DONALD MACKAY AND DAAN STEENKAMP: Government protection keeps SA on a low-growth path

The SA economy is more protected than many people realise. Automotive manufacturers, for example, receive about R35bn per year in government support (0.5% of GDP), including forgone customs revenue and direct transfers.

Though it is our most complex and most supported manufacturing industry, motor manufacturing contributes only about 0.9% to GDP. It is not a big job creator either, employing about 100,000 people, implying a cost of government support of about R350,000 per job.

Industry in general receives more than R55bn in explicit subsidies and incentives (0.9% of GDP), up from about R7bn two decades ago (0.5% of GDP at the time).

Government support to state-owned enterprises (SOEs) amounts to about 4% of tax revenues (1.2% of GDP) and there is a risk that this figure could rise. Municipal arrears to Eskom total R75bn (more than 1% of GDP) and consumers owe municipalities some R350bn (5% of GDP).

Government guarantees to public entities could result in larger future expenditure if specific events occur. Guarantees and contingent liabilities (such as to the Road Accident Fund) total almost 16% of GDP, so further financial mismanagement in public entities could cause the amount of government support required to rise dramatically.

In addition, several industries receive indirect support in SA. Scrap metal consumers (mini mills and foundries) benefit by about R8bn a year in forced value transfers from the scrap metal generators (mostly manufacturers, mines, construction and SOEs such as Transnet). The result of this market distortion has been overinvestment in the sector due to artificially cheap raw materials.

Large gap

The Industrial Development Corporation (IDC) provides funding to these companies at friendly rates, creating even greater investment, to the point where the IDC’s exposure (debt and equity) to these companies, which produce about 20% of SA’s steel, is 10 times as big as the market capitalisation of ArcelorMittal, which produces 50% of the steel. When something is subsidised, people consume more of it, as can be seen with the investments into scrap consumption.

The IMF argues that there is mispricing of energy inputs in SA, with a large gap between efficient prices (representative of supply, environmental and other costs) and retail prices of coal. It suggests that implicit subsidies (undercharging for supply and environmental costs) are more than 10% of GDP. The efficient price of residential coal was eight times higher than the consumer price in 2022, while the residential price of electricity was 17% underpriced by IMF estimates. This slows the transition to cleaner and more efficient technologies.

Everyone loves free money, so when government gives away enough of it, either directly as cash transfers or indirectly through forgone tax revenue, expect the line of people wanting corporate welfare to grow. This does not mean such money is well spent. The government gives R2.5bn per year to clothing manufacturers, yet the country employs half the number of people in clothing production in 2024 than it did in 2009.

SA has been subsidising car production for 30 years and we will have to continue providing support for as long as we want the industry here — support was recently extended to 2030. SA consumers do not get cheaper cars though; a significant premium is, in fact, paid on all cars to support the local producers.

Import-substituting policies have not made the SA economy more export focused either. It was found in an SA Reserve Bank paper by Guannan Miao that our automotive industry’s integration into global value chains is lower than one would expect considering SA’s economic structure, resource endowments and industrial policies.

Low integration into global value chains compared with Group of 20 emerging markets limits the extent to which SA firms benefit from faster growth in major emerging markets and the extent to which foreign competition spurs pressure in our economy.

Harvard University’s Atlas of Economic Complexity shows that our level of complex manufacturing has dropped significantly over the past 30 years. The products we manufacture are simpler than in leading emerging-market economies, requiring lower skill levels and less intellectual capital to produce. Even though SA has been manufacturing cars for 30 years, the most complex parts of the cars are not made locally even after all this time. SA’s manufacturing outputs are becoming less, not more, sophisticated.

Corporate welfare in SA is not driving innovation, as happened in China and the US. BYD’s Seagull electric vehicle retails for $10,000 in China, indicating that the country’s subsidies have been driving both innovation and user consumption — 25% of new car sales in China in 2023 were fully electric. Electric vehicle sales in SA amounted to only about 1,000 in 2023.

Much of SA’s social welfare functions to compensate unemployed people for labour laws that make it difficult to employ people. These payments have been increasing over time: grants and other transfers to households now represent about 4% of GDP (16% of total revenue).

For subsidies to create economic value it should reward innovation and improve competitiveness. Subsidies should not be evergreen and should not be used to compensate for poor economic policies.

If we cannot walk away from companies that are not becoming more globally competitive, we run the risk of suppressing the development of ideas by making it difficult for newcomers to compete with their elderly, well-supported competitors.

This is the road to lower growth and increased inequality.

• MacKay is CEO of XA Global Trade Advisors and Dr Steenkamp CEO of Codera Analytics and a research fellow with the economics department at Stellenbosch University.