OECD report scathing about SA's industrial policy
Thématique :
sud afrique
Finance Minister Trevor Manuel might have moved to strongly deny persistent suggestions that he did not support South Africa's National Industrial Policy Framework (NIPF), but there was no denying his irritation with the Department of Trade and Industry's (DTI's) handling of the its implementation.
"Unless people can put a business plan on the table, that is costed and viable, where the benefits to all of us as citizens of the country are explained, you shouldn't expect us to give the taxes that you earn and pay over to the State to ill-considered proposals," Manuel said at a briefing held in Johannesburg last week to release of the Organisation for Economic Cooperation and Development's (OECD's) inaugural economic assessment report for South Africa.
He added that it was not about "blocking things that can make a difference", but about raising the bar.
Manuel made his comments in support of industrial policy despite's heavy criticism of South Africa's industrial-policy vision from the OECD itself. In fact, more generally, the report also baulked at the post-Polokwane African National Congress' desire for greater State involvement in the economy, calling, instead, for greater liberalisation of the economy and for the privatisation of South Africa's network industries, such as transport and power.
The South African Finance Minister said it should not be forgotten that he was once Trade and Industry Minister, and that his "DNA" was all over some of South Africa's largest industrial-policy interventions. This, he noted, included the Motor Industry Development Programme (MIDP), about which the OECD report also raised several questions.
In fact, the report, which was released at a joint briefing attended by Manuel and the OECD secretary general Angel Gurría, suggested that a more detailed cost-benefit study be undertaken to establish the validity of the DTI's argument that the maintenance of support for the industry remained worthwhile and should, thus, be extended beyond 2012.
DTI director-general Tshediso Matona recently defended the economics behind sustained automotive-industry support, telling Engineering News that the new programme, which would be unveiled later this year, would seek to shift the emphasis away from the current export focus, to one that emphasised ‘scale' in the production of vehicles, and was supportive of the development of world-class component manufacturing.
"Through the MIDP, we know now that we have the capacity to produce high-quality cars for export.
"We now need to develop the economies of scale so as to reduce production costs and to deepen the components industry.
"Those are the two main pillars of the new support instrument," Matona told Engineering News, adding that this also implied greater levels of investment by the industry, skills development, and a stronger emphasis on industrial upgrading in the components sector.
This was also in line with a recent review by a panel of Harvard economists, which acknowledged the automotive industry's potential to become globally competitive, with the proviso that the domestic supplier base was more fully developed and modernised.
Unconvinced
But the OECD was unconvinced saying, "such a support programme is often justified by the 'infant industry' argument. The extent to which such an argument may apply to a sector essentially driven by foreign direct investment is, however, questionable, as is the quasi-permanent character of the subsidies".
The OECD study saved its venom for the NIPF itself, suggesting that it bore the hallmarks of apartheid-era protectionism and that its aims appeared to be in conflict with the country's stated aspiration to boost the overall competitiveness and competitive pressures.
"The emphasis on industrial policies risks preserving the apartheid-era pattern of protected national champions insulated from foreign competition and enjoying high mark-ups. This runs counter to the acknowledged need to enhance the level of competition in the economy," Gurría added in his remarks on the issue.
The study argued that the NIPF was also contradictory in that it noted the negative affects of monopoly pricing on the one hand, but listed preferred sectors that were likely to receive further and enhanced protection.
"If such a strategy of protecting established businesses is applied, there is a risk of a waste and misallocation of resources, as these policies often further distort competition between industries or firms," the OECD report contended.
Use Competition as Main Lever
But given that South Africa's large and increasing current account deficit, precipitated materially by a "secular decline" in the country's export volumes, was the country's "main source of macroeconomic vulnerability", according to the OECD, there is growing urgency to find policies that help redevelop South Africa's heavily depleted industrial capacity.
Indeed, the OECD warned that the "size and pace" of the growth in the deficit "cast doubt" on its sustainability. However, it added swiftly that at 7,3% of gross domestic product, which was the deficit recorded for 2007, it was not yet "extreme".
The gap was a measure of trade in goods and services, and spiked to a 26-year high of 9%, or R195-billion, in the first quarter, from 7,5% in the last quarter of 2007. This put immediate pressure on the South African exchange rate, which had since recovered modestly from its lows.
The OECD report also pointed to recent research, which showed that a number of successful developing countries had, in fact, been capital exporters, a notable break from the orthodoxy, whereby the importation of capital from capital-intensive countries was perceived as the developmental norm.
"There may therefore be a case for taking action to reverse the widening of the current account deficit not only to reduce vulnerability to a sudden stop of capital inflows, but also to enhance long-term growth," the assessment proposed.
South Africa's weak export performance since 1994 appeared to lie at the heart of the current account strain, with OECD attributing the bulk of the decline to a fall-off in productivity. However, it also noted technical factors, such as the depletion of the country's gold mines, as well as policy factors, such as the uncertainty created by the change to the country's mineral-rights regime.
"Nevertheless, to an important extent the declining market share is a reflection of poor trend productivity growth, which also helps to explain the narrow range of manufacturing activities in which South Africa has established a revealed comparative advantage," the study asserted, noting that more than 50% of total exports were from five industries, all involving metals or coal.
Arguably, that was also why the report warns that South Africa's near-term growth could be seriously threatened by the prevailing power shortages, given that much of South Africa's industrial and export capacity was built on the abundance of low-cost electricity.
In fact, the report pointed out the loss of first quarter output as a result of the power disruptions, which peaked in January and February, but which continue for large industrial and mining consumers, which are still taking "voluntary" cuts of between 5% and 10% of their historical power draw. This has "led economic forecasters to revise down their projections for real GDP growth this year by between 0,5% and one percentage point".
Worryingly, the study also noted that the power shortages had been a "blow" to financial market sentiment, which was reflected in the sharp move in South Africa's short-term paper, or bonds, spreads between November and March 2008, implying something is a perceived risk downgrade.
The report also noted South Africa's poor educational performance as well as the substantial skills gap as a key contributor to poverty and unemployment.
But the study's preferred approach to reversing the export decline was for policies that sought to improve competitive conditions, through strengthen competition policy, the restructuring of State-owned enterprises and the further acceleration of trade liberalisation, rather than an industrial-policy intervention that is "close to being an advocate for a de facto picking-winners strategy".
"Unless people can put a business plan on the table, that is costed and viable, where the benefits to all of us as citizens of the country are explained, you shouldn't expect us to give the taxes that you earn and pay over to the State to ill-considered proposals," Manuel said at a briefing held in Johannesburg last week to release of the Organisation for Economic Cooperation and Development's (OECD's) inaugural economic assessment report for South Africa.
He added that it was not about "blocking things that can make a difference", but about raising the bar.
Manuel made his comments in support of industrial policy despite's heavy criticism of South Africa's industrial-policy vision from the OECD itself. In fact, more generally, the report also baulked at the post-Polokwane African National Congress' desire for greater State involvement in the economy, calling, instead, for greater liberalisation of the economy and for the privatisation of South Africa's network industries, such as transport and power.
The South African Finance Minister said it should not be forgotten that he was once Trade and Industry Minister, and that his "DNA" was all over some of South Africa's largest industrial-policy interventions. This, he noted, included the Motor Industry Development Programme (MIDP), about which the OECD report also raised several questions.
In fact, the report, which was released at a joint briefing attended by Manuel and the OECD secretary general Angel Gurría, suggested that a more detailed cost-benefit study be undertaken to establish the validity of the DTI's argument that the maintenance of support for the industry remained worthwhile and should, thus, be extended beyond 2012.
DTI director-general Tshediso Matona recently defended the economics behind sustained automotive-industry support, telling Engineering News that the new programme, which would be unveiled later this year, would seek to shift the emphasis away from the current export focus, to one that emphasised ‘scale' in the production of vehicles, and was supportive of the development of world-class component manufacturing.
"Through the MIDP, we know now that we have the capacity to produce high-quality cars for export.
"We now need to develop the economies of scale so as to reduce production costs and to deepen the components industry.
"Those are the two main pillars of the new support instrument," Matona told Engineering News, adding that this also implied greater levels of investment by the industry, skills development, and a stronger emphasis on industrial upgrading in the components sector.
This was also in line with a recent review by a panel of Harvard economists, which acknowledged the automotive industry's potential to become globally competitive, with the proviso that the domestic supplier base was more fully developed and modernised.
Unconvinced
But the OECD was unconvinced saying, "such a support programme is often justified by the 'infant industry' argument. The extent to which such an argument may apply to a sector essentially driven by foreign direct investment is, however, questionable, as is the quasi-permanent character of the subsidies".
The OECD study saved its venom for the NIPF itself, suggesting that it bore the hallmarks of apartheid-era protectionism and that its aims appeared to be in conflict with the country's stated aspiration to boost the overall competitiveness and competitive pressures.
"The emphasis on industrial policies risks preserving the apartheid-era pattern of protected national champions insulated from foreign competition and enjoying high mark-ups. This runs counter to the acknowledged need to enhance the level of competition in the economy," Gurría added in his remarks on the issue.
The study argued that the NIPF was also contradictory in that it noted the negative affects of monopoly pricing on the one hand, but listed preferred sectors that were likely to receive further and enhanced protection.
"If such a strategy of protecting established businesses is applied, there is a risk of a waste and misallocation of resources, as these policies often further distort competition between industries or firms," the OECD report contended.
Use Competition as Main Lever
But given that South Africa's large and increasing current account deficit, precipitated materially by a "secular decline" in the country's export volumes, was the country's "main source of macroeconomic vulnerability", according to the OECD, there is growing urgency to find policies that help redevelop South Africa's heavily depleted industrial capacity.
Indeed, the OECD warned that the "size and pace" of the growth in the deficit "cast doubt" on its sustainability. However, it added swiftly that at 7,3% of gross domestic product, which was the deficit recorded for 2007, it was not yet "extreme".
The gap was a measure of trade in goods and services, and spiked to a 26-year high of 9%, or R195-billion, in the first quarter, from 7,5% in the last quarter of 2007. This put immediate pressure on the South African exchange rate, which had since recovered modestly from its lows.
The OECD report also pointed to recent research, which showed that a number of successful developing countries had, in fact, been capital exporters, a notable break from the orthodoxy, whereby the importation of capital from capital-intensive countries was perceived as the developmental norm.
"There may therefore be a case for taking action to reverse the widening of the current account deficit not only to reduce vulnerability to a sudden stop of capital inflows, but also to enhance long-term growth," the assessment proposed.
South Africa's weak export performance since 1994 appeared to lie at the heart of the current account strain, with OECD attributing the bulk of the decline to a fall-off in productivity. However, it also noted technical factors, such as the depletion of the country's gold mines, as well as policy factors, such as the uncertainty created by the change to the country's mineral-rights regime.
"Nevertheless, to an important extent the declining market share is a reflection of poor trend productivity growth, which also helps to explain the narrow range of manufacturing activities in which South Africa has established a revealed comparative advantage," the study asserted, noting that more than 50% of total exports were from five industries, all involving metals or coal.
Arguably, that was also why the report warns that South Africa's near-term growth could be seriously threatened by the prevailing power shortages, given that much of South Africa's industrial and export capacity was built on the abundance of low-cost electricity.
In fact, the report pointed out the loss of first quarter output as a result of the power disruptions, which peaked in January and February, but which continue for large industrial and mining consumers, which are still taking "voluntary" cuts of between 5% and 10% of their historical power draw. This has "led economic forecasters to revise down their projections for real GDP growth this year by between 0,5% and one percentage point".
Worryingly, the study also noted that the power shortages had been a "blow" to financial market sentiment, which was reflected in the sharp move in South Africa's short-term paper, or bonds, spreads between November and March 2008, implying something is a perceived risk downgrade.
The report also noted South Africa's poor educational performance as well as the substantial skills gap as a key contributor to poverty and unemployment.
But the study's preferred approach to reversing the export decline was for policies that sought to improve competitive conditions, through strengthen competition policy, the restructuring of State-owned enterprises and the further acceleration of trade liberalisation, rather than an industrial-policy intervention that is "close to being an advocate for a de facto picking-winners strategy".
