A brief window: coordinating industrial and trade policy
There is broad consensus that in order to address South Africa’s triple threat of poverty, inequality and unemployment the economy needs to grow; at least at a rate higher than the population. But this has not been the case for a number of quarters and with the projected growth rate for 2019 having been revised down again, it seems unlikely to happen in 2019.
There are a number of factors that contribute to the slow economic growth: lack of domestic and foreign investment, low consumer and producer confidence, a slowing global economy, end of the commodity cycle, narrow economic participation, spatial exclusion, a slowdown in government spending, a slowdown in SOC investment… it’s a long list. A particularly troubling trend, however, is the slowdown in South Africa’s growth engines higher up the value chain with more labour absorbing capacity; namely construction, electricity, manufacturing, mining and agriculture. These are the building block of our developing economy.
Productivity in these sectors have been low despite South Africa’s economy enjoying a long period of inadvertent stimulus, with long term depreciation of the rand, public debt increasing, and in some cases generous trade protective measures. All these conditions support an export-oriented development strategy but have failed to yield results. The electricity, gas and water and the mining and quarrying sectors shrank by 4% compared to the first quarter of 2010 while manufacturing only managed to increase by 9%, that’s only 1% per year.
In the June 2019 State of the Nation Address (SONA), President Ramaphosa reaffirmed the NDP 2030 as the economic master plan. This document is huge and captures a lot of priorities and actions that South Africa can take to eradicate the triple threat and, crucially recognises the importance of industrial and trade policy.
However, it’s not clear if this objective was pursued considering industrial incentive schemes and development finance took a scattershot approach with support mostly going to propping up mature industries like the automotive and primary steel industries. Important as they are, these industries are highly competitive and depend on massive economies of scale (export-oriented development) supported by large-scale state intervention.
The productive sectors require some form of government support, considering the cumulative effects of state interventions in the global market, but for a small developing country like South Africa, these have to be very targeted. Unfortunately, targeting and prioritising sectors requires a trade-off, an opportunity cost of pursuing growth in one industry by foregoing support to another, which is loaded with political repercussions. But if everything is a priority, nothing is a priority and governments just end up distorting the domestic market, making it unclear which industries are sustainable if the incentive taps were to dry out.
With a reconfigured state announced post the elections, South Africa is at a juncture where we can review and re-align industrial and trade policy, with an aim of tightening existing strategy rather than re-inventing it. With the Presidency leading on policy coordination, National Treasury and the reconfigured Dtic (Department of Trade, Industry and Competition under former EDD minister Ebrahim Patel’s guidance) have the opportunity to re-engage and truly prioritise industries and implement industrial policy.
While it’s not clear what will come out of the woodwork in the merger between the EDD and Dti the hope is for a greater focus on industrial funding, with EDD back in the Dti. And we hope for a great improvement in the ease of doing business. Industrial funding requirements are key to positioning the private sector to contribute to economic transformation, but cannot exist in a vacuum. Targets and conditions have to be attainable for both domestic and foreign investors especially given the global competition for FDI. The concern here is not the investors we attract, but the ones we don’t due to rigid policies.
Whether the ease of doing business will be narrowly focused on addressing measures in the World Bank’s Doing Business index, or if wider stakeholder engagement will perhaps point to other constraints that businesses face, like the ineffective visa regime, is not clear. But given the opportunity, where priorities have been announced -yet no real actions have been taken-, the private sector could pre-emptively lobby to have broader priorities included.
At this point, it’s not clear what description of roles Patel’s two deputies, Fikile Majola and Nomalungelo Gina, have but the odds are that one would focus on the domestic economy while the other would focus on the global economy and South Africa’s offensive economic interests.
Earlier in June minister Patel supported the rules-based multilateral system but mentioned the need for reform of the WTO to ensure that the promise of increased trade benefit all countries and people. In his own words to the G20 minister of trade stated that South Africa is looking for “greater commitment to development-oriented trade agreements’”, echoing the long-standing concerns by many developing countries about the imbalances created by the outcome of the Uruguayan round. This narrative will hardly bring the global community together to once and for all put the Uruguay round to bed, but South Africa along with the rest of the continent is leading by example through the launch of the AfCFTA.
This too will provide another exciting opportunity for an industrial policy as it will eventually open new markets on the African continent which several South African industries are uniquely placed to supply. Unfortunately, the announcements relating to the ministries of international relations and cooperation and trade and industry were deferred to a later date.