Buy American, buy South African, buy local. There are calls around the world for government to spend its local tax dollars on local resources. It has a gut-level appeal.
If carried to an extreme, however, it can backfire, as excerpts from the following opinion piece from South Africa explain.
Why local procurement rules are a dead end by Jasson Urbach, an economist with the Free Market Foundation.
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".
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. It's 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 is compelling people to buy local a good idea? And, surely, if 75% is good for the local economy then wouldn't inducing people to buy 100% locally be an even better option?
Let's 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?
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 doesn't 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.
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.
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 neighbour's bank account.
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.
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.
I sense a bit of hyperbole in the argument, but I have to say it comes in no small part to a failure of the author to clearly state the facts here.
The claim is implied that this is a compulsory mandate, but the words used are more precatory: "pledging", "local procurement accord", "we encourage people to buy locally (mostly by pulling on patriotic sentiment)", etc.
Surely there is some level of multiplier effect locally if local money, raised through locally assessed taxes, is recycled through the local economy rather than exported. It would not be enough effect to require that all, or even a large part of purchases be made from local sources, but it does have not an insignificant effect, and it does sit better with the local populace if the community first looks to its own, giving itself the benefit of any doubt as to value for money.
Most buy government contracting local laws I have seen (but I have not done any kind of empirical research) give an edge, but only a marginal one, to local vendors. Guam's procurement law is actually one of the more extreme I've seen, giving a local business a 15% price differential advantage to a non-local vendor or service provider, assuming responsive bids or proposal. However, it has defined "local" in a way that makes it very easy to qualify as local, which dramatically reduces the discriminatory impact. For instance, there are NYSE-listed international corporations doing business "locally" on tiny Guam.
The Guam Chamber of Commerce is currently supporting a "buy local" campaign, aimed not at government contracting but the wider community. This program only hopes to encourage locals to buy 10% of their needs from local sources, including local wholesalers, most of whom acquire the bulk of their goods (if not all), from off-island. It, like the South African program is described, is an "aspirational" campaign; it has no enforcement mechanism. It makes no claim that people should buy locally if the product does not pass muster, and in doing so, by encouraging pride in local production, lifts the benchmark for quality, challenging local producers to better off-island sources. It's meant to change the habits of the modern electronic marketplace, not the tastes.
Is that such a bad thing?
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