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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
  • 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: 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
  • 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 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

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

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

Ratio of FIRE GDP to non FIRE private fixed capital investment

Source: SARB

appendix employment
Appendix: employment

Formal employment by sector

Source:Quantec RSA Standardised Industry Database

appendix employment1
Appendix: employment

Unemployment and informality rates


case study automotives
Case Study: Automotives
  • 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

Automotive Tariff Regime 2004 – 2020

Source: DTI

case study automotives2
Case Study: Automotives

Total domestic production versus total exports 1995 – 2013*

Source: NAAMSA

case study automotives3
Case Study: Automotives

Total domestic market versus total imports 1995 – 2013*

Source: NAAMSA

case study automotives4
Case Study: Automotives

Competitiveness progress: component manufacturers (2004 to 2007)

Source: B&M Analysts, SAABC database

case study automotives5
Case Study: Automotives

Trade balance 2005 – 2010

Source: DTI, NAAMSA, Econometrix

case study automotives progress and challenges
Case Study: AutomotivesProgress 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