Economic Diversification, Black Industrialist and the pursuit of progress

2015-06-02 15:11

“Who is more to be pitied—these innocent victims of an ancient wrong, or I and men like me, who had inherited the problem? I had long ago thrown aside illusions and theories, and was willing to meet the facts face to face, and to do whatever in God's name a man might do towards saving the next generation from such a burden.”  Walter H. Page, Up from Slavery – Booker T Washington, 1890

If the next generation and their survival is the objective to all policy development, it would then need us to face up to facts at the expense of theories. We are in trouble and we need to critically look at ourselves irrespective race, religion, sex or creed. According to figures released on May 26th, annual GDP grew by a mere 1.3% in the first three months of this year, a crawl compared with the 4.1% achieved in the fourth quarter of 2014. Unemployment is up even by a narrow definition, it stands at 26.4%, the highest since 2003. The expanded definition puts unemployment at 36.1%. Thus effectively it makes the Industrialisation programme the saving grace for the economy and perhaps the single most important subject. Understanding the concept, government’s proposals and creating intense debates around it may just be next frontier in the struggle. (This a hard subject to bring up on the cusp of events and announcements by our politicians from last week, but please indulge for a few minutes)

Industry constitutes an important driver of economic transformation and growth. Indeed, the achievement of prosperity and a decent economic socio-economic life for the citizens of advanced countries and regions of the world is closely associated with the development of robust industrial sectors in the concerned countries and regions, in which typically manufacturing dominates. Imagine the pie shared above and the 21% slice for the secondary sector grown to absorb more people. Effectively this is what the objective of Industrialisation programme is about. Manufacturing sector generates economy-wide spill-over effects by promoting intra-sectoral linkages. The economic opportunities provided by industry stimulate entrepreneurship and enterprise development, technological dynamism, and higher efficiency and productivity.

General Sentiment

The prospects created in any discussion of Industrial policy can be misunderstood given areas the affected economic policy issues. The role played by the state in the process is viewed as intrusive by proponent of the classic school, who believe it’s a realm of private sector. Also noting how our government has not clothed itself with an effective track record with state owned entities in the secondary sector. Detractors will also point at failures of the process in India, Latin America and Africa.

Policy Framework

Minister of the Department of Trade and Industry summarised the policy Industrialisation policy with the following 5 pillars in his budget vote to Parliament on the 21st of May:

Infrastructure-driven industrialisation

This will “ensure that the very substantial build programme supports local industrial development”, said Davies.

Resource-driven industrialisation

This is “aimed at leveraging the mineral resources endowment to support higher levels of downstream beneficiation and value addition, whilst systematically building up both the demand and competitive advantages South Africa enjoys in the upstream mining, transport and capital goods sectors”.

Advanced manufacturing-driven industrialisation

“The dti will continue to build an integrated system of industrial financing, incentives and export support with a special focus on lead and dynamic companies that can compete effectively in export markets,” said Davies. “It encompasses a strong commitment to support emerging black industrial entrepreneurs.”

Procurement

“This focuses on strengthening the localisation of public procurement, building on the lessons learnt through the implementation of various policy instruments over the past few years,” said Davies.

Regional economic integration

“This centres on maximising the opportunities presented to the domestic economy by a growing market on the African continent, driven by high growth in the region, strong consumer demand, infrastructure development and resource exploitation,” said Davies.

What are the Gaps with our Industrialisation Programme and where has political debate fallen short?

South Africa is said to have a well-crafted policy regiment with the biggest failure being in the implementation of those policies. For this reason it’s been hard for the level of debate to be raised in parliament beyond rhetoric across the spectrum. The left will seek nationalisation and the liberals will lament private sector leadership and participation.

Thus the following points are but my observation from outside the House and the debates I am waiting to hear:

The IPAP identifies certain sectors including mining, agriculture and manufacturing as “productive” sectors, and the implication is that the rest are “unproductive”. The development of the SMME sector, especially emerging black businesses, needs the recognition that all sectors of the economy are productive and that they complement each other. While it is acknowledged that the manufacturing sector has the capacity to create large numbers of low-skilled jobs, it is currently the small business sector that we hope creates employment opportunities to combat the high unemployment numbers.

NEDLAC has gone very silent in articulating its role in crafting a social contract that it is supposed to be brokering between business, government and labour. How is the harmony being developed? Striking seasons have gone long unchecked and the harmony is compromised. Also can we agree that the private sector might be better at picking industrial winners?

There also remains a need to understand the competitive advantage of the different sectors. Industrial policy should aim at discovering the competitive advantages in the economy in close collaboration with the private sector instead of prescribing what they should be.

Technology and its skilled use can provide abundance, which the economy requires. The opposite side of the coin is a how labour-intensive growth path will provide high employment numbers. We therefore need to map the balance between technology and labour intensiveness, cognitive of the low real wages and labour flexibility from Asian countries.

We need workers to move into higher productivity jobs to achieve an improvement in real wages. This model however works in economic systems that have a certain character that South Africa is far from.

The implementation of the policy is dependent on the creation of rents, whether in the form of direct benefits such as subsidies or indirect benefits such as concessionary finance; it encourages rent-seeking behaviour and corruption. The way to counter these tendencies is to put in place definite performance requirements for the recipients of government assistance, with penalties if they are not complied with.

We need harmonised policy environment to support and supplement the IPAP. To this end in driving the attempt to address South Africa’s poor performance in the entrepreneurial stakes, I believe that this objective cannot be frustrated by other government policies that discourage entrepreneurship, e.g. the National Credit Act, means it’s hard for black small business start-ups to get funding without evidence of a secondary income source.

The exclusion of the services sector in the IPAP is an oversight given how the sector accounts for more than 70% of global output (even in SA as shown above). India has benefitted from the globalisation of services and has shown how economies can be turned around by embracing the IT and Contact centre services. The main focus of the IPAP is on growing the manufacturing sector. The possibility of utilising the services sector as the lead sector in economic development was not considered seriously.

Last year we introduced the ministry of Small business, I think from all announcements made on black Industrialisation, the ministry should ask this question. “Are we promoting small business or big business as the agent of industrialisation?”  I am a fan of growing Small business instead of a 100 trained individuals owning stakes in sponsored entities. This approach requires a vastly different plan and this debate has gone unchecked.

Our education and school system in South Africa need to be positioned in the industrialisation process.  One of the key elements of successful industrial policies has been their focus on the transfer, absorption, diffusion and development of technology. In the current WTO-dominated environment the protection of intellectual property rights of course complicates the transfer of technology from the advanced to emerging and developing economies, requiring a special policy focus on enabling such transfers. The best way available remains via the involvement of multinational companies in the economies of the latter group of countries. However, the capacity of an economy to absorb technological advance is heavily dependent on the quality of its human capital, which depends very much on education and skills development, and South Africa is unfortunately not well positioned in this regard.

Be Inspired SA!

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