Covid-19 laid bare the failures of South Africa’s efforts to industrialise, which had remained, at least in theory, a cornerstone of the country’s macroeconomic policy since its transition to democracy. Photo: Kevin Sutherland/Bloomberg/Getty Images
Much of the world has heralded the return of industrial policy, which fell out of favour in the early 1990s when the likes of the World Bank and the International Monetary Fund (IMF) embraced the free market approach to development.
In recent years, we have seen some of the world’s most powerful economies throw their weight behind industrial policy as they navigate the pandemic’s aftermath and the various geopolitical ructions that have ensued.
As was the case in the rest of the world, Covid-19 laid bare the failures of South Africa’s own efforts to industrialise, which had remained, at least in theory, a cornerstone of the country’s macroeconomic policy since its transition to democracy.
While many other countries have put resources towards addressing these shortcomings, South Africa risks falling behind — a predicament which stands to further undermine its position in an ever more perilous global economy.
Earlier this year, researchers at the IMF published data showing that industrial policy has dramatically risen in prominence in public discourse over the last decade or so.
“This renewed interest comes as governments have sought effective tools and strategies to remedy the fallout from multiple, compounding crises — sluggish post-financial crisis growth, the Covid-19 pandemic and associated supply disruptions — coupled with intensifying geopolitical tensions and conflicts, including over territory, resources and leadership in new technologies, that have raised the spectre of geoeconomic fragmentation,” the IMF paper observed.
Adding to this increased interest is the fact that governments have also been forced to finally put in place climate mitigation strategies, the paper added.
US president Joe Biden’s Inflation Reduction Act (IRA) is perhaps the most prominent example of this revived inclination towards industrial policy.
In 2022, ahead of the legislation being passed, esteemed economist Joseph Stiglitz wrote that, while imperfect, the IRA would go a long way towards addressing long-standing flaws in the US economy.
The legislation — which is key to the Biden administration’s efforts to spur investment in clean technology manufacturing — seeks to bring down inflation over the long term by boosting the economic superpower’s competitiveness and industrial productivity.
Other Biden-era legislation, the Bipartisan Infrastructure Law and the CHIPS and Science Act, have similar objectives.
A decade prior to the IRA being signed into law, Stiglitz reportedly remarked that “industrial policy used to be a four-letter word at the World Bank” at a conference on industrial policy in Africa, held in Pretoria.
Stiglitz — who had previously served as the World Bank’s chief economist — co-wrote an essay reflecting on the Pretoria conference. It opened with an account of Nelson Mandela’s efforts to convince his comrades of the need to launch an armed resistance.
While many initially opposed this strategy, Mandela eventually got his way, but soon had to come to grips with the daunting task of seeing it through.
“Many economists who have long argued in favour of industrial policy — defined as a policy by which governments attempt to shape the sectoral allocation of the economy — now find themselves in a similar situation,” the paper continues.
“After long suffering from benign neglect if not outright contempt by some of their self-proclaimed ‘mainstream’ colleagues who long dismissed it disdainfully, industrial policy is almost fashionable again.”
The essay cited work by economist Jean Imbs, who wrote on the premature deindustrialisation of South Africa — a subject which has been taken up by a number of authors since. In said paper, Imbs noted that the country’s deindustrialisation began in the early 2000s amid increased investment in the services sector.
The department of trade and industry recently cited Stiglitz’s work in its 2023 annual performance plan, which underlined the administration’s efforts to follow the path of a number of other countries and revive industrial policy.
But this proposed revival has not been met with the requisite investment — as fiscal policy has become increasingly out of sync with industrial policy amid the intensification of austerity.
Following the recent budget, which entrenched the government’s post-pandemic austerity programme, Neva Makgetla, a senior economist at Trade & Industrial Policy Strategies, noted that it inflicted deep cuts on the department of trade and industry.
More broadly, the economic vision set out in the budget “downplayed efforts to promote more inclusive industrialisation”, she said.
According to Makgetla, the budget reduces the department’s spending by 14% in constant terms. “These cuts continue a sharp downward trend from 2022,” she adds, noting that the department’s budget shrank by 30% between the 2021-22 and 2024-25 fiscal years.
The department’s incentive programmes — aimed at promoting more competition and innovation — have borne the brunt of these cuts. Makgetla shows that the budget for the incentives division is expected to fall by 30% in the coming year.
She further notes that the treasury’s current stance places initiatives to restructure the economy on the back burner, with the word “industrialisation” mentioned only once in the budget.