South Africa: As Durban climate summit approaches, industrial policy hits green wall

South Africa’s trade and industry minister Rob Davies.

By Patrick Bond

April 18, 2011 – Links International Journal of Socialist Renewal – Hosting the Durban COP17 – let’s rename it the “Conference of Polluters” – starting in late November puts quite a burden on the African National Congress government in Pretoria: to pretend to be pro-green.

Embarrassingly, last week’s US Export-Import Bank loan of US$805 million to South Africa will feed huge profits to the notorious US corporations Black & Veatch so that a vast coal-fired power plant, “Kusile”, can be constructed, mainly on behalf of huge smelters run by BHP Billiton and Anglo American Corporation – whose profits soar away to Melbourne and London.

But poor people are facing an electricity price increase of more than 125% in coming years, according to the South African power company Eskom. Of its 4 million customers, already a million are disconnected. Multiply the cut-off figure many times more when municipalities are considered.

According to Physicians for Social Responsibility’s environmental health director, Kristen Welker-Hood, Kusile’s costs to both the power plant’s neighbours and climate change victims elsewhere include “harming human health and compounding many of the major public health problems”. Moreover, mass disconnections of South Africans mean that electricity’s many potential health benefits will be denied to low-income people, and will cause a biased version of economic development, a lower standard of living and lower life expectancy.

This is abundantly evident at a time when South Africa is starving for industrialisation not distorted by the “Minerals-Energy Complex” (MEC), as it is called by London School of Oriental and African Studies economist Ben Fine. The MEC’s nexus of huge mining and metals corporations, plus the chaotic behemoth Eskom causes a “resource curse” in South Africa, partly related to macroeconomic imbalances and partly to the country’s extreme fossil fuel dependency.

The global economic crisis is still hitting hard, forcing the local currency (the rand) higher – as investors flee the global North’s low-interest regimes – but with more volatility. After sinking to nearly R14/US$1 in 2001, the rand rose to above R6/$1, then fell again to nearly R12/$1 in 2008, but the April 2011 rate is R6.7/$1.

The high currency is double trouble for local manufacturers not only under pressure from cheap importers, but whose longer-term capital goods orders also become vulnerable when the rand crashes by 15-30% in a matter of days, as has happened five times since liberation: 1996, 1998, 2001, 2006 and 2008.

Can South African industry insulate itself from globalisation’s financial cancer? More than any of his peers, past or present, South Africa’s trade and industry minister Rob Davies understands the macro-beggars-micro dilemma. But the question is whether the ANC government’s “New Growth Path” will give Davies the policy space for a coherent industrial strategy.

Up until now, Davies’ post-apartheid predecessors (Trevor Manuel, Alec Erwin and Mandisi Mphalwa) merely offered stop-gap favours to special interests and failed sectoral subsidies, along with grandiose “Spatial Development Initiative” projects – such as the notorious Coega complex near Port Elizabeth – which now resemble white elephants as big and hollow as those 10 newly built or refurbished World Cup 2010 soccer stadia.

The latest iteration of Davies “Industrial Policy Action Plan 2” (IPAP2) offers a great deal of tree-level detail which, through no fault of Davies, ignores the raging forest fire. When I debated him on national radio last week, Davies still lacked answers to either green or macroeconomic critiques.

To his credit, in early 2010 when introducing IPAP2 to parliament, Davies conceded that the crisis is exceptionally deep, for reasons related to macroeconomic mismanagement: “SA’s recent growth was driven to too great an extent by unsustainable growth in consumption, fuelled by credit extension. Between 1994 and 2008 consumption driven sectors grew by 7.7% annually, compared with the productive sectors of the economy which grew by only 2.9% annually.”

The green wall

Even the bulk of growth in productive activity – in automobiles (which registered job losses) and heavy metals (with flat employment) – is untenable, once a post-carbon world tax regime descends. The Durban COP17 will expose how South Africa is 20 times higher in energy-related CO2 emissions per person per unit of output than even the great climate Satan, the USA.

In his IPAP2 statement, Davies introduces the climate challenge with a terrifying prediction: “A specific emerging threat is the rise of ‘eco-protectionism’ under the guise of addressing climate change concerns, particularly from advanced countries. For instance, some countries are considering the imposition of ‘border adjustment taxes’ on imports produced with greater carbon emissions than similar products produced domestically, and subject to carbon emission limits.”

But if true (and it is), why would IPAP2 endorse more subsidised energy-intensive, capital-intensive smelting? “Mineral Beneficiation is an area of work that presents much untapped opportunity but which has lagged in policy development and implementation.” Davies is especially high on titanium beneficiation, even if one of the world’s highest profile attacks on resource curse politics comes now from the Transkei Wild Coast’s Xolobeni community, intensely opposed to an Australian firm’s extraction of the metal from their beaches.

Davies might have expressed the problem rather differently: “Mineral Beneficiation is an area that the world’s largest mining and metals houses have worked up so effectively in their own interests – witness unfair Mittal steel pricing, Billiton’s electricity-guzzling aluminium and ultra-destructive Anglo and Xtrata coal burning and mining – that Eskom’s apartheid-era policy provides them the world’s cheapest electricity (one seventh the price consumers pay per kilowatt hour), generated by the world’s largest coal-fired power plants, including the third- and fourth-largest plants now under construction at Medupi and Kusile, to be paid for via expensive foreign debt with sky-high electricity price hikes that will lead to millions more Eskom disconnections.”

Such home truths cannot be confessed in policy statements, but what is striking is how in this year’s statement, Davies commits to “key sectors that the 2011/12 – 2013/14 IPAP will focus on”, including “Qualitatively New Areas of Focus”:

• realising the potential of the metal fabrication, capital and transport equipment sectors, particularly arising from large public investments;
• oil and gas;
• ‘green’ and energy-saving industries;
• agro-processing, linked to food security and food pricing imperatives; and
• boatbuilding.

These all fail the green-smell test because the electricity/petrol-guzzling metals and transport sectors are huge contributors to climate change; oil and gas will be disastrous if multibillion-rand Coega heavy-petroleum refining and Karoo gas-fracking are approved; and shipping will also carry a carbon tax on pollution-intensive bunker fuels.

As for the celebrated new “green” industries, the only IPAP2 strategy that earns climate mitigation brownie points is the urgent replacement of electric hot water heaters with solar-powered versions. Yet because Pretoria gave Eskom this responsibility, a tiny fraction of the promised output has been delivered. And Eskom celebrated its new loan last week by cutting its subsidy for consumers installing the solar heaters.

Other components of Davies’ green economy and agro-processing strategy are so bound up in biofuel, genetic engineering and land grab controversies, that they stand with IPAP’s hopes for forestry (also subject to growing eco-social criticisms) and nuclear energy (!) as still-born or dinosaur industries, typically described as “false solutions” to climate crisis.

The macroeconomic ceiling

If these dilemmas represent a green wall beyond which IPAP cannot proceed, they pail in comparison to the macro dilemma: Davies wants to hit the manufacturing accelerator, but the Treasury and Reserve Bank have their foot on the fiscal and monetary brakes.

In his 2010 parliamentary testimony, Davies gave several reasons why “the profitability of manufacturing has been low”, including the currency, “the high cost of capital” (indeed South Africa’s interest rate remains very high even after the 2009-10 reductions), “monopolistic provision and pricing of key inputs”, “unreliable and expensive infrastructure”, “a weak skills system” and “failure to leverage public expenditure” into industrial growth.

Davies named the three most serious “negative, unintended consequences of this growth path: unsustainable imbalances in the economy, continued high levels of unemployment and a large current account deficit”. Moreover, although South Africa witnessed impressive GDP growth during the 2000s, this does not take into account the depletion of non-renewable resources – if this factor plus pollution were considered, South Africa would have a net negative per person rate of national wealth accumulation (of at least US$ 2 per year), according to even the World Bank’s 2006 book Where is the Wealth of Nations?

South Africa’s economy became much more oriented to profit-taking from financial markets than production of real products, in part because of extremely high real interest rates, especially from 1995-2002 and 2006-09. The two most successful major sectors from during this era were communications (12.2 per cent growth per year) and finance (7.6 per cent), while labour-intensive sectors such as textiles, footwear and gold mining shrunk by between 1 and 5 per cent per year, and overall, manufacturing as a percentage of GDP also declined.

Other imbalances include the Gini coefficient measuring inequality rose during the post-apartheid period, with the Institute for Democracy in South Africa measuring the increase from 0.56 in 1995 to 0.73 in 2006. According to Haroon Bhorat’s 2009 study, black households lost 1.8% of their income from 1995-2005, while white households gained 40.5%. Unemployment doubled to a rate of around 40% at peak, if those who have given up looking for work are counted, and around 25% otherwise.

Moreover, most of the largest Johannesburg Stock Exchange firms – Anglo American, DeBeers, Old Mutual, Investec, SA Breweries, Liberty Life, Gencor (now the core of BHP Billiton), Didata, Mondi and others – shifted their funding flows and even their primary share listings to overseas stock markets mainly in 2000-01. The outflow of profits and dividends due these firms is one of two crucial reasons South Africa’s current account deficit has soared to among the highest in the world and is hence a major danger in the event of currency instability.

To pay for the outflow, Manuel’s and Pravin Gordhan’s Treasury increased South Africa’s foreign indebtedness from the US$25 billion inherited at the end of apartheid to a dangerous $100 billion today. FNB bank recently warned that South Africa is nearing the level PW Botha encountered when he gave the “Rubicon Speech” in 1985, followed by a foreign debt default.

The other cause of the current account deficit is the negative trade balance during most of the recent period, which can be blamed upon a vast inflow of imports after trade liberalisation, which export growth could not keep up with.

A genuine industrial policy would forthrightly address all these macroeconomic constraints, and lift them via exchange controls and surgical protection of those  industries that can reliably commit to affordably meeting basic needs, providing decent (and labour-intensive) employment opportunities, and linking backwards and forwards to local suppliers and buyers without reliance upon whimsical international economic relations.

To this end, consider a critical insight that Davies and other IPAP authors missed: the era we have now entered is much closer to the stagnationist 1930s, in which austerity will prevail, than the go-go early 2000s. The winding down of vast debt overhangs and the long-term recessionary environment in the West, not to mention worsening East and South Asian competition, make South Africa’s international standing nearly as vulnerable today as two years ago, when The Economist rated South Africa as the most risky emerging market.

There is, however, a precedent worth discussing: the 1930s era of selective “deglobalisation”, during which South Africa’s growth per capita was the highest in its modern history. At that time, “import-substitution industrialisation” occurred here (as well as Latin America) along its most balanced trajectory, with much of our manufacturing industry established during the 1930s, as well as national assets such as Eskom and Iscor. The years of high growth were not reserved for whites, and indeed the rate of increase of black wages to white wages occurred at their fastest ever during this period.

Insights into global markets provided by the recent crash and the challenge of a post-carbon economy should give rise to a rethink, but this will only happen when the macroeconomic-austerity advocates, financiers and MEC lose power to those interested in a more balanced society.

[Patrick Bond is a senior professor of development studies at the University of KwaZulu-Natal.]