Industrial policies must change
Bold adjustments are needed in South Africa to boost employment and diversify exports
After 28 years of democracy, South Africa has failed to achieve structural transformation of the economy. The government must stop paying lip service to industrial policies and implement aggressive measures to transform the economy and steer production towards sectors that have high employment multipliers. Such policies can significantly increase the pace of job creation.
Industrial policy is about developing a vision for the structure of the whole economy. In the Asian developmental states, changes to the structure of production to reallocate labour from activities with low productivity (unemployment and disguised unemployment in agriculture and urban informal employment) to those with higher productivity in industry were a major driver of growth. State capacity initiates development. Capital accumulation (or investment) is the catalyst for structural change.
But since a given rate of investment can generate different output and employment growth rates depending on its nature, industrial policies are required to change the structure of production according to the broad division of sectors — agriculture, industry and services — and within them. Initially, there was a focus on labour-intensive sectors. As educational attainment increased, industrial policies evolved to move into sectors that required intermediate and high-level skills.
There are three types of industrial policies. Macroeconomic policies include government spending, interest rates and exchange rates. Multisector horizontal policies include competition policies, the promotion of small and medium enterprises and education and training. Finally, there are sectoral policies and targeting, which have been described as the core of industrial policy.
The developmental states used a wide range of policy tools that went far beyond Keynesian expansionary macroeconomic policies that promote growth in aggregate demand. For example, they did not just reduce interest rates and leave matters to the market. There were different interest rates depending on what loans were used for.
They used additional policy tools to change market outcomes and achieve economic development and industrial policy goals. These included central bank lending, state influence over finance, weakening currencies to support exports, capital controls, reserve requirements for banks to influence the supply of capital, subsidies and administrative controls such as lending quotas for priority sectors.
The use of a wider range of tools has two implications for the design of macroeconomic policies. First, there must be close coordination of monetary, fiscal and industrial policies. This has implications for the mandates of central banks.
Second, an inflation targeting framework with one goal (price stability) and one policy tool (interest rates) is not appropriate during the industrial development and catch-up phase.
There is a need for multiple policy tools to address multiple economic policy objectives.
Until 2007, South Africa did not have industrial policies because the neoliberal macroeconomic policy framework did not see the need. The market would magically transform the economy. The government liberalised the capital account, dismantling exchange controls and allowing apartheid-era conglomerates to list offshore. Trade liberalisation reduced industrial tariffs far beyond World Trade Organisation rules. Economist Nimrod Zalk says there were only two sector-specific programmes for the motor and clothing and textiles industries.
The department of trade, industry, and competition (DTIC) published an Industrial Policy Framework document in 2007. From 2010, there were annual industrial policy action plans. In recent years, Trade and Industry Minister Ebrahim Patel has published master plans in seven manufacturing sub-sectors: automotive, poultry, steel, sugar, furniture, forestry, as well as retail, clothing, textiles, footwear and leather. There is also a master plan for agriculture.
While industrial policy was formally embraced after 2007, Zalk says it has been undermined in practice. Monetary, fiscal and state procurement policies were not aligned with industrial policy goals. There were deep cuts to the department’s inadequate budgets. Corruption and maladministration also weakened the drive to industrialise. And the Competition Act does not allow regulators to tackle pre-existing market concentration directly.
Industrial policies were also limited in scope and used too few policy tools. Instead of providing a vision for the structure of the whole economy, they focused on a few sectors. The seven sectors that have master plans employ about 900000 people — 6.2% of total employment, using generous estimates that include indirect jobs.
Due to the scale of the crisis, the master plans will not shift the dial even if they achieve their unrealistic job creation targets. Also, the latest figures show DTIC’S industrial financing and Industrial Development Corporation lending was only about R12-billion or 0.2% of GDP.
More alarming is the failure in the public and private sectors to provide sufficient funding for black SMES, which should be front and centre any strategy to transform the economy. The Small Enterprise Finance Agency disbursed R1.6-billion in the 2020-2021 financial year. The National Empowerment Fund disbursed R425-million. A Banking Association report said the exposure of banks to black SMES was R21.4-billion in 2019. This was equivalent to just 0.4% of the industry’s assets that year.
The lack of an industrial policy until 2007, and subsequent lame efforts to implement one, has led to premature de-industrialisation, capital flight and excessive financialisation.
In 1994, the manufacturing sector was larger than finance. It was the economy’s largest sector. Since then, manufacturing’s share of gross value added declined to 13.1% in 2021 from 22.8% in 1994.
The share of finance, insurance, real estate and business services rose to 23.7% from 18.2%. There has also been limited diversification of exports away from mineral and resourcebased industries.
South Africa must implement bold industrial policies to increase the labour intensity of production and diversity of exports. An employment multiplier measures the percentage increase in employment that is associated with a one percentage point increase in GDP. Within the context of a 6% growth target, small increases in the multiplier could create millions more jobs than would have been the case without industrial policies.
The government must increase annual industrial and black SME financing to 2% and 0.5% of GDP, respectively, within five years. It must also develop other policy tools together with the Reserve Bank and the Public Investment Corporation which can recapitalise development finance institutions and establish new funding and policy windows for priority sectors.
There must be targets (or quotas) for bank lending to labour-intensive sectors and black SMES.