Effective localisation strategies must start by identifying the constraints on local producers that make it harder for them to compete with foreign suppliers, a report issued by economic research firm Trade and Industrial Policy Strategies (Tips) on June 10 states.
Tips identified several constraints to localisation, such as inadequate information about market opportunities; high-cost or poor-quality infrastructure, inputs and skills; lack of access to markets locally and abroad – for instance because they cannot get into the relevant retail chains – and prohibitive initial investment costs.
In all these areas, Tips said the government could promote competitiveness and build local markets, including through local procurement, without raising prices for domestic consumers. However, in the case of luxuries and semi-luxuries, tariffs may be appropriate to build local capacity and create jobs.
A core challenge to the localisation strategy was to identify opportunities, based on an analysis of import data, and to find ways to take advantage of them without unduly burdening working-class households and smaller businesses.
“Ideally, the process should centre on cutting input and logistics costs and improving efficiency, not on protecting domestic markets or raising procurement burdens on government agencies. While localisation is a valuable tool for inclusive industrialisation, it is not a panacea,” the Tips report stated.
It warned that basing industrialisation on import trends alone might lead policymakers to miss opportunities to innovate, especially to meet the needs of working-class households and to address environmental imperatives.
For instance, South Africa does not import e-bikes or motorcycles on a mass scale, but local production of low-cost versions could go far in improving mobility for lower-income families.
Similarly, the mass roll-out of solar heaters for township homes in the early 2010s brought hot water to many for the first time – but they did not displace imports at all.
Tips noted that localisation has become something of a buzzword in industrial policy in South Africa, appearing in departmental strategies, Parliamentary debates and National Economic Development and Labour Council agreements.
For most people, however, it remains poorly defined, although the Department of Trade, Industry and Competition has published some useful guidelines in its Policy Statement on Localisation for Jobs and Industrial Growth on May 18 last year.
The policy of localisation effectively uses trends in imports to signal when demand would justify local production if it could become competitive. Demand could be from export industries, with localisation applying to inputs of all kinds, from commodities to semi-manufactures. It could also be from final consumption regionally or locally.
With this understanding, Tips noted that localisation superseded the often unnecessarily rigid distinction between export-oriented and import-substitution industrialisation. Both these strategies have core weaknesses.
On the one hand, import-substitution industrialisation historically focused on final consumer goods, such as clothing and cars, rather than capital equipment and intermediate inputs. As a result, local manufacturing could end up just assembling imported inputs, with only limited local value add, technological sophistication and job creation.
On the other hand, export-oriented manufacturing strategies often ignore the need to build competitiveness by initially supplying local and regional markets. Typically, developing economies can only enter direct competition with long-established international companies in commodities.
An initial focus on closer markets, where local companies have a built-in advantage, can lay the basis for greater competitiveness over time, the Tips report said.