Import fewer goods, more people and make South Africa GREAT

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Import fewer goods, more people and make South Africa GREAT

In this blog, I would like to take on two generally accepted ideas – that it is a bad to impose import tariffs (additional taxes on imported goods) and that it is bad to encourage immigration.  I will suggest that it is a great idea to impose import tariffs on certain goods/industries, but only if you link it to attracting the right skills through immigration. I will then show that such an approach can help to make South Africa great!

When you ask most people, they will tell you that imposing import tariffs is hurtful to consumers because it increases the price of the goods they purchase and that it artificially protects domestic industries than cannot compete with international counterparts.

Yes, it is true that with import tariffs, certain goods will become more expensive, local consumers’ purchasing power will be reduced and inflation will rise. However, will this not happen anyway once the prices of foreign produced goods are eventually hiked (as I believe they will)?

Yes, it is also true that local manufacturers are artificially supported by such actions. However, is it not worth protecting local industry to preserve jobs and to prepare them for producing competitive products at a later stage?

South Africa, like the rest of the world has become addicted to cheap Asian imports, especially from China. There is a strong argument to be made that the price of Asian goods (and I will use China as an example) is being kept artificially low by government policies. In China, there are three mechanisms for keeping the price of goods in world markets low. Firstly, China keeps its currency (the Yuan) artificially low, which means that they receive more money in Yuan for the goods they produce. However, it inflates the cost of goods that they import and this hurts Chinese consumers. Secondly, Chinese interest rates are kept artificially low, which helps Chinese companies to borrow cheaply (and produce more goods to export), but hurts Chinese savers, which are the average citizens who save through bank accounts. Thirdly, Chinese wages are kept artificially low, which means that Chinese companies receive cheap labour, but wage-earners suffer.

As a result, the percentage of Chinese GDP (gross domestic product – a measure of the size of the economy) that accrues to wage earners has dipped to 47%. This means that producers amount for more than half of the GDP in China. In other developing countries, this percentage is closer to 55% and in developed countries, it is closer to 65%. The more successful countries get, the stronger the demands of the workers become and the higher their wages will become relative to the size of the economy. In my opinion, it is inevitable that over time, pressure in China will build for a more equitable sharing of economic proceeds.

What does this mean for us? If Chinese (and other Asian exporters) wages were to increase by more than GDP (to increase the wage percentage), it would lead to reduced profits for Chinese companies, unless they INCREASE prices. I believe that over coming years, China and other Asian companies will be forced to do this, leading to high inflation of imported goods for us.

If imported goods become increasingly expensive, local manufacturers will become more competitive. However, because of the cheap imports we have seen over many years, local manufacturers have closed their doors – take the SA textile industry as an example. To retool (open up for business, build factories, train workers, etc.) is going to be very expensive for local manufacturers. Is it not better that they stay open for business so that they are ready to offer competitive products once imported goods go up in price?

I say a qualified yes. It would not make sense for SA to protect all of its industries as this would be just too harmful to consumers and not all of our industries have the potential to become globally competitive, even with Asian imports becoming more expensive. Instead, we should choose certain industries to develop and nurture. They should be industries that are at the leading-edge of innovation that have the potential to drive global growth over the next 20 years.  Examples could be renewable energy generation, biotech, software development, mobile telephony, etc.

How do we nurture and grow these industries? We need to make it easy and cheap to do business in these sectors, we need to provide a viable market for the productsproduced and we need to ensure a ready pool of skills to be used by these industries.

For these selected industries, we need to cut the red tape of doing business, build the infrastructure to support growth and offer tax breaks and subsidies. To help provide a viable market, these industries should be awarded government tenders and tariff protection. To enable the industries to have a ready pool of skills, we need to invest in specific education and training of locals, but also throw open our doors for such skills to be attracted from abroad.

And here I come to the second generally accepted idea that I want to challenge. When you ask most people, they will tell you that immigration is a big problem in SA. We have hordes of foreigners crossing our borders and taking jobs away from locals. Yes, it is true that our cities are filled with unskilled immigrants from various countries and I will not debate whether these immigrants are an asset or a liability to our country. The type of immigrant that I would like to discuss is the highly skilled immigrant, the engineer or scientist from India or China for example.

Why should we throw our doors open to these skilled people and why will they want to come? To build world-leading industries in SA, we need skills and we have a shortage here. Even with a huge ramp-up in education, we will be in this situation for years. Importing these skills can help us bridge the gap and accelerate the skills development of locals (who will work with leading people from elsewhere). Bringing in these skilled people will help to grow chosen, leading-edge industries, which can create large numbers of jobs for South Africans. For foreign skilled workers, SA could be a very attractive destination. Such people would be excited to work in leading-edge industries that are aggressively supported by government. SA could offer them better remuneration than they are used to at home and a lower cost of living (Chinese cities are some of the most expensive in the world). SA has a great climate and has more personal freedom than many of the countries we would be attracting skills from. SA is also less polluted and much less crowded. In my opinion, skilled foreigners would absolutely love to come and work in SA, if given the chance.

I want us to make SA great by building leading-edge industries that can create jobs and encourage skill formation. I want SA to be an important role player in the technologies that will drive the world over the coming decades. We can do this, but two important decisions need to be taken by government. To aggressively support leading-edge industries through whatever means possible (infrastructure, incentives, tax breaks, reduced red tape, tariff protection, tenders, etc.) and to make an extraordinary effort to bridge the skills gap (specific education and training as well as throwing the doors open for skilled immigrants).

What do you think? I would love some feedback.

In the mean time, keep your talk straight!