Time for SA to Rejig Investment Attraction Strategies

Time for SA to Rejig Investment Attraction Strategies

The carnage wreaked by Covid 19 to what was an already economically anaemic Mzansi is self-evident. Poverty and unemployment are at an all-time high and the economy is expected to shrink by more than 7{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} this year. By all standards South Africa is in a state of economic emergency, and, like in all emergencies, policymakers should implement what may be unpopular but nonetheless necessary measures to pluck the country out of the present economic quagmire.

While not a panacea on its own, massive foreign and local investment is critical and could help (together with other measures) propel the country to pre-Covid 19 lockdown levels and enable it to begin a new trajectory towards significant growth in the shortest possible timeframe. To this end, creating a conducive atmosphere for foreign direct investment inflows and the deployment of local investment is imperative. South Africa needs to position itself in such a manner that allows it to perform well in an increasingly competitive global trade and investment climate powered by innovations in the digital space.

It is in this context that the economic reconstruction and recovery plan recently announced by President Cyril Ramaphosa is a most welcome development. Among other objectives, the plan aims to create jobs (primarily through aggressive infrastructure investment and mass employment programmes); reindustrialise the economy, focusing on growing small businesses; and accelerate economic reforms to unlock investment and growth.

The drive to unlock more than R1 trillion in infrastructure investments and to ensure energy security within two years as well as the focus on reduction of data costs and expansion of broadband access to poor households is particularly commendable. This is because investors, both domestic and foreign, are naturally hesitant about investing in countries where basic requirements, such as roads, health services and utilities are inadequate.

As such eliminating power supply challenges and load-shedding in South Africa is a priority. It is unstainable for investors to have to provide their own back-up generators etc as this increases the costs of doing business and reduces the rate of return on investment, thus turning away both types of investors.

Some of the challenges hampering efforts to attract investment have to do with the regulatory framework. It is worth noting that the economic reconstruction and recovery plan includes removing regulatory barriers that create inefficiencies and the fast-tracking of certain regulatory processes. For instance, the aim is to reduce timeframes to obtain mining, prospecting, water, and environmental licenses by 50{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1}. An enabling regulatory environment is critical for the objectives of the plan to be achieved. In this regard and in light of the current fourth industrial revolution, regulations particularly in the ever-evolving digital space must be carefully considered and implemented.

Finally, as an economic giant in Africa, South Africa is well-positioned to play a pivotal role in creating a positive environment attractive for investment domestically and to advance such best practices on the continent through the African Continental Free Trade Area, among other initiatives.


South Africa bucks the Covid 19 investment depression

While global foreign direct investment (FDI) trends have halved, with global FDI flows dropping 49{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} in the year to June 2020, and 28{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} across Africa, South Africa saw an encouraging increase of 24{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} with a total of $ 2.9 billion in inward FDI. Of this total, $1.8 billion resulted from one transaction, the purchase of Pioneer Foods by global powerhouse PepsiCo, in a deal announced in June 2019, but completed early this year, according to the UNCTAD semi-annual Investment Trends Monitor published last week.

Welcome as this investment is in showing the potential of South Africa as an investment destination, the reason for Pepsico’s purchase is even more encouraging. Pepsico intends to use Pioneer Foods as the anchor to grow its brands in South Africa and across sub-Saharan Africa. This is the role that South Africa, the most industrialized economy on the continent, with its deep financial markets, strong bench of managerial talent, and a major transport and logistics hub should be playing far more strongly.

The promise that the South African democratic transition offered to sub-Saharan Africa in 1994, was to serve as an African beachhead into global markets. Sadly, this opportunity was not taken up, and South Africa’s economic growth performance has over the last decade actually lowered Sub-Saharan Africa’s growth performance, as our economy lagged that of the region as a whole.

President Ramaphosa’s commitment to increase investment levels, including FDI by $100 billion over five years signaled the intention to turn this sad situation around, and this has been followed by other welcome pronouncements and targets with respect to infrastructure and other important sectors.

While the investment targets were appropriately ambitious, progress to date has been tepid, and Covid-19 has finally put to rest any hopes of meeting them. However, the value of the first half FDI performance in terms of keeping South Africa on investors’ radar reminds us of the importance of keeping focused on this issue as a critical element of getting South Africans back to work and getting growth back into South Africa’s economy.

The most widely cited measure of attractiveness to international investment is the World Bank’s Ease of Doing Business indicator. This ranking compares the opportunities and burdens resulting from laws and regulations governing a typical medium-sized business operating in a country.  It has been published annually since 2007, covering an expanding number of countries 178 in 2007 and 190 in 2019. Its rankings are comparable across countries in a given year, but not across years, as the compilers have continually adjusted the collection methodology to more accurately reflect what is important for businesses and investors. (For example, when they first looked at electricity, they counted how long it took, and what it cost for a business to get an electricity connection. Now they look also at what happens if you turn on the switch – does electricity actually flow!)

The Ease of Doing Business measure provides a useful measure of how well South Africa has kept up with the competition, and also a useful guide on what the best performers are doing, as a template for us to follow. In 2007, South Africa ranked 35 in the world, second only to Mauritius in Africa. In 2019, after more than a decade of competitive global reform, South Africa dropped to 84 globally, and in Africa, Rwanda and Kenya had joined Mauritius in providing a better regulatory environment for their businesses than South Africa does.

President Ramaphosa has set a team to lead an aggressive reform effort targeting the business regulatory environment. Progress to date has been slow. Getting this right, in an area where much implementation can be achieved, if the will is there, simply “by a stroke of the pen”, will be a key contributor to getting South Africans back to work, and to helping Minister Tito Mboweni to balance his figures over the coming years!

Towards the next frontier: Industry 4.0 and e-commerce

Towards the next frontier: Industry 4.0 and e-commerce

Conversations about the fourth industrial revolution often revolve around the negative impacts thereof and how woefully unprepared we are. This debate was brought into sharper focus after Donald Trumps’ victory as the media and academics scrambled to find out why people voted for a man running on a mercantilist platform. As it turns out a lot of people were ‘left behind’, or at least felt that way, in an economy that had marched forward; the private sector had leveraged free trade and automation with government having almost no plan to assists or redeploy those affected by the rapid changes. Now that most people are nodding in agreement, the narrative is changing; governments should be better prepared for these disruptive forces, but what does this mean?

The impact of industry 4.0

Advances in the fields of nanotechnology, biotechnology and material sciences are staggering! Ever heard of Graphene or Navacim? Development of these technologies is in itself a huge leap forward, but we’ll only really know the full extent of their impact once they are absorbed into other industries. This requires scale and commercialization, which at the moment is just out of reach. On the other hand, rapid advances – especially in the biotech industry – are forcing some developers to consider the moral implications of their breakthroughs. However, advances in other fields; like robotics, energy storage, autonomous vehicles, the internet of systems and 3D printing; are already available and some have already entered the market.

As the potential benefits of employing these technologies could far outweigh the risks, staggered labour market shocks can be expected when they are absorbed. In some occupations, clerical work for example, human operators are a big liability, exposing a system to errors, fraud and misunderstandings; things that can be eliminated in a completely automated system. Companies who embrace the advances are likely to be more competitive than those that don’t. It would also mean that the ultimate survivors are those companies that don’t rely on human capital.

We could just as easily see the ‘ironies of automation’ where the systems are less efficient than initially thought but would only be realised after long term operation. At this point it’s hard to tell, as there is a surprising amount of social elements that need to be explored when technologies are introduced alongside human counterparts, but we’re certain at least that more tasks will be automated.

In time the net effect of these emerging technological break throughs will likely translate into large scale labour market disruptions but the extent will depend on the scalability, economic viability, absorption rate and whether or not there’s any room for symbiosis with current occupations. But as more parts of manufacturing value chains are automated, the demand for unskilled and semi-skilled labour will decrease. If left to market forces industry 4.0 will further increase inequality as highly skilled and educated innovators are rewarded for their efforts, alongside those individuals with the capital to invest in risky start-up ventures and large scale research and development projects.

Most advances in technology make our jobs easier; we don’t have to dig individual holes for each seed we plant, we plough and seed an entire field in a matter of hours using mechanical muscle and possibly satellite guided farming equipment. This leaves us with more free time, presumably to develop other skills and satisfy our needs, but at some point certain jobs become so easy that we really don’t have anything to do anymore. Technological advances have always caused disruptions like this but it’s the first time that we’ve seen this many industries and occupations become vulnerable in such a short time span. Think of it as a massive productivity shock which can make humans the least productive part in most manufacturing chains.

Folklore suggests that humanity ultimately loses this battle and is left behind with our old means of production while the machines march on. But people are uniquely equipped to adapt, and as opportunities disappear from one segment of the economy, people will migrate to pursue opportunities in another. We’re already seeing such a migration.

The opportunities of digital trade

Digitalisation is a ‘cross-border trade’ game changer, and while there are significant threats and disruptions, massive opportunities are created. According to McKinsey Global Institute, the value of data flows has overtaken the value of global trade in physical goods. Cross-border data flows transmit valuable streams of information and ideas in their own right, and also enable the movement of goods, services, finance, and people such that virtually every type of cross-border transaction now has a digital component.

Approximately 12{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} of international trade in consumer goods is now conducted via e-commerce. The total global flows of goods, services, finance, people, and data have raised world GDP by at least 10{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} in the past decade, adding US$7.8 trillion in 2014 alone, of which data flows accounted for $2.8 trillion.

As such, harnessing the power of digitalisation should be a top priority for policy makers and business everywhere particularly developing countries with massive economic inequalities. Digital trade presents an opportunity for shared global economic growth and allows many start-up companies to become global players even while they are still micro-enterprises.

What’s a government to do?

It’s worth noting that most online service providers, like Airbnb and Uber, initially operated in a largely unregulated space giving them the opportunity to quickly gain market share over traditional, more strictly regulated, service providers. Frustrating as it may be, legislators need to continue regulating markets and technologies as they are introduced to the economy rather than trying to primitively introduce regulation to protect traditional markets which has a smothering effect on industry innovation. Government efforts should be focused on identifying crosscutting issues in industry 4.0 and introducing legislation that will create an enabling environment to further increase competitiveness.

This entails, inter alia, more investment in education (especially in the STEM – Science, technology, engineering and mathematics – disciplines) in order to promote digital literacy and spur innovation; revamping tax policies to reduce or eliminate customs duties on ICT infrastructure in order to reduce internet access costs; and ensure affordable data charges with a view to enhance access to the internet and creation of new platforms and/or participation in the world’s biggest digital platforms such as Alibaba, Amazon, and eBay, amongst others, which are enabling millions of SMEs around the world to seize cross-border opportunities.

There certainly will be losers. The challenge for policy makers is to ensure that more winners than losers are made. Without doubt, the well-connected and digitally literate will swell the ranks of winners.

Photo credit: MattHurst via Visualhunt.com /  CC BY-SA
FCTC threatens tobacco growing nations

FCTC threatens tobacco growing nations

The adoption of the World Health Organisation’s ( WHO’s) Framework Convention on Tobacco Control (FCTC) is regarded as a significant step in setting up an international regulatory framework aimed at protecting present and future generations from adverse effects of tobacco consumption and exposure to tobacco smoke.

However, while the FCTC was not originally aimed at banning or prohibiting tobacco consumption or production, its provisions could be implemented in a way that imperils the tobacco growing and tobacco dependent economies of Africa with dire implications for the livelihoods of millions of people who depend on this crop.

The importance of the tobacco industry in southern Africa, for instance, can hardly be overemphasised.

Zimbabwe has about 75 000 tobacco growers or farmers and is the largest employer in the agricultural sector with about 415 000 people employed on the farms and in the industry side (leaf companies, auction floors etc.) and a minimum of about 2 million people are directly dependent on tobacco.

Tobacco contributes about 12 percent of the country’s gross domestic product and 27 percent of foreign currency earnings. Malawi has about 350 000 tobacco growers with about 800 000 people employed and more than 2 million people directly dependant on tobacco. The tobacco industry contributes about 60 percent of foreign exchange earnings in Malawi.

Importantly, more than 95 percent of tobacco grown in African countries such as Malawi and Zimbabwe is for export, only an insignificant amount is consumed locally. Therefore, any radical demand reduction measures would have a direct negative impact on the prices fetched by tobacco growers and ultimately deal a potential death blow to tobacco growing.

For an undeveloped, poverty-stricken country like Malawi whose economy is heavily reliant on tobacco growing and export, this would be a disaster of gargantuan proportions. It could also have destabilising regional implications should radical demand reductions result in a downward economic spiral in the country.

While it seems theoretically possible for alternatives to tobacco growing to be found and promote a move away from dependence on tobacco growing and trade, in practice, tobacco growing in some countries such as Malawi is so important to the economy such that even policymakers, based on sound research, have simply concluded that there are no viable alternative crops to tobacco growing.

In Malawi, while the government is considering other crops (such as soya beans) to lessen dependence on tobacco growing, such crops are simply regarded as potentially “complementary” crops and not as alternatives.

The same goes for Zimbabwe, where the several stakeholders are unanimous that at present, there are simply no alternatives to tobacco.

It is worth noting that the FCTC provisions are not inherently antithetical to the interests of tobacco growing and tobacco products’ exporting countries, per se. Indeed, there are significant issues where there is apparent common ground between the objectives of the FCTC and the interests of the tobacco growing countries in Africa, such as the need to eliminate illicit trade in tobacco products (ITTP) by securing the tobacco supply chain; and ensuring that non-smokers are not exposed to tobacco smoke; among others.

Should the WHO, through the FCTC, adopt measures as currently being proposed, to promote “carve outs” of tobacco products from trade liberalisation and investment protection agreements, the impact thereof could be disastrous for many tobacco growers in southern Africa whose income depends on successful exports to international markets.

In respect of tobacco “carve outs” from trade and investment agreements, apart from the legalities or political economic implications, it is debatable whether such an approach is necessary at all.

At a multilateral level, the WHO allows its member states to impose measures to promote human health provided such measures are non-discriminatory and necessary to achieve the stated objectives. Where bilateral investment treaties are concerned, two recent cases where Phillip Morris lost investment disputes regarding government measures to promote public health indicate that arbitration tribunals do recognise the host state’s right to regulate in the public interest (Phillip Morris v Uruguay and Phillip Morris v Australia).

The findings in the two disputes suggest that legitimate regulations to promote public health in respect of tobacco products are not so threatened so as to require the implementation of radical proposals in order to give effect to them.

While it is trite that tobacco use is a public health challenge, it must also be borne in mind that the tobacco industry does make important positive contributions to certain tobacco growing countries.

Therefore, measures to discourage consumption in export markets must be taken with proper consideration of potentially bigger socio-economic challenges in certain countries that depend on growing tobacco primarily for export, presumably to informed consumers in high income and some middle-income countries.

Measures to “clean up” the tobacco industry or tobacco value chain such as the elimination of ITTP, appropriate health warnings on cigarette packs; age limits on who can purchase tobacco products; among others, are laudable.

However, a balance is required and the FCTC member states must ensure that in their noble zeal to promote public health they do not adopt measures that are tantamount to throwing away the baby with the bath water, resulting in disproportionate impacts on poor countries with very few alternatives to tobacco production. Nkululeko Khumalo, a senior associate at Tutwa Consulting, is one of the authors of the forthcoming paper by the Tutwa Consulting group which inter alia examines the socioeconomic impact of tobacco growing and implications of the emerging global regulatory environment on the tobacco economies of southern Africa.



South Africa – Zimbabwe trade war: time for WTO intervention?

South Africa – Zimbabwe trade war: time for WTO intervention?

The current dispute between South Africa and Zimbabwe relating to the latter’s import restrictions on groceries and other products such as building materials underlines the importance of a vibrant dispute resolution system in trade relations.

The import restrictions at issue were imposed in terms of Statutory Instrument 164 of 2016 (SI 164) under the auspices of Zimbabwe’s Control of Goods Act. According to the press statement issued by the Zimbabwean Minister of Industry and Commerce on 22 June 2016, the aim of SI 164 is not to “ban” the importation of the goods in question but rather to “regulate” them. Further, “[t]he main purpose of SI 164 is to promote the revival of our local industries” and the support so provided to the relevant local producers is “not to be open ended but time bound and sector specific”. The relevant local industry is supposed to use the protection from imports to “re-tool and bring in new technology and address production inefficiencies”.

The products in the SI 164 can only be imported under license issued by the Minister of Industry and Commerce whose ministry, based on the press statement, “will allow importation of goods which can be produced locally, when local production cannot meet the national demand; in an endeavour to avoid shortages on the local market.” In other words, it seems that importation will be allowed only to prevent shortages, otherwise a virtual import ban has been imposed.

Through SI 164, Zimbabwe seems to be attempting to apply “safeguard measures”, one of the legitimate trade remedies against imports, provided both substantive and procedural provisions for their application are complied with. Zimbabwe is a member of the World Trade Organisation (WTO) and the SADC Trade Protocol and is therefore obliged to observe the relevant provisions of the two regimes in its imposition of any trade restrictions.

Safeguard action can be taken when a surge of imports leads to domestic industries not being able to cope with an increase in competition. These temporary measures allow the domestic industry to adjust and improve competitiveness. Safeguards may only be used to prevent or remedy serious injury or to facilitate the adjustment to increased competition for the domestic industry due to further trade liberalisation.

The procedure to be followed before the imposition of safeguard measures is more complex than that for other trade remedy instruments such as anti-dumping duties (to counter dumping) and countervailing measures (to counter subsidies). Unlike anti-dumping and countervailing measures, safeguard measures are not meant to counter unfair trade practices but rather to provide succour to the domestic industry where it suffers “serious” injury as a result of legitimate trade.

As such, a safeguard measure is one of the most difficult instruments to use (that is if strict provisions of the WTO are applied). For example, a WTO member state that wishes to impose safeguard measures has to first initiate an investigation to determine that there has been a surge of imports as a result of unforeseen developments and that such increased imports of the subject product(s) is recent, sudden, sharp and significant enough. In addition, there should be a causal link between the serious injury so suffered by the local industry and the surge in the volume of imports arising from the unforeseen developments.

In circumstances where delay could result in injury that would be difficult to repair, a WTO member state is allowed to impose provisional safeguard measures (which should not exceed 200 days) while investigations are still underway provided a preliminary finding is made that there is clear evidence that increased imports have caused or are threatening to cause serious injury. However, such provisional measures can only take the form of tariff increases which should be refunded if the final investigation does not determine that increased imports have caused or threatened to cause serious injury to the domestic industry.

Article 20 and Article 20 BIS of the SADC Trade Protocol contains provisions similar to those contained in the WTO Agreement on Safeguards regarding the procedure to be followed before safeguards could be imposed and on provisional safeguard measures.

Should Zimbabwe’s action be regarded as safeguard action, that is, provisional safeguard measures, a violation of both the WTO Agreement on Safeguards and of Articles 20 and 20 BIS of the SADC Trade Protocol is apparent. For instance, the measure imposed should only be a tariff increase pending an investigation and not a ban requiring a license which can only be issued to prevent shortages in the local market where domestic production cannot satisfy demand.

Interestingly, SI 164 as well as the subsequent press statement by the Minister of Industry and Commerce do not make any reference to any enabling provisions of the SADC Trade Protocol or WTO provisions, as if Zimbabwe is not bound by its trade liberalization commitments regionally and internationally – only domestic legislation is mentioned. While the SADC Trade Protocol provides a mechanism, Annex VI, to be followed in the event of a dispute, to date no trade dispute has been considered under this system.

At present, considering the fact that Annex VI has never been implemented and the SADC Tribunal was disbanded (while a new system is being devised), there is virtually no rules-based dispute settlement system in SADC. The only available forum is the WTO since both South Africa and Zimbabwe are members thereof. However, the general “culture” in Southern African trade communities is to avoid hauling each other before a dispute settlement body in preference of “diplomatic” solutions. This is the path that South Africa seems to be taking and has reportedly given Zimbabwe three weeks to lift the restrictions to South African imports.

The calculation, if any, from Zimbabwe’s side is perhaps that SADC lacks capacity to enforce its trade liberalisation provisions and that South Africa is unlikely to invoke the WTO dispute settlement system to deal with this matter.

Where due process is not followed and in the absence of an effective rules-based dispute settlement system, a trade dispute such as the one sparked by SI 164 between South Africa and Zimbabwe could easily raise political temperatures and potentially become something much bigger and uglier.

Should Zimbabwe refuse to relent, it’s unclear what South Africa will do. However, to avoid further escalation of the dispute into unhelpful political wrangling, South Africa should perhaps take the high road by referring the matter to the only rules-based system available under the circumstances – the WTO.

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