Department on Industrial Policy Development Process: briefing

Meeting report

PORTFOLIO COMMITTEE ON TRADE AND INDUSTRY
09 November 2005
DEPARTMENT ON INDUSTRIAL POLICY DEVELOPMENT PROCESS: BRIEFING

Chairperson:

Powerpoint Presentation: ‘Industrial Policy Process’ from the Department of Trade and Industry
A Draft National Industrial Policy from the Department of Trade and Industry

SUMMARY
The Department briefed the Committee on its Industrial Policy Process. The rationale for a strong industry policy was given and the principles for the design of Industrial Policy interventions were explained. Both the challenges and the opportunities entailed in unlocking industrial growth and development through the proposed changes were detailed. Planned cross-cutting interventions and sectoral interventions were outlined, as was the need for improved capacity and institution building.

The Committee was concerned by the subsidisation of exported goods by foreign countries, which made South African goods comparatively uncompetitive in the domestic market. It was suggested that South Africa either subsidise its industries or place impediments to the importation of subsidised goods, as the openness that currently existed was not good. The issue of labour was also raised, with the Committee recommending an emphasis on training and education, as well as a need to extend the working hours of individuals, in order to lower fixed costs.

MINUTES
Presentation by the Department of Trade and Industry
Before the presentation began, Mr L October (Department of Trade and Industry; DDG: Enterprise and Industry Development Division) stressed that the policy was, at that stage, at a broad conceptual level. This was an early consultative meeting. The Government had set an explicit growth target of 6% so that it (the Government) could have an assertive role in deciding how the industrial sector could contribute towards the achievement of that target.

The presentation was given by Mr N Zalk (Department of Trade and Industry; Chief Director: Industrial Policy). The Committee was briefed on the purpose and scope of the Industrial Policy. The vision for 2014 was outlined. Links with other policies and processes – both intergovernmental and initiatives within the Department – were explained. Industrial policy development would be a consultative process leading up to January 2006. A 3-5 year ‘rolling’ framework would then be followed. This would be reviewed every 2 years in order to accommodate changes in both the local and the international economy. South Africa’s pre-1994 economic trajectory was traced in order to justify the ‘defensive’ policy response taken since that point in order to achieve macroeconomic stabilisation among other aims.

The changing structure of the South African economy since 1994 was illustrated by way of a graph showing the annual average sectoral growth in value-added and employment between 1994 and 2004 across various industry sectors. This data was analysed and various trends explained. Against the background of reflections on post-1994 Industrial Policy, recent developments in the economy were highlighted in order to show the need for an industrial policy response. A shift to a more offensive Industrial Policy based on a strong balance sheet and fundamentals was the conclusion.

Changes in the global economy were outlined, as were the industrial performance of selected developing economies in order to show South Africa’s position in the global trade context. Lessons from international industrial policy experience were drawn. The rationale for a strong industry policy was given and the principles for the design of Industrial Policy interventions were explained. Both the challenges and the opportunities entailed in unlocking industrial growth and development through the proposed changes were detailed. Planned cross-cutting interventions and sectoral interventions were outlined, as was the need for improved capacity and institution building.

Mr October added, by way of summary, that were this proposal to be adopted, Government would have to play a much more active role in terms of interventions in order to accelerate economic development. After visits to Malaysia and Korea, where unemployment had been solved and advanced economies built in just 20 years, he was convinced such intervention was required by the state in order to build a strong private sector. There was a need to establish a structural fund like that in the European Union (EU) so that poorer regions were specifically targeted for resources. Industrial Development Zones (IDZ’s) had proven successful so this programme should be expanded. There was also a need to create new industries such as aerospace, nuclear, and biodiesel. The Industrial Development Corporation (IDC) was in a position to be able to triple its investment in such industry.

Discussion
Prof B Turok (ANC) pointed out that many goods available in South Africa were heavily subsidised making it impossible for domestic producers to compete. Either South Africa subsidised its industries in the same way or blockages were put on importing subsidised goods. No industrial strategy would work if this openness was continued. The document needed to distinguish between the advanced and the non-advanced economies as the interventions needed would be different. The question of government coordination was a major and recurring problem. Was the Department strong enough to affect this coordination? Someone had to do it. Coordination was needed, not only between government departments but also to include development agencies such as the Development Bank of South Africa and the Independent Development Trust (IDT). He did not like the reference to NEPAD as ‘probably’ going to be involved in this strategy. There was no probably about it. South Africa had a huge obligation and needed to develop a programme to satisfy this obligation.

Mr L Laubschangne (DA) expressed concern that this all sounded good in theory but what actually mattered was getting things done. He accepted that this was a draft policy but had heard talk of the need for beneficiation for the past 30 years. There was a need to balance these aims with the reality of capacity. Education was inadequate to provide the human capacity necessary. The programme would be tested by what was actually done.

Ms B Ntuli (ANC) expressed concern that the planned shift from low-skilled labour to high-skilled labour would not be possible without the necessary education. Where was the education in this plan in order to provide the skills necessary to effect this shift? Should they be concerned that this was a risk that the private sector was not willing to take? Were there ways to check whether, in taking this risk as a government, it would lead to hyper inflation resulting in a crisis such as that recently experienced in East Asia? Such a crisis would drive away investment and harm future development.

Prof E Chang (IFP) said that no industry could be successful without government intervention. However, Malaysia and Korea had had their success because education had been first priority. Capital incentive industry only made 2-3% profit so government incentives were needed for instance to provide Research and Development. Labour intensive industry made a 15-20% profit due to the impact of human error. The issue was how to get fixed costs lower. Fixed costs in South Africa were high. One way to lower fixed costs would be to extend individual’s working hours. In the countries used as examples of economic success, maximum working hours did not exist. They were therefore not limited in the same way as South Africa was. Fixed costs were killing this country. Another problem was transport. Transport from India to China was ten times less than transport from India to South Africa. Government intervention was needed to reduce transport costs so that distance of other markets was less of an issue.

Ms D Ramodibe (ANC) said that this document was long overdue. However, the point about implementation needed repeating. Government intervention was needed. Structural funding was crucial. A strong private sector was vital as the government would not be able to do this alone. Why was South Africa restricted by its bilateral agreements in ways other countries were not?

Mr S Rasmeni (ANC) said once again that the theory sounded good but the proof would come in its implementation. The International Labour Organisation had conducted research and indicated that South Africa did not have problems with labour. He also did not understand the problem cited around sophisticated infrastructure. The training of postgraduate students was the key to economic growth. Interaction was needed with Sector Education Training Authorities (SETAs). How did they target students at these levels? Clarity was needed on the statement that people would be migrated from the second to the first economy. How would this happen in actual fact? There was a need to look at the non-advanced economy at the same time as the advanced. For a developing country to develop it has to start at a certain level.

Ms F Mahomed (ANC) wished to express ardent agreement at the notion that the government must intervene in terms of incentivising and taking risk. What would be done about the problem of dumping? This happened with or without government intervention. It was gratifying to see intentions to move into industry such as aerospace. What were South Africa’s future trends? There was a severe skills deficit. How had AIDS affected the labour force and impacted on the skills deficit? Synergy was needed between line departments as to how to deal with human resources capital. These were challenging questions for everyone. How would government incentivise to ensure Foreign Direct Investment? FDI would also bring questions of equity in terms of bilateral and multilateral agreements with different countries. Human resources were a tool that should be used to enhance the industrial policy. The policy should be enhanced to include socio-economic indicators. Why were skills and labour not listed as a challenge for South Africa when they clearly were?

Dr M Sefularo (ANC) said that linkages were necessary with other departments and should be made explicit and active from the beginning. Agriculture was an example. Why was medial technology left off the radar? This was a multi-billion industry with elements of high end manufacturing and labour intensity. South Africa should consider it in their industrial policy.

Mr J Maake (ANC) felt that the presentation had been overloaded. The challenges listed were not covered by what was in the presentation. Skills needed, budget, and interventions were not listed in detail. This was wishful thinking. The aim to halve unemployment and poverty by 2014 was not ambitious enough. When talking of government intervention, where were the blockages? There should be some policy from the Department actually implementing intervention by now. It had long been clear that government intervention was necessary. The production side of the economy was lacking. Why was this and how could this be corrected?

Dr E Nkem-Abonta (DA) asked how this proposal differed from the current one. There did not appear to be any radical departure. Nor was the logic provided for the changes suggested. As to the examples of other countries used, both Ireland and Greece had benefited from EU funding. Ireland had had spectacular success whereas Greece had not moved. Ireland had not engaged an active industrial policy. Why was Singapore not mentioned? Surely there were lessons to be learned from their development.

There was a conflict in the design of this programme. For instance, it had been said that South Africa could not compete in high technology and thereafter it was mentioned that South Africa might move into aerospace. How would this conflict be resolved? The timeframe of 2-3 years was not useful. A long term policy stretching for 20, 30 or 50 years was needed. It was not made clear what it was that had failed in the current policy and what needed to be changed.

If there was a shift to the offensive policy surely this would have budgetary implications. The strong balance sheet and fundamentals would be affected. More information needed to be supplied. As to cost-based interventions, surely the cost of labour could be used as an instrument. Nearly every other country seeking development had made use of this.

The comment raised earlier about the East Asian crisis was a good one. The state did not take risks with its own money. It had no money of its own. It took risks on behalf of the individuals of that state. The fact that the private sector did not want to take the risk should be taken as a warning.

The challenges identified were useful. However, they should be followed with a clear explanation about how the changes in intervention strategy would deal with these. There was a need to broaden the economy and finance Black Economic Empowerment. This conflicted with the targeting of industries. It was difficult to see how this strategy would strengthen the private sector. In both Malaysia and Korea the private sector was very instrumental. What would the new strategy cost?

Mr October responded that most of the comments made had been recommendations rather than questions. These contributions were gratefully received. If the policy was adopted it would affect choices made. The budget would need to be increased and the IDC would have to accept a higher risk. It was therefore necessary to get the policy choices right before implementation.

The private sector would not invest in a range of areas such as future industries. This was where government had to take the risk. If this policy was adopted there would be less debate as to intervention. For instance there was much debate on IDZs which had proven successful. Such ventures could only be deemed viable after 5-10 years of investment. That is why the policy should be adopted.

As to the point about the first and second economies, it was necessary to grow, develop and expand the first economy. However, this should be done in such a way as to draw in the marginalised. This was not therefore a policy to invest in the second economy. This was how other countries had solved their problem of underdevelopment. There was a need to destroy the second economy by absorbing it into the first economy.

Mr Zalk added that on the issue of skills, the Department could not redesign policy, but could push for greater integration and coordination between departments. The issue of labour costs was a highly complex area. They could not compete against lowest wage activities but on the other hand it was not as simple as a wage rate. Productivity of labour was very important and affected by a range of issues. The wage rate in South Africa was particularly sensitive to the exchange rate for example.

In practice they were not trying to redesign every policy and every sector strategy, but to provide a coherent framework in which these things could be implemented. Industrial policy was not just conceptual.
In response to the fiscal prudence issue, the government had a strong balance sheet and had smaller fiscal deficits than predicted. There was therefore, scope for a more expensive industrial policy. The expense had not as yet been quantified but there was no danger that it would lead to macroeconomic instability.

Mr October explained that the IDC was a self-financing institution. Its debt equity ratio was 13%. It was underexposed and should be able to double or triple its investment in the economy without being as exposed as the banks in Asia. The budget for the Department would need to be increased. It had stayed constant for the last 10 years. Institutions such as DBSA and the IDC would need to be used. The balance sheet should be used more progressively and assertively.

Mr Zalk said that the policy was more active and the budget was increased but that this was not about throwing money at the problem. Regulatory changes were also very important such as strengthening competition policy.

Prof Chang repeated that labour intensive industry was the most important area for government intervention at this stage. China had begun with this, and when education had improved, they moved onto higher technology industry. South Africa needed to assess itself. At this stage it was not able to look at high technology industry as the education was not there. Her point on fixed costs had been misunderstood. Fixed costs were not labour costs. Fixed costs were high in this country and could be lowered. Labour needed to be stimulated for higher production.

The chairperson pointed out that this was the initial briefing and that the committee would like time to interact further with the documentation provided.

The meeting was adjourned.