Department of Trade and Industry's Industrial Policy

Meeting report

TRADE AND INDUSTRY PORTFOLIO COMMITTEE; ECONOMIC AFFAIRS SELECT COMMITTEE: JOINT MEETING
29 May 2001
DEPARTMENT OF TRADE AND INDUSTRY'S INDUSTRIAL POLICY

Chairpersons: Dr Davies (Portfolio Committee) and Mr Moosa (Select Committee)

Documents handed out
Driving competitiveness: An integrated industrial strategy for sustainable employment and growth
Presentation of DTI's Industrial Strategy (Powerpoint presentation)

SUMMARY
The Department is adopting an integrated industrial strategy as set out in the framework document, "Driving competitiveness: Towards a new integrated industrial strategy for sustainable employment and growth".

Integrated means a mix of non-production activities with production activities. By integrating they will increasingly say that services are a traditional part of manufacturing. With regard to manufacturing, the strategy is not to bank on cheap labour; forget protection; pay attention to innovation; enhance knowledge capacities

In terms of the integrated approach the Department is not advocating a gigantic structural shift to a new economy nor are they moving in a completely new direction. They want to keep the best of the old and gradually they will find new direction.

MINUTES
Introduction by Minister Erwin
The framework document which the Department has compiled sets new directions and consolidates activities which have taken place so far. They have done extensive analysis of changes taking place in a global economy and also the responses of the South African economy. Changes in the global economy are real: these changes can be positive, but not automatically positive. Without a response from the Department, changes in the global economy can have a negative impact.

The gap between the rich and the poor in countries is growing and not diminishing.
It is clear that development in the world economy is very uneven. This is not only a phenomenon in developing countries. It is also evident in developed economies. In the European Union for example they develop programmes to deal with this. Marginalisation of an economy can be rapid. The Minister outlined the thrust of a coherent response to this:
- a development programme, and
- having a macroeconomic policy that is sound and robust.

There is a need for strategies to bring about socio-economic power, especially around black economic empowerment.

The central issue of employment must be addressed. The Department is not suggesting that this industrial strategy will address all facets of unemployment but it is a necessary pre-condition for employment and growth.

"Driving competitiveness: Towards a new integrated industrial strategy for sustainable employment and growth".
Dr Kaplan (Chief Economist: DTI) said that the Department would like people to respond to this document. They can do so by emailing [email protected] under the subject head ''IS Comments''. The document is a framework paper. The key is to maintain flexibility within a broad framework. The paper has policy indicators. The paper balances flexibility and predictability.

To be competitive in the market place manufacturing firms do not focus solely on production. They also have to look at marketing, innovating products, and so forth. A firm must also be involved in the non-production area to be competitive. As firms enter into non-production activities they enter into relationships with other firms (for example, inorder to market their product). SA needs a strategy that looks at all the key inputs.

DTI policy (in the paper) has a broader ambit than manufacturing. One must go into the broader area. Therefore one will need new policy instruments. DTI will have to enter into agreements with other firms. Thus there is:
- broader scope
- new relations within government to achieve an effective industrial strategy.
Broadening scope is a global trend.

Policy toward markets
The global market is expanding. Global trade is rising faster than the national income. There is a massive increase in the globalisation of firms and markets are productive. There are some advantages to this. Market competition offers lower prices for example.

There are also limitations to the market. Public interest must be taken care of. Markets (if left to themselves) will under-perform in a number of key areas. These areas are specifically in skills, technology, and innovation. Skills are important for firms. If they under-perform then government must do something.

Efficient markets must be balanced against other needs. The Competitions Authority may allow uncompetitive behaviour for particular objectives. These objectives are for SMMEs, Black Economic Empowerment, and employment.

Employment
Unemployment is a market failure. What does government do when the market fails?
Employment creating areas are not only in industrial policy but one needs a competitive industrial sector as a prerequisite. It makes other policies of employment possible. The manufacturing sector is not that important for employment. Technology displaces labour (especially unskilled labour).

The State is the regulator (it is not the producer of goods and services). Effective regulation requires co-operation across government.

Globalisation provides many benefits but it is skewed toward the strong. They want to secure:
- better access to markets of industrialised countries.
- also to change the rules of the governing of the global international market
How will this be done? They will engage in negotiations toward this objective.

Competitiveness
The Department liberalised imports and encouraged exports. Firms therefore experienced more competition.

DTI’s past approach was logical but it had problems. Perhaps they should have had fewer programs (multiplicity was bad). They needed a consistent framework. They looked at international best practice and SA borrowed from this. However there were no clear goals and objectives and there was no monitoring and evaluation. In the future all policies will have stipulated goals. They must have monitoring and evaluation.

What was the performance?
- Manufacturers have increased their exports. Firms tended to be more export oriented. The unit value of exports has been rising (it shows that firms are moving up the value chain).
- Labour productivity has been rising
- The numbers of manufacturing areas - investment has been high
Overall on the investment front, the performance has been poor.

Manufacturing - Employment
Over the last five years employment in manufacturing has declined by 11.5%. This is a major cause for concern. Why have jobs been declining? Jobs are gained through the increase in exports which makes up for the jobs lost through the increase in import penetration.

If the Department continues with the existing policies it will result in some failures and some successes. The same pattern of specialisation (as is currently the case) will continue. Therefore they will continue with the broad thrust of policies but they will have to add to the ''armoury''. The common denominator is knowledge and skills. South African manufacturers must develop in new areas. They must pay attention to innovation and enhancing knowledge and capacity.

The Department is not moving into a completely new direction. They want to keep the best of the old. More gradually they will find some new direction. This is called the integrated industrial strategy. Integrated means one must mix non-production activities with production activities. It also means that one must integrate across the region.

The broader social concerns are black economic empowerment, SMMEs, and employment. Is there capacity to do this? The Department believes that there is capacity. There are some good firms in the ICT areas but there are also some constraints.

Currently the skills base is too narrow. One of the policies the Department wants to follow is to fast track skills development. Gender and race representivity is skewed. The brain drain and HIV/AIDS are also concerns.

The framework document has as a counterpart a major restructuring of the DTI. There will have to be mentoring and evaluation.

Concluding comments by the Minister
The statistics here relate only to the manufacturing sector. In the whole economy there will be differences in many areas. Pressures on the manufacturing sector are worldwide. The Department is not advocating a gigantic structural shift to a new economy. All sectors (for example, the mining sector) will have to incorporate these new systems. They need to make this technology available to all parts of the economy. They are talking about integrating information technology into all parts of the economy. By integrating they will increasingly say that services are a traditional part of manufacturing.

Discussion
Mr Zita (ANC) said that they must note the remaining strengths of manufacturing.
He asked about the industry and employment equation. In South East Asia for example there are too many jobs (even though they are low paying). He asked for an explanation of job absorption.

The Minister replied that they are not abandoning manufacturing. All industries, that SA is strong in, must integrate with IT and ICT to remain strong in that industry. They need knowledge and skills to continue having competitive advantage. For example the steel industry must produce perfect steel.

Korea and Malaysia have had different industrial paths. If one looks at the clothing industry in SA, for example, then one must find out from a regional point of view how to improve the industry. How can one get better wool? They are not talking about abandoning existing strengths but only to strengthen it.

Mr Moosa (ANC, Gauteng) asked about the employment graph versus the industry productivity graph. The danger with a general graph is that there are some sectors with increased productivity which could be employing more. He asked if they had done an analysis to show which individual industries have shown a growth?

Dr Kaplan replied that if they unpack individual sectors (sectorally) then different numbers do emerge. It is true that performance has been uneven. It has been especially weak in unskilled labour intensive areas. Paying attention to particular sectors is important (and that is not in this document).

Mr Moosa commented that a more comprehensive industrial strategy should be two-pronged. Firstly it should strengthen the economy - as the presentation suggested today. Secondly they must also develop labour-intensive sectors which require low input to cater for the largest part of the population that have no skills.

Dr Davies (ANC) asked if primary sectors are losing jobs, then from where are the jobs going to come? Which government department or structure is responsible for low-skilled labour absorption?

The Minister replied that jobs come from continual backward linkages into sectors. The State should focus on investing heavily in the basic infrastructure of very poor areas. Information and technology are exciting areas. Information and communication must be accessible to these people. They can then grow from there.

Where will the jobs come from? Dr Kaplan replied that the labour will not come from the areas where there is very high technology or very cheap labour. The key area for a competitive advantage in manufacturing is positioned somewhere in the middle.

Mr Rasmeni (ANC) asked what the Department's approach was regarding people outside the labour market (and those who have been laid off from industries).

Dr Kaplan replied that these issues will be picked up in the Employment Paper. They did not want to address all these issues in one paper because they thought they would be diluting the paper.

Mr Zita asked if the Department was going to do anything about the capital goods industry. Further, how were they going to bring about the "technological route" for companies?

Dr Kaplan replied that the industry responds to greater investment in the domestic market. The Department has a capital goods section. Regional and domestic policies may be the best way to give this sector a spur. They are not advocating more direct intervention.

How must companies be encouraged to innovate? Dr Kaplan said that they need to think imaginatively here. Perhaps the best way is to give firms a tax incentive. They must incentivise firms to undertake that innovation. The Deputy Minister, Ms Lindiwe Hendricks, added that there are incentives in place to encourage firms into ICT and to innovate although these incentives may not be well-known.

Mr Lockey (ANC) commented that while knowledge intensivity is necessary the Department must also explore things beyond this. For example, the South African platinum industry can be developed. He pointed out that fifty percent of diamonds come from SA but Israel (which has no diamonds) are the world leaders in diamond cutting. Government must work with mining houses to develop these skills or they must import these skills. While one must switch to a knowledge-based economy one must also explore creating mass employment.

Dr Kaplan said that Mr Lockey was right. There is no refinement of platinum in SA. Israel has the skills, the people, and the training. The question is how does SA train people to ensure that it has the skills and the knowledge. The policy to move downstream will also be knowledge-based and it will be difficult to implement. These are policies about knowledge and skills, it is knowledge-intensive capacity. The skills are in short supply - not the raw materials.

The meeting was adjourned.