Trade and Industrial Policy in South Africa

1. Trade and Industrial Policy in South Africa TIPS Forum 2008 Frank Flatters and Matthew Stern

2. 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

3. International experience PART 1

4. 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

5. International experience: the role of trade • Fragmentation and global production networks • Import-led growth

6. 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?

7. 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

8. 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

9. The South African experience PART 2

10. 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%

11. 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

12. 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

13. 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

14. 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

15. 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)

16. 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

17. 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’

18. 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.

19. 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

20. 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

21. Lessons learned PART 3

22. 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

23. 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