The Treasury’s recent discussion document “Economic Transformation, Inclusive Growth, and Competitiveness: Towards an Economic Strategy for SA” begins its section on industrial policy with a call for “periodic and independent evaluations of industrial policy to ensure that they are effective in meeting their objectives”.
This is very appropriate. Good industrial policy requires frequent independent evaluations to assess what is and what is not effective so that policy can be adapted accordingly.
The need for an independent valuation of industrial policy is significantly strengthened when it is failing to realise its declared objectives and when the country’s industrial development is lagging its peers.
This is the situation in SA. Measured in terms of growth in output, employment and exports, SA manufacturing has fallen far short of the declared objectives of industrial policy. In addition, SA manufacturing has performed very poorly compared with countries at a similar stage of development.
Manufacturing output is still below that of 2008. By contrast, emerging markets overall have increased manufacturing output about 50%. Industrial policy and a number of government strategy documents envisaged a growing share of manufacturing. However, manufacturing as a share of GDP has fallen from 16% to less than 12%. While other emerging markets have also experienced a decline in manufacturing as a share of GDP, the decline has been far more severe in SA.
Manufacturing employment is a major objective of SA’s industrial policy. The declared objective of the Industrial Policy Action Plan (Ipap) and incorporated into government’s overall strategy, the New Growth Path (NGP), was the creation of 350,000 manufacturing jobs by 2020. However, SA’s manufacturing employment has fallen steadily. Manufacturing employs 320,000 fewer people than in 2008.
This decline arises not only because of the slow rate of growth of manufacturing output, but also because the employment intensity of that growth, the number of jobs per unit of output, is low. Moreover, the employment intensity of manufacturing growth has been declining. While other countries have also experienced a declining employment intensity of growth, this is far more pronounced in SA.
Manufactured export growth has been very slow over the past decade. By contrast, SA’s industrial policy, the NGP and the National Development Plan all envisaged significant growth in manufactured exports. In terms of volume, non-mineral manufactured exports have stagnated. SA’s manufactured exports have grown far more slowly than in comparator countries and SA’s manufactured exports are well below the country’s potential. Large and well-established exporters are exporting fewer new products and exporting to fewer new destinations. Moreover, according to the World Bank, “SA has one of the lowest new-firm entry rates into exporting among its peers”.
The significant discrepancy between the declared objectives of industrial policy and the results realised is evident also in the manufacturing subsectors that are the particular focus of industrial policy and support programmes — namely cars, clothing and mineral beneficiation.
Despite its successes in terms of exports, the car sector has not experienced significant production growth. In 2008, SA produced 563,000 vehicles. The declared policy objective was to double production to a range of 1-million to 1.2-million vehicles by 2020. By contrast, in 2018 SA produced 610,854 vehicles, an increase of a little more than 8% in a decade. The figure for 2019 is likely to be even lower.
In 2009, the government introduced a stronger industrial policy with a raft of support measures for the clothing sector. However, while there have been some positive developments and some significant investments in new state-of-the-art factories, overall employment in clothing is now 25% lower than in 2009 while output has declined. Output has declined consistently. There was a particularly large contraction in 2018; clothing output fell 4.9%.
The Treasury discussion document has harsh words for policy focused on the downstream beneficiation of minerals. “Focusing only on downstream beneficiation at the expense of opportunities from the entire set of potential ‘lateral’ sectors is the wrong approach and a bad policy paradigm ….”
There is little evidence that downstream beneficiation has had any significant success. Evidence relating to the development of fuel cells, energy storage and titanium, for example, suggests SA is well behind other countries with few prospects of catching up.
SA’s industrial policy needs to change direction. An independent review would allow for an assessment to be made about the effectiveness of industrial policy over the past decade. Based on that assessment, existent policies would be modified and adapted.
A review would also allow for new policies, new instruments and new sectors to be considered, particularly where policy outcomes have fallen far short of declared policy objectives and SA’s manufacturing performance has fallen significantly behind that of comparator countries.
For a more detailed discussion see “SA’s Industrial Policy. Time for a Review and a Rethink”. Viewpoints, No 8, August 2019.
• Kaplan is professor emeritus at the University of Cape Town.
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