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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. Context. Apartheid industrial development trajectory (pre-1994)

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South Africa’s industrial policy: progress and constraints

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

  2. Context • 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

  3. Context • 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

  4. SA’s industrialisation policy evolution Average industrial tariff, 1990 - 2006 Source: ITAC

  5. 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

  6. 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

  7. Diagnosis: role of manufacturing • IPAP: value-added sectors with high employment and growth multipliers Sectoral growth and employment multipliers Source: DTI, CSID

  8. Diagnosis: currency • Pervasive currency overvaluation and volatility • Balance on current and financial account, REER 1990Q1 – 2011Q4, R’m / Index (1990=100) Source:SARB

  9. Diagnosis: currency • Strong correlation with international commodity prices ... • Metals and Minerals Prices, 1960 – 2011, Index (2005 = 100) Source:World Bank

  10. Diagnosis: currency • ... despite no real economy commodity boom ... • Mining country growth, 2001-2008, real US$ Source:Global Insight

  11. Diagnosis: currency • ... exacerbated by high real interest rates and quantitative easing • SA short term real interest rates versus developing countries, 2000 - 2011, % Source:SARB

  12. 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

  13. Diagnosis: manufacturing • Manufacturing has borne brunt of currency overvaluation and global crisis • Employment in the manufacturing sector, 2008Q1 - 2011Q4, ‘000 Source:StatsSA

  14. Diagnosis: industrial financing • Rapid growth of private credit extension ... but not into fixed investment • Private credit extension, 1990 - 2010, R’m (2005) Source:SARB

  15. 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

  16. 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)

  17. Diagnosis: infrastructure • Large and rapid electricity price increases Eskom tariff increases, 1996 – 2011, % Source: Eskom

  18. $600,000.00 $500,000.00 $400,000.00 $300,000.00 $200,000.00 $100,000.00 $0.00 SANTOS TILBURY DURBAN NAGOYA LE HAVRE ANTWERP NEW YORK VERA CRUZ YOKOHAMA BALTIMORE SINGAPORE CAPE TOWN CHARLESTON BUENOS AIRES BREMERHAVEN LAEM CHABANG PORT ELIZABETH Terminal Handling Charge Cargo Dues Sea Side Costs Diagnosis: infrastructure • Port charges amongst the highest in the world Average cost per vessel, US$ Source: AIDC Port Benchmarking Study, 2007

  19. 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

  20. 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

  21. 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

  22. 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

  23. 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

  24. 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

  25. 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

  26. 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

  27. 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

  28. 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

  29. 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

  30. 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

  31. 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%

  32. 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

  33. 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

  34. Conclusions • 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

  35. 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

  36. Appendix: growth South African GDP growth relative to high, medium and low income peers Source:World Bank

  37. 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

  38. Appendix: finance, investment and savings Ratio of FIRE GDP to non FIRE private fixed capital investment Source: SARB

  39. Appendix: employment Formal employment by sector Source:Quantec RSA Standardised Industry Database

  40. Appendix: employment Unemployment and informality rates Source:StatsSA

  41. 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

  42. Case Study: Automotives Automotive Tariff Regime 2004 – 2020 Source: DTI

  43. Case Study: Automotives Total domestic production versus total exports 1995 – 2013* Source: NAAMSA

  44. Case Study: Automotives Total domestic market versus total imports 1995 – 2013* Source: NAAMSA

  45. Case Study: Automotives Competitiveness progress: component manufacturers (2004 to 2007) Source: B&M Analysts, SAABC database

  46. Case Study: Automotives Trade balance 2005 – 2010 Source: DTI, NAAMSA, Econometrix

  47. 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

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