbour path of protectionism, which will be the death knell for our economy in an ever-globalising world. Protectionism prevents South African firms from accessing new technology and specialising and finding their particular niche in global value chains,” she warned.

The dtic’s master plan framework, based on the assumption that the South African economy comprises a series of sectors and subsectors, has led to additional inefficiencies.

Bernstein pointed out that this approach often resulted in protectionist proposals as firms within a sector attempted to limit foreign competition.

She recommended a shift in focus towards supporting firms seeking to expand exports, arguing that export competitiveness should become the key measure of success for industrial policy.

“Exports should be regarded as the most important metric to assess the competitiveness of firms and of the impact of policy interventions. By making exports the goal of industrial policy, policymakers are forced to focus on the key elements that drive competitiveness, particularly input costs and productivity,” she said.

She also noted that such a focus would have positive spillover effects for domestic markets, as firms better equipped to compete internationally would also compete more effectively against imports.

The CDE report outlines specific recommendations for reforming the dtic’s approach. These include establishing an independent evaluation process for tariff applications, phasing out tariffs with sunset clauses unless strong justification exists for their extension and eliminating tariffs on goods not produced in South Africa.

The report also calls for an independent review of the costly vehicle subsidy programme and advocates replacing master plans with productivity councils focused on improving competitiveness and facilitating access to export markets.

In terms of competition policy, the CDE proposes a return to its foundational goal of preventing anti-competitive behaviour by large firms while minimising public interest interventions and market inquiries.

Finally, the report suggests a broader role for the dtic in promoting business and markets within government and society, arguing that the department should shape policy debates to prioritise the expansion of businesses.

“The dtic needs to reform its trade policies, shift its industrial policies towards promoting exports and harness the competitive pressures that well-functioning markets can provide. It should also become an effective advocate for business and markets, within government and across society,” Bernstein said.

She added that the aim should be to remove obstacles to firm entry, survival and growth, while fostering an environment that supported productivity and competitiveness.