DTI Industrial Policy

Process Portfolio Committee

on Trade and Industry

9 November 2005

Industrial Policy Chief Directorate

Enterprise and Industry Development Division

2

Outline

• Purpose and scope of an Industrial Policy• Industrial Policy Vision for 2014• Links with other policies and processes• Industrial Policy development and review process• South Africa’s post-1994 industrial development path• Assessment of post-1994 industrial and trade policy• Lessons from international industrial policy experience• Principles for design of Industrial Policy interventions• 3-5 year drivers of the industrial economy• Unlocking industrial growth and development:

challenges and opportunities• Cross-cutting interventions• Sectoral interventions• Capacity and institution building

3

Purpose and scope of Industrial Policy

• Define contribution of national Industrial Policy to government objectives of:– > 6% growth by 2009– Halving unemployment and poverty by 2014

• Scope of Industrial Policy– Manufacturing + selected services, agricultural

activities– Emphasis on employment-catalysing activities

and value addition– Shift industrial structure to higher value-added– Competitiveness: fundamental to long run

sustainability

4

Vision for the industrial economy by 2014

• Diversify the economy from its traditional reliance on minerals and mineral processing and increase value added per capita, characterised by:– Increased downstream beneficiation– Participation in higher-value activities and value chain

segments– Technological leadership in specific technologies

• Promote a more labour intensive industrialisation path, characterised by:– Sustainable labour-intensive manufacturing and

services sectors– Economic linkages which catalyse employment

creation• Promote broad-based industrial growth, characterised by:

– Greater levels of participation of historically disadvantaged people in the mainstream of the industrial economy (E2 E1)

5

Links with other policies and processes

• ASGI, MERS• Intergovernmental

– Technology: NR&DS, AMTS– Infrastructure: CAPEX programme, transport,

energy, telecommunications– Skills: NSDS, SETA’s– Spatial: NSDP, Provincial / local sector and LED

strategies • DTI initiatives

– Industrial financing– Customised Sector Programmes– BEE / COGP– SMME– Competition Policy Review– Trade negotiations

6

Industrial policy development and review process

• Industrial policy development– Consultative process leading up to

January 2006 (Reference group, Portfolio Committee, Cluster, Minmec, Nedlac, Cabinet)

• 3-5 year “rolling” framework, to be reviewed and revised every 2 years.– Mar - May 2007– Mar - May 2009– Mar - May 2011– Mar - May 2013

• Annual Industrial Policy Programme

7

South Africa’s pre-1994 economic trajectory

• Pre-1994 crisis– Falling GDP per capita– Declining investment rates– Exports concentrated on mining / mineral

processing + low and volatile– Uncritically protective incentive / tariff

regime

8

‘Defensive’ policy response

• Macroeconomic stabilisation• Global reintegration: WTO + bi-lateral trade

agreements (EU, SADC)• Supply side measures

– Investment (THS, SMEDP, SIP)– Technology (SPII, THRIP)– Spatial (SDI’s, CIF, IDZs)– Sectoral (MIDP, DCCS)– Exports (EMIA)

• SMME / Coops policies + Agencies• Competition policy (1998 Act)• BEE policy / COGP

9-8.00

-6.00

-4.00

-2.00

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

GDP Growth Employment Growth

The changing structure of the SA economy since 1994

Annual average sectoral growth in value added and employment (%), 1994-2004

Source: Quantec RSA Standardised Industry Database

10

Industrial performance since 1994

• Manufacturing: tracked GDP growth• Services: increased share in economy• Primary sectors: decline in mining and

agriculture• Low capital expenditure• Growth within manufacturing:

– Capital intensive basic upstream sectors– Autos– Leather, plastics, furniture

• Employment– Overall decline– Shift to services– Shift away from low skilled

11

Industrial performance since 1994

• Exports– Steady growth– Recent negative influence of rand– Resource-based dominated

• Spatial– Continued geographic disparities

• BEE– Slow progress in manufacturing– Faster pace in mining and services

12

The changing structure of the SA economy since 1994

Gross geographic product by primary, secondary and tertiary sector, 2003, Rm

0

50000

100000

150000

200000

250000

NC MP FS NW LP EC WC KZN GP

R'm

PRIM

SEC

TER

13

Recent Developments in the Economy

• Consumption and property boom driven by increased income– Social grants– Employment Equity, BEE– Lower interest rates

• Increased private sector investment• Global commodity boom

– Resource sector growth– Currency appreciation

• Production side of the economy is lagging the consumption side

• Need for an industrial policy response

14

Reflections on post 1994 Industrial Policy

• Successes– MIDP, Technology Programmes,

Increased status of BEE/WE, Certain IDC programmes

• Scale– Were supply side programmes large

enough for structural change?• Scope and prioritisation

– Proliferation of small initiatives– Prioritisation of sectoral interventions?

• Incentives– Additionality– Reciprocity?

15

Reflections on post 1994 Industrial Policy

• Role of medium and large firms• Capacity• Competition policy and industrial structure• Insufficient linkage between sector

strategies and trade negotiation positions

Need to shift to a more “offensive” Industrial Policy based on strong balance sheet and fundamentals

16

Changes in the global economy

• Trade / investment liberalisation• Entry of China and India to global trading

system • Technological advance• H-M tech manufactures predominate• Rapid growth in services, esp BPO• Competition has become extremely fierce

– product and service markets– for investment

17

Changes in the global economy

Share of manufactured products in world trade, by technology levels: 1976 – 2000 (%)

0

5

10

15

20

25

30

35

1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

RB LT MT HT

MEDIUM TECHNOLOGY

LOW TECHNOLOGY

HIGH TECHNOLOGY

RESOURCE BASED

Source: Lall

18-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

China

Vietn

am

Mal

aysia

Polan

d

Hunga

ry

Slova

k Rep

ublic

Korea

, Rep

.In

dia

Singa

pore

Thai

land

Egypt

, Ara

b Rep

.

Sri La

nka

Indo

nesia

Slove

nia

Turk

eyPer

u

Philip

pine

sChi

le

Mex

icoBra

zil

South

Afri

ca

Croat

ia

Ecuad

or

Argen

tina

Parag

uay

Colom

bia

Urugu

ay

Vene

zuel

a, R

B

%

Industrial performance of selected developing economies

Average annual real manufacturing value added growth (%), selected developing countries, 1993-2003

Source: World Bank Development Indicators

19

Lessons from international industrial policy experience

• Historical evidence: developing countries which have grown fastest have not blindly followed the Washington Consensus (although some parts of Washington Consensus are important).

• Rather than restricting their development path only to existing comparative advantage, they have intervened selectively to build competitive advantage

• They have done this through active industrial policies which link state support to economic performance

• This was integrated with other key policies such as macroeconomic, skills and technology policies

20

Rationale for a strong industrial policy

• Developing countries can strategise about their position in the global division of labour, considering their:– Developmental needs– Actual / potential mix of cost structures /

capabilities

• Three essential elements of industrial development have not emerged automatically– Competitive cost structure– Industrial capabilities– Economic inclusion

• Therefore purposive interventions are required

21

Unlocking industrial growth and development (national / sectoral / spatial)

C/L

C = COST PER UNIT OF PRODUCTION; L = NO. OF WORKERS; E = NO. OF ENTREPRENEURS; Y = OUTPUT

Y/L

A

B

C

D

COST BASED INTERVENTIONSCurrency / interest rateTransport / LogisticsCost of labourRegulation

Cost of capitalCompetition policySelected import tariffsWage/employment support

INDUSTRIAL UPGRADING INTERVENTIONSSkillsPerformance linked grants / tax concessionsLeveraging government CAPEX / procurement Industry specific physical infrastructureIndustry specific technical infrastructureCommercialisation of technologiesR&D support

L, E

INCLUSION BASED INTERVENTIONSLabour intensive sectorsBEESmall BusinessSpatialWage/employment support

22

Principles for the design of Industrial Policy interventions

• Due to limited resources, government must target and prioritise its industrial interventions.

• Focus on programmes / projects that will bring about structural change minimum effective scale

• Discovery / identification of market / production failures• Interventions must be aimed at mitigation of these failures• Incentives must be based on reciprocal economic behaviour

monitoring, enforcement, review • Consider economic impact in relation to human and financial

resources required• Use existing institutions in favour of creating new

institutions, wherever possible• State must take risks that private sector is unwilling / unable

to and be willing to recognise unsuccessful schemes• Take into account restrictions imposed by global trading

rules and capacity constraints. However, should not exaggerate these

23

3-5 year drivers of the industrial economy

• Growth: 4 % until 2009 6% 2010-2014• Domestic consumption

– Import demand / replacement– Construction

• State CAPEX programme– Investment effect– Competitiveness effect

• Continued commodity boom (China, India)• Continued upward pressure on currency• Africa growth

24

Challenges / Opportunities

• Challenges– Relatively small (but growing) domestic

and regional economy and buying power– Distance from markets– Price and quality of infrastructure– Skills formation and labour costs– Industry concentration / lack of

competition– Exchange rate– Intense global competition– Insufficient investment in industrial

upgrading, innovation and technology

25

Challenges / Opportunities• Opportunities

– Cumulative industrial capabilities built from long history of industrialisation

– Pockets of technological leadership: e.g. mining capital equipment, chemicals, agro, energy, aerospace

– Natural resources: minerals, agricultural/land, flora/fauna

– Relatively sophisticated infrastructure: transport, ICT, financial

– Build economies of scale for export– Increased public investment expenditure– Growth in domestic buying power– Rest of Africa– Range of institutions have been built– Industries / activities with intermediate barriers to entry

26

Cross-cutting interventions

• Revision of industrial finance focus / targeting– Sectoral– Industrial / technical infrastructure– World Class Manufacturing– Commercialisation of technologies– Link equity to growth

• Trade policy / market access– Integrate with CSPs– Multilateral participation, esp. NAMA– Broader range of bilateral engagements, incl.

trade and investment/resource agreements (China, India)

– Tariff regime, esp related to input costs

27

Cross-cutting interventions

• FDI/Export promotion– Targeted promotion strategies– Driven by CSPs

• Leveraging public CAPEX– SOE’s: Transport, Electricity– Housing, Taxi Recap, Gautrain …– State procurement

• BEE / WE– Deepening BEE / WE– Linking BEE / WE more closely to growth

• Industrial upgrading, technology & innovation– World Class Manufacturing– Commercialisation of domestic technologies– Technical infrastructure– AMTS

28

Cross-cutting interventions

• Cost structures and competition policy– Strengthening competition policy– IPP/telecomms price structures

• SMMEs– Strengthening existing institutions– State: pay SMME’s within 30 days

• Regional industrialisation– Sophisticated approach– Targetted high potential regions– Dedicated regional fund?

• Africa– NEPAD strategy

• Skills development– Integration between industrial and skills policy

29

Sectoral interventions: CSPs

• Resource-based / Beneficiation: metals, chemicals / plastics, machinery & equipment, oil & gas, jewellery, paper & pulp– Input costs– Technology– CAPEX programme– Global subsidies/distortions

• Advanced Manufacturing: autos, aerospace, rail / marine, electronics– Deepening value chains (autos)– Leveraging existing capabilities (aerospace)– Technical infrastructure (tooling)– FDI promotion

30

Sectoral interventions: CSPs• Labour intensive sectors

– Diverse set of sectors– Growth strategies: sectors with good prospects– Restructuring strategies: sectors in decline– Regional/spatial implications

• Selected Services– Business services / BPO– ICT– Telecommunications costs – Engineering, Procurement and Construction services (link

to manufacturing)

• A CSP process to identify new employment generating and value-adding sectors and/or activities

• Strengthen CSP process to achieve alignment between sector strategies and industrial policy– Trade policy– Design and targetting of incentives– Engagement with provinces / local authorities

31

Capacity / Institution Building

• Improve design and administration of industrial financing• Establish Industry and Trade Policy Advisory Council

(ITPAC) to Minister• Short term: re-organisation for internal efficiencies

– Consolidate sector strategy/implementation and incentive design

– Link sectoral capacity in IDC and universities / research bodies

– Match short term interventions to current capacity• Medium term: capacity building

– Establish Trade and Industry Policy Centre(s) of Excellence at universities / research institutes: research and training of post-graduate students

– Programme for recruitment, retention of key Industrial Policy staff

32

Capacity / Institution Building

• Greater strategic direction / management of agencies• Inter-governmental fora to increase policy coordination

and develop task teams– Vertical coordination

• Sectoral interventions and functional incentives (provinces and metros under CSPs)

– Horizontal coordination• Infrastructure / Public CAPEX programme (DPE,

DoT, IDC)• Technology (DST, CSIR, SABS, SAQII)• Skills (DoL, SETA’s, DoE)• Macro policy (NT, SARB)