241. Beneficiation

Why does SA not "beneficiate" its raw materials that it exports? For the same reason that the sheep farmer sells the wool and purchases his jersey from the local shop.

The answer lies with a phenomenon called "specialisation".

The tomato farmer does not manufacture his own tomato jam. Should he? The answer is clear. He should, only if the marginal return of making jam is higher than spending his time and effort on growing tomatoes. And then, if his return is higher for making jam, should he not stop growing tomatoes and focus on manufacturing jam? The answer is: Yes! it should stay "yes" till the marginal returns are equal.

The prices of and profits made on embarking on various activities will ultimately determine which actions entrepreneurs would take to optimise their return on investment of time and resources. If something is not done, or some activity is not carried out, it is because there is no profit opportunity to do so. If a government wants to use funds to "stimulate" such activity, it can only do so at the cost of the alternative use of the funds (such as the building of a road, hospital or education). So yes "encouraging" an industry will change the rewards for the recipient but at the cost of the person that provided the funds - the taxpayer whose use of the money would have yielded a higher return for him. Or to return to the example of the tomato farmer - he is taxed on his farming endeavor to make it possible for someone else to be subsidised make jam! Overall value is being lost.

Individual firms in South Africa would beneficiate only if it beneficial to do so. And it is best to let the market indicate, through the price mechanism the best allocation of resources and not the bureaucrats.

C.M. Heydenrych

June 2017

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