September 17, 2019

Parliament must develop “holistic” approach to economics

South Africa lacks a nationally coherent national economic policy because from the starting point, at parliament, legislators work in silos and fail to talk to each other. This was according to Professor Ben Turok, former MP and now Director of the Institute for African Alternatives, who addressed the parliamentary committee on Trade and Industry. The following is a summary of what he told the Members, ending with an apology for being “a little controversial.”

There are a number of ways of analysing the national economy. The conventional way for economists is to talk about GDP and the contribution of the different sectors to GDP. But there is another way, and that is the way of analysing the value addition that takes place in the economy. In that way you are able to make judgements about the successes of sectors, and also have a much better idea of what is actually happening in the economy, especially in industry. I, and our Institute [for African Alternatives], have been using the value addition approach to understand what is really going on in the economy.

South Africa has beautiful beaches and climate, we have lovely scenery and mountains but if nothing is done with these there is no value addition to the economy. It is only when you start putting in an infrastructure, when you start building hotels and roads and communication, that those beaches become valuable in terms of the economy.

The value chain and how you add value is the key to understanding the economy.

So it is critical that we look at our resources. Not only minerals, but all our resources, and ask: are we adding value? An example is the argument in the Eastern Cape right now between the minister [of mining] and the community. Clearly the argument is about how we add value? The community is saying we can add value by [increasing] tourism, while the minister will say we can add value by bringing in the Australian [mining company]. I am not saying which side is right, but if you leave [these resources] alone and don’t touch them in any way, then you are not adding value.

When you add value what is important is the human effort that goes into it. Consider for example the case of the coffee industry in Kenya. Kenya has a wonderful climate for coffee. If you have a coffee bean and you just leave it, there is nothing, until you make a hole in the ground and put that bean in the ground and you put in a bit of water. Then you will get a coffee bean plant. Nothing happens without human activity, so human involvement is a critical element of value addition. You can talk about artificial intelligence. You can talk about the industrial revolution, but in the end it is the human component that brings the very important value addition. Without the human component there is nothing.

Research on mining has always focused to some degree on value addition and the human effort involved. What we found is that the mining industry is very deeply embedded in South Africa in terms of labour, labour usage, skills, supply chain, etc. The mining industry is not an enclave existing in isolation.

When we look at Ghana, Tanzania and other countries we find that the mining industries in those countries are not similarly embedded. What happens in some countries in Africa, especially in Francophone Africa, is if they discover a mineral what they do is they would invite a French company to come along and do the analysis, make a plan and the French company would provide a total package to the government, and say “we will do everything for you”. In that way a package deal is signed up and the return for the government of those countries is the royalties, and that is all, apart from some labour that is used. That mine does not get embedded in the country and all the minerals are exported. There is very little value addition, or beneficiation. The value addition is to the company, not to the host country.

The government of Ghana has become quite sensitive about this question, and is focused on the questions of employment, promotion and training of local people, procurement of locally produced goods and services, licencing and reporting requirements. The Ghanian government has now established legislation in which they require foreign firms, including South African firms, to comply with these things.

I was invited by Rwanda to advise them on beneficiation and localisation. This is a country with some minerals but [it is] a very poor country. It doesn’t have a great deal of technical capacity or manufacturing capacity, [but] there are services they can provide. Cleaning is a service. Security is a service, and I suggested the government should impose conditions about localising all services such as these in order to enter the value chain.

Governments have to find the right entry into the value chain and not leave it to foreign companies. What is happening in South Africa, in my view, is that we have not done a great deal of analysis saying where our country, and the government in particular, should enter into the value chain. What happens ... is that a local, smart businessman opens an import-export agency and imports things. There is no value added, and he puts on a mark up and the product becomes even more expensive. You will find opportunists will enter the value chain, not as producers but as distributors, making a profit from the markup, and this is actually a disaster.

South Africa is guilty of exactly that. We used to manufacture a great deal of engineering equipment for the mining industry, [but now] a lot of that equipment is being handled by these parasites, frankly, who are import-export people who don’t produce anything. They have external connections and are politically connected inside the country. Their job is connections, networking. Once they have got the network they import and claim this is a South African product and that is very harmful for the economy because there is no value added.

The value chain and how you add value is the key to understanding the economy. If you don’t add value, that is parasitic and unhelpful.

[Trade and Industry Minster Rob] Davies always says he wants to industrialise Africa and this is part of our policy but we also want to export to Africa and there is a contradiction there. We need a policy which takes account of our African aspirations and our desire to help the continent, which is absolutely vital, and how that interacts with our national interest, but I don’t see any clarity on that.

If I was a Ghanaian and I want to import from South Africa and I want to industrialise in Ghana I want to know if there is any contradiction between South African exports, at what price, under what conditions and with the support for the industry in Ghana. I think this is something that this parliamentary committee needs to look at.

In Tanzania, too, there is new legislation about procurement but [it is] not as advanced as Ghana. Their legislation seems designed primarily to get royalties. I have been in meetings with African government ministers and the common complaint is that we, as African countries, are getting royalties but we get nothing else. In some African countries, foreign companies don’t pay VAT, they don’t pay taxes, they don’t procure locally. [They] will give a royalty and that royalty is pitiful. I have heard Ministers of Finance from African companies complain that the royalties are small and that there is no benefit to the country because the royalties don’t even cover the cost that the host countries incur. This is a delicate issue and I think we need a lot more discussion about the policies involved.

My institute held a workshop on industrialisation. What came out was that parliamentary committees are a little bit too localised and too focused on their own area [but] economics does not work in silos. The economy is a whole network and you can’t say industry is here and mining is there and the two don’t meet. In fact they work together, so parliamentary committees should find a way of addressing the national issues of the economy in addition to the specialised sectors that you work in. Government itself is also not integrated. Ministries do not often talk to each other.

[We must consider] the question of the holistic nature of economics. The inter-connections of all elements of economics is so important [yet] we allow people to set up silos [and] operate in compartments. They don’t speak to each other. They don’t take account of each other. The result is that we don’t have a coherent national economic policy.

This is an edited summary of a transcription of Prof Turok’s address to the Portfolio Committee on Trade and Industry.

The editor of Notes from the House is employed at Turok’s Institute for African Alternatives as Production Manager on its flagship magazine, New Agenda.

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  • Author: Moira Levy
Last modified on Sunday, 10 February 2019 19:50

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Notes from the House is an independent online publication that tracks and monitors Parliament’s role in fulfilling its constitutional responsibilities to improve the lives of South African citizens. Published by Moira Levy with the support of the Claude Leon Foundation.

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