Industrial Policy: public hearings

Meeting report

TRADE AND INDUSTRY PORTFOLIO COMMITTEE; SELECT COMMITTEE ON ECONOMIC AND FOREIGN AFFAIRS: JOINT MEETING

Submission by Business South Africa on Integrated Manufacturing Strategy
Presentation by Business South Africa on Integrated Manufacturing Strategy
Submission by Department of Arts Culture Science and Technology
Submission by Competition Commission South Africa (see Appendix 1)

SUMMARY
The presentations broadly supported the DTI's integrated manufacturing strategy particularly on its emphasis on research and development, innovation and information and communications technology. The points of disagreements were not the idea but factual inconsistencies and clarification.

MINUTES
Submission by Business South Africa
Business South Africa (BSA), represented by Mr Baxter, began the presentation. Mr Baxter argued that South Africa's economy was suffering from low sector growth with low savings rates, low investment rate, low foreign direct investment rate and an increasing unemployment rate when compared to its competitors. Moreover, he said that South Africa had a high level of inequality with a Gini Coeffient of 0.59 and he attributed this income inequality to unemployment. He also said that even though there was progress at macro economic level, there was no progress at microeconomic level. He suggested that South Africa needed increased investments particularly at firm level. He reckoned that the supply-side economics was necessary to boost an investment led growth. He listed some factors that drive in and drive out investment. He concluded his presentation by stating that the BSA supported the government's economic, investment and employment cluster approach and that it was advisable to combine both traditional (comparative advantages) and new policy measures toward a high investment led economic growth.

Discussion
A Member asked what process the organisation would go through with its constituency when putting together a position such as the one presented. One of the concerns Members have is that participation at hearings such as these do not tend to attract industrialists or people who have ownership of productions lines.

Mr Baxter explained that BSA had a standing committee on economic policy and tasks teams that were set up to negotiate some issues with the government and organized business. He also said that they produce a paper on a particular issue and take it to back into organised business and invite discussion. A mandate is produced and they do not bring in anything which is not mandated by the committees within organized business within Business South Africa. He also added that the process did not preclude any multisectoral body to produce its own views but that at national level the BSA represented the mandated views of the nineteen constituencies.

A Member asked if increased domestic savings were a prerequisite for economic growth in South Africa as it was suggested to be the case of the East Asian miracle of the Four Tigers.

Mr Baxter agreed that high levels of domestic savings was one of the key drivers of the East Asian miracle but that the problem was that they had no financial intermediation system that could allow them to invest in activities that would enable them to create real sustainable growth. He further observed that in South Africa the situation was the opposite because we had on the best financial intermediation but we had no savings rate. He however, warned that savings should not be seen as the only factor and that South Africa was faced with a savings structural problem strained by a huge demand on the savings and high interest rates. He suggested that low interest rates, low cost of capital, low tax rates and low risk profile attached to the country by investors would lead to broad body of projects that would create jobs and greater return earnings which would increase savings.

Another Member asked Mr Baxter to give an example of a legislative monopoly that has been a shackle in constraining economic growth. She also wanted to know if BSA thought parastatals should be privatised. Moreover she asked if there has been any research and if indicators were available on the claim that Brazil attracted 33 times more foreign direct investment than South Africa, and if so how could South Africa improve on that.

One the first question Mr Baxter made two examples, one of a municipal refuse collector that failed to do the job. Secondly, in respect of ports, the delays and congestion. Such examples were an indication of lack of competition. On the second question, Mr Baxter said that BSA's position with regard to parastatals was that the slant in privatisation in South Africa has been towards strategic equity partners which has not led to increased competition in various markets. It has not led to innovation nor has it led to the introduction of new technologies. It has not led to a major focus on customers. If Telkom is taken as an example, he said he did not believe that all the telephone lines that have been connected in recent times in previously disadvantaged areas are all working today. Half of them have been disconnected because of the relatively expensive costs involved.

If a different route had been taken where contestable markets have been introduced at an earlier stage in the telecom side, the results could probably have been different to what there is at the moment. On the question of Brazil, Mr Baxter said that Brazil had virtually liberalised every sector of its economy in particular steel, mining and energy and that made them attract that much more foreign investment. From the business perspective, it was crucial to create contestable markets, adopt proper technologies and invest in human capital in order to create economic vibrancy in South Africa.

A Member commented that what BSA had presented was prescriptive and was common knowledge in the business world and he suggested that BSA should rather comment on the Department of Trade and Industry's proposed methodology towards participatory and integrated measures towards economic growth. He also wanted to know what BSA thought could be done to improve research and development and staff training. Mr Baxter said that BSA liked the part of clustering of businesses provided there was a degree of leadership and problems solving on the part of business at national level rather than self vested interests.

A Member wanted an explanation why there was little domestic investment if foreign direct investments are also attracted by a high rate of domestic investments. How much did BSA invest in innovation, research and development and information and communication technology?

Mr Baxter said that recent surveys investigating market investment choices by multinationals showed that multinationals wanted to invest in growing domestic markets and where domestic private sector exhibited confidence in the economy and where opportunities allow them to expand globally. Our environment needed to be attractive first to domestic investors and then foreign ones.

On the question of research and development he said that there was a task team looking into that but he had no idea of its progress and it was important to look into the statistics on that. He added that there has been a decline in investment in research and development but he did not know what could be the reasons.

He disagreed that business was not investing in training; they were spending more that the levy required by the National Skills Fund. There are millions of rands from the Skills Fund that the government has not used and he urged the government to use it.

Ms September (ANC) asked for Mr Baxter's view on the recommendations of the King Commission. She also commented that the BSA never mentioned anything on the black business side. She then asked how privatisation of parastatals could help if there was a low rate of domestic savings. To what extent would the industrial strategy proposed by BSA lead to economic growth?

Mr Baxter responded that the King Commission would feed into better corporate governance; better certainty from shareholders and funds would be used properly. He could not comment further on the King Commission. On the question of black business he said that the Black Business Council did not participate in the document but he promised that they would be included in their future engagements. Improved investment would benefit black business and business in general much more.

On the question of privatisation he said that the issue was not the domestic private sector buying parastatals. Rather it was the huge economic inefficiency effect of parastatals on input costs, on the lack of service provision have a huge bearing on the ability downstream users of those services to be internationally competitive. Secondly, because those companies have such a poor investment record in their own right, perhaps the time has come for them to be competing in contestable markets because their investment decisions will improve enormously. On the industrial strategy perspective, he added that beneficiation was an angle where they had done extensive work it could be presented to the Committee if it so wished. He made an example of export minerals by stating, "primary mineral exports in this country constitutes 35% of total merchandise exports. If you include beneficiated mineral products it takes it up to 60%."

A Member commented that the BSA presentation did not make any distinction between domestic investments that recirculates wealth and domestic investment that creates wealth. He claimed that domestic investments did not build industries and wanted to know the proportion of each of the two investments and their contribution to economic growth.

A Member asked if BSA would recommend the breaking down of Mark Steel as the monopoly in steel distribution. Mr Baxter said that he had no details around the issue.

Another Member asked Mr Baxter to give an example of our infrastructural impediment towards attracting investments.

Mr Baxter gave an example of the poor tariffs system such as the ad valorem system that was previously used in South Africa but now gradually phased out.

Submission by Competition Commission South Africa
Advocate Simelane represented the Competition Commission to respond to the Department of Trade and Industry's integrated manufacturing strategy. He made a brief response in which he commented on clarity and interpretation of facts. The Department of Trade and Industry's argument on the relationship between increasing labour productivity and shedding of labour was confusing with regard to the wood and leather products. On value chains, he commented that the Department of Trade and Industry had minimised both South Africa's competitive advantage in certain raw materials and the importance of cheap labour and downplayed trade barriers and transport costs. Moreover, he said that some markets (e.g. steel) are steel guarded against the claim of diminishing access to privileged markets. The Competition Commission agreed with the Department of Trade and Industry's observation that information and communications technology have integrated various stages of production into tighter value chains.

Discussion
Mr Zita (ANC) commented that the Department of Trade and Industry's comments on transport cost indicate that there was no interaction between the Commission and the Department of Trade and Industry before the strategy document was released and he considered that to be an anomaly. He then asked the Competition Commission's position on trade tariffs. He also asked why the Department of Trade and Industry had a general approach to choosing sectors instead of being specific like it worked in East Asia.

In response, Adv Simelane said that in their first submission they indicated the importance of traditional factors of competitiveness such as transport and raw materials and that both traditional and new policy measures are necessary for dynamic economic growth. On the question of tariffs he said that generally the Commission opted for open markets but that since this was a political economy it would be advisable to assess the impact of tariff's protection on consumer surplus and dominant local suppliers. On the last question he said the question as to whether choosing sectors has worked or not, there are many examples where it has worked, but equally economists will debate that there are many examples where it did not work.

Ms September asked whether the Competition Commission's industrial policy was in any way influenced by companies that it has encountered since its inception. She then asked if the Commission's view on trade tariffs was research based. What did the Commission mean by the importance of cheap labour?

Adv Simelane said that the Commission has made use of research based on complaints by consumers and firms against monopolies.

A Member asked if the Competition Commission could see the value of the strategic use of tariffs. He also asked if the Commission could not agree that incentives should not be general but granted on a strategic vision of development. He asked the Commission's assessment of market concentration in the private sector South Africa. Adv Simelane said that the Commission believed in the simplification of tariffs and incentives measures that are based on general rather than specific sectors.

Ms Hajaij asked what other sectors the Commission would include as areas of priority. Adv. Simelane said that it was difficult to assess other sectors.

Mr Zita asked what the Commission had done with the Iscor monopoly.

Adv Simelane said that one must differentiate between the existence of a monopoly and the abuse of dominance by a monopoly and that the Commission responded to complaints against monopolies.

Mr Moosa (ANC) argued that even though the undervalued exchange rate might attract the demand for cheap labour the cost of importing production capital is higher and he wanted to know how could the Commission claim a forty percent protection.

Adv Simelane agreed that an under valued exchange rate could cause high input costs but he said that it depended on the interplay of the inflation rate, monetary and fiscal policy. He added that some industries and sectors would not be necessarily affected by the undervalued exchange rate.

Submission by the Department of Arts Culture Science and Technology
Dr Adams said that the Department of Arts Culture Science and Technology (DACTS) largely supported the Department of Trade and Industry's strategy on the points of common analysis of the past. These were the importance of knowledge, technology and innovation and microeconomic reforms. DACTS' overall argument was that South Africa needed the private sector to finance research and development and innovation based on research and supported by information and communications technology with the aim of redressing past inequalities and improving quality of life.

Discussion
A Member commented that according to a report he had been reading, export led growth by developing countries forced countries to relegate research and development to multinational companies thereby weakening domestic capacity even though export are growing. Was South Africa not in a similar danger? He also wanted to know if the promotion of information and communications technology would not create a digital divide between rural and urban and between rich and poor people.

Dr Adams agreed that it was a big risk to externalise research and development. It was advisable for domestic companies to span the whole value chain to be internationally competitive and added that we need to put policies in place to make sure that research and development was done locally. One the question of the digital divide, he said that he believed that there needed to be a culture of technology in rural areas because technology was not about just gadgets but human imagination that could even solve problems such as access to water.

Dr Davies asked if the incentives for research and development would not ultimately be a role played by the State. He also needed clarity on what DACTS meant by saying that our industrial policy was a mixture. Was there a process in which South Africa contemplated innovation in some untapped segments of information and communications technology?

Dr Adams said that the role of the State in research and development in South Africa still needed to be strong. Countries move in different stages and will have different answers to the question and he asserted that the role to the state was crucial. On policy mixture he meant that there was no concrete planned industrial policy yet but a mixture of approaches.

Mr Zita commended the DACTS's report. Firstly, he wanted to know if there was any convergence between the Department of Trade and Industry's perspective and that of DACTS. Secondly, he wanted to know how South Africa can draw technology and science to people's needs. Thirdly, he asked how much it cost the Department to do undertake it mission that it presented. Finally he asked why the Department did not consider the Bologna model of industrial strategy.

On the first question, Dr Adams agreed that there was a convergence and that the DACTS has added other aspects such as natural resources. On the second question, he said it was not a matter making scientist extension officers and that incubators have been fairly tried internationally. On the last question he said economic regional cluster were a trend internationally and not just in Italy and he saw no reason why clustering could not happen in some sectors in South Africa.

A Member asked what intervention the Department was doing on the poor science and technology preparation of pupils in schools. Secondly, he asked the Department to explain what it meant by "vote for science" and if that could mean establishing a department of science. Finally, he asked if there could be a legislative intervention that would require the private sector to make a financial contribution towards research and development.

On the first question Dr Adams said that it was crucial to align science and technology at all levels of education but at the moment the institutional arrangements are being planned. He added that there was no blueprint in managing technology.

Ms Mohamed asked if there were particular missions that the Department would use to the maximum in the light of the fact that there were structural constraints inherited from the past, and also wanted to know if the outcomes would be measurable. She also asked the Department's awareness and plan about science graduates without jobs.

Ms Hajaij asked at what level the Department intervened in schools with regard to science and technology.

The rest of the questions could not be answered because of time constraints and the meeting was adjourned.

Appendix 1:

ACCELERATING GROWTH AND DEVELOPMENT:
THE CONTRIBUTION OF THE INTEGRATED MANUFACTURING STRATEGY
PRESENTATION BY THE COMPETITION COMMISSION TO THE PORTFOLIO
COMMITTEE ON TRADE AND INDUSTRY
PRESENTED BY

ADV. MENZI SIMELANE - COMMISSIONER

AND MR GEOFF PARR - CHIEF ECONOMIST: POLICY AND RESEARCH

25 APRIL 2002

1. INTRODUCTION

The Competition Commission would like to thank the Portfolio Committee Trade and Industry for inviting us to make contributions to these proceeding. We believe that this process is very important because it gives differ stakeholders an opportunity to also take ownership on the strategy document

The Competition Commission would like to state that the DTI has put together fairly good document. It clearly indicates the focus of our economy particularly the important instruments and sectors that are critical for economic growth.

2. DISCUSSION

(a) Industrial Performance since 1994

The document has significantly improved the analysis of the trends in output exports, employment and productivity in manufacturing since 1994. More clarity can still be provided on these issues, for example, the interpretation of data in respect of wood and wood products and leather and leather products. In document (pagel7), it is stated that labour productivity has risen in all sect except for these two. Reference is made later in the document despite the in productivity, the manufacturing sector has been consistently shedding Iabour. Those sectors that have not shed labour include wood and wood products, leather and leather products. It is quite possible therefore that the fall in employment is being misinterpreted as a rise in productivity and vice-versa. This could be further clarified because, if there has been a rise in demand labour in the wood products sector, a decline in the employment/output ratio only have occurred if there was an increase in output in that sector more than in proportion to the increase in employment in wood and wood products. In case, it appears that there has surely been a rise in productivity in wood and wood products.

As stated, this area of the document can still be clarified.

(b) Value chains

This is one of the areas in the document where clearly the DTI has put a lot of thinking and made revisions, since the first draft.

(i) The importance of South Africa's competitive advantage in certain raw materials is minimised, and trade barriers and transport costs are downplayed. The fact of the matter is that transport costs in this country are still very substantial, particularly in ports and railways, as are trade barriers in for example, steel. Further, the price wedge between import parity and export parity prices remains large for many commodities. We believe that this price wedge both hampers SA exporters in their efforts to supply goods to foreign markets and create the necessary market power for SA suppliers to price at import parity in the domestic market.

(ii) The importance of cheap labour is also minimised. South Africa, with its chronically undervalued exchange rate, can offer cheap labour as a prime attraction for businesses demanding labour, whether it is unskilled, semi-skilled or skilled.

(iii) Privileged access to markets is claimed to be diminishing, but that is not the case where it hurts most. For example, in agriculture and steel, market access is still jealously guarded and continuing efforts by the DTI will be required to prise open these markets.

(iv) 'On the issue of NEW sources of competitiveness', the Commission agrees with the DTI on the crucial importance of ICTs and technology, and that time, efficiency and responsiveness are also becoming more important. We accept that all this technology and electronic communication has integrated the various stages of production into far tighter 'value chains', and that it is important for SA businesses to integrate into these value chains.

What should be done with the document however is to provide more clarity on what all of this signifies for industrial policy.

3. CONCLUSION

The Commission finds the document more coherent in terms of the way it sets out the whole approach to how technology and communication has transformed value chains and clusters of industries and their inter-relationships.

We would also like to emphasis two areas. Firstly the issue of input costs. The DTI clearly envisages policies related to developing the ICT, electricity and transport sectors and also clearly recognizes the efficiency of economic input sectors. In this regard, the Commission, as previously, supports the restructuring of the crucial sectors, to introduce competition and to realize the efficiencies in the value chain that the DTI speaks of.

The second point to emphasise is what we believe to be crucial in ensuring the success of the value chain. That is closer co-operation and interaction between the DTI and other affected government departments. The benefits of the value chain will not be realised if there is no such interaction. We note that the 3 critical input sectors referred to, transports energy and telecommunications, are not only within the ambit of the State control through parastatals but are the domain of other departments. Therefore co-operation between the DTI and these departments cannot be more emphasized.

Thank you for your attention.