Guest Column

Economic growth does not come by divine providence

2016-12-08 08:53

Yonela Diko

The ANC's policy conference in June 2017 must strongly reconsider the path to industrialisation. 

In the 1960's, Korea was an undeveloped nation whose major exports were human hair (for wigs) and fish, and their average annual income was around $400 per working family. Today it’s a major industrial power with an average annual per capita income of over $32 000, and it beats the United States in its rate of college attendance, exports and lifespan.

South Korea did all this in a single generation by closing its economy and promoting its export industries. A decade earlier Japan had done the same thing. Fourty years earlier Germany also did it. But of course we have been sold the guilt and worry about the protectionist rhetoric and policies and the consequential trade war it could potentially have.

By throwing out “free trade” and embracing “protectionism” during the 1960's South Korea managed to do in 50 years what it took the US 100 years and Britain 150 years to do. Had South Korea adopted the “free trade” policies espoused by Steven Friedman and the New York Times, it would still be exporting fish.

The history of successful protectionism goes way back. King Henry VII turned England from a backwater state with raw wool as its chief export into a major developed state that produced fine clothing and other textile products from wool. He accomplished this by severely restricting the export of wool from England with high export tariffs and restricting the import of finished wool products with high import tariffs. 

King Henry learnt this from the Dutch. They, in turn, copied the Romans. And the Romans got it from the Greeks, 3000 years ago. A few millennia later Alexander Hamilton, first Treasury Secretary of the US, would champion this strategy to build the greatest industrial powerhouse the world had ever seen. 

For about 200 years, America understood well the benefits of tariffs, subsidised exports and protectionist policies. Had the fathers of the US like Abraham Lincoln, George Washington, Andrew Jackson or Ulysses Grant applied for IMF loans, they would have been denied. All of them believed in high tariffs and a heavy control of foreign investment, and considered “free trade” to be absurd.

When Washington became president in 1789, most of America’s personal and industrial products of significance were manufactured in England or in its colonies. This was a routine policy for England, and is why until India achieved its independence in 1947, Mahatma Gandhi (who was assassinated a year later) illegally sat with his spinning wheel for his lectures and spun daily in his own home. It was, like his Salt March, a protest against the colonial practices of England and an entreaty to his fellow Indians to make their own clothes to gain independence from British companies and institutions.

Washington asked Hamilton what could be done about this and Hamilton came up with an 11-point plan to build American manufacturing, which he presented to Congress in 1791. 

It was this approach of putting America first that their government followed for most of their history, with average tariffs of 30% through the 19th and 20th centuries. There is no denying that it helped turn America into an industrial and economic juggernaut in the mid-20th century and beyond.

The three periods when America radically dropped tariffs – for three years in 1857, for nine years in 1913, and by Reagan in 1987 – were all followed by economic disasters, particularly for small American manufacturers. The predictable result was the haemorrhaging of American manufacturing capacity to those countries that protect their industries through high import tariffs but allow exports on the cheap – particularly China and South Korea.

When Ronald Reagan came into office, as the result of 190 years of Hamilton’s plan, the US was the world’s largest importer of raw materials; the world’s largest exporter of finished, manufactured goods; and the world’s largest creditor. After 34 years of Reaganomics, America has completely flipped this upside down. They have become the world’s largest exporter of raw materials, the world’s largest importer of finished goods, and the world’s largest debtor. We now export raw materials to China, and buy from them manufactured goods.

For South Africa, who has been battling with industrial policy after industrial policy, the historical policies of our ugly past has left us without any significant domestic industrial base.

First, we need to go exert our force in charging real import taxes to balance the manufacturing costs – a tariff – on goods made overseas that compete with domestic manufacturers, while keeping import taxes low on raw materials that domestic industries need. In short, import duties are used to equalise manufacturing costs and protect domestic industries.

Secondly, we have to encourage South Africans to save, so there’s a strong pool of investment capital for businesses to borrow against and grow – the best way to do this is to offer people an above-the-inflation-rate interest rate on savings.

Of course, such protectionist policies would not sit well with some of the multinational conglomerates, whose loyalty is not to any country, but only to their investors and shareholders. A lot of them manufacture products in China and sell them here at a huge profit without giving a damn about the consequences of these actions to local workers.

If we want to create jobs locally, all we need do is reject the divine providence given to the so-called “free trade” and go back to what made other countries great: industrialise our economy, protect our industries, and provide the kinds of import and export taxes that will help our small industries not be at a disadvantage with regards to manufacturing costs.

The time is now to be bold.

* Diko is a spokesperson for the ANC in the Western Cape.

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