Cost & outcomes of Industrial Development initiatives: Parliamentary Budget Office briefing

Meeting report

Parliamentary Budget Office (PBO) briefing: 1994 – 2015

Mr Rashaad Amra, PBO Economic Analyst, said industrial policy, in context, was state intervention in the economy to promote economic development. This was done through the allocation of resources which took the form of subsidies, tax breaks and support in the development of high value-adding industries, the protection of infant and vulnerable domestic industries, the support of labour-intensive industries to reduce unemployment, the economical exploitation of the country’s natural resources and the incentivisation of industries to pursue more environmentally friendly pathways to growth.

It was necessary to consider the outcomes of industrial initiatives in order to not only evaluate the efficacy of industrial development, but also to identify opportunities. This allowed the legislature to prioritise better, to make informed decisions on whether or not to continue programmes, and to determine alternative means to achieving ends.

South Africa’s approach to industrial policy had seen a gradual shift in focus since the advent of democracy in 1994. The policy had shifted from a simple focus on the development of the manufacturing industry to more of a regulation of competitiveness and implementation of enhancement programmes in the manufacturing industry.

From the period of 1994/95 until 2014/15, overall resource expenditure had been R4.1 billion for transformation, skills and employment, R6.7 billion for motor vehicles and components, R6.7 billion for small business, R4.2 billion for export promotion, R7.9 billion for spatial development, R4.9 billion for clothing and textiles, R17.8 billion on sector specific support and R32.1 billion on general manufacturing.

Mr Brandon Ellse, PBO Financial Analyst, described the sector performance over the sample period in the various sectors of manufacturing, and provided insight into the various policy instruments injected into the respective industries and their objectives.

Mr Amra said the PBO estimated that since 1994, R291 billion (R84.3 billion in expenditure and R207.3 billion in tax expenditure) had been dedicated to industrial policy, with the majority of support leaning toward manufacturing, automobiles, and clothing and textiles. Despite the investment and relative growth of these sectors and exports since 1994, employment rates had continued to fall. A large contribution to this had been that sectors were becoming increasingly less labour intensive, with industrial equipment and technology replacing human skill and labour. Productivity was thus being driven by an increase in capital, rather than an increase in labour.

Prof Mohamed Jahed, PBO Director, suggested that he be allowed to substantiate the information that had been given to the Committee with some economic theory. He said that the period covered, from 1994 onwards, had been a period of huge change, not only in South Africa, but also in the global economy. The increased integration of Asian economies was, in a sense, doubling the workforce of the global economy. These economies used to be kept fairly separate, but there had been huge competition for developing manufacturing capability in Asian economies as developing countries. If one looked at sectors where support has been provided for a long time, one could actually see progress linked to the change in employment statistics in countries like South Africa. The career paths of many employees had now changed, because a lot of the work had been outsourced. Part of the decline in employment was linked to industrialisation, but also to a global phenomenon.

The second change in the global economy had been increased concentration along global value trends. What has been seen since the 1990s is an unprecedented number of mergers and acquisitions across economies. This has occurred where firms had also restricted how they responded to global value trades. If South Africa wanted to keep playing a role in the global economy, it needed to be integrated into the global value changes. 

Discussion

Dr M Figg (DA) asked Prof Jahed whether the policies had been designed for South Africa to participate in the global economy, and whether industries had evolved enough in comparison to the objectives identified in 1994. He also questioned, for interest sake, whether SA’s economic downturns were more or less congruent with global downturns. He added that any policy ought to be to the benefit to the country as a whole but that in his opinion, too few people were benefiting to the exclusion of the greater citizenry. He asked Mr Amra for a distinction between financial and economic costs, and questioned the use of the gross domestic product (GDP) multiplier.

Mr Amra responded that in business cycles, there were upward and downwards phases and that SA’s position was comparable to the global economy. Regarding the use of the GDP multiplier, it was an equation which involved a GDP deflator, taking into account expenditure and inflation.

Ms E Louw (EFF) emphasized that government needed to have a look at the report and re-evaluate the policies already in operation.

Dr C Madlopha (ANC) asked whether the decline in the employment rate had anything to do with the policy focusing itself on the supply aspect and the initial focus on macroeconomics, rather than microeconomics.

Mr Amra responded that the employment rates used in the analysis were those supplied by Statistics South Africa, which had seen a delay in the data log. Rather than policy being at fault, therefore, it was perhaps a question of the reliability and currency of the data.

Prof Jahed said that one of the difficulties in compiling such a report was the limited access to data. For this kind of study, the PBO did not have the capacity to do an in-depth study, as the Committee had asked.

Ms M Manana (ANC) questioned why there had been so many policy changes over time, and what effect illicit trading had had on SA’s economy.

Mr Ellse said that the effects of illicit trade had not been considered in this report.

Mr A McLoughlin (DA) asked whether objectives had been met, and what instruments were used to measure efficacy of policy. How would the labourers that had been replaced by machinery be accommodated?

Mr N Gcwabaza (ANC) asked how SA’s industrial policies accommodated the interplay between small and big industries, and the upstream and downstream sectors. It needed to be accepted that the global economy, including SA’s, had shifted in such a way that it called for the filling of high-skilled jobs. Therefore, the education sector needed to respond accordingly. The issue of the institutions of learning being funded by government, and then doing as they pleased, could no longer be accepted. If SA kept making excuses for why it was not focusing on the education sector, the country’s youth would remain unemployed.

Mr Ellse responded that SA’s policies had been designed for participation in the global economy, particularly in respect of the automotive and textile industries.

Prof Jahed added that manufacturing was linked to most other sectors of the economy. There had undoubtedly been an adaptation towards an increased use in capital and a decreased use of labour. Overall, the impact that manufacturing had on jobs was that it allowed other sectors to create jobs and increased the ability of the economy to create jobs, so the role of the manufacturing sector allowed a much deeper and broader development of the services sector.

Ms S Shope-Sithole (ANC) suggested that universities should produce documents which provided evidence of their contribution to economy. In other countries, universities were serious whereas here in South Africa, she sensed an attitude of non-patriotism across universities. The triumphs of SA’s economy should not be overshadowed, as one needed to remember that the recession had started in 2008, but the local economy had resisted because competent commissions had been established to see the realisation of the World Cup, for which there had been good fiscal policies. She questioned why BRICS had not been mentioned in the analysis of SA’s industrial policies in the context of the country’s developing economy and constitutional dispensation.

Mr Dumisani Jantjies, Deputy Director of Finance: PBO, responded that the role of the PBO was not to pronounce on what the Committee ought to do, but rather to offer an analysis. He appreciated the suggestions made by the Committee to the PBO, but that it should be kept in mind that the PBO had very limited resources.

Ms Nelia Orlandi, Deputy Director: Public Policy, PBO, reiterated that the PBO was not authorised by legislation to make any sort of recommendations. Therefore, no responses could be provided for questions, other than those seeking clarity. 

The Chairperson thanked the PBO delegates and the Committee for their engagement. She said that the engagement had been fruitful.

Other Committee business

The minutes of the previous Committee meeting were adopted, with a minor correction.

The third draft of the third term programme of the Committee was put forward for deliberation. Ms Louw requested that telecommunications and water and sanitation engagements be swapped. Her reason was that the issues around telecommunications were less pressing that those regarding water and sanitation, which often took longer to deliberate. The Committee agreed to this.

The meeting was adjourned.