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South Africa’s industrial policy: progress and constraints. Economic Association (IEA) / World Bank Roundtable New Thinking in Industrial Policy 22-23 May 2012. Context. Apartheid industrial development trajectory (pre-1994)

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South africa s industrial policy progress and constraints

South Africa’s industrial policy: progress and constraints

Economic Association (IEA) / World Bank Roundtable

New Thinking in Industrial Policy

22-23 May 2012


  • Apartheid industrial development trajectory (pre-1994)

    • Industrialisation built on ‘Mineral Energy Complex’ (MEC) sectors: Mining + capital and energy intensive mineral processing sectors (steel, petro-chemicals, aluminium etc.)

    • Unstrategic / incoherent approach to development of ‘downstream’ manufacturing sectors

    • However, important capabilities were developed in a range of sectors, e.g. autos, agro-processing, metal fabrication, capital goods


  • Orthodox reforms (post-1994)

    • Monetary policy: inflation targeting, high real interest rates and capital account liberalisation

    • Fiscal policy: debt reduction, weak infrastructure investment, increasing social expenditure

    • Widespread tariff liberalisation with narrow pockets of sector support: Automotives, Clothing / Textiles

    • Commercialisation of state assets, weak oversight and regulatory mechanisms to discipline monopoly pricing

    • Skills: weaknesses in education and skills development institutions

    • *Black Economic Empowerment: narrow transfer of ownership stakes in existing sectors and companies

Sa s industrialisation policy evolution
SA’s industrialisation policy evolution

Average industrial tariff, 1990 - 2006

Source: ITAC

Industrial policy approach
Industrial Policy Approach

  • National Industrial Policy Framework (NIPF): 2007

    • Emphasises need for economy-wide policy coherence

  • Annual Industrial Policy Action Plan (IPAP)

    • Three year rolling plan, updated annually, ten year outlook

    • Cross-cutting / transversal constraints, levers and policy proposals

    • Sector strategies

      • High global growth and intermediate barriers to entry

      • “Self discovery” processes with sector stakeholders

      • Policy levers

      • Reciprocity requirements

      • Review / adaptation

    • Capacity building

    • “Voice” in relation to intra-governmental co-ordination / “state failure”

  • Implementation overlapped with large external (currency, global crisis) and internal (electricity price) shocks

Diagnosis employment
Diagnosis: employment

Tradable sectors critical in context of high unemployment and skills constraints

Ratio of semi- and unskilled labour in tradable and non-tradable sectors, 1970 - 2010

Source:Quantec RSA Standardised Industry Database

Diagnosis role of manufacturing
Diagnosis: role of manufacturing

  • IPAP: value-added sectors with high employment and growth multipliers

Sectoral growth and employment multipliers

Source: DTI, CSID

Diagnosis currency
Diagnosis: currency

  • Pervasive currency overvaluation and volatility

  • Balance on current and financial account, REER 1990Q1 – 2011Q4, R’m / Index (1990=100)


Diagnosis currency1
Diagnosis: currency

  • Strong correlation with international commodity prices ...

  • Metals and Minerals Prices, 1960 – 2011, Index (2005 = 100)

Source:World Bank

Diagnosis currency2
Diagnosis: currency

  • ... despite no real economy commodity boom ...

  • Mining country growth, 2001-2008, real US$

Source:Global Insight

Diagnosis currency3
Diagnosis: currency

  • ... exacerbated by high real interest rates and quantitative easing

  • SA short term real interest rates versus developing countries, 2000 - 2011, %


Diagnosis manufacturing
Diagnosis: manufacturing

  • Manufacturing has borne brunt of currency overvaluation and global crisis

  • Trade balance by sector 1995Q1 - 2011Q3, Rm

Source:Quantec RSA Standardised Industry Database

Diagnosis manufacturing1
Diagnosis: manufacturing

  • Manufacturing has borne brunt of currency overvaluation and global crisis

  • Employment in the manufacturing sector, 2008Q1 - 2011Q4, ‘000


Diagnosis industrial financing
Diagnosis: industrial financing

  • Rapid growth of private credit extension ... but not into fixed investment

  • Private credit extension, 1990 - 2010, R’m (2005)


Diagnosis industrial financing1
Diagnosis: industrial financing

  • Fixed investment sectorally concentrated in consumption-driven sectors

  • Change in capital stock between 2000 and 2009 across all economic sectors R’m (2000)

Source:Quantec RSA Standardised Industry Database

Diagnosis industrial financing2
Diagnosis: industrial financing

  • Industrial financing constrained not just by cost but by term

Nedbank distribution and term of loans, 2009, R’m

Source: Letsema (Nebank)

Diagnosis infrastructure
Diagnosis: infrastructure

  • Large and rapid electricity price increases

Eskom tariff increases, 1996 – 2011, %

Source: Eskom

Diagnosis infrastructure1

























Terminal Handling Charge

Cargo Dues

Sea Side Costs

Diagnosis: infrastructure

  • Port charges amongst the highest in the world

Average cost per vessel, US$

Source: AIDC Port Benchmarking Study, 2007

Diagnosis infrastructure2
Diagnosis: infrastructure

  • Infrastructure investment scaling up but de-linked from manufacturing

  • Public investment and trade balance: metals and machinery1990 – 2009, R’m (2000)

Source: SARB, Quantec

Diagnosis manufacturing2
Diagnosis: manufacturing

  • Auto’s and machinery major diversifiers since 1994

  • MVA annual average growth:1994-2011 and share 2011, R’2005 prices

Source:Quantec RSA Standardised Industry Database

Diagnosis economy
Diagnosis: economy

  • Two speed economy: consumption vs production driven sectors

  • Growth in production and consumption- driven sectors and trade balance, 1994 – 2010, R’m (2005)

Source:Quantec RSA Standardised Industry Database

Ipap progress transversal kaps
IPAP: Progress – Transversal KAPs

  • Leveraging Procurement

    • Amendments to procurement regulations: designation of ‘fleets’ for local production

      • Rail coaches, wagons, locomotives

      • Electricity pylons

      • Buses

      • Clothing / Textiles / Footwear

      • Further designated sectors to follow

    • Designation methodology and research

      • Industry capabilities and competitive structure

      • Appropriate level of local content

      • Modalities to avoid excessive price premia/ promote dynamic competition

      • Scaling up over time

Ipap progress transversal kaps1
IPAP: Progress – Transversal KAPs

  • Industrial financing

    • Re-orientation of Industrial Development Corporation (IDC) funding

      • R102bn ($82bn) for IPAP and New Growth Path sectors over five years

    • Manufacturing Competitiveness Enhancement Programme (MCEP)

      • R5.7bn ($725m) additional funding to upgrade existing manufacturing capacity, new investments and expansions

      • ‘Matrix’ incentive with various access windows

        • Investment: new, expansions, technology upgrades

        • Interest make-up and working capital

        • Firm and cluster competitiveness upgrading

        • Standards and conformity assessment

        • Feasibility studies

Ipap progress transversal kaps2
IPAP: Progress – Transversal KAPs

  • Tariffs and standards

    • Strategic rather than “high”or “low”tariff regime

      • Informed by sectoral analysis

      • Tariff reductions / rebates: intermediate inputs, especially in sectors with market dominance

      • Tariff increases: sectors with potential for employment and value-added improvements

    • Green, energy and water efficiency standards

      • Required to create / facilitate new sectors: biofuels, renewable energy, solar water heating

      • Increase energy efficiency in context of supply constraint and rising electricity prices

    • Stronger enforcement

      • Customs fraud

      • Non compliant products

Ipap progress transversal kaps3
IPAP: Progress – Transversal KAPs

  • Competition policy

    • Focus of competition authorities on intermediate inputs to production sectors and goods and services for poor and working class households

    • Particular problem with import parity pricing of intermediate inputs due to lack of regional competition and high logistics costs

    • Removed / reduced duties on most intermediate inputs: steel, chemicals etc.

    • Priority to introduce greater competition into steel sector

Ipap revamp major sector strategies
IPAP: revamp major sector strategies

  • Automotives

    • Inheritance of a deeply uncompetitive automotive industry in 1994

    • Motor Industry Development Programme (since 1995)

      • Import Rebate Credit (IRCC) for exports, with declining tariffs (80% - 1994 to 25% - 2012)

      • IRCC useds: investment, import vehicles / components, sell to other importers

    • Key achievements

      • Vehicle production increased from 388,442 in 1995 to 534,490 in 2007

      • Vehicle exports increased from 15,764 in 1995 to 239,465 in 2010

    • Automotive Production and Development Programme (from 2013)

      • Investment Allowance (on budget) + IRCC earned against production / value added

      • Minimum volume requirement, targetting 1.2m vehicles per annum by 2020

      • Broaden scope to mini-bus taxis, buses and trucks

    • Key challenges

      • High import penetration and intensity of production

      • Insufficient number of domestic Tier 1 component suppliers – MNC dominance

Ipap revamp major sector strategies1
IPAP: revamp major sector strategies

  • Clothing, Textiles, Leather, Footwear

    • Duty Credit Certificate Scheme (1995-2009)

      • Substantial decline due to fierce global competition (especially end of MFA in 2005), currency strength and volatility, illegal imports and insufficient competitiveness

      • DCCS did not work – only applicable to small pool of exporters and promoted imports through duty credits

    • Clothing Textiles Competitiveness Programme (from 2009)

      • Priority to recapture domestic market share through leveraging ‘economies of proximity’

      • Production credits earned which can only be redeemed against specific competitiveness enhancing investments

        • Machinery and equipment

        • Process and product improvements

        • Skills upgrading

        • ‘Cluster’ initiatives e.g. IT systems linking retailers and manufacturers

    • Key achievements

      • Arrested employment losses with modest increases by 2011

      • Buy-in of a number of domestic retailers

    • Key challenges

      • Currency overvaluation

      • Illegal imports

Ipap 2012 k ey sector focus
IPAP 2012: Key sector focus

  • Green industries and industrial energy efficiency

    • Solar and Wind generation componentry

      • Leverage Renewable Energy Independent Producers Programme (REIPP) – procurement of 17.8GW by 2030

      • Minimum and rising levels of local content with each round of procurement (approx. 1GW per round)

      • Target componentry in Solar PV, Wind and Solar CSP

      • Develop financing mechanism for ‘lateral migration’ of companies with relevant engineering, fabrication, casting capabilities

      • Develop financing mechanism for testing and certification to meet OEM standards

    • Solar Water Heaters

      • New building regulations require most new buildings to install SWH or similar technologies

      • Designation of SWHs purchased by public entities

      • Work with insurance industry to

    • Industrial energy efficiency

Ipap 2012 key sector focus
IPAP 2012: Key sector focus

  • Metal Fabrication, Capital and Transport Equipment

    • Rail

      • Leverage large rail upgrade capex

      • Designations related to key componentry into loco’s, wagons and coaches

      • Appropriate pre-shipment financing

    • Electricity

      • Leverage large coal and nuclear upgrade capex

      • Designations in range of areas

      • Appropriate financing mechanisms

    • Mining

      • Linkages to major mining company procurement chains

      • Beneficiation strategy / Mining obligations

Ipap 2012 key sector focus1
IPAP 2012: Key sector focus

  • Agro-processing

    • Biofuels

      • Drive technical work related to mandatory feed-in of minimum levels of biofuels into national fuel stock

      • IDC financing for farming and refining operations

    • Food-processing, Beverage and Confectionary

      • Identification of export opportunities in net food-importing countries

      • Product development

      • Standards

    • Import replacement opportunities

      • Soybean meal and oil

      • Furniture

      • Processed food products

Ip as voice intra governmental co ordination state failure
IP as “voice”: intra-governmental co-ordination / “state failure”

  • “Voice” for co-ordination / remedial action within the state

  • Accelerated progress with respect to industries requiring complex multi-departmental co-ordination, driven by Minister’s IPAP forum and through the Economic Cluster, such as

    • Renewable energy

    • Biofuels

    • Water licences for forestry, paper and pulp and agriculture

  • Port tariff rebates for Manufacturers of R1bn

  • ‘Moderation’ of recent electricity price increases from 25% to 16%

Capacity building
Capacity building “state failure”

  • Recruitment

    • Hire best senior management possible

    • Hire young Master’s graduates and ‘incubate’ with capable mentorship

  • Dedicated university programme in economic development for internal capacity improvement / recruitment pool

    • Certificate

    • Honours

    • Masters

  • African Programme on Rethinking Development Economics

  • Learning by doing / ‘economies of scope’ with respect to sector strategy development

  • Dedicated internal training programme to be developed

Political economy considerations can south africa live rent free
Political economy considerations: “state failure”can South Africa live rent-free?

  • Rents are pervasive in SA economy (as elsewhere)

  • Currency overvaluation rents

    • Currency speculation

    • Importers / retailers

    • Consumption boom fed by short term inflows

    • Rodrik: currency undervaluation rent linked to high growth

  • Financial sector rents?

    • Puzzle of massive growth without corresponding increase in investment and savings

    • ‘Internal Dutch Disease’ relative profitability of financial vs real investment

  • State as site of accumulation

    • Corruption

    • ‘Tenderpreneurship’

    • Limited development of black entrepreneurs

  • Industrial policy rents

Conclusions “state failure”

  • Significant progress with development and implementation of industrial policy, but serious constraints

    • Coincided with two major external and mutually re-inforcing external shocks: currency overvaluation and global crisis; and

    • One internal shock: massive increases in energy and other prices based on ‘bunched-up’ user pays approach to infrastructure finance

  • Mobilisation of key transversal policy instruments

    • Industrial financing: IDC + on-budget

    • Procurement

    • Trade policy

  • Capacity and experience for economies of scope in further sector strategy development / implementation

  • Need policy macro / economy-wide policy alignment

    • Monetary policy and exchange rate

    • Fiscal policy, especially sustainable infrastructure financing

  • Need to promote Black-owned and managed value-adding manufacturers

Appendix micro vs macro explanations of manufacturing and economic underperformance
Appendix: Micro “state failure”vs Macro explanations of manufacturing and economic underperformance

  • Micro explanations

    • Manufacturing is over-protected

    • Weak education and skills system

    • Infrastructure constraints

    • Wages are too high, labour productivity too low

  • Macro / economy-wide explanations

    • Orders of magnitude

    • Average tariff has declined by 71%: to 8%

    • Persistent currency overvaluation exerts a capital and skills bias

    • Short term capital inflows feed short term lending for consumption, not directed to long term investment

    • Manufacturing relatively less skill intensive than non-tradable private services

    • Internal ‘dutch disease’ relative profitability of real versus financial activities

Appendix growth
Appendix: growth “state failure”

South African GDP growth relative to high, medium and low income peers

Source:World Bank

Appendix finance investment and savings
Appendix: finance, investment and savings “state failure”

Gross Fixed Capital Formation and Savings to GDP versus share of the Finance sector in GDP, 1970-2008 (%)

Source: SARB

Appendix finance investment and savings1
Appendix: finance, investment and savings “state failure”

Ratio of FIRE GDP to non FIRE private fixed capital investment

Source: SARB

Appendix employment
Appendix: employment “state failure”

Formal employment by sector

Source:Quantec RSA Standardised Industry Database

Appendix employment1
Appendix: employment “state failure”

Unemployment and informality rates


Case study automotives
Case Study: Automotives “state failure”

  • Inheritance of a deeply uncompetitive automotive industry

    • Crude tariff protection

    • Proliferation of platforms and models

  • MIDP: Motor Industry Development Programme

    • Export / import complimentation: import credits earned against exports in a context of declining tariff s (80% in 1994 to 25% in 2012)

    • MNC assemblers and mix of MNC and domestic component suppliers

  • APDP: Automotive Production and Development Programme

    • Production / import complimentation plus Investment Allowance:

    • Comparable with major competitors and WTO consistent

    • Target 1.2m vehicles per annum by 2020

    • Production based programme with minimum volume requirements

Source: DTI

Case study automotives1
Case Study: Automotives “state failure”

Automotive Tariff Regime 2004 – 2020

Source: DTI

Case study automotives2
Case Study: Automotives “state failure”

Total domestic production versus total exports 1995 – 2013*

Source: NAAMSA

Case study automotives3
Case Study: Automotives “state failure”

Total domestic market versus total imports 1995 – 2013*

Source: NAAMSA

Case study automotives4
Case Study: Automotives “state failure”

Competitiveness progress: component manufacturers (2004 to 2007)

Source: B&M Analysts, SAABC database

Case study automotives5
Case Study: Automotives “state failure”

Trade balance 2005 – 2010

Source: DTI, NAAMSA, Econometrix

Case study automotives progress and challenges
Case Study: Automotives “state failure”Progress and Challenges

  • Key achievements

    • Production volumes / economies of scale

      • Consolidation of platforms and models

      • Vehicle production increased from 388,442 units in 1995 to peak of 534,490 units in 2007

      • Vehicle exports increased from 15,764 in 1995 to 239,465 in 2010

    • Increased efficiencies, effort and learning at both assembler and component levels

  • Key challenges

    • Import penetration and import intensity of production

    • Insufficient number of domestic Tier 1 component suppliers – MNC dominance

    • Vulnerable subsectors: catalytic convertors, leather seats

    • Logistics costs