According to a Business Day news article by Setumo Stone (Buy-SA bid to channel billions to local companies, 1 Nov. 2011), Business, the government and labour signed an accord on local procurement on Monday, pledging to increase their purchasing of goods and services from South African producers to an "aspirational target" of 75% in a bid to boost industrialisation and to create employment. But is compelling people to buy local a good idea? And how did business, government and labour arrive at the 75% aspirational target? And, surely, if 75% is good for the local economy then wouldnt inducing people to buy 100% locally be an even better option?
Proponents of the local is lekker, Buy South Africa and the more recent Proudly South African initiatives argue, essentially, that buying local keeps the money in the economy and boosts growth and employment. Not surprisingly, ex-trade unionist turned Economic Development Minister Ebrahim Patel is one of the architects behind this latest local procurement accord. After doing his utmost to deter the Wal-Mart deal, Patel is now recklessly determined to force through this blatant protectionist agenda.
Its easy to recognise the simple logic of the protectionist movement argument: if we encourage people to buy locally (mostly by pulling on patriotic sentiment) then we increase demand for domestically manufactured goods and with more goods being produced locally more South Africans will get jobs. But when it comes to understanding the economics behind this simple logic, we cannot avoid seeing the flaws and realising that by compelling people to buy local will make the very people we want to help, namely, the poorest of the poor, a lot worse off.
Lets assume that I am a successful car manufacturer. By successful I mean I run a profitable business without relying on special privileges from government at my fellow taxpayers expense. To manufacture my make of car, I import the engine from Germany at a cost of R100,000 per unit. Now, suppose I have a neighbour who, using South African labour, can manufacture an engine of equal quality but with a price tag of R1 million. Should I support the local is lekker drive and buy the engine from my neighbour? According to the proponents of the Buy SA initiative, this is the best option because the money will stay in the country and my neighbour will be able to create jobs and build up a local engine manufacturing industry.
Well, this option is certainly better for my neighbour and his workers, but not for me, my workers, or the South African economy at large! And this is especially so if, instead of making an engine of equal quality but significantly more expensive than the German engine, my neighbour makes a really shoddy engine that doesnt work quite as well.
The smart business thing for me to do would be to continue buying the engine from Germany if I want to produce my car at the best price and make enough profit to keep my workers suitably rewarded. The savings I make by importing the engine will allow me and my workers to buy a lot of other goods and services, some produced locally and some imported.
Adam Smith wrote over 200 years ago, that trade is the engine of economic growth. And the reason we trade is simple: because its a win-win situation after a trade, both parties are better-off than they were before they entered into the transaction. The tried and tested way to prosperity is to produce goods and services that other people actually want and at a price they can afford or are prepared to pay. I cannot be expected to buy the engine from my neighbour just because he lives in the same country as me, irrespective of the price or quality of the good he produces. In my quest to obtain the most suitable engine at the best price, the fact that the person who can provide may be someone who lives in Germany or someone who lives in Uitenhage, means the same to me - nothing!
I could well decide to buy the engine from my neighbour out of compassion or because I like the guy, but this would amount to charity. If business, government and labour force me to buy from my neighbour and I receive less value for my hard earned cash, the net result is that I am simply transferring some of my wealth into my neighbours bank account and foregoing the full benefit I would have derived from this money, money which could have been used far more productively in other sectors of society. People buying my cars would have purchased an item built to the best of my ability. I would have received the best price for it. My workers would have retained their jobs and have had extra income to spend on their own family wants and needs.
Individuals who choose voluntarily to help their countrymen by buying products at a higher price or of a lower quality, do so as an act of compassion and must do so at their own cost. There is no decent reason to force or compel people and businesses to do what the simple logic of proponents of the Buy local initiative deem is right at a cost to the country in general and the poor in particular. Should we buy South African regardless, to preserve money and jobs domestically? No, obviously, if it means we would be buying non-operational, overpriced goods from each other. If this happens, with the best will in the world, after only a short while, there wouldnt be any money left for us to buy anything worthwhile from one another.
By restricting everyone to buying from and selling their goods and services to fellow countrymen only, we limit the range of products available as well as the people we can buy from and sell to, and ultimately everyone is worse off.
Finally, Mr Patel said that new regulations on state procurement will come into effect on December 7, aimed at significantly expanding the value of goods and services the government procures from local producers. Scandalous is the idea that government will now purchase expensive locally produced goods with taxpayers money in order to prop-up inefficient special interest groups within the South African economy - a totally inefficient use of scarce taxpayers money. Every tax paying South African should demand that their scarce resources be spent on the best available goods and services so that every South African obtains the best possible value from our limited resources.
Every South African should claim it as a fundamental non-negotiable right to purchase the goods and services they desire and can afford from whomever they choose. Anyone that proposes, or worse, forces their fellow citizens to do anything to the contrary should immediately be labelled as exploitative and uncaring. This is not mere rhetoric. Those who lobby for protectionism after being warned of the inevitable consequences, cannot care about the mass of ordinary South Africans who need the best possible opportunities to live the best lives they can.
AUTHOR Jasson Urbach is an economist with the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the authors and are not necessarily shared by the members of the Foundation.
FMF Feature Article / 15 November 2011
Jasson Urbach is an Economist and director of the Free Market Foundation.
Publish date: 17 November 2011
The views expressed in the article are the author’s and are not necessarily shared by the members of the Foundation.