Executive summary

At its Extra-Ordinary Summit, held on 29 April 2015, in Harare, Zimbabwe, the SADC Leaders adopted the pdf SADC Industrialization Strategy and Roadmap 2015-2063 (2.34 MB) . The Summit also directed the SADC Secretariat to develop a detailed and costed Action Plan for the implementation of the Strategy, and design and develop an appropriate institutional framework to implement the Strategy. Pursuant to these decisions it was resolved that the Costed Action Plan should cover Phase I and II of the Strategy, with specific focus on the first fifteen years (2015-2030). It is within this context that the Costed Action Plan is hereafter elaborated.

The Industrialization Strategy was developed as an inclusive long-term modernization and economic transformation scheme that enables substantive and sustained raising of living standards, intensifying structural change and engendering a rapid catch up of the SADC countries with industrializing and developed countries. It is anchored on three interdependent and mutually supportive strategic pillars – industrialization as champion of economic transformation; enhancing competitiveness; and deeper regional integration. The Strategy sets out three potential growth paths – agro-processing; mineral beneficiation and downstream processing and industry- and service-driven value chains. The paths are mutually supporting and inclusive, encompassing the combination of downstream value addition and backward integration of the upstream provision of inputs, intermediate items and capital goods.

The central challenge facing Africa is how to transition from the commodity-dependent growth path in which African countries find themselves to value-adding, knowledge-intensive and industrialised economies. The goal is to occupy a higher place in the global division of labour. Africa at present is predominantly viewed as a producer and exporter of primary commodities and an importer of value-added manufactured goods.

There are deep structural fault-lines in the economies of the SADC countries that remain entrenched, characterised by resource-dependence, low value-addition and low levels of exports of knowledge-intensive products. This is reflected in the low levels of private sector investment into the manufacturing sector of the economy. The concern of policymakers is that if the declining share of manufacturing (11.3% in 2014 across SADC, down from 15.9% in 2004), is not reversed, the “ladder” to address the deep structural problems in these economies will be effectively removed.

A key focus of the SADC strategy is to develop targeted and selected industrial policies that create conditions that will enable higher rates of investment by the public and private sectors into economic infrastructure, which in turn will enable crucial sectors of the economy, particularly value-adding manufacturing, to grow. The policy toolkit should include a review of existing trade, investment and industrial policies, with a view to these being deepened and broadened. This will, amongst others, entail the more strategic use of tariffs, incentives and industrial financing, targeted foreign direct investment, stronger customs controls, compulsory specifications and standards, public procurement policies and other measures.

Within this context, the Strategy sets out ambitious, but highly feasible growth targets (of 6 percent annual growth in per capita income) and significant transformation of the industrial sector and allied services – through doubling of the share of manufacturing value added (MVA) in GDP to 30 percent by 2030 and to 40 percent by 2050, raising the share of medium-and-high technology from its current level of less than 15 percent to 30 percent by 2030 and 50 percent by 2050. To achieve these targets, the share of manufactured exports in total exports should rise from the present 20 percent to at least 50 percent by 2030, and the share of industrial employment in total employment increase to 40 percent. This should be underpinned by a strong industrial diversification drive, the development of viable and competitive regional value chains capable of interacting with global value chains, as well as supporting measures to enhance capital and labour productivity and efficiency.

Emphasis on value chains promotion arises from the desirability of moving development perspectives from a national to a regional focus. Secondly, the greater share of global exchange is currently carried out through value chain participation, reflecting the profound structural changes in modern manufacturing systems and their complex product and geographical interdependencies.

The fundamental issue is not whether or not SADC countries are integrated into global value chains (GVCs); rather, it is where the SADC countries are integrated in GVCs. The key objective of the Action Plan is to facilitate the movement of SADC participation up the value chains where the highest value is derived. This will be accomplished by working with and supporting industry players and investors to diversify into higher value-addition activities. This needs to be supported by the application of well-harmonised industrial policies at both a member state level that is supported by a strong regional integration agenda.

Experience suggests that the best development outcome for SADC countries will be achieved by a combination of increased value chain participation with simultaneous upgrading. Participation in value chains may start at regional level and graduate to the global level. Within this context, the key challenge for corporate and government policy makers is to identify and prioritize entry points into value chains, as well as tasks that can be undertaken competitively and how they might be shared within value chains in the region.

Deeper regional integration is an essential pre-requisite for the development of regional value chains and integration in global value chains. Close public-private collaboration is pivotal. The industry 'discovery' process in value chain policymaking is heavily reliant on close collaboration between the two main actors to remove the infrastructural, institutional and financial constraints to value chain development, and to encourage investment by private sector players.

Central to attracting more targeted investment is the access which a regional market will provide, supporting – as it must – a far greater advantage in its economies of scale. SADC Member States have committed themselves to investment-led trade and regional economic and industrial integration. This also requires addressing the many physical and soft barriers to investment-led trade. From an implementation perspective, the emphasis therefore needs to shift to some of the microeconomic elements underpinning future growth, with a particular emphasis on moving up regional and global value chains supported by regionally coordinated procurement; targeted domestic and foreign investment; technology transfer; skills development; and the development of a friendly investment and regulatory environment.

Specific investment and industrial opportunities emerge from integrating value chains and ensuring specialisation across the region. Judicious and strategic development of domestic and regional value chains will also allow supply companies to increasingly explore higher value-added export opportunities and enter into global value chains. The investment opportunities that arise from the regional value chain work will need to be underpinned by a significantly ramped-up focus on industrial finance and incentives, particularly with the strengthening of the role of national and multilateral development finance institutions (DFIs) to leverage and secure investment in the productive sectors of national economies, and in catalytic projects that facilitate regional trade and industrial integration.

A significant focus of the past decade has been on expediting investment into major infrastructure projects. The focus moving forward should also emphasise ensuring that private sector investment is leveraged in key economic infrastructure (with strong conditional reciprocal conditions) and unlock major economic activity in the productive sectors of the regional economy. State Owned Enterprises (SOEs) also have a major role to play in supporting infrastructure development and enabling economic infrastructure (energy, rail, road and port, and telecommunications) and crowding in investment. To achieve this, strong support for localisation and support for regional supplier development is essential.

To encourage the entry of domestic players into new industrial activities, particularly into higher value-added activities, will require the application of smart and responsive trade measures to create a dynamic regional market. This for example, would require the rapid response to the dumping of sub-standard products in the region or the flooding of markets of second hand clothing and vehicles. Without protection against these forms of market penetrating strategies it would be exceptionally challenging for emerging producers to be able to compete in what is an unequal playing field.

There should also be a deliberate policy to promote national and regional clusters as vehicles for developing the SMEs sector, enhance competitiveness and innovation and facilitate interface and complementarily between firms and value chains. A critical mass of competitive enterprises with high aptitude and readiness to operate regionally and globally is a precondition for successful interface between clusters, SMEs and regional and global value chains. To strengthen capabilities and interfaces, the Action Plan proposes two linkage programmes: (i) action programme to strengthen SMEs, clusters and regional value chains; and (ii) a business linkage programme.

Capabilities and capacities development require massive investments especially in education, innovation, institution building and physical assets to create strong knowledge economies in SADC countries, and raise productivity and competitiveness. The Action Plan therefore indicates important areas for capabilities and capacities development, comprising of: i) a business environment and competitiveness programme; and ii) a programme for enhancing the quality of education, training and innovation and related support institutions including the strengthening/creation of Centres of Excellence and Centres of Specialization. The policy focus should target raising productivity and competitiveness, laying emphasis on research and development (R&D) and the science, technology and mathematics (STEM) education and leveraging them to support industrialization.

Focus areas for value chain policymaking should be on facilitating: i) entry into regional/global value chains; ii) expanding and strengthening cross-border value chain participation, and iii) embedding value chains in the domestic economy. This requires strong cooperation between governments, the private sector and other critical role-players to address the medium-term challenge of building consensus among Member States to determine which policy functions should be prioritized and to what extent. Policy must also be value chain-specific and maximize national gains rather than those of a specific sector or industry or firm.

The implementation of the Action Plan would require significant financial, technical and logistical resources, which for the sake of greater economic and social prosperity, should be situated within a long-term macroeconomic equilibrium path. Analysis for the Plan suggests that the SADC region has a financing gap amounting to 11.3 percent of GDP in 2014. Resource needs projections for the period 2015-2030 reveal that investment will need to rise substantially to 41.3 percent as compared to 23.6 percent of GDP (2014), in line with the targeted high growth rate of 6 percent in per-capita income and the assumed improved capital efficiency. Assuming that savings rates, FDI and ODA remain at their historical averages for the period 2000-2014, the financing gap will rise to 18.2 percent of GDP. These projections have important implications for resource mobilization. To close the financing gap, action will be needed across the policy spectrum. To this effect:

• Efforts will be needed to boost savings rates, enhance FDI flows and ensure fiscal consolidation

• Specific measures to increase the flow of risk capital to SMEs

• Institutional reforms and incentives

• Governments will need substantial funding for infrastructure development, notably energy, transport, skills and technological development

• SMEs will need large amounts of capital for output expansion, technology upgrading and the replacement of obsolete plant and equipment, and

• Special provisions will also have to be made for financing start-ups.

The relative importance of these sources of demand for finance will naturally vary according to the stage of a country's development, its resource endowments, macroeconomic challenges and the sophistication of the private sector. Given the funding constraints, the Action Plan prioritizes those activities most crucial to the successful implementation of the Industrialization Strategy.

The implementation of the Strategy also requires a strong, capable, cohesive and accountable governance body. The Action Plan is of the view that this structure should consist of four interdependent tiers, namely: SADC statutory bodies; national structures; private sector associations; and industry-related Centres of Excellence and Centres of Specialization. A new dispensation is needed, functionally and institutionally. The Strategy and its Action Plan recognize the critical role of the private sector in industrial development. Efforts to create knowledge economies across the region also underscore the role of technological and scientific inputs. The Strategy also calls for efficient functioning and inclusiveness of the industrialization decision-making process. It is therefore imperative that these singular and complementary roles be formalized and institutionalized.

The Action Plan outlines the specific functions of these bodies. In particular, it calls for the reconfiguration of the Industrial Development Forum to consist of Member States, the private sector, think tanks and other stakeholders. The technical capacity of the Secretariat should be substantially enhanced to cope with the heightened coordination and monitoring responsibilities. To this effect, the Action Plan strongly recommends the establishment of an Industrial Development and Trade Directorate within the Secretariat to provide guidance to implementation. In line with this, the industry related functions currently residing in different units would need to be structurally aligned.

The Action Plan Framework (Part II) outlines the numerous actions and policy interventions embodied in the goals and objectives of the Strategy. Without such framework and direction, there is obvious risk that the interventions, while competing for financial, technical and time resources, may not impact synergistically or result in unpredictable outcomes that will inhibit industrial and overall development of the region. To this end, the Action Plan utilizes a number of guiding principles on form and content.

Among the most important principles are:

• A developmental state perspective as an essential driving force for advancing industrialization, while recognizing the critical role of the private sector.

• The strengthening of trade and industry capacity across Member States to support and manage the application of cohesive industrial policy tools.

• Strong complementarity and interdependence of the three strategic pillars of the Industrial Strategy.

• The recognition that targeted outcomes are a function of the quality of deployed assets (physical, human and technological) and policies.

• Prioritization of actions embracing the three growth paths identified by the Strategy, namely: agro-processing, minerals beneficiation and manufacturing value chains development.

• The Action Plan also attaches equally high priorities to removing the three binding constraints indicated in the Strategy (i.e. infrastructure, skills and finance). The prioritization of these focus areas arises from their combined positive impact on deepening regional integration and speeding up the tempo of industrialization.

• The critical need for initiation and sustainability of industrial clusters and regional value chains and their integration into global value chains, including upgrading and deepening of existing value chains.

• The recognition that value chain development and sustainability will depend on a number of parameters, notably: the nature of value chain positioning (raw material, low-tech, high-tech, etc), the extent of value addition; upgrading potential; the willingness of Member States to accept deeper integration; and necessity of longer-term up-scaling from regional to global levels.

• Recognition of the stage of development, size and geographic location of Member States and the need for inclusive industrialization and development.

• The importance of the private sector as wealth creator and policy partner.

• Clarity of requisite responsibilities of the various development agents involved in the development and implementation of the Action Plan.

• The necessity of establishing a coherent and effective industrial development-supporting environment, for the public as well as for private involvement.

The Action Plan templates (in Part II) detail the key actions, organized with reference to the three pillars of the Strategy, and the requisite activities as well as the key enablers needed to unlock industrial potential. Whilst some of these measures and interventions need to be undertaken immediately, the majority target the medium to long term.

Built in the Action Plan is the flexibility of implementation of the Strategy, where beyond collective action on regional projects, national development (a preserve of the countries) would take into consideration the capacities and constraints they face individually. Ultimately, the far-reaching changes and the long-term transformations envisaged in the Strategy (production, distribution, policies, institutions and the global and regional engagements) would assist Member States to converge into the unified and developed SADC economy of the future by 2063. By then SADC countries would be readier to operate and compete at the demanding developed country standards of high business and economic sophistication and innovation.

The total indicative public coordination cost for the Action Plan over the period 2016-2020 is estimated at about 102 million US dollars.

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