Published in Sunday Times, Business Times, 22/7/12

Industrial Policy: Who Needs It?

Dr Gavin Lewis

For anyone interested in the future trajectory of the South African economy, and of the prospects for growth and employment, and indeed on favoured sectors for investment in the future, a knowledge of this country’s industrial policy is essential. This policy can be found in the Industrial Action Plans  (IPAP), of which there have been several renditions, perhaps the best known being IPAP 2. The problem is that IPAP 2 is a very long and very complicated document. Too long, and too complicated. But understanding it is critical, because it affects both our current and future economic policies in detail.

Some countries do not regard a specific industrial policy as essential. The current UK government prides itself on not having a formal industrial policy, preferring to let the private sector take the lead – to the consternation of the Business Secretary, Vince Cable, who wants a ‘joined-up’ growth and development strategy. In the UK that means picking sector winners and assisting them with tax breaks, framing procurement policies, ramping up infrastructure investment and focusing on exports – a post-crisis industrial plan, in short.

So what does our IPAP say? It concludes that central to the poor performance of the SA economy is a fall in production, as opposed to consumption, and that this translates into a poor manufacturing performance. Since manufacturing contributes 54% to production, reviving manufacturing, and with it “decent” jobs, is the key but not the only focus of our industrial policy. This approach includes a new thrust into green industries, rural development, the Expanded Public Works Programme (EPWP) and infrastructure investment.

A central element of IPAPs is access to discretionary finance, to fund developmental projects (e.g. infrastructure) that are not currently attractive enough for voluntary private sector investment by offering such prospects loans at reduced interest rates, or backed by state guarantees. Here they run headlong into the fiefdoms of the Department of Finance and National Treasury. So IPAP 2 is  not explicit as to additional sources of long term concessionary finance for disbursement by the Industrial Development Corporation (IDC) , other than to hint that this could come from state assets such as workmen’s compensation funds (or retirement funds?) or – as more recently mooted by minister of economic development and currently interventionist-in-chief Ebrahim Patel – through development bonds.

 Central place in the IPAP 2 goes to the IDC, the state-owned development finance institution which received R102 billion for this purpose in 2011, with the Development Bank of South Africa (DBSA) in a supportive capacity: “…the public role of industrial financing is to channel capital into productive [as opposed to consumption] investments which directly and indirectly generate decent jobs and value addition,” says IPAP 2. Raising funding through the full or partial privatisation of State Owned Companies (SOCs) is however no longer considered an option, reflecting the dominance of leftist influences in the current government. This matters because it rules out raising finance for infrastructure from the partial or full sale of SOCs, as Brazil is doing with considerable success

A further source of such assistance open to the state is leveraging off public and, where possible, private purchases. The model here is the National Industrial Participation Programme (NIPP)  whereby in return for major state orders from abroad for weapons such as civilian aircraft, ICT systems, nuclear power plants, etc, above a certain minim incurs reinvestment obligations as part of offset programmes by those from whom the purchases are made (the ‘obligors’).

The existing seven industrial sectors prioritised by IPAP 2 include automotive, plastics and pharmaceuticals, clothing, textiles and shoes, bio fuels, forestry products, tourism/cultural industries, and business process outsourcing (BPOs). More recently attention has been gained by the oils and gas rig repair sectors and the boat building industry.

Conspicuous by its absence both historically and given China’s insatiable demands for commodities, is one area which forms the backbone of the SA economy, namely mining. Its absence speaks volumes about picking winners and creating jobs. IPAP 2 added new sectors here – metals fabrication, capital and transport equipment, green industries, in particular solar panels, and agro-processing; but not IT services, engineering, legal and medical services. It retains three additional high potential sectors – nuclear, advanced materials and aerospace.

In the end what this aggressive industrial policy – at least in theory- portends is that bureaucrats, not the market, decide where and how resources will be channelled. And unless your bureaucrats are world class in their fields, you are in trouble. This is especially the case when, as in South Africa, the industrial policy emphasis is on big industrial investments, whereas the job creating benefits of small business, universally acknowledged, get hardly a mention and the binding constraints of poor rail, port and energy infrastructure still loom so large as reasons for our poor economic performance.

There are no guarantees of success in devising industrial policies. There are many examples of failures of industrial policy. One is the failure to rescue Britain’s motor industry, which no longer exists. Who remembers British Leyland now? All too often, government bureaucrats fund so called ‘zombie industries’ long after they have ceased to become viable.  Propping up failing businesses that can never be sustainable is a waste of resources. But politics intervenes, and in the case of the ANC industrial policy is distorted to meet essential political imperatives rather than economic ones. BEE crony capitalism and the policy veto exercised by organised labour are also formidable constraints. Instead, the IPAPs exclude some options for ideological rather than for business reasons.

 Similarly, political imperatives often preclude long term planning and the patience needed for long term investments to bear fruit. Election cycles are shorter than economic ones. A case in point is the abandonment of the Pebble Bed Modular Reactors (and the scarce skills it retained) despite the hundreds of millions invested in it on the eve of IPAP 2 which posited the nuclear industry as a high potential future sector for the SA economy.

An associated danger of sector specific and company specific industrial policy worldwide is that of capture of the benefits by a small group of political insiders – crony capitalists. This is an obvious threat in South Africa.

On the other hand there is a growing consensus that the “essence of economic development is structural transformation, the rise of new industries to replace traditional ones,” (The Economist, 17/7/10 ) and that the acceptable face of contemporary industrial policy is where it seeks to temporarily support brand new or infant domestic industries.

Success or failure then depends on a tailored, rather than a shotgun approach; sector specific strategies rather than one-size-fits-all; successful implementation by a competent state; a strict focus on costs, including opportunity costs; and performance measurement, usually by monitoring export performance which is difficult to fake. It also means having an exit strategy for state-owned enterprises such as SAA and Denel, instead of maintaining them at a permanent cost to the taxpayer.

But all of this has to happen after certain pre-conditions are met, prominent amongst them a prior emphasis on strengthening entrepreneurialism instead of suffocating it. A first priority should be to build and maintain public goods that underpin business – getting the basics right, like efficiently run ports, transport infrastructure and communications network. In addition, slashing unnecessary red tape for business pays proven dividends. In none of these is the ANC government distinguishing itself.

It is worth remembering the words of David Lewis (formerly of the Competition Tribunal) that when it comes to industrial policy you “have to be very selective and very focused in your interventions, and you want to leave as much as you can to competitive forces” (Business Times 17/06/12). He should know.

The key issue instead is to focus on those businesses that are already emerging and growing, and to assist them to grow faster without second-guessing by bureaucrats who have no personal practical knowledge of business and the market. In sum, industrial policy must always be market driven for success. In our case the jury is still out.