Past production policy was naive, says October
• Director-general responds to World Bank report by backing return to grant-based incentives
SA was stupid and naive to have withdrawn support for its productive sector in the 1990s in line with international policy guidelines, because the country paid a price and had to play catch-up, Department of Trade and Industry director-general Lionel October said in an interview on Friday.
October was commenting on a World Bank report on SA released last week in Johannesburg. The bank recommended the government redirect its tax incentives to labour-intensive industries such as agriculture and manufacturing to boost growth and job creation, saying that the social returns in manufacturing were greater than for mining.
October said the department welcomed the report: “Our view is we mustn’t withdraw support for mining — we must increase support to manufacturing, agriculture and tourism.
“Mining is important, but it’s just the production of raw materials. We must add value to those raw materials.”
The government wants to provide grant-based incentives for agriculture and tourism similar to those offered by the US, the EU and Japan to support key sectors. This is the kind of support SA withdrew in the 1990s.
“That was the biggest mistake we made as a country. We’re the only country in the world that doesn’t have support for agriculture. So, we’re at an absolute disadvantage.”
The IMF, the World Bank and the Washington Consensus had encouraged disincentivising productive sectors, even though there were countries that had contradicted this.
“We [were] naive and paid attention to the World Bank and all its ideas whereas other countries don’t do that. They pay lip service to it [the World Bank] and support their sectors.
“The global financial crisis brought about some change. Even right-wing conservatives support manufacturing.”
SA had been stupid but was slowly clawing back.
“Since 2007 and 2008, the department has been pushing to develop an industrial policy to reverse withdrawal of support.”
The response might be a bit late, he said, but at least some sectors were making progress.
The clothing and textiles sector was almost decimated, but the department introduced an incentive scheme six years ago that resulted in the creation of 6,500 jobs. The automotive sector incentive has been in force for 20 years and about R150bn worth of exports leave SA every year.
A R1bn incentive scheme has been devised for downstream agroprocessing such as poultry, red meat and fruit.
In addition, funds to the agriculture sector would be increased incrementally.
October said manufacturing received a tax incentive of about 30% — about R15,000 per job created in the sector.
To date, the manufacturing sector had generated investment of R64.8bn.
The department is working with the World Bank to develop ways to streamline investment and regulation across all three tiers of government.
The World Bank has highlighted SA’s growth rate as being too low to lift citizens out of poverty and joblessness. The World Bank recommends that the country lift its economic growth by rebalancing its imports to stimulate domestic product consumption, since investment has remained weak.
Marek Hanusch, World Bank senior economist for SA, said the country’s economy was more capital intensive than its emerging market peers.
“Investment tax incentives may have contributed to capital moving to less productive sectors,” Hanusch said.
Mining and manufacturing sector participants eligible for tax incentives enjoyed the same return, but the social return on manufacturing was 3.4 times higher at 29.6% while on mining it was 8.8%.
However, the mining tax incentive was more favourable than the manufacturing one.
The World Bank said the five sectors that were generally most responsive to tax incentive schemes were those with the largest employment multipliers. They are typically agriculture, trade and hospitality, community and social services, construction, and manufacturing.
The end of the commodity super cycle had seen these sectors become more competitive. Realigning investment towards these industries would amplify growth and job creation, the World Bank said.