East African (Nairobi)

OPINION

21 August 2007

Posted to the web 21 August 2007

By Peter Draper and Phil Alves

Nairobi

At the beginning of September last year, South Africa's Minister for Trade and Industry, Mandise Mphalwa, announced that the government would impose quotas on imports from China covering some 200 items of clothing until the end of 2008.

This ostensibly brought to an end a process that had been in the making for more than a year, but judging by the sharp reactions that ensued, the announcement still caught South Africans by surprise.

Deputy President Phumzile Mlambo-Ngcuka reportedly said that clothing retailers who circumvented quotas by importing from other countries would be regarded as engaging in "treason," and their actions would be "a slap in the face for the poor and the unemployed".

THE DEPUTY PRESIDENT was endorsing the view of trade unions and the majority of South Africans that the government needed to step in and limit the flood of cheap Chinese imports.

How can we be genuinely competitive and efficient if we continue losing thousands of jobs, suffer 40 per cent unemployment and have nearly half the population living in poverty?

Two weeks later, the Commissioner of the South African Revenue Services, which will ultimately have to administer the policy, remarked: "Some make the policy; we are the ones who have to provide the administrative capacity to back up those policies."

AS IF THAT WERE NOT enough, Tito Mboweni, the Governor of the South African Reserve Bank and former labour minister under whose watch South Africa's modern - some say rigid - labour laws were introduced, said in comments to parliament's finance committee that the clothing and textiles sector "did not have a dog's chance in hell" of being competitive.

This drew a sharp rebuke from Cosatu chief Zwelinzima Vavi, and a more measured one from the Trade and Industry Minister Mandise Mphalwa. The former reportedly described Mr Mboweni's remarks as "irresponsible" and told him to mind his own business while the latter noted that China was not solely to blame.

But an unrepentant Mr Mboweni retorted: "I gather Vavi says I should not talk about the economy, only monetary policy... I'll stick to monetary policy if he sticks to organising unions." The two subsequently met to discuss their differences.

This is heady stuff indeed. Coming in the midst of South Africa's increasingly polarised presidential transition, which pits the "left" against President Thabo Mbeki's reformist legacy, it is clear that there is more to it than just underpants and bras.

This episode is symptomatic of, and clearly reveals, deep rifts over the future of South Africa's economic policy. It is about the future of what the leader of the South African Communist Party refers to as Mr Mbeki's "class project," meaning the dominance of business interests in economic policy-making.

BUT HOW SHOULD SOUTH Africa cope with China's economic emergence?

Based on current trends, China will overtake the US as the world's largest economy before the middle of this century, if not earlier. This transformation is occurring at a breathtaking pace and is likely to continue at the same pace for the next decade or two. Hence a new centre of global economic growth has emerged to supplement the traditional triad economies: The US, EU and Japan.

This is good news for the global economy. This transformation is concentrated in assembly-based, export-oriented manufacturing, within which multinational corporations locate low-wage, labour-intensive processes along China's seaboard. These "foreign funded" enterprises account for approximately two- thirds of China's exports, most of which are destined for the US, European, and Asian markets.

Collectively, this constitutes a giant interconnected production system into which Africa and Latin America are incorporated principally as suppliers of raw materials. This process constitutes a secular transformation of the global economy and production systems, sweeping aside cosseted manufacturing producers elsewhere.

CHINA'S EXPORT BOOM has been accompanied by price declines in labour-intensive sectors such as clothing, which have underpinned China's exchange rate, widely regarded as undervalued against the US dollar and other floating currencies (notably the South African Rand).

Besides, large sectors of the Chinese economy are still state-owned and financed; in these sectors, investment is inordinately high while productivity levels are rather low. This has created significant excess capacity in a variety of industries which, if released onto global markets, may lead to further global price declines.

Of course, there is much more to the China story than this. Nonetheless, we believe these are the three key features that should determine how South Africa engages with China on a long-term basis.

The first, namely China's secular transformation, makes a long-term strategic response imperative. The next question is what this response should be.

China's voracity for resources and its manufacturing export juggernaut collectively constitute the core of South Africa's dilemma. Doomsayers argue that we are "condemned" to exporting primary products while our manufacturing sector is unfairly hollowed out through ruthless low-cost competition. The concerns are genuine and serious but misplaced.

FIRST, GIVEN ITS SMALL domestic market and location vis-à-vis the major economic centres, South Africa has to trade to survive. Resource exports are our comparative advantage. Yet unlike Australia, Chile and other successful resource exporters, we have not taken sufficient advantage of the global commodity price "supercycle." Potentially significant export proceeds and the tax revenues from them should be pumped into the economy.

In this respect, the government's new "Accelerated and Shared Growth Initiative,"which prioritises reducing South Africa's cost structure mostly through infrastructure provision, is on the right track, but should be far more vigorous. Two key priorities are infrastructure expansion to support the domestic market and facilitate movement of people (bringing transport costs down) and rapid expansion of our ports (both sea and air) accompanied by liberalisation of trade in goods and people (services and skills).

This would encourage a host of new entrepreneurial activities while boosting productivity levels - two keys to our future prosperity.

Second, the government should provide generic support to the manufacturing industry to counter the Chinese challenge, but not through protection. Current protection levels are generally low, and building a "Great Wall" around manufacturing would only encourage illegal imports and criminal syndicates, boosting a crime wave, increasing anti-China sentiment and ultimately, worsening bilateral relations with China.

Besides, South Africa's labour-intensive sectors are already shielded by high tariffs, with those on clothing ranging between 40 and 45 per cent. However, with WTO negotiations underway and an expanding free trade agenda, these tariffs are under pressure.

So, serious dislocation of our labour-intensive industries is underway or just around the corner. Restructuring is imperative but will be painful. Cosatu, the SACP and their allies on the left have targeted this liberalisation pressure as the primary scapegoat for South Africa's indisputably high unemployment rate.

GIVEN THAT MOST OF THE recent liberalisation was introduced when the ANC government came to power, and largely under then deputy president Thabo Mbeki's stewardship, this has, not surprisingly, become a major issue in the ANC's leadership tussle. This dynamic partly explains the Mboweni-Vavi fracas.

Yet protected firms will not be competitive and thus stagnate compared with more productive competitors. Besides, protection, even if it reached very high levels, would not provide these industries with the wherewithal to kick-start strong, sustained, job-creating growth. South Africa's tradeable manufacturing sector faces deeper, more fundamental challenges.

Peter Draper and Phil Alves are researchers at the South African Institute of International Affairs