In his State of the Nation address in February 2007, President Thabo Mbeki announced some stimulus towards the industrial policy strategy totalling over R7-billion in tax incentives and support. This was followed by some details in the Budget Speech provided by Minister of Finance Trevor Manuel in the subsequent week.
All these were preceded by the Cabinet Lekgotla’s July 2007 endorsement of the Industrial Policy Action Plan for the implementation of the new industrial policy framework (NIPF). The industrial policy action plan of has prioritised four sectors, namely:
Furthermore, the President indicated that other sectors that have not developed strategies are not excluded. These are mining and mineral beneficiation, agriculture and agro processing, information and communication technologies and others.
Objectives of NIPF
The NIPF is implemented to achieve the following:
The main concern with NIPF is that it lacks the details on how these objectives are going to be achieved and some appear to clash. For instance, the objective of creating knowledge economy sounds like it is in conflict with the increase in participation of previously disadvantaged individuals.
The knowledge economy requires participation of a highly skilled labour force, yet by definition, previously disadvantaged individuals were denied opportunities to gain necessarily skills. Furthermore, the action plan is silent on how productive capacities will be built in Africa. Although it is possible to use different vehicles to achieve both objectives, for time being they appear to be in competition for the resources required.
Interventions
For the industrial policy action plan to be effective in putting the country on the growth path, its objectives should aim at addressing the current blockages in the economy. The strategy identified supply-side constraints which include:
Most of these constraints require government action for solution. This implies that for the action plan to be effective it will involve mostly government intervention. The Department of Trade and Industry, as the custodian of both trade and industrial policies, designed the strategy in such a way that it will have to intervene to support job creation.
Some of the government actions include strengthening of the Competition Act and development of state-owned enterprise pricing and procurement to deal with monopolistic pricing. Tariff reviews will be needed to possibly reduce the cost of doing business in downstream manufacturing.
In terms of state investment and infrastructure development, the industrial policy received a shot in the arm from the Minister of Finance through a massive allocation of over R8-billion to public transport, roads and rail infrastructure. Investment in public transport and road infrastructure is further spurred on by South Africa’s commitments to hosting 2010 Soccer World Cup.
There seem to be a lack of harmonisation between the sector strategies and trade policies. For example, as much as effective road infrastructure and public transport can help reduce some constraints, the action plan does not give details of how it links with the automotive sector, considering that the latter has been supported since 1995 and has billions invested. This would be an opportunity to link it with other sectors.
Secondly, the trade policy has few instruments remaining as tariff measures are continuously losing their effectiveness as a means to drive strategies like this one due to commitments, like the World Trade Organisation and the liberalisation process. Only tax incentives and direct support seem to be the only viable means to make it effective.
Attracting foreign investors
It is clear that the strategy is to be used to attract foreign direct investments. Developments at the industrial processing zones, tax incentives plus exchange control reforms aim to create an investor-friendly environment. However, the amount of regulation and intervention required to implement the NIPF might not provide a positive signal. Businesses prefer few regulatory burdens, especially if small and medium enterprises are also to
be encouraged. There is a lot of balancing required to attract and keep investors.
Lessons from elsewhere
The NIPF appears to have drawn mostly from the East Asian industrialisation model. The Asian Tigers implemented their strategies while they still had full control of their trade policies and could provide protection to sectors as they required. Nowadays there are limitations on the extent to which a country can use those measures.
Secondly, they emphasised investment in education and it would be logical that, given the skills shortages and unemployment in this country, NIPF would have given that more emphasis. However, only in few cases that involve reviewing of targets and institutional skills does the Department of Education get mentioned. To make things worse, none of the key action plans are led by the Department of Education.
Another surprise omission is mineral beneficiation from the prioritised sectors. Successful industrial policy initiatives are based on the country’s comparative and competitive advantage. And there is no doubt that our mineral resource endowment would have provided a strong base for the strategy. High commodity prices of the recent years would have provided additional impetus.
Right direction
There are commendable steps that aim to remove blockages at border posts and harbours, expand container terminals, and construct liquid pipelines and, obviously, new power stations. This will facilitate trade by reducing delays at the harbours as well as reducing administration costs, and thus general cost of doing business.
Now that the NIPF has been launched, it needs disciplined implementation. The regulatory environment needs to be neutral and efficient to eliminate any uncertainties and rent-seeking possibilities.
