Image: Karabo Mdluli (Unsplash)
On the 15th of October 2020, President Cyril Ramaphosa addressed parliament on South Africa’s Economic Reconstruction and Recovery Plan. Before presenting the plan, he acknowledged the damage caused by the COVID-19 pandemic to employment and to an already weak economy, which contracted 16.4% when compared to the previous quarter. The plan involves an intensive localisation drive. Similarly, the South African Trade, Industry and Competition Minister, Ebrahim Patel, recently suggested that to reverse the COVID-19 pandemic’s paralysing effect on the economy, we need to deepen localisation efforts. The recent emphasis on localisation is apparent, but what does localisation entail and how can it aid in the reconstruction and recovery of the South African economy?
Economic localisation can be defined as political and practical support for locally owned businesses which use local resources, employ local workforce and serve primarily local consumers. Economic localisation provides a possible alternative to globalisation. Globalisation’s promise to improve the standards of living and increase economic growth has not yet fully materialised, globally. Anti-globalisation scholars have pointed out the unintended consequences which have increased global inequalities and allowed the rich countries to get richer and the poor; poorer.
An example of the crippling effect of globalisation on developing economies is evident by international clothing brands. Globalisation has allowed the manufacturing process of products to be divided up into sections knows as, global value chains. Transnational corporations can exploit cheap natural resources and low wage labour in the Global South. Many of these companies source raw cotton from developing countries such as Kenya. The raw materials are shipped to factories in countries such as China, Bangladesh and India for manufacturing, after which, they are shipped to warehouses in the country where the company is based. End products are then distributed to retail shops internationally or sold online. During each stage, value is added and the price of the product increases. It is understandable that this system can be debilitating for a developing country. Their raw materials are bought at a low price and they must import the end product at a higher price due to the value added, therefore they are trading at a loss. The manufacturing sectors in these countries cannot stay competitive in the global market due to factors such as trade barriers and lack of investments. South Africa’s manufacturing sector dropped its contribution to the Gross Domestic Product (GDP) from 24% in 1990 to 13% in 2018, clearly corresponding to South Africa’s deindustrialisation.
Localising the value chain can counteract this effect. If the sourcing, manufacturing and warehousing of a product is localised within a country, the country benefits from each stage of the value chain. Domestic customers can purchase the products at a lower price due to no international shipping being required. More jobs are created from each stage allowing for different levels of skilled labour which can decrease unemployment and finally the country can export final products internationally and become a contributor to the global supply chain instead of only a consumer.
Economic localisation is not an abstract nor distant concept for South Africa (SA), it has gained attention from politicians and companies in the recent months during the debate of how to restimulate the economy. Some South African businesses have already adopted localised advertising campaigns. Earlier this year, Castle Lager redesigned their label to be distinctly more South African. The new label bears the South African flag and the words ‘100% Homegrown’. Additionally, they have decided to highlight the national origin of the beer, replacing the words “dedicated to quality” with “South Africa’s National Beer”. The back of the label even references where the ingredients are sourced within SA, including the maize from the Free State, the barley from Caledon and the hops from George. This is essentially an advertisement campaign based on localisation strategies. The Foschini Group have also revealed a new plan to reduce reliance on imports from international suppliers such as China and support local productions instead. The increase in local production aims to boost the local manufacturing sectors. Despite the initial increased cost of producing locally, the new plan can decrease the time required to produce their products from approximately 150 days to just below 50 days. Additionally, the environmental impact of production will be reduced significantly due to the decreased transporting distance. This could be vital for South Africa’s move towards a green economy and avoid increasing carbon taxes. By increasing manufacturing in South Africa, The Foschini Group is expected to increase employment in the sector by 120 000 jobs across the value chain.
Localisation has been incorporated into South Africa’s economic policies and plans for many years, but these policies have not saved the economy from entering a recession. Despite this, three key developments suggest that implementing and focusing on localisation of the South African economy now, could finally reach the level of success which it has the potential to reach.
The first development is related to renewable energy. One of the biggest problems with industrialisation and manufacturing in SA has been the electricity crisis. Most manufacturing processes require large amounts of electricity, in a country such as South Africa where the supply of electricity is expensive and unreliable, due to frequent load-shedding, manufacturing of raw materials can become costlier than importing the produced product. This can be observed in the steel industry in SA. SA exports iron ore to countries such as China, who use it to make steel. Unfortunately, making steel is in SA from iron ore is more expensive than importing it from China. It is the opportune time for SA to invest in the steel industry, as well as others, because South Africa’s Renewable Energy Independent Power Producer Procurement Programme (REIPPPP) has just reached commercial operation. The Bokamoso Solar Park is now able to supply 177 660 MWh/y into the Eskom grid, the renewable contribution to the Eskom grid is planned to only increase over the coming years. This increase in renewable energy feeding into the Eskom grid will allow the electricity supplied nation wide to be more reliable, minimising the risk of load shedding.
The localisation of some sectors could have a knock-on effect which could facilitate development in other areas. President Cyril Ramaphosa announced immense infrastructure projects which will focus on schools, roads, ports and rail to aid economic growth. The localisation of other sectors, such as steel, will aid in the success of these projects. By procuring locally produced steel for infrastructure projects, local jobs in steel production and the iron ore mining sectors will be created to supply the increased demand and more importantly, the cost of importing steel will be avoided.
The second development is the African Continental Free Trade Agreement (AfCFTA) which aims to create a single continent-wide market for goods and services and to promote the movement of people and money. The agreement is set to begin implementation in January 2021. The agreement will give signatory countries a broader export market within Africa and will reduce the trade costs associated with Non-Tariff Trade Barriers due to the introduction of a common set of rules for participating countries. With lower trade costs, the price of a unit of imports is less expensive, thereby increasing the competitiveness of local production in countries such as SA because more African countries will be able to afford to import South African products. This could allow the more developed African countries such as SA and Nigeria to be better equipped to replace and compete with European countries, as a primary trade partner for finished products in Africa.
The third key development are the changes in the international political economy. COVID-19 has acted as a catalyst towards economic localisation. Self-sufficiency has gained new significance. The paralysis of global supply chains due to border closures and production shutdowns demonstrated the vulnerability which many countries are threatened with, if they are dependent on income from exports or on supplies from imports. Furthermore, COVID-19 has further weakened economies such as South Africa’s which was already entering into a recession before the pandemic. If there was ever a time to focus on an economic strategy which could provide employment, counter the inequality and hinderance of globalisation and decrease dependence on international supply and demand, the time is now.
Laura is in her final year of BPolSci International Studies degree at the University of Pretoria and is concurrently completing a level 4 NALP paralegal diploma. She hopes to complete her honors in International Relations in 2021 and pursue a career in the field of Public International Law and Human Rights. Laura is one of the permanent members of the writing staff at The Art of Politics.