By: Stephen Hanival

Of late, South Africa’s trade deficit has been in the news with increasing regularity, most recently in relation to the automotive sector. Some analysts in the mainstream press have used this debate to renew their criticism of government’s industrial policy and its associated incentive schemes. Such an approach appears to assume that current account deficits are inherently ‘bad’ and that government’s industrial policy and incentives have contributed to the creation of a rapidly growing trade deficit.

This criticism, although authoritatively delivered, requires more careful reflection of the causalities inferred by these analysts before they are accepted as received wisdom.

Starting with the trade deficit, it is not the case that a trade deficit is per se bad for an economy of South Africa’s size and relative openness. Rather, it is the underlying drivers of the country’s export and import performance that are of vital importance. South Africa has periodically experienced periods of trade deficit, especially when investment rates rose substantially. This was caused by investors absorbing capital-goods imports when local industry was unable to keep up with demand, or could not supply the requisite, sometimes specialised, machinery. Under such circumstances, attempting to reduce the trade deficit would effectively place a growth cap on the economy and would clearly not be in the country’s long-term best interests.

So what are the underlying drivers of South Africa’s exports and imports at present? Over the last four years, the Department of Trade and Industry (DTI) has become increasingly concerned that the economy appears to have entered a new growth phase, which is primarily driven by demand for a range of consumer goods and services. This has manifested in the high growth rates of sectors such as retail and trade, communication, and restaurant services. The production side of the economy, by comparison, has grown relatively slowly, in part due to slowing demand for some exports in South Africa’s traditional export markets, rising competition from other exporters in these markets, and increasing import competition in the domestic market.

The net result is a growing trade deficit, with the South African Reserve Bank Quarterly Bulletin, March 2013, showing that merchandise imports in 2012 were 15% higher than in 2011, while merchandise (and net gold) exports grew by only 2.8% over the same period.

This is especially true in terms of the volume of exports and imports. These data therefore suggest an important nuance to the analysis: South Africa’s merchandise exports have not suddenly plummeted, leading to deterioration of the trade account. In fact, considering the county’s relative dependence on the largely stagnant European Union (EU) market, exports have – at the broad level – held up relatively well under the circumstances.

Rather, the main driver has been a substantial rise in mainly consumer goods imports, and the emergence of nontraditional sources of these imports. For example, the South African market has become an attractive market for a range of quite diverse consumer goods from the EU. This has resulted in significant – and growing – imports of products such as frozen vegetables, olives and olive oil and, most recently, even poultry. These developments are clearly not so much about South Africa’s manufacturing competitiveness – although this is important – as they are about EU producers facing stagnant or declining demand in their domestic markets needing to find an alternative market for their surplus production.

It is hard to see how these circum- stances could be improved by the withdrawal of industrial policies and incentives. Doing so would leave South African manufacturers exposed to an unusual set of circumstances not of their own making, and not likely to be responsive to the actions of individual companies.

The DTI’s response to these circumstances has consequently needed to be comprehensive. The key elements are financial support for firm and cluster-level competitiveness enhancement, leveraging government procurement to support local industries, realignment of our trade policy to more firmly support industrial development and active advocacy on the need to contain administered price increases, such as electricity and port charges, that ultimately undermine manufacturers’ competitiveness.

Whether this response is sufficient will only be seen in the next year or two, but given the latest gross domestic product results for the first quarter of 2013, it would appear that more support is required – not less. Unsurprisingly, this is also the feedback being received across the very broad range of manufacturing entities with which the DTI regularly engages.

More surprising, perhaps, is the widespread agreement among policymakers across the globe that industrial policy and associated incentives are legitimate and key economic policy levers. While the UK and the US may not call its interventions ‘industrial policy’, the form and objectives thereof should leave us in no doubt that these are industrial-policy interventions.

International organisations such as the Organisation for Economic Cooperation and Development (OECD) and the World Bank have had to respond to the resurgence of interest in industrial policy. The OECD now talks of ‘smart’ industrial policy, while the World Bank has begun to concede that the structure of economies plays an important role in determining long-term economic outcomes.

As these debates continue to evolve, South Africa’s experiences will provide important case studies for what works and what doesn’t, and why. We encourage these debates, grounded in solid analysis and without preconceived ideological prejudices.

• Hanival is the DTI's chief economist - shanival@thedti.gov.za