FINAL NEDLAC REPORT

ON

THE INDUSTRIAL STRATEGY DOCUMENT

APRIL 2002

  1. BACKGROUND
    1. The DTI drafted the Industrial Strategy document titled "Driving Competitiveness: an Integrated Industrial Strategy for Sustainable Employment and Growth".
    2. This report is based on the following:

      1. "Driving Competitiveness: an Integrated Industrial Strategy for Sustainable Employment and Growth".
      2. Industrial Policy Discussions at Nedlac
      3. Initial comments on the Integrated Manufacturing Strategy (IMS). Business has tabled a formal comment on the IMS.

2. PROCESS IN NEDLAC

    1. The Industrial Strategy document fell under the ambit of the Trade and Industry Chamber.
    2. On 10 April 2001 Dr. A. Ruiters, Director General (DG) of the Department of Trade and Industry (DTI) presented an overview of DTI’s plans for an integrated coherent development strategy to Trade and Industry Chamber.
    3. At a meeting held on 17 May 2001 Government provided the framework for the completion of the document as follows:
    4. 2.3.1 It would be presented to the Parliamentary Portfolio Committee in two weeks for consideration over a two-month period.

      2.3.2 Public hearings would be held in September 2001.

      2.3.3 The Parliamentary Portfolio Committee would have adopted the document in October 2001 once comments had been considered.

    5. The Chamber established a task team in order to consider the document.

2.5. Representation on the task team included Trade and Industry Chamber delegates, and was as follows, with some changes during the period of consultations:

Business: M. McDonald, R Baxter; A. Lamprecht; H. van der Merwe, Dr. E Basson. J Pienaar

Labour: T van Meelis, N. Makgetla; J Ndumo; M Paulsen; C. Leepo; S. Ganca; B. Ndebele;

Government: B. Sibisi, S. Moodliar, L. October; S. Hanival; M. de Bruyn

2.5. The task team met on numerous occasions during 2001 and 2002. Schedule of task team meetings attached as appendix 1.

    1. Business and Labour made submissions to the document on 27 September 2001 and 13 November 2001.
    2. Labour made a submission on the document on 11 October 2001. Furthermore Labour made written submissions on Investment and Taxation.
    3. Government had stated that it would redraft the document, taking into consideration both the submissions made by Business and Labour. The redrafted document would then be tabled at Nedlac for further engagements either before the end of 2001 or early in 2002, before it was submitted to the Portfolio Committee on Trade and Industry.
    4. The Task Team agreed to continue discussions on industrial strategy issues, parallel to the government process of finalising the strategy document, as well as after the document had been finalised. Refer to Item 3 for a detailed list of issues, which Constituencies agreed that it was not exhaustive.
    5. To that effect Business made a presentation on Beneficiation to the Task Team on 25 February 2002.
    6. Furthermore, an Industrial Strategy Roundtable was held on 28 March 2002. At this roundtable Government indicated that it would table the new document on 11 April 2002 and agreed to hold further discussions.
    7. Government circulated the redrafted document titled "Accelerating Growth and Development: the Contribution of an Integrated Manufacturing Strategy" on Wednesday 17 April 2002.
    8. Government tabled the document "Accelerating Growth and Development: the Contribution of an Integrated Manufacturing Strategy" (IMS) at Nedlac for further engagements on Friday 19 April 2002.
    9. Government envisages that consultations on the IMS would take two months to complete, after which a revised draft will be developed and submitted to Cabinet for it.

3. ISSUES ON INDUSTRIAL STRATEGY IDENTIFIED BY THE TASK TEAM

3.1 Key objectives of an industrial strategy

3.1.1 Economic growth

3.1.2 Job creation and retention

3.1.3 Addressing inequalities

3.1.4 Coherence and coordination of macroeconomic, industrial and sectoral policies and strategies.

    1. The Task Team identified examples of key issues for further engagement as:

3.2.1 Aggregated impact of all factors in a particular macroeconomic environment

3.2.2 Beneficiation (Including identifying reasons for the lack of beneficiation in the past and the future potential of beneficiation)

3.2.3 Black Economic Empowerment and ownership

      1. Cost of capital (Including means to reduce the real cost of capital, relationship between risk, returns, and investment time horizons)
      2. 3.2.5 Confidence (Including crime, governance and image/perception management)

3.2.6 Definition of "knowledge-intensive" economy

3.2.7 Economic inputs e.g. energy and telecommunications

(Including efficiency, reliability and international cost-competitiveness)

3.2.8 Effective and efficient government (Including an efficiently functioning bureaucracy)

3.2.9 Employment creation

3.2.10 Financial sector (Including access to finance)

3.2.11 Infrastructure (Including physical and logistics infrastructure)

3.2.12 Investment (Including required investment levels, public and private investment, domestic and FDI)

3.2.13 "Joined-up" Government (Including policy coordination and institutional implications)

3.2.14 Legislative certainty and coherence

3.2.15 Markets (Including market focus - domestic/export/high-end/basic needs - and market access)

3.2.16Procurement

3.2.17 Regional political and economic stability

3.2.18 Research & Development (Including R&D infrastructure, expenditure, and linkages to commercial applications)

3.2.19 Retail and marketing as crosscutting issues

3.2.20 Skills development (Including effective implementation of the skills development policy, matching skills to economic needs)

3.2.21 Small, Medium and Micro Enterprises

3.2.22 Supply-side measures

4. CONSTITUENCY VIEWS

4.1 Labour submissions can be found under Appendix 2

    1. Business submission can be found under Appendix 2

  1. AREAS OF AGREEMENT

5.1 Business agreed with Government document on the following:

5.1.1 The integration of policies.

5.1.2 Overall policy coherence.

5.1.3 Joined up government.

5.1.4 A review of policies to check for gaps.

5.1.5 Continuities such as preserving the best with the old.

5.1.6 Building on existing comparative advantages, whilst reducing disadvantages and grow competitive advantages over time.

5.1.7 Old advantages are less important (as new competitive advantages such as created capital become more important to growing investment and economic growth).

5.1.8 That the reversion to protectionist policies is a fruitless exercise.

    1. All agreed that there was a need for Black Economic Empowerment (BEE) to ensure that previously disadvantaged individuals are brought into the mainstream of the economy.
    2. Labour stated that its conceptualisation of BEE was broader than a view of BEE that seeks to empower only a few black entrepreneurs. It wanted to ensure that BEE initiatives empower and advance worker’s and the working class more broadly

5.3 Business agreed with Government further that the adoption of higher tariffs and an inward oriented industrial strategy will help maintain inefficient production and will prolong economic stagnation.

5.4 All agreed that sector summits could play an important role the economy.

5.5 Labour stated that there was need for research into WTO rules and agreements to allow more scope for national development.

5.6 All agreed that regional issues were important

5.7 Government and Labour agreed that the domestic market was relatively small and should be expanded.

5.8 All agreed that skills’ development and transfer were very important

5.9 All agreed that procurement was an important link of an industrial strategy

5.10 Labour agreed with Business that Education is vital and that that the problem in Mathematics and Science was not only on poor pass rates, but related to lack of facilities and qualified teachers.

5.11 All agreed that the secretariat should arrange a roundtable around industrial strategy separate from the engagements of the task team. Such a session should include individuals and groupings not represented at Nedlac and the report of which would not be binding to Nedlac.

 

 

  1. AREAS OF DISAGREEMENT
    1. For detailed areas of disagreement, refer to the detailed position papers.
    2. Discussions are still continuing and there is a spirit of working together to get agreement on issues, which are critical to propelling South Africa to greater economic growth. All factors are being looked and debated in a constructive manner in order.

DOCUMENTS SUBMITTED DURING THE NEDLAC PROCESS OF ENGAGEMENT ON THE INDUSTRIAL STRATEGY DOCUMENT

8.1 APPENDIX 2: WRITTEN SUBMISSIONS

8.1.1. Labour submissions

(a) Labour Position Paper on DTI discussion document: "Driving Competitiveness: an Integrated Industrial Strategy for Sustainable Employment and Growth", May 2001

(b) Labour Position Paper on Taxation

(c) Investment

(d) Cosatu response to Business position paper

 

8.1.2 Business submissions

        1. Business South Africa Submission to the Department of Trade and Industry regarding "the Draft Integrated Industrial Strategy for South Africa"
        2. Business South Africa Response to the Department of Trade and Industry document titled: "Accelerating Growth and Development: the Contribution of an Integrated Manufacturing Strategy".

8.1.3 Government submissions

8.3.1 Driving Competitiveness: an Integrated Industrial Strategy for Sustainable Employment and Growth", May 2001

8.3.2 Accelerating Growth and Development: the Contribution of an Integrated Manufacturing Strategy, 19 April 2002

 

9. CONCLUSION

9.1. This report, therefore, captures discussion on "Driving Competitiveness: an Integrated Industrial Strategy for Sustainable Employment and Growth", of the Industrial Strategy Document, in Nedlac".

    1. It is acknowledged that the Nedlac parties may continue to advocate their views in the public consultation and parliamentary processes.

9.3 The Task only had the Integrated Manufacturing Strategy for a week. Business has forwarded a formal mandated document which is attached

9.4 The Nedlac process will continue as follows:

      1. Discussion on the Integrated Manufacturing Strategy
      2. Roundtable discussion
      3. Task team process

Appendix 1

Schedule of meetings of the Industrial Strategy Task Team:

17 May 2001

17 July 2001

26 July 2001

27 September 2001

11 October 2001

13 November 2001

15 November 2001

25 February 2002

19 April 2002

25 April 2002

Labour Position Paper:

DTI discussion document, "Driving Competitiveness: An Integrated Industrial Strategy For Sustainable Employment And Growth," May 2001

October 11, 2001

The document presents a welcome opportunity to discuss industrial strategy. Its support for skills development and improving retail linkages is useful, as are the proposals for improving the quality of policy making, through broader consultation and consistent monitoring.

Despite these points, the document does not provide an adequate industrial strategy, above all because it is delinked from over-riding developmental concerns.

The document does not even attempt to address the central problems in the economy – above all, mass poverty, massive inequalities in wealth and income, rapidly rising joblessness, and low skills levels. Nor does it analyse the serious structural problems in the South African economy that maintain these problems. As a result, it cannot propose transformative policies. In that context, it focuses narrowly on the high end of manufacturing, and supports an almost exclusively export-oriented thrust. This approach will not help restructure the economy to create employment or meet the needs of the poor.

The document essentially argues that the DTI is not responsible for the broader developmental agenda. But that surely cannot mean that government does not need to function within a clear developmental framework. In particular, DTI must still locate the industrial strategy itself more clearly in terms of developmental imperatives.

The document proposes that government must shift its support to more "knowledge-based" activities. This proposal remains inadequately developed, however.

The lack of detail follows in large part from the document’s methodology. It starts, not with an analysis of South Africa’s problems and how we should solve them, but with an assessment of what has succeeded in other countries. As a result, its proposals do not pretend to address unemployment, poverty or inequality directly; and they may not be viable at all. In the same vein, one could argue that a bird can fly because it has wings, and then start working on growing a pair oneself.

The document supports privatisation, especially in telecommunications. COSATU feels that a more nuanced approach is necessary to ensure that the poor have access to affordable basic services, while at the same time finding ways to improve economic infrastructure.

In short, the DTI discussion document does not address or even attempt to help solve the key problems facing South Africa today. While it makes some valuable contributions, then, it cannot be accepted in its present form as an adequate statement of industrial strategy. The discussions at NEDLAC on industrial strategy and the sector summits must help fill in the gaps.

The rest of this paper assesses the DTI document chapter by chapter.

Why an industrial strategy?

The document justifies industrial strategy because of manufacturing’s importance in terms of employment, investment and exports. It does not, then, start with a clear problem statement that would locate industrial strategy as part of the effort to address South Africa’s deep-seated economic problems – above all unemployment, mass poverty and huge inequalities, hesitant growth and investment, and the pervasive lack of skills.

In this context, the problems of unemployment and low investment seem particularly pernicious. The official unemployment rate rose from 16 per cent in 1995 to 25 per cent in 2000, according to Statistics South Africa. This astonishing increase reflects in part the loss of formal jobs. Formal employment shrank by around 10 per cent between 1997 and 2000 alone. About a third of the job losses were in manufacturing, especially in clothing and metal work. At the same time, there has been a shift from well-paid, relatively skilled and permanent work to informal and survivalist employment. Rising unemployment also reflects the growth in the labour force. As a result, unemployment for people aged under 35 is disproportionately high, at almost 50 per cent.

Generally, the failure to start by defining the core developmental problems leads to the document’s deepest flaw: the overall failure to direct its proposals clearly to meet South Africa’s many challenges or even to locate them in our realities. The document’s basic argument seems to be that South Africa should simply replicate the measures used in other countries, without reference to our special conditions. These include the mining basis of the economy, the low skills levels and massive inequalities in income and wealth inherited from apartheid, and the impact of substantial changes in the role of the state since 1994.

COSATU argues that an effective and appropriate industrial strategy must prioritise measures that ultimately address joblessness, mass poverty and low skill levels. That requires an understanding of the structural problems in the economy. That does not mean that manufacturing alone must immediately provide answers to these problems. Still, the connections between industrial strategy and these broader social aims must be well-defined and realistic.

The Changing World – The Growing Impact of Markets

The ultimate argument for industrial strategy is that the market will not meet key social needs. In this vein, the document argues that markets, while good for efficiency, also have limitations. It focuses on the potential of downsizing as a result of reduced protection; monopolisation; and the general perception that markets help the strong, not the weak. For these reasons, the State must set rules for the market, especially through competition policy.

The first pillar of our industrial strategy consists of establishing and enforcing a set of rules that govern economic conduct. These rules are principally designed to ensure that markets function effectively, to ensure price and quality competition, innovation and easy entry into the market, and that markets are not dominated by the powerful at the expense of the weak. But, these rules also encompass provisions designed to secure the broader objectives of the society, the public interest. (page 7)

This section does not provide a systematic theoretical analysis of when markets do not produce socially appropriate outcomes. Nor does it undertake a consistent investigation of markets in South Africa. As a result, the policy proposals do not sufficiently take into account the impact of market imperfections in the South African context.

In effect, the document implies that the only market failures relate to monopoly power and the underprovision of knowledge-based activities. Yet standard economic theory identifies a range of factors that will cause inefficient markets, including factor immobilities, information problems, substantial income inequalities (so that market demand does not equate to social needs), and externalities, as well as monopoly power.

For South Africa, a critical factor is that because poor people can’t pay, private providers won’t supply them adequately with basic goods and services. We can conceptualise this shortcoming in terms of externalities: private producers are unable to capture the full benefits to society of measures that increase the productivity and living standards of the poor. A vicious cycle emerges, in which the very poverty of the poor means that they cannot afford the infrastructure they need to escape from poverty.

The document’s ignorance of South African realities emerges in its argument that, "if our providers, public and private, do not provide world-class services at affordable prices, both individuals and business consumers will experience the consequences." (page 14) For the majority of South Africans, "world-class services" are still a dream. They need basic services that will enable them to engage with the economy and maintain a decent standard of living. Competitive markets may well provide "world-class services" for the rich, but leave the poor majority without any services at all. An exclusive focus on world-class goods and services risks ignoring the basic needs of the poor.

The analytical failure that blinds the document to the inefficiencies of South African markets leads it effectively to suggest that natural monopolies are the only reason for the State to provide services. It then argues that since new technologies reduce the number of natural monopolies, the state can increasingly withdraw from the provision of basic infrastructure. Yet from the standpoint of long-term economic and social development, even competitive markets will underprovide for the poor.

This situation can be illustrated in telecommunications – patently an area of special concern for the document. Certainly new technologies open up the scope for competition to meet the needs of businesses at the top end of the market, with reduced costs and improved services. But they do not provide any new incentives to meet the needs of the poor. Indeed, the trend with increased competition has been rising costs for rentals and basic telephony, making telecommunications less, not more, accessible for poor South Africans.

The document also fails to analyse the way in which markets reinforce the existing economic structure, and with it job losses and rising unemployment. Our growth has historically been centred in mining and refining, which produce relatively few jobs. We need a better understanding of the failure to establish more downstream linkages, which could create employment on a broader scale. We also need an analysis of why the world-class technological centres developed for mining have not been applied to stimulate other sectors.

Finally, we need to explore why efforts to improve productivity to compete on export markets have so often been associated with job losses. The document argues implicitly that because the market causes job losses, they are unavoidable. Such a passive approach ignores the huge economic and social costs of these jobs losses. Surely a key aim of industrial policy must be to find ways to ensure the sustainable retention of jobs.

The failure to analyse market failures in South Africa means the document’s commitment to regulation rings hollow. It means the basic thrust of regulation, except in terms of competition policy, remains vague. Moreover, the document does not at any point explain the general weakness of South Africa’s existing regulatory agencies.

Based on its unsystematic and superficial review of markets, the document assumes they are the most desirable form of social organisation. It pays no attention to the importance of social capital or collective ownership as ways to ensure greater equity and democracy. In particular, in some countries a strong co-operative movement has proven critical in expanding the options for engagement by the poor. In addition, state control of basic infrastructure can give it the capacity for important strategic interventions to foster more equitable and dynamic economic growth. The growth of social capital in poor communities is a critical way to improve overall productivity and ensure more equitable access to wealth and services.

The document does contend strongly that the market will underprovide key capacities that it groups together as "knowledge" – skills development, research, design and innovation, and information and communications technology associated with procurement and marketing.

The conceptualisation of this group of capacities is too broad to be of much use in guiding policy. At best, it may provide an heuristic framework. But it cannot help policy makers or economic actors distinguish where to place the emphasis within such a diverse group of activities. The key emphases must be:

After reviewing domestic markets, the document turns to an assessment of global markets. It argues that these markets are run under unfair rules, and that South Africa should make every effort to modify them.

A critical question is: should we focus on ways legally to circumvent or bend WTO rules, or aim solely to reform the rules themselves? The DTI has generally taken the latter path only. Thus, it has not developed adequate procedures for safeguard duties – which under WTO rules permit temporary protection of industries threatened by tariff cuts – or anti-dumping. COSATU would argue that we need a more differentiated approach to trade policy, taking full advantage of provisions designed to let nations ensure more constructive outcomes from the economic changes contingent on international change.

Furthermore, the document does not discuss mechanisms to ensure that trade policy in fact supports growth and development. Too often, we have seen pressure to make concessions in bilaterals that have unexpected consequences in terms of job losses. Any policy on trade negotiations must set up procedures that ensure a proper evaluation of the overall costs and benefits. Otherwise, the proposed negotiations can undermine both investment and jobs.

In the middle of Chapter 2, the document has boxes on what the DTI calls its broader objectives. These are BEE, support for SMMEs, and employment creation. The segregation of these central concerns in little boxes in itself points to the failure to integrate them into the overall strategy.

On employment, the DTI says the key strategies, such as land reform and public works, fall outside of manufacturing and therefore the industrial strategy. It argues that manufacturing itself cannot create many jobs as it has "fixed production co-efficients" – that is, a relationship between investment and labour that policy cannot influence. But it argues that manufacturing expansion will stimulate employment in other sectors that can create jobs.

Despite this observation, the document argues that supply-side measures can help create jobs by supporting more labour intensive technologies and sectors, as well as SMMEs; enhancing training; and extending policies to encourage investment and growth in job-creating areas – notably in the tertiary sector.

The argument on manufacturing and employment creation is contradictory. Within industries, it is often hard – although not always impossible - to find viable, less capital-intensive technologies. But as the document itself notes, supply-side measures could shift production to more labour-intensive sectors, such as food and clothing production as well as metal and plastic fabrication downstream from the refineries. To the extent that these measures meet basic needs and raise living standards, they would stimulate domestic markets and raise productivity. That in turn would contribute to economic growth and further employment creation. The industrial policy should explore these possibilities in much greater detail.

Current industrial policy

The document argues the democratic government aimed to:

"1. Liberalise imports and encourage exports via export marketing assistance and other measures. These measures sought to overcome inward bias and stimulate exports.

"2. Shift from demand side measures (import controls, tariffs, subsidies, GEIS) to supply side measures. The supply-side measures aimed at reducing costs and improving the efficient use of inputs." (page 19)

In the event, the largely undifferentiated focus on export promotion has tended to maintain the focus on mining. Today, minerals still make up 60 per cent of all South African exports. This sector has proven unable to create jobs on a large scale, either directly or by stimulating downstream production. Certainly South Africa needs the foreign exchange it generates. But an industrial strategy must include other elements in order also to create jobs and raise living standards. To that end, it must discuss changes in the production structure.

COSATU has long argued that the DTI has neglected measures to meet domestic needs, as discussed above. The exclusive focus on export markets ignores the experience of other countries: that developing domestic demand and production is a prerequisite for a successful export drive. Measures to this end include social protection strategies, for instance by providing housing and infrastructure; encouragement for industries that provide basic goods and services for the poor; and public and private procurement strategies, such as Buy South African, that encourage the use of local goods and services.

The document argues strongly that South Africa has taken the best from other countries’ experience. By extension, there are no immediately evident major policy gaps or omissions. There are two important problems with this approach.

The document then assesses whether the DTI policies have succeeded. It answers that they have, overall, as evidenced by increases in exports, productivity, and investment in some industries. It admits, however, that there were declines in total investment and employment, and no real growth in SMMEs. But it concludes these problems happened despite, not because, of the DTI policies.

The question becomes whether a policy is successful if it fails to address the basic structural problems that lead to very low investment and sharp declines in employment. In 2000, investment fell to 14,9 per cent of GDP – the lowest since 1994. (At the same time inflows of portfolio capital dropped from R80 billion in 1999 to R10 billion in 2000.) Can we say a policy is successful by any criteria, given this disastrously low level of investment – as well as the loss of hundreds of thousands of jobs?

We need a much more honest and critical review of economic strategy in order to point the way forward. Above all, we expect the DTI to analyse the massive loss of jobs, including in manufacturing, and the drop in investment in the past three years. Moreover, an assessment of existing policies must explain failure to integrate industrial and trade strategy coherently with social protection programmes, agricultural development and the skills development strategy and the relatively low levels of utilisation of supply-side measures. Only on the basis of this type of in-depth analysis of existing policy, as the document itself notes later on, can we develop realistic and effective measures to address our economic difficulties.

How to do better: An integrated industrial strategy

The document argues that critical changes face manufacturing. They are:

In effect, we can read this section as the problem statement. Again, the section underscores its failure to address South African problems. While these changes may be typical of industrialised countries and to a degree world trade in manufacturing, it is questionable how far they help in understanding the changes in South African industry.

The document then suggests that we cannot rely on old advantages. Specifically, it says that companies cannot expect to compete successfully on the basis of access to cheap raw materials, cheap unskilled labour or propriety production technology, or privileged access to markets. Instead, the only solution is a shift to a knowledge-based economy.

Again, this section seems more geared to the North than to South Africa. The only truly "world class" section of our economy is still mining and energy. We also have some specific advantages in agriculture. We cannot simply argue that these have been left behind by the new economy – a patently false assertion. Rather, we should be considering how to build on these traditional strengths to expand production, increase investment and create jobs. That will require substantial structural change, but it cannot mean, as the document appears to imply, that we simply abandon the existing economy.

The document limits the concept of an "integrated industrial strategy" to the integration of marketing, design and procurement, and to a limited extent the region. The normal understanding of an integrated industrial strategy revolves much more around establishing a complete production cycle locally, with stronger upstream linkages – to local raw materials – and downstream linkages, to the production of finished products. By redefining the concept so narrowly, the document ignores key factors related to employment growth and more robust overall economic growth.

This section also reveals, once again, the document’s virtually exclusive focus on high-level markets, with "discriminating consumers." It does not discuss at all the need to produce basic necessities to raise the living standards of the poor. As noted above, that means it does not explore the possibility of expanding domestic demand while raising productivity and living standards by providing more housing and infrastructure as well as production of basic foods and consumer goods.

Here, as noted above, the document relies heavily on a vague conceptualisation of "the production and assimilation of knowledge." It appears to mean predominantly innovation in production processes and the use of ICT in retail trade. It would be useful to be much more specific. After all, introducing ICT in production processes can lead to job losses, especially in a relatively stagnant economy. In contrast, innovation in products is typically associated with employment growth.

Overall, as noted above, this strategy will not address the key problems of the South African economy. Nor does it provide any serious assessment of whether the proposal of shifting to a knowledge-based economy is viable. Still, it could be helpful for the top end of the manufacturing sector. Moreover, improvements in retail linkages could help cut the cost of wage goods and support SMMEs. Thus, it would be useful to develop a more specific strategy on how to use retail trade to improve markets for SMMEs and cut the cost of wage goods. In the absence of a more detailed analysis, however, the proposed approach risks encouraging the introduction of ICT in ways that destroy more jobs, rather than creating them.

Industrial Strategy in SA – continuities and new directions

The document argues that DTI will continue with the core elements of its existing policy. As noted above, however, that policy has failed to restructure the economy, essentially because of the focus on exports and the failure to define job-creating expansion paths.

At the same time, the document stresses the need to shift increasingly to "technologically progressive knowledge-intensive industries." It stresses that this does not only mean support for high-tech industries, but rather improving the use of knowledge capacities in other sectors. It also expects to expand its role in supporting "new economy" service sectors based on knowledge. In effect, this will let us offset relatively high wages by raising productivity.

As noted above, this is a limited and very abstract proposal for industrial strategy. The conceptualisation of knowledge remains vague at best, able to justify virtually any policy.

Constraints and tensions in making the change to a knowledge-based economy

The document stresses constraints in terms of human resources and telecommunications. In terms of HR, it notes that we have some world-class institutions – but a limited overall skills base. It stresses also that we are losing skills to emigration and limits on immigration.

This argument reflects a tendency to see the import of skills as a quick fix. It ignores the fact that imported personnel often take a long time to adjust and understand local requirements. Many are paid a premium, increasing total costs without much improving the transfer of skills. The cases of management brought into SAA and SAPOS underline the dangers. Furthermore, a shift to importing skills may tempt employers to downplay the need for local skills development. While it is important to make foreign skills more accessible, that will not in itself go far toward curing the skills shortage.

To improve on telecommunications, the document argues, we need "high levels of competition combined with an effective regulatory regime." (page 36) In the event, however, as noted above, competition in telecommunications will only serve the rich and big business. While Labour accepts that increased competition for business services could prove useful, we also need a universal service provider to meet the needs of the poor, particularly in the relatively high-cost rural areas. Competition in basic telephony will only make that harder.

The document argues that the new strategy requires closer co-operation with other departments. That is certainly an important goal. The stress on joined-up government is a strength in the document. But it must not mean that short-run economic imperatives dominate infrastructure and social service provision. It should not deteriorate into making infrastructure departments focus primarily on better services for business, or directing education and training to meet the needs of the economy first and foremost, while neglecting other social aims.

The document does admit that its strategy could come under fire because it does not address employment growth adequately. It concludes that this is unavoidable, since in its view, "traditional manufacturing industry is not likely to be a source of significant employment gain." (page 36)

As noted above, the conclusion that manufacturing cannot create jobs is unacceptable. In effect, the document argues that since manufacturing is not likely to be the main source of employment growth, the policy can virtually ignore this imperative. Yet as noted above, a shift to growth in more labour-intensive sectors, associated with a shift away from mining and refining to downstream and light industries, could go some way toward protecting and expanding jobs in industry.

The document also notes that any new jobs created as a result of its focus on "knowledge-based" activities will go mostly to skilled people. Its only proposal to address this is to ensure widespread education and training. Yet many South Africans over 30 have inadequate basic education. This cannot easily be remedied – and the proposals here simply argue that these workers will lose out, without any real attempt to develop alternatives.

This is an extraordinarily short-sighted approach. It condemns the majority of South Africans to un- and underemployment. In addition, no strategies for BEE and SMMEs can work if they are limited only to the educated. It is thus not clear how compatible the proposed strategy is with the DTI’s other objectives.

7. Making it work: Indicative policies

The DTI highlights skills development, research and development, and ICT as critical areas. Proposals in the first two areas remain, at best, broad brush – and in the case of research and development, very thin indeed. On ICT, it argues again that, "Strong competition overseen by effective regulation is key to achieving the market structure that can best achieve this objective." (page 41)

It sometimes seem that the DTI has not really come to grips with the Skills Development Strategy. The document is severely flawed by its failure to integrate an that strategy consistently. Specifically, it lacks an analysis of how SETAs and workplace skills plans can support employment creation and productivity growth in manufacturing.

Finally, the document commits the DTI to consultative policy making. The NEDLAC Trade and Industry Chamber and the sector summits are critical forums for this purpose. The Chamber must continue with its systematic programme of discussing key issues and instruments for industrial strategy, in order to ensure a better framework for the industrial strategy. As agreed, key issues for discussion include investment; trade; procurement; governance; skills development; and infrastructure.

8. Government Implementation of the new industrial strategy framework

The document suggests that the key areas of government intervention to create rules should be in ensuring competition and regulation. A concern is that the approach seems linked to the idea that we need to privatise even core public services, admittedly with regulation. While the document admits that regulation is not easy, it fails to provide a systematic analysis of the persistent weaknesses in South African regulatory agencies. Moreover, the failure to identify the problems with existing markets systematically means it gives little guidance on the direction regulation should take.

The DTI stresses that it must ensure co-operation of other departments, notably education, labour, and arts, culture, science and technology. It says these departments must support its industrial strategy, which DTI will lead. As noted above, broader social aims, such as educating good citizens, labour rights and culture, should not be subordinated to an export-oriented strategy. The idea of greater co-operation around economic strategic is of course welcome – but what are the aims of that strategy?

9. Government as learning organisation

The document commits DTI to continuously assessing and refining its policies. This is very welcome. Again, the NEDLAC trade and industry processes and the sector summits must be seen as critical to achieve that aim.


Labour position paper on taxation

Our main concern is that South Africa cannot afford to reduce government revenue or make taxes less progressive. There are two reasons for this.

First, given the overall backlog in government services, we clearly cannot afford to cut taxes. South Africa has unusually unequal incomes, which means the state must spend more on social protection for the poor. Otherwise we risk a deteriorating cycle, where falling living standards and deepening poverty reduce productivity, in turn fuelling poverty.

Second, historically, state investment has always led private investment in South Africa. For various reasons, however, budget cuts invariably lead first to cuts in government investment. Incentives that cut overall tax revenue, then, could actually lead to a fall in investment.

Currently, total taxes come to under 25 per cent of GDP, a target fixed by Treasury. The bulk of revenue comes from personal and income tax plus VAT. Since 1994, personal income tax revenues plus the tax on pensions have increased by 0,5 per cent a year in real terms, VAT revenues have risen by 0,2 per cent a year in real terms, and company tax revenues have remained virtually unchanged. (We used CPI to deflate tax revenues; the source is National Treasury, Budget Review 2001)

Business argues that we have a high effective tax rate relative to other countries. The problem here is the definition of "effective." Usually we would look at the actual taxes companies pay relative to profits. In contrast, business’s NEDLAC presentation looked at the nominal rate less incentives. So we don’t actually know what companies pay in practice.

Tax incentives have some well-known drawbacks.

In sum, it is not clear that high taxes cause low investment, or that incentives will work. After all, a central problem around investment is the capital outflow (see the paper on investment.) Surely no one blames the capital outflow on high taxes. That points to the need to address the overall economic structure, rather than tampering with the tax system.

Proposals

  1. Measures to reform taxes must recognise the impossibility of cutting government revenues and that taxation must be progressive overall.
  2. Tax incentives should be transparent, accountable, simple and fair, and linked to proposals from sector summits as far as possible. The cost to the state must always be estimated and published on an annual basis.
  3. Generally, we want to shift the focus to more effective measures to stimulate investment, especially provision of infrastructure, targeted credit and support through IDC/DBSA, improved access to supply-side measures, measures to increase domestic demand, and skills development.
  4. We should conduct research into:

Investment

  1. Problem statement

Overall, investment is low and biased toward capital-intensive sectors, with rising capital outflows. Investment has remained well below the 20 to 25 per cent generally considered necessary for growth. In 2000, investment fell to 14,9 per cent of GDP – the lowest level since 1993.

As the following table shows, investment had a particularly poor record in agriculture, manufacturing, electricity generation and financial services themselves - critical sectors for development and job creation.

Gross Fixed Capital Formation by sector

 

Value in 2000, R bns.

% of total

Real change

Sector

1993-'97

1997-2000

Financial intermediation, insurance, real estate and business services

31,9

24%

40%

1%

Manufacturing

30,5

23%

46%

1%

Transport, storage and communication

19,4

15%

75%

27%

Community, social and personal services

17,0

13%

15%

3%

Mining and quarrying

10,6

8%

32%

-7%

Wholesale and retail trade, catering and accommodation

8,7

7%

39%

15%

Electricity, gas and water

7,0

5%

0%

-33%

Agriculture, forestry and fishing

4,1

3%

2%

-24%

Construction (contractors)

1,2

1%

15%

-2%

Total

130,3

100%

37%

1%

Source: Calculated from, SARB, Quarterly Bulletin, June 2001, pp. S116-7

In addition, the capital outflow grew rapidly and steadily between 1994 and 1999, although it dropped slightly in 2000. In contrast, capital inflows have been markedly unstable, with a massive decline in 2000. As a result, a net capital outflow emerged in that year.

Capital outflows and inflows, in R bns.

1993

1994

1995

1996

1997

1998

1999

2000

Foreign investment in SA

-3.9

10.1

32.4

29.0

67.8

60.1

76.1

27.9

Of which: Portfolio investment

2.4

10.3

10.7

18.0

51.6

50.5

83.9

11.8

Investment abroad by SA companies

-1.8

-5.7

-12.6

-15.6

-40.8

-42.8

-53.7

-37.5

Of which: Portfolio investment

*

-0.3

-1.6

-8.4

-21.0

-30.1

-31.5

-25.6

Net investment in SA

-5.7

4.4

19.8

13.4

27.0

17.3

22.4

-9.6

under R0,5 billion.

Source: South African Reserve Bank, Quarterly Bulletin, June 2001, p. S-90

A particular concern is that foreign direct investment flowing out of the country has increased rapidly, and since 1994 has exceeded direct capital inflows. Between 1994 and 2000, foreign direct investment into the country came to R45 billion, while outflows of direct investment came to R54 billion.

To establish an appropriate industrial policy, we need to analyse the main causes of low investment. We see the following as critical.

The South African economy has had to make major adjustments related both to the slow down in gold mining and to the opening of the economy after 1989. In effect, this has required the definition of a new growth trajectory for the economy. The historic areas of profit and certainty – especially around mining, refining and agriculture - are no longer viable, and it is difficult to define new ones. In this context, rather than diversifying into new activities within South Africa, we have seen mining and financial companies developing foreign investments.

The massive income inequalities inherited from apartheid act as a major obstacle to investment, since they depress the domestic market. The UNDP found that South Africa’s income distribution ranks third worst in the world, following Brazil and Uruguay. In the early 1990s, the richest 10 per cent of South Africans got around 45 per cent of the national income, compared to between 30 and 40 per cent for almost all other middle-income developing countries, and 24 per cent in South Korea.

A frequent response to limited domestic demand is to call for a focus on exports. That ignores international experience, which suggests that successful export drives require a basis in a strong domestic economy. For this reason, the RDP argued that we need to find ways to expand domestic demand as well as supporting exports. Critical strategies to that end include increased social spending and infrastructure for poor communities; accelerated skills development; and support for small and micro enterprise, including land reform.

Measures designed to attract foreign capital have depressed conditions for local capital – in particular high interest rates and budget cuts. Declining budgets usually lead to falling government investment, and South Africa is no exception. Indeed, historically, there is clear statistical evidence of crowding in, where government investment is a major stimulus for private investment.

Experience throughout the world demonstrates that in attracting foreign investment, a robust economy, with high levels of domestic investment, is far more important than tight macroeconomic parameters. This is underscored by South Africa’s experience with direct investment, as discussed above. It also appears from the failure of our rigid fiscal policies to prevent the huge decline in portfolio investment last year. That outflow was reputedly fuelled by the Zimbabwe crisis, which indicates the problem of relying on foreign capital’s perceptions, rather than real growth, to attract investment.

Furthermore, given slow domestic growth, the little direct investment since 1994 has often been associated with the displacement of local production, without bringing in the hoped-for benefits. In some cases, foreign companies have essentially closed down local production to benefit their foreign activities. Examples of this trend have emerged in white goods, dairy, pharmaceuticals and even refining.

To the extent we attracted foreign investment, as the table above demonstrates, it has been predominantly portfolio capital, which is disastrously sensitive to international perceptions and crises. Between 1999 and 2000, portfolio inflows dropped from R84 billion to R12 billion, leading to a net capital outflow.

The structure of the financial sector has contributed to inappropriate and low investment. The sector is concentrated, focused on serving large scale enterprises, and increasingly geared to shipping South African savings overseas.

Government’s supply-side measures have not proven adequate to deal with the fundamental obstacles to investment. On the one hand, they are not linked to sectoral strategies that would plot a way forward for economic growth. Nor do they consistently support labour-intensive growth or improved training. On the other hand, many potential beneficiaries do not know about them or cannot access them.

For its part, the IDC has continued to focus on capital-intensive projects that do not create jobs or support downstream activities. Yet the Minister for Trade and Industry has suggested that the IDC has a role in 20 to 30 per cent of all investment.

Proposals

It follows from the analysis provided here that sector job summits, with buy in by all the main stakeholders, are the critical mechanism for defining new investment opportunities. They must define realistic growth trajectories for each sector that will, as far as possible, create employment, meet the needs of our people, support the balance of payments, and enhance equality. On that basis, they should mobilise appropriate commitments from government, business and labour to enhance investments.

In addition, the macro-economic policy should be revised to stimulate domestic investment. We need to ensure that the monetary policy does not lead to excessively high interest rates. Moreover, the fiscal policy must expand government spending sufficiently to support growth in state investment. That means real government spending overall must grow 4 to 5 per cent a year, or slightly faster than current MTEF projections.

In light of the devastating impact of fluctuations in portfolio inflows as well as capital outflows, we should explore "roadblocks" that could help stabilise foreign capital flows and slow the outflow of domestic savings. These could include greater limitations on the relocation of company headquarters abroad, as well as on financial institutions’ shifting of deposits overseas.

The financial sector summit will come up with proposals on how the industry can do more to support investment and growth. From the standpoint of industrial strategy, the key reforms include:


COSATU response to Business position paper November 14, 2001

The Business input argues strongly against "targeting sectors." We need to distinguish between having a conception of a viable sectoral trajectory and "targeting." Economic actors invariably act on their expectations for the economy. In particular, when government provides infrastructure, it projects sectoral as well as regional developments. We think it is critical to discuss these projections and encourage a growth trajectory that will create jobs.

It is also important that all the partners take into account the others’ concerns. It would be useful if Business included a discussion of how its proposals would impact on employment creation and living standards for the majority of South Africans.

On specific points:

Privatisation: We propose that the task team review specific proposals for SOEs and major services such as water, in order to ensure that they will meet both the needs of formal business and those of households.

Stabilisation of the labour market: We need more specific proposals to comment meaningfully.

Sanctity of Property and Contract: Research (for instance by Stephen Gelb) suggests that uncertainty about property rights arises where incomes and wealth are highly unequal, as in South Africa. In these circumstances, even if the State puts considerable effort into maintaining property rights, the rich will always be worried. It follows that measures to ensure equity within the law are critical to secure property rights in the long term.

Education policies: We agree with the Business analysis, with some additions.

The problem in maths and science is not only a poor pass rate, but also that many African high schools still have neither teachers nor facilities in these subjects. We have yet to see meaningful programmes to deal with these backlogs. The current processes for allocating teachers to schools, for instance, tend to maintain disparities.

In addition, the fees system in a context of budget restraint has meant that massive inequalities in education persist. We need to address this urgently, amongst others by (a) redistributing at least a share of the income from fees to poorer schools, and (b) ensuring greater access for poor children to suburban schools, in part by relaxing residency requirements.

Finally, the matric exam system needs to be revised to ensure that competencies are better recognised.

Taxation: We attach a position paper on taxation.

Competition policy: We agree with the Business analysis, except for the point on state-owned enterprise. Usually, the decision that government should deliver a good or service results because of market imperfections. In these circumstances, introducing competition could reinstate the problems originally identified. For this reason, we feel that these issues should be dealt with as part of the discussions about privatisation of SOEs and services.

Trade policy: We agree in general. We feel, however, that we need more research into WTO clauses that permit at least temporary relaxation of rules to achieve national aims. Beyond anti-dumping provisions, these include safeguard tariffs and the right to get cheap medicines in national emergencies.

Human capital: We need a much deeper discussion of the skills development strategy. To reduce the plethora of bureaucratic institutions, the SETAs should take over standards development for general and further education.

On immigration and retention of skills, we need more detailed proposals in order to comment. We do feel, however, that any relaxation of immigration rules must be linked to measures to build local capacity.

SMMEs, knowledge-based culture and R&D: Again, we need more detail in order to respond meaningfully. Can we develop joint research in these areas?

1 November 2001

BUSINESS SOUTH AFRICA SUBMISSION TO THE DEPARTMENT OF TRADE AND INDUSTRY REGARDING "THE DRAFT INTEGRATED INDUSTRIAL STRATEGY FOR SOUTH AFRICA"

Introduction

BSA welcomes the opportunity to comment on the integrated framework paper. Rather than limiting the comments to the paper itself, BSA will make recommendations on issues that transcend the boundaries of the total economic policy package offered in South Africa. Indeed, there has been much global discussion and research work done in interpreting if selective government intervention – through industrial policy – does foster more rapid economic growth. Whilst BSA supports the broad approaches of joined up government and the co-ordination of a multitude of policies that impact on industrial competitiveness, there is little focus on the decisive issues that affect investment decisions at the firm specific level – whether it be for manufacturing companies or any other business for that matter. For example, in the case of Johannesburg Securities Exchange (JSE) listed companies with a market capitalisation of over US$5 billion and a debt to equity ratio of 25 percent, the average risk and cost adjusted rate of return was a paltry 0.5 percent in 2000 compared to levels of 5 percent for the USA and Ireland. Until factors that affect the costs and risks of investment are addressed at a microeconomic level, there will not be escalation in investment or a substantive increase in economic development and growth.

BSA supports a number of the concepts enumerated in the DTI’s framework paper including:

However, BSA has two critical points of departure:

Comparative And Competitive Advantage And The Knowledge Economy

Important changes are emerging in the key factors that influence which countries generate domestic and attract foreign direct investment. In contrast to the traditional comparative advantages of mineral resource endowment, natural capital and supply of low-cost labour, the increasingly integrated global economy is resulting in companies seeking investment destinations where there is an abundance of competitive advantages. Such competitive advantages tend to be created rather than inherited and include created assets such as technology and innovation capacities, availability of skilled human capital, communication infrastructure, marketing networks, etc. Created assets can be tangible such as the stock of financial or physical assets in an economy, or can be intangible assets like skills, business culture, attitudes to wealth creation or the stock of information on trademarks or goodwill. The key denominator of intangible assets in this context is knowledge, which thus forms a key part of a country developing competitive advantages to attract investment.

In this regard BSA agrees with government on the knowledge-based economy but on the basis it is included in a slightly broader framework of competitive advantage and created assets.

Comparative advantages tend to determine which countries best grow wheat, refine alumna or make cheap garments. Competitive advantage determines who makes machine tools, microchips, cars and who has successful banks, etc. Comparative advantage depends on endowment factor costs and tends to be owned by industries in countries. Competitive advantage tends to be owned by individual firms and depends on scale, propriety technology, brand strength, marketing channels, etc. Regions or countries possess comparative advantage while individual firms develop competitive advantage. Table 1 attempts to highlight the differences between comparative and competitive advantage.

Table 1 Comparative advantage versus competitive advantage.

Type of advantage

Source

Beneficiary

Description and policy implication

Comparative advantage as traditionally defined

Endowed

All firms in industries, regions

Cheap resources, low cost labour. Endowed advantages remain critically important to Australia’s primary industries. Microeconomic reforms that improve the country’s ports, transport and electricity will support the country’s comparative advantages in these areas.

Dynamic comparative advantage

Created

All firms in industries, regions

World class human and physical infrastructure, as well as clusters that develop capacities useful to all firms. Here South Africa is weak and policy objectives should be the enhancing of physical infrastructure, a better educated and skilled workforce, labour market reform, support for R&D, etc.

Competitive advantage

Created

Individual firms

The fostering and nurturing of world class firms. Policy issues here include competition law responses to the need for scale in global markets, tax regimes relative to competitors, domestic non-tariff barriers, government procurement, overseas market development support, export facilitation, etc.

Traditional determinants of investment remain an important key to attracting investment, but the shift by multinational companies to looking for countries that have competitive advantages – means that countries without the traditional comparative advantages can be more competitive in attracting FDI. The key point here is that a country that has traditional comparative advantages should not solely rely on these traditional strengths but should increasingly focus on developing competitive advantages such as created assets. Successful nations with little comparative advantage such as Japan, Taiwan or Singapore have had little choice but to create competitive advantages.

With comparative advantage, intervention is ultimately a no win game. European agricultural subsidies clearly cost their consumers much for no permanent gain. When these agricultural subsidies are removed, the countries that possess comparative advantage in wheat production will resume larger production levels at the expense of European farmers. The point is that the EU subsidy of agriculture cannot shift traditional or dynamic comparative advantage and thus makes no economic or strategic sense. However, governments do have a key role when it comes to creating a conducive environment that allows firms to develop competitive advantages.

As globalisation has resulted in an increasing emphasis on competitive advantages so too has the economic policy environment in many countries had to change. Over the past two decades the overwhelming majority of countries around the world have introduced measures that promote macroeconomic stability whilst also opening up markets to competition through liberalisation and privatisation. The traditional policies such as sound macroeconomic management, trade liberalisation and market competition are now considered the absolute minimum for generating investment. Increasingly countries are focusing on a second set of policies which encourage differentiation from a competitive advantage perspective. The following chart emphasises the traditional policy measures whilst also integrating the new policy measures designed to facilitate the creation of competitive advantages at the firm level.

The choice of countries for the multinational investor is now greater than ever. There are increasing challenges for government’s regarding the development of policies that generate competitive advantage. Whilst it is important that there is not a "race to the bottom" in terms of trade off around tax policy and the like, it is absolutely critical for government’s to ensure that the traditional policies are firmly in place and that policies that develop competitive advantages are adopted. For South Africa the choice is no different.

In the world of perfectly competitive markets where comparative advantage is endowed factor cost advantage, the loss of firms now will be unfortunate for the owners but eventually they will be replaced as normal market conditions return. (E.g. if the EU stops subsidising wheat the mass production of wheat will return to those countries that have the endowed factor cost advantage). However, in competitive advantage industries, competitive firms driven out of business by dumping, through the lack of access to foreign markets, or through the weight of South African inefficiencies will in most instances never return. If South Africa looses companies in the vehicle manufacturing industry, it is unlikely that they will ever be re-established, because competitive advantage is very mobile. Even with a depreciating currency and productivity gains, for competitive advantage firms that have shut they will not necessarily relocate to South Africa because cost is only one factor determining competitiveness in many industries.

developing a competitive advantage framework for a new enterprise strategy

Again it must be reiterated that traditional comparative advantages should not be neglected, as they remain a key element of the investment picture. For example, the minerals industry has a significant foundation role for economic development and growth and can provide the critical mass necessary for the development of capital markets, infrastructure, manufacturing, services and so on. However, the New World economy demands a range of policies that develop competitive advantages. These new economy policies still require that the traditional economic policies used to provide a sustainable investment platform must also be in place. As mentioned earlier the traditional policies include:

The above traditional policy measures are now considered to be the absolute minimum for a country to attract investment – and tend to concentrate on enhancing traditional comparative and dynamic comparative advantages that a country may have. Again these are important areas and cannot be overlooked simply because increasing attention is being devoted to evolving sources of competitive advantage for firms. Policies that can encourage the development of competitive advantage include:

SOUTH AFRICA HAS A TRADITIONAL ECONOMIC POLICY REFORM AGENDA THAT IS UNFINISHED!

Whilst significant progress has been made in institutionalising democracy, stabilising the government fiscal situation, in reducing price instability in the economy and in reforming a number of markets, there remains an unfinished reform agenda. This is especially so in the traditional policy reform arena South Africa has an unfinished reform agenda with significant focus necessary on the reform of markets – and especially the government’s role in key markets.

Globalisation, the Restructuring of State Assets and Greater Private Sector Participation in Contestable Markets

On a world-wide basis there has been a significant shift in the role of governments in markets. The previous role of participant (normally the only one), rule setter and arbiter has changed such that the state’s role in most economies has become that of regulator and rule setter. Almost every government around the world have recognised that the private sector can, and does provide goods and services more efficiently, more cost effectively than governments can – especially in competitive markets. The growth in private sector service provision has been exponential in the past decade. South Africa does not have the luxury of trying to avoid globalisation, the integration of markets or greater levels of private sector participation in domestic markets.

Current estimates suggest that state owned enterprises (SOE’s) and the government’s property portfolio are worth some R400 billion which constitutes a value of nearly 25 percent of the market capitalisation of the Johannesburg Security Exchange. The economic and investment performance of SOE’s in the past decade has been, with the possible exclusion of Eskom, dismal and continues to be a significant source of non-performance for the South African economy. In particular, the fact that a significant amount of the input costs of the average business are provided by SOE’s in uncompetitive markets with non-market determined prices is a significant disadvantage for South Africa. This excludes the negative agency problems between the users and providers of funds and the lack of focus on economic efficiency factors which has a significant impact on affordability of goods and services produced by SOE’s. From the large wharfage costs charged on an advalorem basis with high demurrage costs at the ports, to the lack of competition in the telecommunications sector, the negative impact on business users has been significant. The monopolistic nature of SOE’s combined with administrative price setting and anti-competitive behaviour has resulted in distorted prices and reduced the ability of investors to truly determine what prices will be in the medium to longer term.

The economic vibrancy effects of the privatisation of SOE’s into contestable markets would result in a raising of the economic growth rate by an estimated one to two percentage points per year. It would also result in much greater efficiencies of investment in these areas and would result in more appropriate technologies and innovations being brought into the domestic markets. The critical issues of private ownership and contestable markets and therefore the regulatory environment and the regulators of such an environment are crucial components. The delivery of social and political objectives in terms of extension of infrastructure could be done very efficiently through licensing arrangements of the new private sector operators.

There is an urgent need to reform the institutional and regulatory arrangements, which have produced costly and inappropriate infrastructure in the communications, transport, and port sectors and in the public service in general. Secondly there remain a number of markets that require review and these include the foreign exchange market and the labour market. Given South Africa abundant supply of unskilled labour and its high 30 percent unemployment rate aptly demonstrates that interventions in this market have not worked and should be reviewed.


The Rule of Law

According to a survey of the CEO’s of large firms in Johannesburg crime and theft were rated by 94 percent of firm CEO’s as the major obstacle to firm growth. Interviews with managers supported this ranking whereby 83 percent of firms reported that they had suffered from some sort of crime during 1998, with many listing more than one incident. It is important to point out that the crime issues was rated above other factors such as the cost of capital, labour regulations, or rand volatility – although these other items are crucial to investment decisions.

 

The Sanctity of Property and Certainty Of Contract

Respect for property rights and private ownership in an economy are the key pillars of the free enterprise system. Property rights form the basis of the trading and financial systems that attaches value to assets, goods and services. Property rights provide the collateral for bank lending and equity financing.

Property rights are a "sine qua non" for a market based economic based economy. The actions and policies of government which result in an abrogation of property rights, whether at an intellectual right level or property title for land, can create a level of uncertainty which by itself is a major detraction to potential investment. Governments must send clear signals that the sanctity of property rights will be respected and that the issues around land reform, etc. are conducted within a comprehensive legal framework which is acceptable to all parties.

Investors and businesses require certainty that contracts will be enforced through the courts in an efficient and transparent manner.

Education Policies

Education expenditures in South Africa at 7-8 percent of GDP are high by international standards and do reflect government’s commitment to addressing the apartheid education gap. However, the results of South Africa’s education system leave much to be desired. In particular, the poor pass rate in the mathematics and science categories results in only a small pool of people available for the engineering and science fields of study at a tertiary level. In addition, the general "parrot fashion" means of tuition results in students with limited problem solving abilities. This is an area that requires significant immediate attention.

New policies designed to enhance the development of competitive advantages

 

Despite the unfinished reform agenda with the traditional economic policy measures, it is vital that new policies and reform of existing policies which address competitive advantage issues are dealt with as quickly as possible.

Taxation Policy and The Provision of Market Enhancing Incentives

Whilst South Africa’s nominal corporate tax rates appear slightly about other country rates, a comparison on an effective tax rate basis suggest that South Africa’s effective tax rates are significantly out of kilter with other countries (e.g. four times higher than Ireland’s effective corporate tax rate). High effective tax rates are as a result of few accelerated depreciation programmes or incentives.

As the supply of global financial capital (stock of foreign direct investment funds) has risen significantly governments have intensified competition with one another to attract their share of such flows. Evidence of the effects of investment incentives on corporation’s real investment location decisions is consistent with the view that the decision is normally a two-stage process in which investors initially compile a list of acceptable sites on the basis on economic and political fundamentals and only later do investors consider the investment incentive angle. So incentives can play a role in attracting or generating investment but the pro’s and cons need to be equally measured because at the end of the day investment decisions will be based on pure project economics in relation to the underlying fundamentals of the investment location. Investment incentives form only one of the policy measures that can tilt potential investment decisions. The negative ramifications in terms of distortions to decision-making, the inducement of rent seeking behaviour, including corruption, can be costly and ultimately undermine the need for certainty in investment decisions.

While governments often justify providing investment incentives with the argument that they are needed to guide investments to poorer areas of their economy, in reality incentives are often of limited effectiveness in this regard and they sometimes actually reinforce inequalities instead. Even in the absence of global bidding wars for FDI (the traditional race to the bottom story) the distortionary effects of incentives - which tend to discriminate against smaller firms and against local companies especially in sectors that are not specifically targeted - can be significant.

Overall South Africa has had relatively little experience with incentive schemes and the uptake by the private sector has been minimal for the schemes that have been on offer. If targeted incentive schemes are to be pursued due diligence must be made to ensure that the incentives are broad based but at the same time fiscally affordable. It will be important in any incentive scheme for government to avoid trying to pick "winners" or to create complex selection criteria and procedures that end up creating excessive administrative burdens for government or high levels of compliance by possible beneficiaries. Global evidence on the effectiveness of targeted incentive schemes generally suggest that such measures rarely attract additional investment, are costly and often distort markets that lead to further resource misallocations. Investors are drawn to countries and regions that facilitate their participation in the very competitive global environment. Thus the factors which drive competitive advantages such as the general business framework, ease of entry and exit into the country, rights of legal recourse, existence of supply networks, efficient and affordable infrastructure, the availability of entrepreneurial culture and sufficiently skilled human capital, etc., are key.

Governments have been very poor at choosing successful industries and companies and therefore in general they should most probably refrain from trying to. Perhaps the most appropriate approach on the incentive front is to provide "market enhancing incentives" through the tax system rather than the use of grants. These can be targeted on broad categories such as exports, value added, etc. to minimise cost but in general should not be too specific. One of the key reasons for looking at broad-based incentives and not specific target incentives is that it eliminates rent seeking behaviour by firms and reduces corrupt behaviour by corrupt officials.

The possibility of successful implementation of broad-based incentives could also be enhanced if there is serious and regular dialogue between business and policy makers.

Competition Policy: ensuring the authorities recognise the need for size in the global market, despite a small South African market

Ultimately competition policy should seek to promote a more dynamic, creative and competitive economy.

Linked to the overall business regulatory environment South African Competition policy went the international policy convergence route by focussing on the penalisation of anti-competitive behaviour rather than a focus on market size. Unfortunately the crucial element of the need to have reasonably large global companies which may appear big in the domestic context is missing from the domestic regulator radar screen. It must be stressed that the vast majority of South African companies listed on the JSE are actually quite small in the international context. Global investors /- Fund Managers /- Economists /- attach significance to a country if it has companies of reasonable global size with recognised brands and standards.

A critical difficulty for South Africa is its small market relative to other countries. Almost every successful international company has been launched off the back of a strong domestic market base with very few exceptions. Yes domestic rivalry is important, but the small domestic market and long distances to major markets are significant problems for South African companies aspiring to be world class. One of government’s key policy areas should be the attraction and nurturing of internationally capable firms with a focus on international markets. Unfortunately the existing Competition Act focuses on the dominance of firms in the domestic market. What this does is that firms that reach the dominance thresholds (which happens quickly) are compelled to invest offshore which seriously detracts from local investment.

There are three important areas that require investigation:

Trade Policies and Access to Global Markets

The further South African firms move down the value curve in terms of beneficiation of traded goods the greater the degree of protection and uneven playing fields in foreign markets. The following policy areas are suggested:

Human Capital Development and the Development of entrepreneurial culture

The availability of sufficiently skilled human capital at competitive prices is a significantly important component of encouraging enterprise development and investment in South Africa. The recently launched Skills Development Act and its associated money act, are clear indicators of the business commitment to skills development in South Africa. Linking business and government on future skill needs is clearly vital. However, the relatively bureaucratic structures of SETAs is reducing their potential effectiveness. The recently announced incentive to encourage companies to take on learners for tax rebates is welcomed. It is important that while the skills development strategies are being implemented the need for access to skills from abroad should not be encumbered.

The issue of the emigration of skilled human capital is extremely concerning to business. Consider the facts, if skilled engineers, artisans, technicians, managers, marketers, etc. are not available in an economy the ability of that economy to grow will be severely constrained. Yet consider the following issues:

Given that skilled human capital is similar to financial capital and tends to migrate to the country that offers the best after tax rates of return, there clearly has been little consideration given to such factors by the government. Forcing locally developed skills to stay in South Africa via the big stick approach (such as conscription) will have the opposite negative affect. A system of incentives to encourage skilled human capital to remain in South Africa is a vital component of any Enterprise Strategy.

Facilitating SMME growth and development

Usage of DTI support programmes for SMMEs is very low suggesting the need for a dramatic revision of all such programmes. A survey done by the World Bank of SMME’s shows that awareness of DTI programmes is about 7-34 percent per programme; usage of each programme is in the range of 0.5 percent. No more than 20 percent of SMMEs were aware of Khula and Ntsika programmes, with the exception of the quality standards programme offered by SABS. Less than 10 percent of firms that have heard of these DTI programmes have used them.

The SMME sector is traditionally recognised for its potential in providing employment, fostering innovation, driving competitiveness and ultimately being the breeding ground for larger companies. South Africa’s SMME sector is relatively underdeveloped and a significant portion of the existing sector is survivalist/informal in nature. The factors influencing investment decisions for SMME’s are very similar in nature to that of large companies in that ultimately risk and cost adjusted rates of return are the determining factor for investment and start ups. Obviously there are differences in the nuances of the costs and risks that larger businesses are able to manage vis-à-vis. SMME’s.

Factors impinging on the growth of the SMME sector include:

 

A comprehensive, integrated Enterprise Strategy can play a meaningful role in providing the type of environment which encourages SMME’s just as much as it facilitates the development and growth of large companies. Again, it is reiterated that it is not confined to the manufacturing sector but to all businesses, small and large.

Policies to improve the ease of access of entrepreneurs into business and compliance costs

To strengthen the overall competitiveness of the economy requires an overall improvement in the domestic business environment. In this regard, a thorough review programme which assess the relative merits, costs and benefits of the domestic business regulatory environment should be undertaken as a matter of urgency. What is required is a simplified and improved administrative and regulatory business environment which ultimately facilitates enterprise development. Complex legislation and regulation simply add to the compliance costs of business and force many small businesses to go "underground" into the formal sector.

Development of a Dynamic Knowledge Based Culture

 

It is important to recognise that technological change is occurring at an exponential rate and that e-business and e-commerce are bringing about revolutionary changes in the global economy and in working and business practices at the firm specific level. It is clear that e-business and Information and Communication Technologies (ICT’s), will be significant drivers of enterprise development in the short and medium term. Progress on the ICT front will be driven by the needs of flexibility, the availability of skills, costs of services (such as the availability of telecommunications infrastructure), and on overall competitiveness.

Promoting Innovation, Research and Development

Clearly the development of competitive advantages and created assets are inextricably linked to investment in research and development and the promotion of innovation in any economy. Innovation is a key factor in technical progress and is critical to the developing competitive advantages in the development of new products and services. In order to fairly reward innovation, strong legal protection of legal property is necessary to allow the creators of innovation to secure fair reward.

State support for innovation could be extended to include:

Integrating Sustainable Development into an effective enterprise strategy

 

The increasing global emphasis on sustainable development which means appropriate attention being given to social and environmental capital, as well as economic prosperity require that sustainable development objectives be integrated where appropriate and affordable into an enterprise strategy for South Africa. This could facilitate the co-ordination of environmental and social policies to reduce business compliance costs and ensure real sustainable development.

The role of government:

 

Government has a critical role to play in an Enterprise Strategy and such a role includes:

The role of business

Business stands ready to engage with government and labour to generate constructive solutions and to facilitate an improved investment and enterprise environment in South Africa.

 

 

Additional issues that BSA wishes to highlight

The following additional issues are raised by BSA to contextualise the aforementioned input on a new Enterprise Strategy for the country.

Does Selective Government Intervention Produce Successful Economies?

The purpose of this section is not to present the merits and demerits of this rather endless debate. Rather, a fairly comprehensive literature survey tends to conclude that government interventions in many successful Asian economies appeared neither necessary nor sufficient in explaining their success. What most of these economies did share in common was:

 

Yes, South Africa can learn form the lessons of other countries, but one thing is clear that in the rapidly globalising economy, the room for special, targeted incentives and measures as opposed to a broad-based low risk and low cost environment is being squeezed.

Black Economic Empowerment (BEE)

From a moral, social and political perspective there is common agreement that previously disadvantaged people need to be brought into the mainstream of the South African economy. BEE is not just about ownership, but management, employment equity (quality employment with advancement possibilities), procurement, and rural development. At all these levels of BEE two key issues need to be dealt with: how to provide PDIs with the skills and experience to participate in the economy and secondly access to opportunity.

One of the striking features of the relatively successful BEE programmes in Malaysia and the USA was that it was undertaken within a framework of high levels of economic growth or where significant resources were available. As will be discussed later the Malaysians in particular realised that BEE in a low growth climate would have been socially unsustainable. In Malaysia a deliberate policy focus on economic growth and BEE as complimentary measures was taken. Malaysia, with a high level of domestic savings and investment grew at an average of 6 percent per annum in the 1980’s and 6.5 percent in the 1990’s. South Africa starts from a position of very low savings and investment rates and low economic growth rates (1.5 percent per annum in the 1980’s and 1.3 percent in the 1990’s).

Source: World Bank database

The very high growth rates in Malaysia were translated into very high growth rates in per capita GDP (3% per annum in 1980’s and 5% in the 1990’s). This helped to ensure unemployment rates declined and that the level of income inequality declined.

Source: World Bank database

The significant empowerment challenge in South Africa is further complicated by the country’s low savings, investment and growth rates (although it is important to state that since 1994 the growth path has been managed upwards as a result of prudent macroeconomic policy making to the 2.6 percent level).

Low risk- and cost-adjusted rates of return in South Africa will provide little incentive for black investment and thus undermine BEE.

The access to opportunity area, particularly at the ownership and new business arenas need to be contextualised in an economic and investment environment where the risk and cost adjusted rates of return are too low.

Low investment and GDP growth rates imply that the risk- and cost-adjusted rate of return on investment in South Africa is low. In other words, after the costs of production, tax, interest payments, the amount of money finally available for distribution to shareholders is small and is thus providing little incentive for investment. This will be to the disadvantage of BEE, just as it is a disincentive to investment from existing players (both foreign and local).

The critical issue here is that BEE is far more likely to succeed in a high investment and high growth environment, because such an environment implies that risk and cost adjusted rates of return is good. In Malaysia a conscious policy decision was made to parallel the process of BEE with a rapidly growing domestic economy. As will be expounded below the Malaysian government understood that BEE in a low growth scenario was unsustainable.

Offset Programmes for Government Procurement Should Be Discouraged.

Induced investment in enterprise is unlikely to make South Africa competitive or the economy prosperous. A successful economy is based on prosperous firms and industries Forcing foreign companies to invest in South Africa on the basis of government procurement projects should be thoroughly investigated on the basis of who ultimately bears the costs of these investments. The very sustainability of such offset programmes is questioned? Should all investment decisions not be based on the specific business economics of a particular project – and not on coercion. The likelihood of successful projects is much higher in the case of voluntary business economic decisions rather than on coercion

Where economic actors are allowed to respond to market forces, in the sense that factor rewards are more closely linked to factor productivity, investment rates are likely to be more sustainable in the long run.

Protectionism Has Been Seriously Damaging To South Africa

 

BSA agrees with the government view that the adoption of higher tariffs and an inward oriented industrial strategy will simply maintain inefficient production and will prolong economic stagnation.

24 April 2002

BUSINESS SOUTH AFRICA RESPONSE TO THE DEPARTMENT OF TRADE AND INDUSTRY DOCUMENT ENTITLED "ACCELERATING GROWTH AND DEVELOPMENT: THE CONTRIBUTION OF AN INTEGRATED MANUFACTURING STRATEGY" AS RELEASED ON 19TH APRIL 2002

 

INTRODUCTION

Business South Africa (BSA) welcomes the release of the revised Department of Trade and Industry (DTI) document on the contribution of an Integrated Manufacturing Strategy to Accelerating Growth and Development. The document represents progress made in the NEDLAC discussions on the issue and is a significant improvement on previous drafts.

South Africa stands at a critical economic threshold whereby the economic growth trajectory of the economy needs to be raised to a significantly higher level through a massive expansion in the growth of economic opportunity and investment. Failure to raise the growth trajectory from the current two and a half per cent per annum rate, given South Africa's 7.8 million unemployed people, may result in the likelihood of social and political turmoil in South Africa in the not too distant future. BSA rejects the latter scenario as unacceptable. But we must understand the dangers of not raising the economic growth trajectory.

BSA has committed significant expertise and capacity to negotiating and debating Industrial Strategy, Micro Economic Reform Strategy and ultimately factors that impact on the Growth and Investment Summit to ensure as far as possible agreement between the social partners on what needs to be done to raise the growth trajectory. An Integrated Manufacturing Strategy located within the context of Macro Economic Policy, Micro Economic Reform Policy and the Growth and Investment Summit, forms an integral part of addressing critical factors that impact on investment decisions at the firm level. Unless the investment environment provides a substantial improvement in the Risk and Cost Adjustment Rate of Return to private enterprise, there will not be a higher level of investment and the current economic growth trajectory will not change. Similarly, unless there is a significant increase in the entrepreneurial skills in the broader population – the increase in economic opportunity may be wasted.

BSA’s input continues to demonstrate the serious commitment of organised business to guiding, facilitating and ultimately producing the type of environment which will lead to a massive expansion of economic opportunity, significantly higher investment levels, lower unemployment and an inclusive participatory economy for all.

GENERAL COMMENTS

Investors lay out capital in order to achieve positive returns. Returns equal total revenues less total costs, all adjusted for risk and other imponderables. Provided that the benefits of doing business exceed the costs (including the cost of capital itself) and the risks then investment will occur, other things equal.

Other things are seldom equal. With limited supplies of investable funds other (national) destinations may be less costly to operate in than South Africa. If the costs and risks of investing in South Africa are too high versus competitor countries then investment will not materialise. It is the contention of BSA that South Africa’s low levels of domestic and foreign direct investment are indicative of a poor investment environment where the costs and risks are too high and thus undermine investment.

The principal mechanism through which political, social and policy uncertainty influences investment is the perception amongst investors that future events will place in jeopardy their future share of income streams from a particular investment (i.e. a shift in transport policy results in increased prices, taxes are raised, volatile currencies). Any factor that creates uncertainty regarding future income streams and property rights will tend to discourage investment. The following chart illustrates that the investor stands last in line to benefit from the revenues accruing from an investment after labour, suppliers, bond holders, the taxman and retained earnings have been accounted for.

The investor stands last in the cash receipt queue, and thus any factors which undermines the certainty regarding the distribution of the benefits of an investment will raise investment hurdle rates and reduce investment.

Over the past two decades the overwhelming majority of countries around the world have introduced measures that promote macroeconomic stability whilst also opening up markets to competition through liberalisation and privatisation. The traditional policies such as sound macroeconomic management, trade liberalisation and market competition are now considered the absolute minimum for generating investment. Increasingly countries are focusing on a second set of policies, which encourage differentiation from a competitive advantage perspective. The following chart emphasises the traditional policy measures whilst also integrating the new policy measures designed to facilitate the creation of competitive advantages at the firm level.

 

Chart 1: Traditional economic policy measures coupled with new competitive advantage policy measures

The choice of countries for the multinational investor is now greater than ever. There are increasing challenges for government’s regarding the development of policies that generate competitive advantage. Whilst it is important that there is not a "race to the bottom" in terms of trade off around tax policy and the like, it is absolutely critical for government’s to ensure that the traditional policies are firmly in place and that policies that develop competitive advantages are adopted. For South Africa the choice is no different.

The government controls a significant portion of the fixed capital stock of the economy (46 percent) and yet the investment performance is poor and continues to drag down the growth of the entire economy.

Despite controlling 46 percent of the total fixed capital stock of the economy, the net investment performance of state assets (i.e. investment over and above the provision for depreciation) over the past decade has been dismal. While it is important to recognise that many parastatals were inherited in poor shape – the lack of progress in introducing competition and real private sector ownership in these industries has had a major effect on input prices to the private sector and on investment and growth in the economy. Real competitive markets result in constant drives for efficiency, new product development, development and adoption of appropriate technologies and realistic pricing which creates certainty for investment in activities that use such goods and services. The economic vibrancy effect of real competition will have a significant impact on the delivery of reasonably priced services to all entrepreneurs and consumers throughout the economy.

 

It is interesting to note that the private sector has accounted for over 98 percent of all net capital formation in South Africa over the past decade despite only owning 54 percent of the fixed capital stock of the economy. The negative pricing, inefficient service, and poor investment performance of state parastatals will be a key theme of the business input on microeconomic reform and industrial/manufacturing strategy.

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