South Africa’s new Industrial Policy Action Plan
2010-03-03 Sean Woolfrey
Resources > By Topic > OTHER TRADE TOPICS > Trade and Development
Sean Woolfrey, a tralac Researcher, discusses South Africa’s new Industrial Policy Action Plan.
Last month South Africa’s Department of Trade and Industry (dti) finally made public the 2010/11 – 2012/13 Industrial Policy Action Plan. IPAP2, as it has become known, builds on the National Industrial Policy Framework and the Industrial Policy Action Plan of 2007/08. Whereas the plan of 2007/08 addressed ‘easy-to-do’ actions such as strengthening the Competition Act and revising and developing support programs for strategic sectors such as the automotive and clothing and textile industries, IPAP2 focuses on interventions that policymakers ‘need to do’ in order to move the South African economy away from its current reliance on ‘traditional commodities and non-tradable services’.
The new plan, which aims to create almost 2.5 million jobs over the next decade by moving the South African economy onto a more intensified, labour-absorbing industrialisation path, is based on seven key initiatives. These are: 1) Aligning macro and micro economic policies more closely; 2) Ensuring greater concessional financing through the Industrial Development Corporation (IDC); 3) Overhauling existing public procurement processes in order to leverage more local procurement; 4) Adopting a strategic approach to trade policy and the use of import tariffs in particular; 5) Targeting anti-competitive practices; 6) Increasing skills levels and innovation; and 7) Boosting production in a selection of newly targeted sectors, including some with long-term potential.
There is much to commend in the new IPAP, and its drafters are surely right to emphasise the need to address South Africa’s deep-seated unemployment problem. In this regard, the aim of making the country’s industrialisation process more labour-absorbing is an important one. IPAP2 is also somewhat more focused than the previous IPAP, and is more explicit when it comes to specific measures to be implemented. A number of sensible measures are proposed, including a review of current government incentive schemes (which have failed to attract a significant up-take), attempts to ensure more local procurement and a continued focus on anti-competitive behaviour. Nevertheless, despite these prudent proposals, IPAP2 raises a number of issues.
The first issue concerns the distinction highlighted in IPAP2 between the production and consumption sectors of the South African economy. The South African government has been quite explicit in its beliefs that the manufacturing sector should be the focus of industrial policy, and that the ‘productive’ sector of the economy creates the ‘conditions for the services sector to grow’. This explains the relative lack of focus on services industries in IPAP2
Significantly, no attention is given to Information Technology (IT) services despite the importance of these for the long-term development of a knowledge economy, and the existence of valuable skills in this area. Other professional services such as engineering, legal and medical services are also neglected. Given a relative lack of these services in South Africa’s neighbours, they could fit the bill in terms of the dti’s attempts to encourage the production of tradable services. Transport services are also potentially tradable services in the region, especially in light of the infrastructural development that is currently taking place across the region.
While these industries may not be able to absorb large quantities of unskilled and semi-skilled labour in the way that government hopes an enhanced manufacturing sector will, it does not make sense for potentially productive industries to be ignored simply because they are not labour-intensive. The important question to be asked here is whether the creation of jobs (undoubtedly vitally important in the South African context) should be the sole criteria for industrial policy support?
Another issue arising from the new IPAP is the omission of any mention of the regional context of industrial policy. South Africa, as a member of the Southern African Customs Union (SACU), has committed itself, under Article 38 of the 2002 SACU Agreement, to developing a common SACU industrial policy. Nevertheless, other than a short reference to locking-in regional procurement, IPAP2 does not make mention of any efforts to align South Africa’s industrial policy with those of its neighbours, nor does the plan reveal evidence of any considerations toward the interests of South Africa’s neighbours, be they members of SACU or of the Southern African Development Community (SADC).
The new IPAP has also been described as being overly ambitious. The implication of this criticism is that the plan tries to pick too many ‘winners’. A total of 12 sectors are earmarked for support. These are: agro processing; automotives and components; capital equipment and machinery; mineral beneficiation; plastics, pharmaceuticals and chemicals; clothing and textiles; biofuels; forestry, paper, pulp and furniture; cultural industries and tourism; and advanced manufacturing (which includes the nuclear and aerospace industries). Specific measures highlighted range from the establishment of craft hubs to the development of an aerospace industry. Such a range of identified interventions raises the question of whether the government should have chosen to focus on a smaller number of industries. Furthermore some of the initiatives (the development of an aerospace industry for example) do not appear to be that realistic or consistent with the aim of labour-absorbing industrialisation.
Despite this apparent scattergun approach, it is interesting to note that the financial support earmarked by the plan is focused disproportionately on just two industries, the automotive and clothing and textile industries. The support programmes identified for these two industries take up over half of the R8.2bn on-budget resources for industrial support pledged over the next three years, with R2.6bn allocated for auto and R1.7bn for clothing and textiles. What these two industries have in common (apart from theoretically being able to absorb significant amounts of labour) is a proven track record of being heavily reliant on government support in order to survive.
While the demise of these industries would undoubtedly lead to further significant job losses in South Africa, the disproportionate amount of financial support earmarked for these two industries – neither of which could be described as infant industries – suggests that the South African government is focusing too much on maintaining existing jobs, rather than on creating new jobs. Many of these existing jobs are only viable thanks to taxpayer money, however, while new jobs in other industries might at least have the potential to be viable without government support. This preoccupation with preserving existing jobs seems to indicate a flaw in the South African approach to industrial policy.
In a 2006 working paper entitled What’s so Special about China’s Exports? Harvard Professor Dani Rodrik analysed China’s recent economic success and came up with some findings on the appropriate role of industrial policy in developing countries:
‘The usual criticism of industrial policy is that governments cannot pick winners, and therefore should not try. But this is not the right way to think about industrial policy. In environments that are rife with uncertainty and with technological and informational spillovers, markets under-provide investment in non-traditional products. The appropriate role for industrial policy is to fill in this market incompleteness by subsidizing investments in new products. It is a given that not all of these additional investments will prove to be socially profitable. Good industrial policy consists of withdrawing support from those projects that are revealed to be failures, so that resources do not get bottled up in unproductive activities. Hence the appropriate criterion of success for industrial policy is not that “only winners should be picked” (an impossible task) but that “losers should be let go” (a much less demanding and more doable task). The latter is the relevant yardstick against which industrial policies ought to be measured.’
Certainly one could question whether the South African automotive and clothing and textile industries can accurately be described as ‘losers’, and whether letting such losers go is ‘a much less demanding and more doable task’ in the South African context, given the political clout of trade unions and other special interests in the country. What is undeniable, however, is that support for these industries comes at the expense of support for other, potentially more viable industries, or for cross-cutting industrial policy interventions. This is not to say that ailing, but labour-intensive manufacturing industries should simply be left out to dry, but rather that the South African government should not be blind to the full cost of supporting these industries.
The above are just some of the issues that have arisen in response to the publication of the new IPAP. The plan also leads to many questions concerning whether the South African government’s approach to industrial policy is optimal given the prevailing circumstances in the country. Certainly one could question whether the attempt to pick winners is more appropriate than a policy based on interventions that cut across the economy. Given the relative lack of success of previous sectoral initiatives, a less targeted approach – for example, one that aimed at boosting technological innovation or the development of marketable skills throughout the economy – might just be a better way to achieve a more productive and labour-absorbing economy.
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