Trade and industrial policy in south africa
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Trade and Industrial Policy in South Africa. TIPS Forum 2008 Frank Flatters and Matthew Stern. Outline. Part 1 – International experience Part 2 – South African experience Tariffs and trade policy Sector targeting Tax incentives Government procurement Development finance

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Trade and Industrial Policy in South Africa

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Trade and Industrial Policy in South Africa

TIPS Forum 2008

Frank Flatters and Matthew Stern


Outline

  • Part 1 – International experience

  • Part 2 – South African experience

    • Tariffs and trade policy

    • Sector targeting

    • Tax incentives

    • Government procurement

    • Development finance

    • Strategic infrastructure investment

  • Part 3 - Lessons learned


International experience

PART 1


International experience / themes

  • Cheap points or to real lessons? (post hoc ergo propter hoc fallacy)

  • The question is not big state vs. small state; intervention vs. no intervention; markets vs. governments; or industrial policy vs. no industrial policy

  • The real issue is effective policy vs. ineffective policy


International experience: the role of trade

  • Fragmentation and global production networks

  • Import-led growth


International experience: policy-making in the real world

  • All governments make mistakes

  • All policies have unintended, and often unwanted consequences

  • How to minimize the costs and maximize the benefits?


Asia: successes and mistakes

  • Tax incentives – varieties of experience in ASEAN

  • Beneficiation – forest products

  • Motor vehicles – Indonesia and Malaysia

  • Capital controls and the Asian crisis

  • Import regulations and administration

  • Human capital – basic health and education


International experience: keys to success

  • Ability to assess overall economic consequences of policy actions, ex ante and ex post

  • Institutions and processes that ensure a role for independent economic analysis and monitoring of policy impacts

  • ‘Eternal vigilance’ and opportunism in policy design

  • Ability to listen to and learn from ‘stakeholders’ while avoiding capture by special interests


The South African experience

PART 2


Trade and Tariff Policy – initial reform

  • The average tariff fell from 23% in 1994 to 8.2% in 2004 (Edwards 2005)

  • Increased openness across all manufacturing:

    • Export orientation rose from 16% to 30%

    • Import penetration rose from 23% to 36%


Trade and tariff policy - stalled

  • But performance disappointing; SA’s share of world exports fell from 0.7 to 0.5 percent over the post-1994 decade.

  • Why? The reform programme stalled:

    • The number of MFN bands has increased

    • SA has become a prolific user of anti-dumping duties

    • PTAs are the major focus of ‘reform’; but partial and ambivalent (rules of origin, NTBs, distrust of implementing agencies)

    • Tariff ‘concessions’ saved as negotiating ‘weapons’

    • Selective, made-to-measure tariff reform and rebates; ERPs have risen across many manuf. sectors


Sector targeting – the motor industry

  • The great South African success story

  • Unintended consequences:

    • High costs

    • Catalytic converters the largest beneficiary

  • Weak monitoring; no transparency; economic cost benefit analysis questionable at best

  • Capture

    • Transitional assistance morphed into “strategic” industry; support levels increasing


Tax incentives – international experience

  • Not necessary and largely ineffective, especially for ‘good’ investments

  • Costs are generally large and usually not transparent

  • Discretionary authority is often abused

  • Tax system should not be a substitute for dealing with underlying investment problems


Tax incentives – SA experience (the SIP)

  • R10 billion in tax allowances for strategic investments

  • Favoured capital intensive and up-stream industries

  • Tailored to meet specific projects

  • Claims of job benefits exaggerated

  • Independent review never published


Government procurement – industrial offsets

  • NIPP obligations apply to all government purchases of more than US$10 million

  • Core principles:

    • No increase in price

    • Mutual benefit

    • Sustainability

    • Responsibility

    • Additionality

    • Causality (SPAs excluded)


NIPP ‘Success Stories’

  • Ferrostaal will provide a ‘secured loan at a preferential rate’ to a polyester plant in Gauteng

    • Euros 2 million in investment credits

    • Euros 12.5 million in sales

  • Volvo ‘has convinced Acerinox to favour Columbus Steel as their sourcing partner’

    • R1.8 billion in export credits

  • Various other obligors are involved in a wide range of projects

    • BAE/SAAB ‘spearheading’ tourism in PE

    • Ferrostaal testing and sealing condoms

    • Augusta spinning and knitting Mohair

    • Thyssen producing wheat beer


Development Finance – the IDC

  • IDC internal review (2005):

    • The IDC has failed to diversify out of its core metals and chemical interests

    • Future role lies in correcting for ‘the intrinsic failures of the private financial sector’

    • The IDC’s knowledge base and appetite for risk enable it to fund projects that would not be considered by commercial sector

    • The IDC has a dual role as both a ‘policy actor’ and a ‘development agency’


The IDC – mission confused and conflicted?

  • The recent performance of the IDC does little to suggest that it is doing more or less than what the private sector is already doing

    • Preoccupied with large BEE deals

    • Dominated by mining and telecomms interests

    • SMME financing down

  • For the IDC to be involved in the design and implementation of industrial policies and not compete with the private sector raises potential conflicts of interest.


Strategic investment – Coega

  • Government investment

    • R8 billion

  • The feasibility of the project hinges on an anchor aluminium smelter

    • SIP

    • Subsidised electricity

    • 60 to 75% local (IDC, Coega and other) equity

  • Private sector investment

    • Claims 9 investment deals worth R21 billion

    • Of which just R500 million seems secure


Strategic investment – Blue IQ

  • 11 strategic investments over five-year period

    • The Innovation Hub

    • Gauteng Automotive Cluster

    • Wadeville Industrial Corridor

    • JIA Industrial Development Zone

  • Measures of success

    • No attempt to justify the economic value of investments

    • Investment/output multiplier lower than the rest of economy

    • Impact on private sector investment lower than government expenditure on social services


Lessons learned

PART 3


Systemic problems

  • Confusion over the role of trade

  • Anti-labour bias

  • Sector-specific focus

  • Lack of capacity for policy analysis

  • High risk of capture

  • Lack of institutional coordination


The way forward

  • Industrial policy in SA must be targeted at job creation and poverty reduction. This requires:

    • Real and objective economic analysis

    • Honest and independent reviews

    • Serious consideration of the community of stakeholders

  • And it needs to be thought of much more broadly than simple sector strategies – the overall regulatory and investment environments; human capital; infrastructure; and above all competition


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