Department of Trade and Industry

Republic of South Africa

Comments are welcome.

Within these frameworks one of the most contested areas has been that of an industrial strategy. Many have argued that this dimension of policy has not been explicit enough. Labour has been of the view that the government has, in effect, been pro-business as it has not been interventionist enough in support of employment. In the area of tariff reduction there has often been more common ground between the labour movement and segments of business.

These debates have been intense within the Alliance. The debate is healthy and it is unrealistic to expect that there can be agreement on all matters. Government has argued that there has been an industrial strategy but concedes that it may not have been made explicit enough or accessible enough to the economic actors. In the end, whilst debate may continue, the government needs to have a policy framework within which it acts and interacts with the main economic constituencies. It is important that there is predictability of policy over a meaningful period of time.

In order to make the industrial strategy more explicit and accessible and to deal with changing conditions a new policy statement needs to be made. This paper is a draft statement of such a framework that will provide the basis for a detailed interaction with the main economic and political constituencies. The outcome in a few months will have to be the policy certainty that will assist investors and other decision-makers.

The focus in this paper is on manufacturing and an industrial strategy. The paper does not deal with all aspects of the economy or economic policy. There is a danger in this since many other aspects of economic policy impact on manufacturing and its development. However, it is as problematic to deal with the whole scope of economic policy when the objective is to provide greater clarity and certainty within a more defined area. Accordingly, the approach taken by the DTI is to provide a limited number of major policy statements as separate papers. Within each paper a brief statement on how strategies are linked one to the other is provided.

The Department of Trade and Industry has produced a number of papers over the last few years and will shortly be producing a journal, Sisebenza Sonke. These provide the broader context of discussion and debate within which this document should be situated.

In this way it is hoped to provide both operationally specific policy frameworks as well as insight into the overall approach to economic policy.

By way of introduction to this paper the main conclusions of the overall analysis can be briefly stated in the following manner. The oft-used term globalisation does in fact have real content in that there have been major structural and qualitative changes in the working of the world economy and consequently in the relationships of national economies to that world economy.

Information technology and economic liberalisation policies have had the effect of greatly increasing the global integration and significance of markets and thereby increasing their impact on economies. This has major implications for the financial stability of economies, investment decisions, the location of production and economic activity and the dynamic competitiveness of manufacturing activities.

This does not mean that markets are now necessarily more efficient or that they should reign supreme. In means the role of the state and public sector has to change. The role of the state is not decreased but its actions have and must change if it is to be effective in promoting and protecting the interests of its citizens. The increased impact of markets also means a greater need for effective commercial law and regulation – competition and consumer law being major examples.

In a developmental situation such as ours in South Africa the state will have to play a leading role. As important, it will have to have the political capacity to implement reform over a sustained period. The political economy of development is as critical as the technical economic programs, but a polity that ignores the power of the changes in the global economy does so at the peril of the well being of its citizens.

This paper is based on the analysis that argues for a comprehensive response by the state within the context of the national and global political economy. The critical elements of this response can be briefly stated. There is need for an industrial strategy, located within a stable macroeconomic framework which requires a range of fiscal and financial reforms. The industrial strategy has to be supported by an international economic strategy and complemented by an effective socio-economic empowerment strategy. The last is to counter the powerful tendencies toward inequality, uneven development and marginalisation that characterise the globalisation process. It is also argued that such a response can only be effective within the context of a democratic and developmental state.

Turning to the paper at hand the focus is on ensuring that the South African manufacturing processes will be dynamically competitive so that we can raise the levels of employment and income for all of our people.

May 2001

Alec Erwin

Minister of Trade and Industry, South Africa

Manufacturing makes an important contribution to national output and to employment. Moreover, the products of our manufacturing sector make up a significant share of our exports and they are critical inputs into other sectors of our economy. Manufacturing matters and government is committed to supporting a flourishing manufacturing sector.

A clear and well communicated vision for the manufacturing sector on the part of government increases certainty, particularly for investors, and it allows the private sector to align its own strategies so as to take cognisance of both current and likely future government policies. The purpose of this document is to produce such a vision. This document outlines government thinking on the major global developments that will face our manufacturing sector, the likely areas for growth and the role that government will play to enhance the ability of our manufacturing firms to meet resulting challenges and opportunities.

As is commonly acknowledged, the pace of change in the global manufacturing environment is increasingly rapid. Policies will need to be constantly adapted in response to these changes. As with firms and their employees, in a rapidly changing environment, government will need to be flexible. At the same time, too much flexibility will introduce uncertainty, undermining the credibility and hence the efficacy of policy and the confidence of the private sector. Government will strive for a balance between policy flexibility and predictability. Embedding changes in individual policies within a clearly defined and stable framework best does this.

This document therefore does not provide a detailed and comprehensive list of policies that government will inevitably follow. Rather, this document provides a framework – outlining the broad trajectory or thrust that government anticipates for its industrial policy over the next two decades, as well as the premises upon which it is constructed. To distinguish this framework from the individual policies pursued, the framework is referred to as a strategy.

As we shall see, global changes have resulted in the manufacturing sector developing new forms of production that have simultaneously both substantially enhanced the importance of other non-production activities such as innovation and marketing and the importance of the effective integration of these activities with production. This has led to the traditional divide between production and other activities, and indeed between manufacturing and other sectors, becoming increasingly blurred.

Consequently, internationally, many government departments that have historically been concerned with manufacturing are increasingly widening their scope. As a consequence of this broader scope, they are also utilising new policy instruments. This is the approach adopted in this document. It is proposed that the DTI extends the scope of its policy to focus more upon new non-production activities undertaken by manufacturing firms; that the DTI extends its focus beyond the boundaries of traditional manufacturing to new sectors that are increasingly integrally linked with the manufacturing economy. Moreover, in order to secure its broader objectives the DTI will need to utilise new policy instruments. To capture this significant shift, we employ the concept of an integrated industrial strategy.

In addition, in order to be effective across this wider scope, internationally departments of trade and industry and their equivalents have had to develop new relationships with a range of other governmental ministries. This document similarly proposes that, in pursuit of its wider focus, the DTI enhances its linkages with other government departments.

While it is convenient to distinguish between the rules and institutions that govern domestic and international trade, the interactions between these markets should be appreciated. Hence, concern that a domestic product market is dominated by a small number of local producers will be allayed if ready access to imported commodities constrains the market power of the dominant domestic producers. But, that having been said, the availability of products on the international market seldom acts as a perfect constraint on the power of local producers who generally retain an advantage on the domestic market over international competitors. Accordingly, a liberal trade policy is rarely a substitute for competition rules governing the conduct of domestic producers.

By the same token those who have responsibility for maintaining domestic competition are obliged to recognise that in some instances the minimum efficient scale required to compete effectively on international markets may result in a firm that dominates its domestic market. While this seldom arises in the massive markets of the highly industrialised world, it is somewhat more likely in small economies such as our own. But again, while this possibility must be recognised in the rules that govern our markets, it should not be exaggerated. Research confirms time and again that the most effective international competitors are those who are tested by competition in their domestic markets. In other words while the correlation between scale and international competitiveness is a reality, it is seldom grounds for turning a blind eye to dominance and eliminating competition on domestic markets.

In summary, the rules for the conduct of trade on the domestic and international markets must be cognisant of the interactions between these markets. But because the interaction between them is seldom seamless each requires a distinctive approach. The respective approaches have in common the desire to ensure the effective functioning of the markets for which they are responsible, that is markets that ensure efficiency and promote access. However, the rules will also recognise that the unfettered play of markets may under-provide critical economic resources and threaten the development of others, and the operations of the market may, in certain instances, conflict with key national policy objectives.

2. A Broader Mandate: Objectives for DTI Industrial Strategy

There is considerable concern and some evidence to the effect that income has recently been growing faster in some countries, notably the rich industrialised countries, than in others, notably the developing countries, and particularly the countries classified as least developed countries.

While the jury is still out as to all of the causes of this growing international inequity, it is widely held that the rules of the game governing international markets for finance and particularly for goods and services, currently favour the powerful richer countries at the expense of the weak and poor. A major cause for concern is the extent to which expanded trade and investment flows have outstripped the ability of the international community to devise a framework of rules to ensure that it functions effectively in the interests of all nations and the diverse interest groups that make up each of these nations.

We are, insofar as international economic relations are concerned, in a position analogous to that of US policymakers at the turn of the century. This was the period when the ‘robber barons’ expanded trade and commerce in every conceivable direction. There can be no doubt that this represented great economic progress but, because of the absence of a coherent framework of rules to govern this expanded trade, it often came at the expense of the environment, of workers and, not least of all, of the competitive process itself. It is no accident then that this period of US history coincides not only with great labour struggles but also with the rise of anti-trust laws, the body of law that to this day is concerned to ensure access to the US economy. These regulations ensured the sustainability and diffusion of this rapid spurt of growth and innovation.

The apartheid regime’s industrial policy was defined by import substituting industrialisation. Import protection combined with high levels of concentration of economic ownership resulted in high and distorted domestic prices. The manufacturing sector was inward focused and its relations with government were frequently characterised by rent-seeking behaviour.

Given this context, the new government sought to:

1. Liberalise imports and encourage exports via export marketing assistance and other measures. These measures sought to overcome inward bias and stimulate exports.
2. Shift from demand side measures (import controls, tariffs, subsidies, GEIS) to supply side measures. The supply-side measures aimed at reducing costs and improving the efficient use of inputs.

Certain input prices, principally unskilled and semi-skilled labour, were seen to be high (by comparison with many of our competitors) in relation to productivity and the structure of the wage system reflected past economic and political distortions. It was anticipated therefore (although less often articulated) that there would be some output and employment loss in the areas which were low skill labour intensive. This would however be compensated for as firms, in all manufacturing sectors, sought to adjust to heightened competition by "moving up the value chain". Supply-side measures e.g. the support given to innovation, were intended to encourage this movement.

Accordingly, with the partial exception of the auto assembly and components and the clothing, textiles and footwear industries, which had a number of sector-specific measures, a non-targeted approach was adopted. Supply-side policies were generally made available to all manufacturing firms.

Policy formulation therefore proceeded in logical fashion. Based on an analysis of the problems, objectives were identified. A number of policies to address these problems and achieve the objectives were then initiated.

In relation to trade, a formal programme of phased tariff reductions and tariff harmonisation commenced in 1995 in terms of an Offer presented to the WTO in 1993. The tariff offer was the product of consultation between government, business and labour. Average tariffs, maximum tariffs and the number of tariff lines all decreased significantly. This process has led to a certain amount of debate in that the binding rate - a maximum - has been confused with the actual phase down schedules. This has led to the assertion that we have phased down the tariffs faster than our obligations. This is not the case. The actual phase down schedules reflect the desired reduction of tariffs to achieve our objectives.

Negotiation of a Free Trade Agreement (FTA) with Europe was completed in early 1999.

As trade liberalisation proceeded, the DTI developed a large number of supports to firms on the supply side. The DTI took a broad front approach initiating a wide raft of new policies that were designed to support firms.

However, a broad front approach and the consequent multiplicity of new programmes introduced within a very short time period, has compounded problems in effective implementation, in communications with the private sector and, most importantly, contributed to a lack of coherence. With regard to policy coherency, what has been lacking is a well-articulated and accessible vision – an industrial strategy that gives thrust to policy and that provides a framework for the co-ordination of different industrial policies.

International best practice in industrial policy design is quite well defined and diffused. Very broadly, the design of our industrial policies generally conformed to such practices, with adaptations being made to accord with specific local circumstances. Thus, while there may be some areas of policy that are less developed than others, there are no immediately evident major policy gaps or omissions. At the level of individual policies, there are no obvious "winners" out there, at least within the conventional areas of industrial policy, which other countries have employed and which has been omitted here.

However, the DTI will be reviewing its suites of policies in each of the main areas of industrial policy. The purpose of the reviews will be to more systematically enquire as to any possible policy gaps as well as to assess the coherency of policies within the area in question and the capacity to implement – see Appendix.

In many respects industrial performance has conformed to expectations. Manufactured exports have consistently increased in importance. Exports have risen at more than double the rate of increase of the pre-1994 period and stronger export growth post-1994 has prevailed across almost all manufacturing sectors. (The fastest growing sectors include chemicals, metals and metal products, machinery and motor vehicles and components. Food, clothing and footwear saw a decline in exports). Whereas in 1994, 15% of the output of the manufacturing sector was exported, in 2000 this had almost doubled to 28%.

The unit value of exports has been rising, suggesting that there has been significant movement up the value chain on the part of exporting firms.

There has, since 1994, been a steady rise in labour productivity – labour productivity increasing by 30% since 1994.

Investment in some sectors of manufacturing has been rising rapidly (e.g. in glass and glass products and basic non-ferrous metal products).

However, on the negative side, aggregate manufacturing investment peaked in 1996 and, apart from a limited rise from the end of 1999, has since been on a declining trend.

Manufacturing output has been largely stagnant.

Of particular concern, has been the steady decline in enumerated employment. Between 1994 and 1996, there was a marginal increase in employment, but over the last five years enumerated employment in manufacturing has declined by 11.5%.

The employment decline is of particular concern. Employment decline has complex causes, but the evidence does not suggest that it is the consequence of trade liberalisation.

What is not clear is the contribution of policy to manufacturing performance. Clearly, a wide range of factors other than policy has affected performance. Moreover, it is very likely that any effects that industrial policy may have, will be manifest only after a considerable lag. In the absence of clearer and more systematic assessment measures, we are, as a consequence, currently only in a position to surmise what has been the link between the policies followed and the industrial performance achieved.

There is an urgent need for developing much better criteria for monitoring and evaluation of the impact of policy. It is necessary to enhance the information flow as between manufacturing firms and the department (see below).

Certainly, it is evident that our current industrial policies are not having the desired impacts in particular areas – employment creation and SMME development, most notably. Indeed, some critics regard policy as significantly contributing to poor performance. In particular, trade liberalisation is seen as the source of employment loss. However, the empirical evidence is that employment creation through enhanced export growth has more than compensated for declines in employment due to increased imports – albeit, and this is of significance, employment growth has been very largely located in skill intensive occupations.

Despite our cautionary observations about drawing links between industrial policy and industrial performance, it is probably fair to surmise, based on limited evidence, that industrial and trade policy has had some positive impacts on industrial performance. Moreover, these impacts conform, very broadly, with many of the expectations that underlay the formulation of our policy.

If this is correct, and if it is accepted that our policies in general conform to best practice, there is a strong case for retaining the broad direction of policy with regard to supply side measures, albeit with refinements which will follow the review processes outlined in the Appendix.

At the same time, an appreciation of global trends combined with a deeper analysis of our manufacturing performance strongly suggests that simply refining our existing policies will not be sufficient to achieve the objectives of government – most especially in relation to employment creation.

1. Key Factors Affecting Manufacturing: ICT, Innovation and Demanding Customers

Manufacturing firms are faced with a myriad of changes – in the markets in which they operate, in the technologies that they utilise and in the manner in which they organise their activities. Trade and investment liberalisation has significantly increased competitive pressures on manufacturers internationally. South African manufacturing firms face similar challenges.

Amongst the most important changes that are changing the way in which manufacturers undertake their business are the following –

• Changes in information technology, that are transforming all aspects of the manufacturing process and relationships with customers and suppliers and the manner in which products are marketed and sold.

• Rapid advances in innovation, which is constantly transforming products and production, requiring increasing investment on the part of manufacturing firms.

• Changing consumer demand, particularly, but not exclusively in the industrialised countries, which requires more sophisticated, more customised and more environmentally sound-products.

Many of the more traditional modes of securing competitive advantage employed by manufacturing firms are becoming increasingly less significant:

• Access to cheap raw material inputs. Firstly, in a globalised economy where such resources are increasingly traded internationally, where duties and other trade barriers are coming down and where transport costs are declining, manufacturers, wherever they are situated, will face similar prices and delivery conditions for most raw material inputs. Secondly, raw material commodity prices are at historically low levels and the predictions are that, while prices may rise in the short term, in the medium-long term they are likely to be depressed – at least, by comparison with the prices of manufactured inputs. Finally, raw materials are a declining share by weight in many manufactured articles and of little or any significance in most rapidly growing service activities, giving rise to notions of "the weightless economy." Accordingly, abundant and cheap raw materials are only a competitive advantage if most or all of the other factors discussed below also apply.
• Access to cheap unskilled labour. First, the changing nature of consumer demand with its stress on quality, variety and customisation is less conducive to production by unskilled and untrained labour. Second, technological changes affecting manufacturing are increasingly unskilled and semi-skilled labour saving and skilled labour and capital augmenting. Finally, as the large population countries, notably India and China, increasingly integrate into the global economy, the supply of unskilled and semi-skilled labour has risen dramatically, with consequent impacts on the prices of products which are unskilled and semi-skilled labour intensive.
• Access to proprietary production technology. Production knowledge diffuses ever more quickly while the market for technology is increasing rapidly. The globalised operations of multinational companies make it far less likely that firms will retain a clearly superior production technology for any lengthy period. While firms will have to acquire much of their technology from abroad, effective acquisition and assimilation is not costless and requires effective institutional development and high skills level - underlining the need for institutional and skill development.
• Privileged access to markets. This opening up of markets is the consequence of two interrelated factors – namely liberalisation of trade and investment and, in very many countries, stronger legal prohibitions on monopoly powers and market restrictive practices.

As the more traditional mechanisms of securing a competitive position – access to cheaper raw material inputs, unskilled labour, proprietary production technology and markets - decline, so the ability of firms to compete will depend on their capacity to adapt and to take advantage of the new manufacturing environment, as outlined above. We will see the management of information and innovation and satisfying the requirements of a rapidly changing consumer demand increasingly driving company strategies.

What effect is this likely to have upon South African manufacturing firms, in the short and the longer term?

As outlined earlier, there is a strong case for the continuance of core elements of our existing policy. Subject to the review process, as outlined in the Appendix, a wide raft of supply-side policies covering all of the major areas of industrial policy will remain in place. Such policy support will generally still be accessible to all manufacturing firms.

Supply-side policies will be designed to improve the capacity of those industries that currently are internationally competitive to enhance their position. Thus, for example, government will continue to support and facilitate their export activities. Other industries are not currently competitive and still enjoy measures of protection. Here supply-side measures will be aimed, as currently, at providing support and incentives to facilitate their gaining a competitive position.

Further tariff reform will be based in the main on trade agreements and the possibility of a new round in the WTO. In addition tariff reform should now be targeted at meeting specific industrial strategy objectives within sectors or production chains and clusters.

Thus, there will be a measure of continuity – both of focus and of policy. However, at the same time, new policy directions will also be required if government is to enhance development in other areas.

Based on economic theory an objective of policy has been to eliminate inward bias, such that firms would face the same prices in domestic as in international markets. This correction of price distortions will facilitate growth in sectors and activities in which South Africa has an existing comparative advantage. South African producers would become more specialised and this will promote more efficient output and the overall welfare. This has been the main thrust of our supply side policies and of our industrial strategy.

In the context of our comparative strength in raw materials and energy, many of our export industries continue to rely heavily on these inputs. While our export growth in manufactures has been notable, there is some evidence to the effect that this is largely concentrated in those manufacturing sectors and products characterised by slow growth in the world economy. In many of the most dynamic areas of manufacturing in which demand is growing most rapidly and which are generally non-material intensive our performance is weak – electronics, for example. In some other areas, evident weaknesses in the activities of innovation and product customisation makes it difficult for producers to retain their own brands and participate in the increasing share of the profits and value added that accrue to such activities. Furthermore, while there are some dynamic industrial sectors, it is nevertheless clear that employment and output gains are being increasingly concentrated outside of manufacturing in the so-called "new" economy, largely the services sector. Our current industrial policies have little or no impact on developments here.

Because of the cumulative nature of technological change and firm level learning, existing patterns of specialisation are likely to be reinforced through time. Thus, if our industrial policy in the future is to be solely a continuation of our existent policy, we are likely to reinforce patterns of existent specialisation and activity within the manufacturing sector. Industrial policies will have little impact upon our capacity to develop some of the more technologically dynamic and fast growing areas of manufacturing and of the new economy.

The rapidly growing manufacturing sectors, those activities in manufacturing which generate higher returns and the new economy sectors are all highly knowledge-intensive – requiring both in-house knowledge creation and the assimilation of knowledge from outside of the firm. There is accumulating evidence to the effect that the dynamic areas of international trade are knowledge-intensive and that investments in knowledge activities generate very considerable positive externalities.

For these reasons, some economists argue that countries that specialise in technologically progressive knowledge-intensive industries will experience faster growth than those that do not. They argue that there is accordingly a case for government to go beyond the market and to intervene selectively to change the pattern of specialisation and enhance the development of more knowledge-intensive sectors and activities.

Recognising the critical importance of knowledge-intensive sectors and activities and the extent to which the market will under-provide, a major new thrust of our industrial strategy will be designed to enhance the ability of our manufacturing sector, more especially but not exclusively knowledge-intensive manufacturing, and the new economy services sectors, to compete effectively through the production and utilisation of knowledge.

As stated earlier, the development of ICT has facilitated the integration of manufacturing with upstream activities, such as development and design, and with downstream activities, such as marketing and sales. It is increasingly the capacity of industrial firms to integrate and manage these activities successfully that yield the highest returns.

Our industrial strategy cannot therefore focus solely on production. It will seek to integrate both backward and forward linkages with production. Of particular importance here will be the development and enhancement of our existent capacities in knowledge-driven activities. This will rest upon the development of leading edge logistics - an essential foundation for this integration.

South Africa is part of a region where there are complementarities in many areas. South Africa has some significant capacities in knowledge-driven activities, particularly compared to the rest of the region. Our industrial strategy will aim to harness these complementarities in order to lower production costs, promote economies of scale and develop an integrated regional production system. This will entail closer economic integration – expressed in relation to trade, notably the SADC Free Trade Agreement and measures to encourage South African investment in the region, but also in other areas such as infrastructure, notably the SDI programme. This gives a second integrative dimension to our industrial strategy.

Accordingly, our industrial strategy is an integrated industrial strategy.

Government anticipates a progressive shift in policy. The continuance of existing policy and focus will be combined with a progressive re-orientation of policy designed to enhance the ability of workers to engage effectively in knowledge-intensive activities and the ability of firms, in both manufacturing and in the new economy sectors, to increasingly compete through effective knowledge production and utilisation. Government will accordingly be seeking policies that can enhance those areas of and activities in manufacturing which generate higher returns and in the new economy sectors. However, as was outlined earlier, while of more importance in certain sectors and to certain activities, the ability to effectively assimilate and utilise knowledge, will be of increasing significance to all sectors and activities of manufacturing and their employees.

Accordingly, government support to all manufacturing firms and sectors will increasingly take the form of policies that are designed to enable firms to effectively produce and assimilate knowledge. Government will seek policies which, for example, facilitate the more effective use of knowledge on the part of internationally, competitive raw material-intensive manufacturers. Such policies will aim at further enhancing their competitive position in existing activities, but also encourage them to engage in those activities downstream and closer to the market, which tend to be more knowledge-intensive, and that could generate higher returns, employment and value added. For those industries that are not currently competitive, policies will similarly progressively seek to enhance their competitive position by facilitating the more effective production and use of knowledge.

It is important to stress that in this progressive re-orientation of our industrial policy, government will not therefore be neglecting its traditional constituency of manufacturing firms and manufacturing activities.

The existent capacities and activities of the local economy and the manufacturing sector will decisively shape our capacity to engage in and develop new knowledge intensive areas and activities. Thus, we particularly need to examine the experience of other raw material-intensive economies in generating new knowledge-intensive sectors, which are dynamically linked to such extractive activities.

Within the context of our integrated industrial strategy, other policies and objectives will be developed. Three particular areas stand out as critical – namely the development of Small and Medium Enterprises (SMMEs), Black Economic Empowerment and employment creation(see above). More detailed papers on these areas will be produced in the coming months.

Two key constraints stand out – namely human resources and a sound infrastructure and market structure for telecommunications

The proposed re-orientation of our industrial policy is not without its tensions. Two are particularly evident.

Accessing, creating and exploiting knowledge on the part of firms is complex and multi-faceted. Firms will need to source knowledge from within the firm itself and from outside. Internally, it will need to draw on all of its divisions and employees while externally a firm’s partners and customers will be critical, but also its suppliers and competitors. Finally, firms will draw on other knowledge producers – science councils and tertiary education institutions, in particular.

Knowledge has always been important to manufacturing. Many of our existing industrial policies – those relating to innovation such as THRIP and SPII, for example – are intended to help firms acquire and exploit knowledge more effectively. But, we can go a lot further. What follows is an indication of the sort of industrial policies that would be considered in order to support firms in accessing, creating and exploiting knowledge. Such policies can be grouped under four main action areas – namely policies relating to skills development, the acquisition and creation of new knowledge, the utilisation of information and communication technologies and the establishment of networks and best practice.

South Africa is poorly endowed with skilled people. Many of the recent Foresight Studies, including that of Manufacturing and Materials, identified skill shortages as the key constraint to further development.

The recent Technology Foresight crosscutting report on human resource development offers some interesting pointers and suggestions as regards human resource needs. The needs of the particular sectors examined in the foresight exercise were considered and combined. These needs were then clustered for each sector. A factor impact, which measured the attractiveness to the country of developing this expertise, was developed for each cluster.

The foresight report provides interesting pointers to skill shortages and what combinations of skills that it would be particularly attractive to develop. The issue that needs addressing is how this work might be taken forward so as to prioritise the development of particular skills or combinations of skills, identify the magnitudes and provide more detail as to how this might be concretely done. To be brief, we now have a sense of many of the skills that will be most needed and which are attractive to develop, but we are still some way from translating this into definite objectives and policies

In Canada, government has identified a number of knowledge-intensive areas where Canada is already strong or where there are significant opportunities for growth - including aerospace, automotive, environmental technologies and IT. An Expert Panel on Skills was established to report on the skills needed to improve Canada’s position in these industrial sectors; to identify the expected shortages – both in quantity and in quality; how skill requirements might be monitored; the options available to ensure skills provision and how stakeholders can best work collaboratively in order to ensure adequate provision. In Britain, a Skills Task Force has been established as a non-departmental public body and it identifies skill shortages at an economy-wide level and makes recommendations to the Secretary of State for Education and Employment on how best such shortages might be addressed.

Skills development linked very closely to economic need is essential to effective participation in knowledge-intensive activities. The DTI will investigate the knowledge-related activities undertaken in various industry sectors and, in cooperation with other government departments, will devise policies to ensure that the specific needs of sectors are realised. Other government departments have recently undertaken a number of important initiatives in respect of education and training strategies. These initiatives include:

• The National Skills Strategy, led by the Department of Labour
• The integrated Human Resource Development Strategy led by the Departments of Education and Labour
• The National Plan for Higher Education led by the Department of Education.

These strategies will require a leading role for the DTI, particularly in the identification of the requisite knowledge-intensive activities and in the integration of these initiatives with other policies designed to support our industrial development.

In the short term, special programmes to allow individual firms to tackle particular skill shortages could be developed. Such programmes are currently being experimented with in a number of countries. In the UK, for example, the DTI and the Department of Education and Employment are launching a new programme to help manufacturers – particularly small and medium sized enterprises – deal with shortages of engineering and technician skills. Other schemes include a University for Industry and various schemes to integrate higher level studies with work-based learning.

Spending on innovation both increases the firm’s own knowledge base and it also helps firms to develop in-house knowledge and capacity to recognise and exploit technologies produced outside of the firm. Studies have shown that the societal returns to innovation expenditure substantially exceed private returns.

The White Paper on Science and Technology sets out a framework for effecting a more integrated National System of Innovation wherein linkages between the business sector and other performers of innovation are enhanced. But, South African manufacturing firms are, in the main, not innovation intensive. Currently, business R&D is supported through a number of programmes – namely PII, SPII and THRIP. These are essentially matching grant schemes to support innovation and R&D. A number of countries, notably OECD countries, allow for significant R&D tax credits – and some of these are specifically targeted at smaller manufacturing firms.

In some countries, the development of particular technologies with high potential receives governmental support – biotechnology for example. Opposition to such selection on the part of government is on the grounds that government should not itself engage in picking winners. Joseph Stiglitz has recently argued that governmental support for particular technologies is justified where such technologies generate substantive externalities. The case for such support in South Africa is advanced in some of the recently completed Foresight Studies. Foresight also identified particular technologies that are candidates for enhanced support. In his state of the nation address, the President identified investment in research and development as a focal point of an integrated plan to achieve a cutting edge in biotechnology.

Unlocking the knowledge potential in tertiary institutions is vital; in a number of countries there are a multiplicity of programmes to link businesses more effectively with tertiary education institutions. In South Africa this is principally given effect to through support for research and training cooperation between tertiary institutions and firms – principally through THRIP and the Innovation Fund. One other modality is to promote the flow of persons as between tertiary institutions and business – both the UK and the US, for example, support such programmes.

R&D and innovation are important, but placing too much emphasis on this stresses the generation of technology rather than the effective use of technology. South African firms access most of their product and process technology from abroad. Government will investigate additional mechanisms by which the transfer of technology from abroad can be facilitated and whereby firms could be aided to access and assimilate technologies developed abroad.

Recent evidence suggests that sectors and countries that have experienced the most rapid diffusion of ICTs, have also experienced the most rapid rates of employment and output growth.

A cheap, effective and technologically sophisticated telecommunications service is a prerequisite for the application of knowledge-intensive activities and for the development of business in general. E-commerce has the potential to transform the way in which business is transacted. This is particularly true for the new economy areas, but it impacts on all business – large and small.

Strong competition overseen by effective regulation is key to achieving the market structure that can best achieve this objective. Our industrial policy will also aim at providing the right environment to ensue rapid diffusion of ICTs. For the larger and more sophisticated corporates, this will suffice. However, smaller firms, for whom ICTs paradoxically hold out particular promise, are likely to require further support. Government will accordingly investigate policies to improve ICT performance on behalf of SMMEs.

Our policies in this area will be closely co-ordinated with other governmental departments, especially the Department of Communications.

Government is committed to encouraging best practice and the development of efficiency enhancing networks. Spurred to a significant extent by developments in ICT, sharing and trading information with other firms is a major way in which firms can expand their knowledge and enhance their competitive position.

There are existing measures to support firm networking and the diffusion of best practice– the Sector Partnership Fund and the Competitiveness Fund – but further policies are envisaged. Of particular importance will be encouraging the development of supplier networks.

We have identified the main directions of industrial policy and provided illustrations of specific policies that government might develop in its attempts to support firms effectively create and assimilate knowledge. However, before turning ideas into concrete policies, further investigation will be necessary. In particular, government will want to consult with all stakeholders to develop workable and effective policies. As has happened in the last decade in South Africa the trade union movement and its shop steward structures can play an important part of such a process.

As firms will need to be in close and constant touch with their customers in order to supply what is really needed, so with government and industrial policy. International experience strongly demonstrates that a productive relationship between government and the private sector, including the trade union movement, is a sine qua non of a successful industrial policy. Informational flow from the private sector is critical to all aspects of industrial policy – formulation, implementation and monitoring and assessment. Similarly government is an important source of informational flow to the private sector. Government can play an important role in signalling to the private sector, whose vision is necessarily short-term and bounded by its own particular experiences and activities, major changes that are likely to affect the environment for business.

Government is accordingly committed to strengthening and deepening consultative mechanisms with all industrial stakeholders, particularly firms. We will also pay more attention to generating new forms of enterprise that are essentially co-operative and participative in nature. This latter aspect of policy will be dealt with more fully in the papers on enterprise development and empowerment.

The growing importance of the so-called new economy services sectors in the expansion of output and employment creation has been outlined. Many of these sectors, which were previously dominated by public sector or quasi-public sector producers, have been increasingly opened to competition on the part of private firms – health and telecommunications services, for example. However, the governmental agencies and departments that oversee the development of new economy service sectors have traditionally not had to concern themselves with the development of policy aimed at supporting private firms in a commercial environment. In relation to now commercialised or privatised service entities, these governmental departments are principally concerned with improving service standards and promoting access.

By contrast, the DTI has traditionally dialogued with private firms and focussed on these issues, albeit only in relation to manufacturing industry. The DTI’s experience in this area and the fact that many of our policies are increasingly as appropriate to other new economy services sectors, strongly suggests that, while there will still remain some policies specifically designed in relation to manufacturing industry, the DTI should develop a strategy which has broader applicability.

The scope of many of the traditional instruments of trade and industrial policy is being increasingly circumscribed – particularly as a result of agreements at the WTO. At the same time, a number of "new", or at least substantially transformed policy instruments, have come increasingly to the fore. They include regulation; competition policy, R&D support, and investment incentives.

In South Africa these "new" instruments have been increasingly deployed – the development of new regulatory authorities and regimes; the creation of a new Competitions Act and corresponding institutions; the coordination and enhancement of R&D under the national system of innovation and the significant expansion of investment incentives.

The creation of more competitive markets is of particular importance. Competitive markets spur productivity and innovation, enabling firms to gain their required inputs at competitive prices. There is some indication that in South Africa domestic firms maintain substantial market power. This enables them to raise prices and to put up with substantial inefficiencies in production. Increasing competitive market pressure will therefore be an important complement to raising company-level efficiencies. This will be effected principally through trade liberalisation and application of the new Competition Act, but also through policies which aim to spur the creation of new businesses.

Strong and knowledgeable consumers also play a major role in encouraging efficient and competitive business, and disciplining inefficient businesses and business practices. This is a much-neglected aspect of policy in South Africa. The DTI is currently examining the issue to see how consumers might be better informed and how businesses can be encouraged to follow good practices. This will be an important complement to our industrial strategy.

Where open competitive markets are not possible, regulation will be central. Regulatory certainty is a major determinant of investment and growth. The importance of regulatory certainty is evident for some South African manufacturing sectors such as pharmaceuticals, but is especially important to the development of the "new economy" sectors such as education, health and communications. As barriers to trade in commodities decline, the regulation of the services sectors will become an ever more critical issue. Experience has shown that effective regulatory institutions are not easily created or maintained. More will need to be done in this regard.

Provision for effective regulation will accordingly occupy a central role in our future industrial strategy.

Extending the focus of the DTI far more broadly than manufacturing industry and emphasising "new" tools of policy, particularly in the field of regulation in order to secure output and employment objectives, inevitably entails greater co-operation with a number of other government departments. This is especially true in relation to those departments, which have formal responsibility for many of the new economy sectors, such as health and communications. It is also significant in relation to departments that are concerned with the supply of key infrastructural inputs to business – such as energy, transport and telecommunications.

The developing thrust envisaged in the industrial strategy towards enhancing the ability of firms to access, produce and exploit knowledge will only be effective with the co-operation of a number of governmental departments – education particularly, but also labour and arts, culture, science and technology. In the absence of an integrated approach in government, industrial policy will have a very limited impact. The importance of government, in all its spheres, taking an integrated approach to meeting economic challenges was a major theme of the State President’s state of the nation address in February this year.

Cooperation between government departments with DTI playing the lead role, will become increasingly central to the processes of formulating and implementing industrial policy.

Given the myriad of changes in markets, in technologies and in business practices, industrial policy will always have to be developed in a situation of limited information. "Mistakes" are therefore inevitable. Indeed, the existence of strong uncertainty ensures that there is not one unique optimal policy and that judgement calls are inevitable. What is important is that government possesses firstly the ability to assess and learn from experience and secondly that there be the flexibility on the part of government to adjust policy in the light of experience. In the managerial language of the day, effective governments, like effective firms, must be structured as "learning organisations."

Indeed, many of the principles outlined for effective participation in the knowledge economy on the part of firms apply equally to government. To be effective, government too needs to be innovative, to make much more extensive use of ICT, to network and, in particular, to respond to the diversified needs of customers whose needs are constantly evolving. The major organisational restructuring of the DTI currently underway has, as its overriding objective, ensuring that the DTI and all of its programmes and policies, function as a customer-driven organisation.

However, in relation to our industrial policies, governmental knowledge is currently very limited. Up to now, assessment of the impact of our industrial policy in general, and of particular policies, has been lacking. Continuous consultation with firms and other stakeholders will play an important role in our policy assessments. We will seek to complement this by developing broader statistically-based information systems that will provide ongoing data on the type of firms making use of our industrial policies and the impacts that such policies are having on firm performance.

Policies will be constantly reviewed and adjusted in the light of the information received. However, the broad thrust of our policy – our industrial strategy – will continue to increasingly aim at equipping our firms to secure a competitive position through making optimal usage of knowledge.

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DTI will review our existing policies. The broad purpose of this review is to assess the efficacy and coherency of policies and the capacity to implement. The review will also enquire as to any possible policy "gaps" or omissions. Amongst other things, this will entail looking at best practice internationally.

Rather that examining each individual policy in turn or alternatively examining all of our policies together, reviews will be undertaken of each broad arena of industrial policy. This will entail the formation of six working groups.

The table below summarises the six main arenas of industrial policy. In addition it summarises the rationale for policy within each arena; indicative policies of that arena and the policies actually adopted by the DTI currently in each modality. It is evident that the DTI has new and active policies in all of these arenas.

The working groups would address a number of issues. For example:

1. Are there any evident "gaps?" This identification of "gaps" should also examine the rationales for policy. In relation to technology learning, for example, many of our policies are currently centered on supporting innovation. However, it has been argued that effective technology transfer from abroad and diffusion plays a more major role in local technological learning than local innovation. Currently, very few policies of the policies designed to promote technological learning address the issues of technology transfer from abroad or technological diffusion.
2. Do the policies hang together as a coherent whole? Is there a clear and coherent "vision" governing the application of policies in each arena? Is this vision communicated and discussed with the private sector and employees?
3. Do the individual policies complement, conflict or overlap with each other?
4. Is the requisite capacity in place to implement policy? What could be done to enhance capacity?
5. How could policy achievements in this arena be monitored and assessed in the future?

A DTI official will manage the review of each arena. Local experts from outside of the DTI, international experts in each area as well as the private sector constituencies will be involved.

The outcome would be a report. The reports from the different arenas would then be combined into a synthesis that would provide direction as to the current suite of DTI policies. A coherent vision and framework for supply side policies would then be developed. Finally, this would be communicated and consulted with key stakeholders.

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