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    South Africa: Reshaping the Foreign Trade Dimension


    © International Trade Centre, International Trade Forum - Issue 4/2004

    Photo: ITC Faizel Ismail and ITC have long worked closely together. In 2003 he chaired the organization's Joint Advisory Group meeting.

    When South Africa broke with apartheid, the country had to rethink its approach to business and trade. It selected ITC as the partner to help rebuild its trade strategy. Here is a portrait of an evolving strategy that helped South Africa fast-forward from isolation to integration in the global economy, boost incomes and become a magnet for investment.

    After breaking with apartheid and holding its first free elections under universal suffrage in 1994, South Africa had to shake itself from economic stagnation and international isolation. A Reconstruction and Development Programme adopted by the new government in September 1994 launched the country on the path to becoming the giant that its natural resources and potentially powerful industrial base suggested it could always have been in a more open political system.

    However, it became increasingly clear that the legacy of the old ways of thinking - which had helped turn the country into a backwater largely cut off from the world mainstream - had to be overcome in business and foreign trade as in every other area. A central player in making South Africa the trading power that it is today was Faizel Ismail, who held key posts in the Pretoria Department of Trade and Industry (DTI) from 1994 until 2002, when he became his country's representative to the World Trade Organization in Geneva.

    Together with Hendrik Roelofsen, ITC's Director of the Division of Technical Cooperation Coordination, he told ITC's Natalie Domeisen and consultant Robert J. Evans how the change came about.

    Mr Roelofsen: We met over breakfast in Pretoria in early 1998. You had just decided to reorganize the DTI's export department. We agreed that it would be a good idea to bring some seasoned experts to Pretoria to share their experiences with you.

    Mr Ismail: It really was a joint story. We worked on this together. I had come into the new government in 1994, after working in NGOs [non-governmental organizations] and the trade unions. By 1996, the minister decided he needed someone to manage all South Africa's foreign trade relations. It was a huge challenge. I had some theoretical knowledge but had done nothing hands-on in this field. The first task was rebuilding all our trade links, starting with our immediate neighbours and then moving out to the European Union [EU], the United States and, of course, our partners in the developing world in Asia and Latin America. But to do this properly, we had to review what we were doing at home, to look hard at our tariff and industrial policies. It was all new and we weren't quite prepared. You know, you never really expect to be in government until you are there.

    We quickly realized that we were very uncompetitive in trade. It went back many years, but one factor in this was the inward-looking attitudes of the previous regime. It felt it was under siege and the policies it followed reflected that. We had high tariffs, but little investment in new machinery, in technology or in developing human resources. With protection, we had a secure local market. But when we looked at it closely, we realized that the South African domestic market was not very big. We have a population of over 40 million people, but there are, and were, huge disparities in income levels and purchasing power.

    However, we also realized that we had a country rich in natural resources, with a good industrial base, and the potential to be competitive on a global scale. And because of the siege economy under apartheid, we had in fact developed an expertise in some niche areas, like electronics and chemicals.

    In electricity and other forms of energy, we had the potential to supply the rest of the African continent. The potential was there, but the domestic market was too small to provide the launch pad. We needed the world economy.

    The new government had to take decisions quickly and accelerate liberalization. We knew we had a problem because workers and the trade unions were part of the new governing alliance, but the sort of reform we knew we needed was bound to bring some job losses, given the high degree of labour intensity in South African industry. However, we came to the conclusion that, in a world of increasing globalization, we would lose jobs anyway, even if we didn't lower tariff barriers. Our companies would have to modernize. Cheaper goods would get in one way or another from outside. We were not living on an island. Competitors were appearing among other developing countries. Countries around us were becoming competitive in products that made up a significant part of our consumer basket. And on the positive side, we felt we could counter job losses by showing that through reform and opening up we could bring down the cost of living, which had been very high, and a heavy burden for the poor in particular, because of the protectionist policies of the past.

    This was the context in which we had to reform. In agriculture, we had to remove all subsidies and the single marketing channels that had constrained small farmers. For textiles, clothing and footwear, we reduced tariffs faster than in other sectors - forcing companies to become more outward-oriented. We had to provide supply-side incentives and find ways of encouraging all firms to look beyond our borders and start thinking in terms of exports, to get into research and development, and build up skills training. We also needed to help our small and medium enterprises find ways of penetrating foreign markets, such as by encouraging and supporting them to go to trade fairs abroad to present their products and gain experience in how to market them. I was given the job of overhauling our foreign trade promotion structure, which was very weak. We had about 40 export offices abroad, but the people working in them had not been trained to react to quickly changing markets.

    Mr Roelofsen: Yes, that's true. And it's worth noting as well that South African trade missions around the world were located on the basis of political and not economic considera-tions. What ITC was able to do was provide input on where Faizel should actually place them to obtain maximum benefit.

    Mr Ismail: The point was that the private sector itself was used to being sheltered from competition from abroad and even in export promotion, our firms had had no tradition of working together. Everyone was looking over his shoulder at everyone else. We had strong companies in some areas, like civil engineering, but they would never think of cooperating in bidding for a project. You could find six South African businessmen travelling abroad on a plane to negotiate for one and the same contract and they would sit tight on their seats and never talk to each other. They didn't understand globalization and were suspicious of other countries - perhaps partly because of the country's international isolation.

    When I met Hendrik, I told him what I needed was to retrain our people and to have a fast-track programme for developing skills in export promotion, to help us change the national business culture. Under the previous regime, there was no meaningful relationship between the private sector and the government or any joint thinking on how to build the future of the country. There was no vision of where the country should be in five or ten years' time. On top of that, the private sector did not even like the government very much. And with the new government, things could have got even worse, given that the private sector was largely white. I was convinced that ITC had something to offer. They had been working on some projects in the country even before 1994, so we knew about them. Hendrik and I agreed that we should take a team from DTI around some of the key countries that had also broken out of a similar economic mould. ITC quickly helped us to put together a study tour to Sweden, Finland, Ireland and New Zealand, meeting representatives of the business sector and export promotion specialists. For me, the Irish experience was especially valuable…

    Mr Roelofsen: Remember that in 40 years, Ireland's economy has evolved considerably.

    Mr Ismail: Yes, they had been an agriculture-based economy and they used a high-tech strategy to modernize, and turn things around, with sheer, dogged hard work. They made a huge effort simultaneously to attract inward investment and develop export promotion. And they invested heavily in education geared towards what they saw as the country's new economic future. In Sweden and Finland too, we were shown how important it is to link export promotion with attracting FDI [foreign direct investment]. In New Zealand, we really saw how a business culture could be changed. It hadn't been easy for them, quite clearly. They impressed on their private sector that New Zealand companies had to work together to have an impact on foreign markets that would benefit them all, to stop relying on the government and use it as a facilitator rather than the main actor. They put a huge effort into building sectoral export councils and very quickly found there were people in the private sector who were ready to take over the lead role.

    Another thing we learned was that there has to be good and permanent feedback between the government and the private sector. I recall that later, back at home, our automobile firms came to us with solid information on how the poor infrastructure in the port of Durban was causing huge bottlenecks in exports. As a result we were losing markets. So we set a major programme of reconstruction under way there and the situation began to turn around. From our side, we saw that our flower growers, instead of working together for economies of scale, were all negotiating separately with airlines and getting bad service for high prices. So we created a flower export council and convinced the airlines to give them collectively a better deal, even changing schedules so that flowers could reach foreign customers faster. These were two success stories, which showed how well this approach could work.

    We created a Capital Goods Export Council (CGEC) and from that moved on to specific sectors, like stainless steel. The people at the CGEC who had seen how synergies helped improve efficiency joined in to help us get the message over. We then moved to more complex sectors, creating textile and clothing export councils in the second year of our programme, but that demanded a lot of hard work in year one. Our relations with them were very tense at first because of the liberalization programme. There was a backlash from the companies and the unions, because the industry was losing jobs after we removed the protection it had enjoyed for so long. We said to them: stop blaming us, turn around and look outwards.

    You will see opportunities and we will help you to realize them. Now, over the last four to five years, we have seen textile exports up by 40%. We weren't the only factor, but we were a factor.

    The automobile industry became SouthAfrica's greatest success story in recent years after foreign giants, such as Toyota, Ford, GM and BMW, saw its potential as an export platform and reinvested in the country. (Photo: Design Studio, Department of Trade and Industy, South Africa)

    The same happened in the automobile industry. We created an export council and they worked with us aggressively. We approached new potential investors jointly. And now the industry is our best success story of the past five years. Big foreign firms like Toyota, Ford, GM and BMW, which had disinvested, have come back in. They see the potential of South Africa as an export platform. When we came to negotiate our trade deal with the EU, we had a very strong input from the industry.

    ITC helped open the bigger picture for my colleagues and me. The vital thing about the link was that we had an open line and could bring people down when we needed. For me, the ITC is like a bank. We were able to use the pool of resources the ITC has developed. On top of that, I found their people as passionate as I was about making it work for us.

    Mr Roelofsen: The interesting thing was that we never had an overall project for South Africa. It was a partnership that developed as we went along. As one thing began moving, we would look together at where to go next. We could keep the dialogue going thanks to a small grant from the Netherlands.

    Mr Ismail: Right. And within two years we had made a giant leap forward. The key to doing this was winning the confidence of businesses and mobilizing them. The ITC played a very important role in this as well. The South African private sector had had some experience of the organization and knew that it was credible and neutral. Hendrik and [ITC Executive Director] J. Denis Bélisle had visited the country and were known to our firms. The fact that the ITC was working with us showed business that it had the government's confidence - and that the ITC had confidence in the government. So it played a bridging role in strengthening links between the two of us.

    It wasn't easy for the private sector. It had to make a huge leap of faith, but once it got the idea it started running without our help. Setting up the business councils was like forming a trade union - it's difficult at first but once it's there, it gains its own momentum. We now have around 20 business councils. They survive on their own but they don't hesitate to let us know what they think. It's as though we have created a network of trade unions to keep up pressure on the government.

    When you are starting out on a huge enterprise like turning round an economy, you can see the possibilities. But you need outside resources to help make the leap. In the trade dimension, what Hendrik and his colleagues enabled us to do in two years would probably have taken at least ten years to do on our own. That is the high value of an international institution like the ITC. It can help a country to jump over stages. When I first met Hendrik, I was looking for resources. I had very little idea of what we needed to do. I realized quickly that ITC offered exactly what we needed and was adaptable and flexible into the bargain. We found we could work together on concrete issues and get them solved in double-quick time. I don't think any other international organization has such a depth of experience of working on the ground in practical matters. For developing countries, there's nothing else that comes close in providing knowledge of export strategies and practices and the tools to develop them. For me, it was a perfect fit.

    Writer: Robert J. Evans
    Contributor: Natalie Domeisen

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