The hidden costs of limiting foreign-owned spaza shops
|Published
Donald MacKay
The problem with most “-ism’s” is they don’t stop where you think they will. Racism under apartheid delved into the smallest minutiae to ensure that the tiniest drop of black coffee didn’t dilute the mug of white milk. Protectionism, you would think, stops at the border, but it doesn’t. It moves into the townships and taverns of South Africa, as demonstrated by eThekwini’s proposed limit on foreign-owned spaza shops.
News24 reports that “eThekwini councillors are discussing a policy proposal that seeks to regulate spaza shops owned and run by foreign nationals, with a specific focus on boosting locals' ownership of the shops in Durban.”
We need to separate the problem off illegal migrants, from foreign nationals operating these businesses. Illegal migrants are exactly that. Illegal. They need to be deported or ideally denied entry before they arrive. You can’t fix this problem through protectionism.
Nedbank explains that “[f]oreign direct investment (FDI) occurs when an individual, company, or government invests in a business or assets in another country, establishing a stake in its operations.” We don’t think of foreigners setting up shops in a township as FDI, but that is exactly what it is.
Yes, it’s not Walmart buying Massmart, but besides the scale, it’s very difficult to see the difference. When City Press reports that “local spaza shop owners had been complaining that an estimated 150 000 spaza shops in the country were run by foreign nationals”, their complaint is about local shopkeepers being unhappy with their more agile competitors. If these foreigners gave worse service and sold more expensive products, no one would complain, because they would simply go out of business.
The same complaint arises when the local chicken industry is unhappy with cheaper imported chicken, or the local retailers struggle with competition from Temu or Shein.
Competing with more agile and productive business is very unpleasant. The risks are real, with bankruptcy being a very possible outcome (unless you are SAA; then you can live for eternity, like cancer and zombies).
Approximately 99% of consumers love heated competition among suppliers, driving down prices and improving levels of service. The 1% who don’t are those fools who burn down the shops of foreign investors and then wonder why the cheap goods are no longer available at hours, which the local shops can’t or won’t supply.
Innovation is everything. It drives up productivity, making everything cheaper and more abundant and the only driver of innovation is competition.
Do we want to live in a country where we discourage FDI or imports because we don’t want to expose our incumbent businesses to high quality competition? Protectionism is the removal of competitive pressures so that domestic industries / locally owned firms can earn high prices from local consumers and hopefully, employ more people. This is trickle-up economics and is believed in like a five-year old believes a bearded man from the north pole delivers presents in a sleigh pulled by flying reindeer. But it is a fiction.
Trickle-up economics is an economic policy proposition that final demand among a broad population can stimulate national income in an economy.
Protectionism, no matter its form, is a tax on consumers to compensate inefficient suppliers. It mutes the market signal so that rather than hearing your consumer tell you, by not buying your product, that something is wrong, you instead hear the call to lobby your local politician to make them buy your stuff. When done at scale, as has happened in South Africa, we are left with a torpid business sector, unable to wash its own face without the help of government. This is a subsidy economy.
When then Finance Minister Tito Mboweni said “[t]he total cumulative amount of money spent on state-owned entities (SOE) recapitalisations and bailouts from 2000/01 to 2019/20 is R187.4 billion”, he was saying that taxpayers have given R187 billion to companies who were unable to deliver the services they were billing for and needed more cash. SAA didn’t fail because the competition was unfair (R57bn went to SAA and still a basket case). It failed because it was simply not good enough despite being given R57bn, without transporting a single passenger for that money. Was it cheaper because it was subsidised? Quite the opposite in fact. Trickle up economics again.
When our local entrepreneurs can’t compete with foreign shop keepers, we need to ask why that is and invest into developing those skills, rather than removing the competition and asking poor consumers to pay a premium so that they have the privilege of trickling up their money to a small group of effective lobbyists.
Donald MacKay is founder and chief executive of XA Global Trade Advisors. MacKay has been advising local and foreign companies on global trade issues for more than two decades. X handle: XA_advisors; email: donald@ xagta.com; website: xagta.com. The views in this column are independent of Business Report and Independent Media.
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