DTI Industrial Policy Process Portfolio Committee on Trade and Industry 9 November 2005 Industrial Policy Chief Directorate Enterprise and Industry Development Division

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DTI Industrial Policy Process Portfolio
Committee on Trade and Industry9 November
2005Industrial Policy Chief DirectorateEnterpris
e and Industry Development Division
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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 Africas 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

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Purpose and scope of Industrial Policy

• Define contribution of national Industrial Policy
  to government objectives of
• gt 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

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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)

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Links with other policies and processes

• ASGI, MERS
• Intergovernmental
• Technology NRDS, AMTS
• Infrastructure CAPEX programme, transport,
  energy, telecommunications
• Skills NSDS, SETAs
• Spatial NSDP, Provincial / local sector and LED
  strategies
• DTI initiatives
• Industrial financing
• Customised Sector Programmes
• BEE / COGP
• SMME
• Competition Policy Review
• Trade negotiations

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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

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South Africas 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

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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 (SDIs, CIF, IDZs)
• Sectoral (MIDP, DCCS)
• Exports (EMIA)
• SMME / Coops policies Agencies
• Competition policy (1998 Act)
• BEE policy / COGP

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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
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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

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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

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The changing structure of the SA economy since
1994

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

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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

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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?

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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

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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

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Changes in the global economy

• Share of manufactured products in world trade, by
  technology levels 1976 2000 ()

Source Lall
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Industrial performance of selected developing
economies

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

Source World Bank Development Indicators
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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

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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

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

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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

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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

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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

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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

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Cross-cutting interventions

• FDI/Export promotion
• Targeted promotion strategies
• Driven by CSPs
• Leveraging public CAPEX
• SOEs 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

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Cross-cutting interventions

• Cost structures and competition policy
• Strengthening competition policy
• IPP/telecomms price structures
• SMMEs
• Strengthening existing institutions
• State pay SMMEs 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

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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

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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

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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

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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, SETAs, DoE)
• Macro policy (NT, SARB)