In the first of a series of articles on economic policy, Asghar Adelzadeh of the National Institute for Economic Policy looks at industrial development
South Africa’s industrial development has been and remains deficient, with serious problems: a lack of capacity in intermediate and capital goods; an aged capital stock, reflecting limited investment in the past; declining shares in critical world markets for manufactured exports; a lack of integration across sectors; limited skills and employment opportunities for the workforce, complemented by poorly trained and inadequate management; a highly concentrated pattern of corporate ownership that straddles the economy as a whole and not just industry; an institutional structure and governance that continues to reflect the economic and industrial imperatives of the past; and a highly skewed distribution of economic and industrial activity within South Africa and across the region as a whole.
In addition, inadequate finance for industry, co-ordination of investment across sectors, formulation, implementation and monitoring of sectoral strategies, and co-ordination across government departments and other agencies raise concern; as do corporate strategies inconsistent with the policies required for industrial reconstruction; and macro-economic policy that is unduly influenced by short-term financial rather than longer-term economic imperatives.
Specifying the scope and content of industrial policy is extremely difficult. Almost any economic policy of any significance is liable to affect industrial performance and, consequently, can be considered to constitute a component of industrial policy. Even those who would seek to minimise the role of industrial policy, in preference to favouring the market and avoiding state intervention, can be interpreted as adopting an industrial policy of a particular type.
Moreover, the sensitivity of industrial performance to a range of influences means that policies that directly or indirectly affect research and development, training and skills, regional distribution of economic activity, for example, also qualify, at least in principle, as industrial policies. Such side-effects are, for example, especially important in the case of macro-economic policy, industrial relations and labour market policies.
As a result, it is necessary neither to take a fixed nor a limited view of what constitutes industrial policy even though this has happened traditionally in South Africa as elsewhere.
In formulating an industrial strategy, the following should be given the highest priority:
Role of Investment: Through a variety of overlapping mechanisms – for example scale economies, externalities, economic linkages, spill-over effects, learning by doing, research and development, education and training, evolving entrepreneurship – investment and growth have the potential to be self-sustaining and mutually reinforcing.
From the perspective of industrial policy and the central role to be played by investment, the weakness of the government’s position stands out sharply in its macro-economic policy, especially the growth, employment and redistribution [Gear] strategy.
While it should be commended for emphasising the need to raise and sustain the level of investment, it is sorely deficient because the strategy is heavily oriented to improving business confidence, and is overly optimistic with respect to the responsiveness of investment to the strategy. This is hardly surprising given that the main orientation of Gear is to hit macro-economic targets, such as the fiscal deficit, with an implicit presumption that doing so will suffice to induce appropriate levels of effective investment.
Role of Finance: One of the key issues in determining investment is the role played by the financial institutions in mobilising and deploying funds. International evidence suggests that the nature of a financial system is crucial in determining the levels, composition and effectiveness of investment. The South African financial system is generally acknowledged to be deficient in promoting appropriate industrial investment and policy. Serious consideration must be given to relations between finance and industry. An investigation into industrial policy should be undertaken with a particular emphasis upon the role played by finance for industrial investment.
Among issues to be investigated are the past, present and prospective sources of finance for investment and the institutional arrangements governing the relations between finance and industry, covering both macro-economic and micro- economic issues, distinguishing between different sectors and enterprise scale and type of ownership.
Role of Foreign Investment: Also to be explicitly addressed is the role played by direct foreign investment, drawing upon best practice in assessing the net socio- economic impact of such investment. There should be no presumption that the overall impact will be significant relative to what needs to be provided from domestic resources, and investments need to be carefully assessed in the light of sectorally specific circumstances and outcomes. An undue courting of direct foreign investment will be damaging to policy making more generally, and will engender support for policies that could even weaken investment from domestic resources.
Role of Trade Policy: Policy makers have in general pursued trade liberalisation beyond the level even required by the Uruguay Round of the General Agreement on Tariffs and Trade. This is despite the negative impact on some industries, and the failure to formulate and put adequate supply-side policies in place before liberalisation.
The justification for, and impact of, trade liberalisation has rested to a large extent on the calculation of effective rates of protection. These are, however, ill-founded conceptually in how they have been calculated, and as a guide to policy in their imputed effects.
In particular, they take no account of dynamic and static economies of scale and scope, excess capacity, capital-labour intensity, market structure, presence of multi-nationals, skill requirements of the labour force and management, developments in world markets, product differentiation and quality, commercial risk, age structure of capital stock, the differential impact of non-tradeables, and the substitution between capital and labour in production in response to changing input prices.
Rather than assessing trade independently of industrial policy, the two must be integrated, with neither logical nor sequential priority attached to trade policy. Exactly the opposite is happening in South Africa. The process of dismantling protection preceded the election of the ANC government and is to gather momentum under Gear.
It is essential that appropriate sectoral industrial strategies are put in place, insisting upon co-operation from large business if necessary, prior to any further trade liberalisation.
Implementation and Monitoring: As important as the formulation of policy is how it will be implemented and monitored. The choice of particular policies does not guarantee that they will be adopted at all nor in the way in which it was intended.
In addition, policy can never be specified in complete detail so there is always flexibility in interpretation and in practice. Who participates in the implementation of policy and how thus becomes crucial. Clearly, government will play a major role in general but its role will depend upon the institutions with which it works, the capacity of those institutions and their staff, and the way policy is put into effect.
Ideally, implementation and monitoring of policy should overlap considerably. One particular role that can be played by monitoring is in ensuring that broader goals are targeted and achieved whenever government intervenes through industrial or other policy. In the context of contract compliance, for example, government as a major customer of industry can impose a number of conditions on its suppliers in order to implement and monitor policy, over and above the traditional concerns of price, quality and delivery time.
Contracts may usefully incorporate requirements on the development of education and skills, security of employment, the development and sharing of technology, affirmative action, and observance of general government policy and specific sectoral policy, such as export targeting.
Some of the above issues are already high on the government’s agenda but others are not. Even where they are high on the agenda, sufficient attention is not always paid to their impact on industrial policy. Moreover, too great an emphasis has been placed on less important determinants of a successful industrial policy, such as promoting a spurious business confidence, privatisation and mega-projects.
In short, there is a need for an industrial policy that gives top priority to the above issues and ensures that efficient, effective and equitable policies are adopted within the context of larger objectives of meeting basic needs, generation of employment, education and training.
South Africa could itself take a lead in the formulation of a new agenda for industrial policy, to its own benefit as well as to the advantage of other developing countries, especially those in Africa which have been least affected in practice by the new currents in development policy.
This is based on a paper commissioned by the National Institute for Economic Policy from Professor Ben Fine of the School of Oriental and African Studies, University of London