SOUTH Africa must encourage the local production of goods to boost the economic recovery, but this must not suffocate the economy or stifle investment.
This was the overall view of industry experts about localisation during a webinar hosted by the EU Chamber of Commerce and Industry and Business Unity South Africa (Busa) yesterday.
The webinar explored the research of a study conducted by Intellidex earlier this year on behalf of Busa and Business Leadership SA into localisation policy.
The study showed that foreign investors accepted policies in South Africa aimed at increasing jobs and transformation.
However, it warned that local content requirements could be widely supported by business if they were implemented in the right conditions.
Intellidex’s head of capital markets research, Peter Attard Montalto, said the survey of 125 companies found scepticism in business about the government’s understanding about how sectors work and how localisation could be best done.
Attard Montalto said that fears in the business community included high compliance costs and upward pressure on prices.
“The real headline outcome is that businesses are deeply sceptical of previous localisation policies, but there are important future localisations under the right conditions,” he said.
“Businesses want to have sustainable localisation. If they have a choice of goods at the right price and quality, they would want to choose local goods. But do those conditions really exist? And the simple answer is no, not at present.”
Localisation has been highlighted by the government as a key policy aim during the recovery of the economy from the Covid-19 crisis.
Organised business in Nedlac has been asked to substitute 20 percent of non-petroleum imported goods for domestically produced goods as soon as possible.
Lauralyn Kaziboni, an economist at a private economic consulting firm DNA Economics, said local content policies could be more effective if bolstered by appropriate complementary policies such as special economic zones.
Kaziboni recommended a regional approach to local content regulations, at least within the Southern African Customs Union, to avoid a race to the bottom.
“If we look at the impact of the localisation policy on the cost of production, firms have lowered production costs, thanks to long-term investment, and other firms benefited from import protection, which made them attractive,” Kaziboni said.
“But more evidence is needed, including detailed cost/benefit analysis and feasibility studies, before extending and expanding any localisation policy.”
Herbert Smith Freehills partner Peter Leon said the localisation policy could somewhat be inadvertently interpreted as the government trying to be protectionist.
Leon said there was a potential conflict between the proposed localisation plans and South Africa’s international trade law obligations, adding that local content needed to be balanced against global competitiveness.
Leon said it was critical that the government implement measures that would promote investment, including foreign direct investment, in the sectors that were driving growth pre-Covid.
“While the proposed localisation measures may have laudable objectives, they could have a materially detrimental impact on the economy,” Leon said.
“If the South African government intends to pursue the policy, it would be important to ensure that it is implemented in a manner which does not further suffocate the economy.”
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