The Siren Song of Localisation: Why Localisation Policy will not Lead to Industrialisation

Superficially, the idea of localisation is an attractive one, and it emerges from a chain of reasoning that proceeds as follows: (i) South Africa is a country in desperate need of industrial jobs, but (ii) despite that need, a significant fraction of industrial inputs, intermediate goods and consumer products are imported from manufacturers beyond our borders, creating jobs in other countries, so (iii) we should channel demand currently being diverted to imported goods back towards goods that are made here. Since GDP is made up of the sum of Consumption, Investment and Exports less the cost of Imports, anything that reduces imports raises GDP if nothing else changes. Framed in this way, localisation promotes growth, industrialisation and employment. What is not to like? It is easy to see why this kind of reasoning is attractive to a range of interest groups: for importing businesses and their employees, it offers protection from foreign trade; for government, it offers an approach to industrial policy that is ideologically comfortable and which also reinforces other policy instincts and priorities including transformation and the creation of black industrialists. For all, it implicitly lays part of the blame for South Africa’s poor employment outcomes at the door of low-wage producers in jurisdictions that are less worker-friendly and on our own fickle consumers. All of this is deemed to absolve government from responsibility for the country’s poor economic outcomes. This report argues that the case that has been made for localisation is defective and unconvincing, that it is economically myopic, and that it ignores the large-but-diffuse costs that must be paid by society even as it creates small-but-highly-concentrated benefits for those businesses whose output will expand in response to effective localisation policies