Industrial Policy: public hearings

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Trade, Industry and Competition

01 May 2002
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Meeting report

TRADE AND INDUSTRY PORTFOLIO COMMITTEE

TRADE AND INDUSTRY PORTFOLIO COMMITTEE
2 May 2002
INDUSTRIAL POLICY: PUBLIC HEARINGS

Chairperson:
Dr R Davies (ANC)

Documents handed out
National Labour and Economic Development Institute Submission (Naledi) [see Appendix].
Naledi PowerPoint Presentation

Relevant Document
British Chamber of Commerce in Southern Africa's Comments on the DTI Document "Accelerating Growth and Development: The Contribution of an Integrated Manufacturing Strategy"

SUMMARY
The National Labour and Economic Development Institute presented its submission to the Committee. This signalled the end of the hearings and members flagged key issues to be discussed with the Director General at the next meeting.

MINUTES
Mr David Jarvis, Senior Researcher at the National Labour and Economic Development Institute (NALEDI) presented the only submission heard by the committee during the meeting.

Members put five to six questions to Mr Jarvis, which he promised would be answered in writing. (This will be provided here when Naledi furnishes the document).

The Committee briefly pinpointed key issues highlighted in the submissions, which it will put forward to the Director General, Mr Alistair Ruiters, in the next meeting.

Appendix
National Labour and Economic Development Institute Submission
Public hearings on Industrial Strategy

The National Labour and Economic Development Institute (NALEDI) would like to thank the Trade and Industry Portfolio Committee and the Select Committee on Economic Affairs on Industrial Policy for this opportunity to present this input on industrial strategy.

NALEDI's organisational mission is to conduct policy-relevant research aimed at building the capacity of the labour movement to effectively engage with the challenges of our new society.

NALEDI's role in industrial strategy is long standing but currently consists of, at its core, a programme to assist Labour in its preparation for Sector Job Summits across a number of sectors. Most of the issues that will be the subject of this presentation have come out of our preparations for Sector Job Summits, this has been supplemented by other areas of research that we have recently been active in.

Because we are presenting late in this hearing process, we are not going to reproduce many of the figures which have already been presented in this forum. Nevertheless it is important to highlight a few important issues which we believe are relevant to our approach to industrial strategy.

The 1990s has seen an increase in restructuring within manufacturing and the public sector leading to national unemployment rates of 29.5% or 41.5% in September 2001 (depending on the official or expanded definition of unemployment).

An increasing number of jobs are informal and insecure.

The bulk of the formal workforce earn less than R2 500 a month and the legacy of apartheid in the form of racialised access to work and promotion remains with us in workplaces around the country.

South Africa is rated as having the third most unequal distribution of wealth in the world.

South African manufacturing has seen a rapid decline in investment during the 1990s to rates of around 15% of GDP.

The pillars that inform our approach to industrial strategy include but go beyond performance of corporations and productivity, also focusing on:

Job creation
Provision of basic wage goods for the poor
Development that addresses inequalities such as the position of women, regional disparities, etc.
Democratisation of decision-making within sectors and ownership

We believe that it is only possible to achieve these developmental aims through targeted industrial strategy that is based on conditions that exist within specific sectors. The DTI's integrated manufacturing strategy is a valuable overall strategy but it is how it gets interpreted within sectors, as opposed to across the economy as a whole, that its success will be measured. Rather than a critique of the integrated strategy, the points below are issues that have arisen out of the context of our preparations for Sector Job Summits.

1. Evidence-based policy
For industrial strategies to work, they need to be based on evidence. Sometimes evidence is hard to come by, sometimes generalisations hide truths within particular sectors.

Trade deals
Increased market access is a goal which is predominantly reflected in trade deals. We believe that there is evidence that trade deals are not always beneficial to domestic industry and therefore would like to express a cautionary note. The EU trade deal for example pits domestic agriculture against a highly subsidised EU agriculture, opening our domestic market up to unfair trade.

Tariffs and investment
Lowered tariffs in certain sectors has seen an increase in imports (as negotiated within trade deals) which have, in conjunction with foreign investment seen the warehousing of local production facilities. An example of this is in the dairy industry where local production facilities have been converted to importing and packaging facilities resulting in job loss. Another example of this is in the pharmaceutical sector where de-industrialisation is also taking place as local facilities that used to produce pharmaceuticals are now merely way stations for their import and further distribution. The situation in pharmaceuticals is not assisted by the fact that tariffs on inputs to some drugs are lower for the finished product rather than the inputs, making it unprofitable for local manufacturers to manufacture the drugs locally.

Knowledge
There are different forms of knowledge and their impact on local industry varies. Within both the furniture and pharmaceuticals industries we have, for example, identified a danger to local industry where licensing arrangements and technology transfers can be used as a means of restricting the growth and development of local production. Often local producers may produce under license but only to certain markets. Sometimes local producers may be given access to new technology only to have their market restricted to the supply of the owner of that technology.

In addition knowledge intensive does not always lead to desirable outcomes. New technology in the wheat industry has seen the retrenchment of well-paid quality jobs in bakeries to poorly paid, insecure agricultural work. Simultaneously new technology in the same industry enables more air to be whipped into our bread, resulting in a less nutritious product at an increased price.

Knowledge should be developed locally, should not restrict local manufacturers and should not lead to a decline in product standard for consumers. The focus should be on appropriate technologies that benefit all.

Exports
Exports can be a vital way of accessing new markets for companies facing a decline in local market and a means of earning vital foreign exchange. But this is not always the case. For example in the food sector the goal of food security and the need to provide affordable quality food to the poor is in direct opposition to one of the features of structural change in the food industry. This has seen the targeting of lucrative (niche) domestic and foreign markets and a neglect of basic (mass) food markets within the country. Likewise in engineering the labour absorbing downstream sectors are being squeezed by upstream producers that are free to export and free to charge import-parity pricing with impunity. To exacerbate matters, exports do not necessarily result in income being directed towards the South African economy. This can occur through delayed repatriation or when earnings are kept offshore. A final point to make is that sectors as identified in the integrated strategy as those that are successful exporters are not, necessarily creating employment.

Devaluation
During your deliberations there have probably been inputs that argue that the depreciation of the Rand is an effective enough import barrier. This is a very limited viewpoint that is based on a simplistic analysis.

First it fails to recognise the fact that local industry is integrated into the global economy. The cost of imported inputs that are vital to many manufacturing ventures have increased dramatically with devaluation. Second, many local companies run their sales on a dollar-based principle resulting in a situation where they are now reaping the benefits of devaluation, leading to exploitation of the local market rather than an export incentive (eg. Wheat and paper). Third, local downstream industries (such as in paper and engineering) are becoming the victims of import parity pricing by large monopolistic upstream producers.

There needs to be a flexible approach to measures of industry success that include minimum standards and social objectives as well as 'economic' success.

2. Co-ordination
In the foreword to the integrated strategy there is commitment to co-ordinated action. Nothing could be more important. Industrial policy can only be effective if there is co-ordination across ministries and departments and within the various departments and institutions that effect the industrial policy of the day. The role of DTI industry directorates in such a structure is to co-ordinate the interests of all stakeholders within a sector and co-ordinate different departments within government and State Owned Enterprises. State Owned Enterprises have a particularly important role to play in development focused industrial strategies. The example of Telkom, where a minority shareholder can dictate the policy of an important SOE shows the necessity of ensuring that SOEs are not compromised by short term restructuring goals.

There is a recognition in the integrated strategy that there is a need for a new manufacturing path. We believe it is hard to merely focus on the industrial sector in the abstract. Budget allocations, social services, infrastructure development, exchange controls, tax regimes, monetary policy all impact on the development of industries. Macro-economic strategy needs to go beyond merely the targeting of inflation but should aim for the targeting of job creation, procurement should support local industry, strategies of other government departments must be integrated into sector specific strategies, skills development programmes should be relevant to the future needs of the sector.

Across the Sector Education Training Authorities (SETAs) there is a need to co-ordinate skills development so that it reflects more than just the interests of Business but also focuses on redress and upskilling the un- and semi-skilled workers that are the main victims of retrenchments. In addition Sector Job Summits and other inclusive industrial strategy processes will be vital in ensuring that Sector Skills Plans reflect the needs of all stakeholders in the development of sectors. Across sectors we see businesses treating the skills levy as tax rather than an incentive to train, this impacts even further on skills development within companies. There is a need to extend penalties so that they relate to more than just the non-payment of levies but are used as a whip besides the carrot approach of the grant system as laid out in the Skills Development Levies Act.

Repeatedly we hear Business complain about the lack of accessibility of supply side measures. For example Business has complained that the application documents for some supply side measures do not exist, or they are unaware of supply side measures, or supply side measures are awarded on a discretionary basis. The capacity and effectiveness to deliver policy instruments to those for which they are meant is therefore a vital one.

The role of the State, and in particular, the DTI is one of leadership. The DTI should seek to ensure that co-ordination takes place and that resources are effectively delivered to where they are needed.

3. Capacity Building
There is an urgent need to build capacity within stakeholders as well as within institutions.

The tariff on domestic washing machines for instance is designed to offer some protection to local manufacturers, however, washing machines imported for domestic use are being brought in as industrial grade washing machines through manipulating the tariff definition. In addition Business complains of the delays in anti-dumping investigations. Both these issues point to capacity problems in the BTT and Customs and Excise that need addressing.

The SJS project at NALEDI is doing its part in building capacity to deal with industrial strategy issues within Labour. Sector initiatives are driven by reference groups made up of trade union leaders, research utilises shop stewards both as a source of information and as a driver of research, it is building researchers' skills so that they can grow the capacity of union's ability to engage in industrial strategy deliberations. We believe it is imperative that similar initiatives are taken across stakeholders.


4. Sector Job Summits
The Minister refers to a process of engaging stakeholders and social partners, we believe that the Sector Job Summits, an initiative coming out of the Presidential Jobs Summit, offer the ideal forum for such negotiations.

Sector Summits are a process of consensus seeking based on the evidence at hand within particular sectors and a means of collective engagement for the development of sectors of our economy.

Labour is preparing for Sector Job Summits in a number of sectors. Namely:
Finance
Transport
Construction
ICT
Food Processing
Pharmaceuticals
Petrochemicals
Paper processing
Automobile
Engineering
Retail and wholesale
Tourism and hospitality

Sector Job Summits need to reflect common vision amongst stakeholders for taking the sector forward. It also has to be based on the capacity of stakeholders to take forward such a common vision. More importantly, a Sector Job Summit will be the elucidation of a process of common purpose, therefore it is more of a beginning than an end in itself, leading to processes determined during earlier planning being concretised and put into action, monitored and evaluated for success or fine tuning.

Sector Job Summits will assist in the identification of key growth sectors, resulting in close co-operation with the DTI's strategic work programmes and customised services as proposed in the integrated strategy. The Sector Job Summits will forge the links with the cross-functional teams within the DTI and propose extending these to other relevant departments. They are dependent on the support of all stakeholders, government, business, labour and community.

For Sector Job Summits to work government has to have sectoral teams ready to negotiate and mandating structures need to be set up so that negotiations can be meaningful.

For Sector Job Summits to work we need collective action between stakeholders based on the evidence at hand. This approach is not new. Recently we have seen the collective approach to seeking solutions in industry working well in the restructuring of Spoornet, where collective agreement was used to supercede earlier recommendations of a foreign-based consultancy. At a sectoral level the role of the MIDP in restructuring the automobile industry has been one where collective action has achieved a number of successes.

5. Increase domestic demand
We also cannot neglect the need for increased domestic demand.

There are measures that have been proposed, such as a Basic Income Grant, others such as food stamps are also potential solutions that could address this problem as well as alleviating the severe poverty crisis in our country. In addition, many sectors are dependent on Government expenditure, besides the obvious example of infrastructure development, there is a need for targeting government procurement so that it assists in achieving the goals of the integrated strategy.

Stimulating economic development and meeting the social needs of poor South Africans are two goals that are mutually inclusive. Housing and construction, telecommunications and transport are all industries which can stimulate local production as well as address inequality of access to services.

6. HIV/Aids
The integrated strategy has to include the impact of HIV/Aids. Even if we are to assume that the worst-case projections of deaths as a result of HIV/Aids are exaggerated this does not mean there will be no significant effect on demand within the local economy, spending patterns, increased health costs and an impact on the work force. Some union based research has found exceptionally high incidents of HIV/Aids infections, with one internal union study finding rates of infection as high as 65% within a particular skilled category of worker.

It is a fact that Business is not ignoring the issue of HIV/Aids. Perceptions are behind the very real business decisions that are being made at this moment. For example, future markets are being predicted and production decisions are being directed by these extrapolations. Food manufacturers are determining to shift food production away from basic food stuffs as they predict a declining market, furniture retailers are also making similar predictions and are moving out of the low end of the furniture retail business. Investment is dropping as manufacturers that are dependent on local markets predict a further market decline. Companies are experimenting with new technologies that are more capital intensive as they predict a shortage of skilled labour in the future.

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