'Free market' advice is no use when imports are subsidised

The plan is presented in a country in which workers still bear the scars of apartheid education or suffer the effects of a still dysfunctional one — a country lacking in service delivery, one with inefficiency and in which corruption is widespread and, importantly, one in which foreign competitors have gained or gain significant market advantage through state subsidy and support.

Criticism

It is in this context that Trade and Industry Minister Rob Davies has crafted his policy document. He has taken a developmental approach, recognising the need to retain and create employment in the short term, as well as to build an economic platform for the future. The textile and clothing industry features prominently in the plan, and its support has received much criticism.

The critics rely on the free market principle that industries that need government support should be allowed to fail so that more competitive industries can replace them.

Unfortunately, this criticism arises from a lack of understanding of the constraints the sector faces. It is also made without offering alternatives that will fulfil the vital job creating role that it provides.

The industry has had a bad image for years, characterised as being unproductive, with eastern competitors being held up as model examples. This view has not been helped by poor public relations and divisions between subsectors.

As good as the competition

In reality, independent analysis has shown that local apparel manufacturers are at least as efficient in the actual manufacturing process as their eastern competitors. Their lack of competitiveness lies largely in input-cost differentials. Productivity is a problem in the South African textile sector, but many of its problems are not sector-specific — they are the result of systematic failures in the broader economy and of society.

Can one stigmatise the sector for productivity problems linked to AIDS and drugs, or the failures of Transnet and Portnet, or the inability of customs and excise to stem the flood of illegal imports? Or should it be supported while these impediments to competitiveness are corrected?

Subsidies and de-industrialisation

Also, the effect of foreign-government subsidy is ignored when analysing the textile and clothing sector — because it is not properly appreciated or because it is simply viewed as a benefit to local consumers. This approach fails to take account of the long term effect of de-industrialisation caused by subsidised imports. The sector could die because other countries subsidise their textile industries, while we do not.

Both Pakistan and India have targeted SA for textile exports and, besides general support measures, have specific subsidies for textile products sold to this country. Should this be regarded as a reason to allow the industry's demise — or a reason to support it against unfair competition?

Also to be considered is the fact that once de-industrialisation has occurred, local retailers and consumers are left to the pricing mercy of foreign manufacturers.

This danger was seen globally in the agricultural sector, where the importing of highly subsidised agricultural products has caused the demise of local farmers, leaving countries facing a food security crisis.

The recession has caused countries to question whether the widespread importing of subsidised finished goods has resulted in the destruction of their industrial capability and brought an unhealthy dependency on imports. This de-industrialisation has also entrenched unemployment and created a dependence on the state for those workers who previously occupied these jobs.

Looking for new solutions

The Industrial Policy Action Plan shows the government is prepared to question the approach of previous administrations and to look for new solutions. It indicates new willingness to decrease or increase tariffs to the benefit of industry, rather than simply to appease the World Trade Organisation.

Where tariffs are decreased, it will be on intermediate goods to lower input costs and increase the competitiveness of local manufacturers. In being prepared to raise duties selectively, the minister is simply recognising the effects of foreign subsidy and the local socioeconomic impediments to competitiveness. He will also temporarily reduce the pressure on the sectors that still need to be restructured to meet the multiple challenges of global sourcing, increased innovation and shorter lead times.

Priorities and opportunities

A number of opportunities for textiles and clothing are presented. To be welcomed is a focus on recapturing lost local market share. This contrasts with previous plans, which aimed at creating an export industry without solid local foundations. This plan copies the approach taken successfully by Brazil. It is belated recognition that export orientation generally follows local market success.

Illegal imports and underinvoicing are also given a high priority, with several efforts by the South African Revenue Service mentioned. These are critical interventions for the sector which, if successful, would certainly change the fortunes of the industry. Industry bodies calculate that nearly half of imported textile finished products enter SA either illegally or are underinvoiced.

Disappointingly, no mention is made of the industry's recommendation for an illegal imports levy on all finished textile imports, the proceeds to be used to resource and reward customs officials in their fight against illegal textile imports.

Skills and transformation

Skills development features in the plan once again, with the emphasis broadened to include management development and succession. However, the dearth of higher-level skills has less to do with the need for training than with the lack of attractiveness of the sector. It must offer the possibility of successful and profitable careers before skilled people will look to enter the industry.

The same applies to the aim of racially transforming the industry. Until it offers a decent return on investment, neither black entrepreneurs nor managers will be enticed to replace existing white capital and skills.

Fabric manufacture

For the first time, a move is made to address rationalisation and specialisation in the fabric manufacturing subsector, with the aim of moving away from futilely trying to compete with the major cotton countries in commodity textiles. This will require consensus between textile and apparel manufacturers and a more active role for the Department of Trade and Industry, both of which have been lacking. Davies should look at how Brazil and Bangladesh achieved their successes in this area.

The fostering of innovation and new technologies are proposed. With other governments also going this route and local industry not profitable or stable enough to make the type of investment needed, the government will need to give it more support than is forthcoming from the Treasury.

Necessary changes

The plan is commendable and could lead to the re-industrialisation of the sector. But to be successful, changes in both attitude and structure in the sector are needed. Success will need an open mind and a willingness to take constructive criticism by industry, labour and the department, a preparedness to co-operate and collaborate and a need to go beyond the scapegoat of “poor productivity”. The process will probably also need more money than the Treasury has allocated.

Source: Business Day