1. Introduction

2. Executive summary

3. Recent economic trends

4. Conceptualising a post-apartheid growth path

5. COSATU’s overall approach to Industrial Policy

6. Specific aspects of industrial policy

7 Overall comments on the DTI document

8 Comments on specific sections of the document

1. Introduction 2

2. Executive summary 3

3. Recent economic trends 4

4. Conceptualising a post-apartheid growth path 9

5. COSATU’s overall approach to Industrial Policy 12

6. Specific aspects of industrial policy 15

7 Overall comments on the DTI document 30

8 Comments on specific sections of the document 33

COSATU welcomes the opportunity to make a submission to the Trade and Industry Portfolio Committee and the Select Committee on Economic Affairs on Industrial Policy. COSATU is very pleased that Parliament has taken the initiative to hold these hearings and hear views on industrial policy in a comprehensive way. We see these hearings both as part of a consultative process on DTI’s proposed document, as well as the opportunity for broader dialogue on the various aspects of industrial policy. We felt that it was important to present not only the Federation’s overall approach to industrial policy, but also to engage on the dynamics of particular sectors of our economy. It is for this reason that several of our affiliates are also making submissions at these hearings.

South Africa now stands at a crossroads. Since 1996, government economic policy has centred on "getting the fundamentals right", especially through restrictive fiscal and monetary policies, deregulation and the pursuit of free trade. The past two or three years have demonstrated, however, that this approach is unable to address the fundamental structural problems of extreme inequality in incomes and wealth, massive unemployment and economic stagnation.

COSATU has welcomed the government’s commitment to addressing this situation through what it calls microeconomic reforms, but continue to raise our concerns with both the content of some of these proposals as well as with macroeconomic policy more broadly. Above all, as a country, we need to understand the way in which structures of production, ownership and spatial development lie at the root of unemployment and poverty. That analysis must guide our strategies for transformation.

The new DTI document on industrial strategy is an important contribution to more appropriate economic policies. The analytical section, in particular, locates the strategy clearly in the overall effort to overcome poverty and create employment. Its thoughtful description of the South African economy and globalisation can help guide measures to restructure the economy. The proposals for reforming policy development to involve stakeholders are particularly important for generating a better strategy over time. Unfortunately, the specific proposals contained in the second half of the document do not really reflect this broader framework, falling back almost exclusively on vague measures to promote exports and improve infrastructure. COSATU is not convinced that the proposals contained in the document will be adequate to deal with the structural problems facing our economy.

COSATU argues that an effective industrial strategy must guide the state in restructuring the economy to create jobs and enhance equity in sustainable ways. The imperatives for structural change are:

• A shift toward more labour-intensive production, in order to retain and create decent jobs
• Improved production of basic necessities, to raise living standards while expanding the domestic market
• Ensuring a sustainable and beneficial relationship with the world economy
• Greater equality in terms of ownership of capital and other assets, both to improve overall equality and ensure more balanced spatial development.

As the DTI document acknowledges, strategies to achieve this type of deep-seated structural change require a rethinking of policy-making institutions. They need substantial changes in the behaviour of all stakeholders, especially big business and government. That, in turn, means government must establish structures that can mobilise and involve stakeholders while maintaining a clear national strategy geared to addressing basic social problems. For COSATU, sector summits and forums are a critical element in this process.

This input first outlines the key challenges facing the economy.

In the course of our submission we will be speaking to the issues identified by the Committee as important for these hearings. Using the concept of a growth path, it then examines where we are coming from and identifies what the core dimensions of a developmental post-apartheid growth path would be. We proceed to set out our broad understanding of industrial policy and sketch out the central debates. We focus in particular on the need for sectoral restructuring and a collective process around this. Thereafter, we hone isn on particular aspects of industrial policy, including those flagged by the Committee in its invitation to these hearings, and set out COSATU’s analysis and proposals. However, we are also taking the opportunity to set out more broadly COSATU’s approach to industrial policy and comment on measures and proposals emanating from government. Finally Wwe will also be commenting specifically on the document published by the Department of Trade and Industry headed "Accelerating Growth and Development: The contribution of an integrated manufacturing strategy".

1. Executive summary

*****************to be completed******************

A discussion on industrial policy necessarily has a huge scope. This summary picks up on some of the key points which are discussed at much greater length in the various sections of this submission.

• We set out the framework of a post-apartheid growth path aimed at structurally shifting the economy onto a trajectory of higher growth, greater equality, and higher levels of employment. The key elements of this are restructuring sectors and the linkages between them; expanding the domestic and international markets for our goods and services; addressing regional imbalances within South Africa while assisting in the development of the Southern African region; supporting new centres of economic power, particularly the different forms of social capital; and enhancing the power of the state to support the growth path.
• The imperative of retaining existing jobs and creating quality and sustainable net new jobs is the key challenge which should inform our industrial policy.
• COSATU’s approach to industrial policy envisages a strong role for the state in driving and shaping industrial development. …
• Our conceptualisation of industrial strategy includes a strong sectoral dimension. Specific sectors need to be targeted for active promotion, especially on the basis of their prospective contribution to employment, importance in meeting basic needs, and potential for strengthening domestic value chains. Further, Aactive intervention is needed in realizingrealising up- and down-stream linkages in throughout the domestic economy, particularly between traditionally strong sectors of the economy and more labour-intensive activities. Sector summits have a critical role to play in identifying sectoral priorities and putting in place sectoral strategies to which all stakeholders are commitedcommitted.
• The financial sector needs major transformation in order to maximise its contribution to industrial development. Access to finance for small and emerging enterprises needs to be improved and the costs of finance lowered. Further, mechanisms such as prescribed asset requirements are needed to channel a portion of the assets of the financial sector into productive investment, particularly social and economic infrastructure. Public development finance institutions, particularly the IDC, need to be more closely integrated with overall industrial policy and need to focus much more on employment retention and creation.
• The retail system, as a cross-cutting sector is currently not supportive of industrial development and the meeting of basic needs. Various interventions are needed in this regard, including measures to reduce the costs of basic necessities to households, support of SMMEs and co-ops, and the extension of retail outlets in poor communities.
• Improved policy co-ordination is required between government departments and policy initiatives. In particular, Macroeconomic policy needs to be far more supportive of industrial development. Where necessary, fiscal and monetary policy must be adjusted to boost productive investment and socio-economic development. This should include more expansionary fiscal policy, lower levels of interest rates, and a tighter capital and exchange control regime.
• State owned enterprises need to play a more active role in advancing government’s industrial policy objectives, in particular by crowding in productive investment. Public Development Finance Institutions, the IDC in particular, also need to be more closely integrated with overall industrial policy and need to focus much more on employment retention and creation.
• Trade policy …
• requires various adjustments, driven by an active industrial strategy. These include tariff policy being guided by sector strategies and properly sequenced with support measures; increased trade within the region in the context of stronger regional value matrices; and stronger capacity to enforce trade measures.
• Improvement in skills levels, both in the workplace and at schools, with particular regard to economically marginalised groups such as blacks and women.
• Our supply-side measures need to ensure "value for money" in terms of their objectives, and should be more strongly weighted in favour of employment creation.
• State owned enterprises need to play a more active role in advancing government’s industrial policy objectives, in particular by provision of infrastructure, crowding in productive investment, meeting of basic needs, and linking with the private sector in value chains.
• The co-operative sector needs to be more actively nurtured as part of our industrial policy. This includes an appropriate legislative framework as well as access to affordable finance, integration in sectoral strategies, capacity-building, and priority access to programmes to support small enterprises. Blockages to SMME growth, such as the structure and policies of the financial sector, need to be dealt with.
• Social protection has a critical role to play in alleviating poverty, while at the same time contributing to the desired economic growth path.
• COSATU supports the move from "social dialogue" to "collective action". The envisaged Growth and Development Summit and the sectoral summits have important roles to play in this regard. COSATU is committed to constructively inputting into the formulation and implementation of measures which will deal with the central challenges of low growth, unemployment, poverty, and inequality.

1. Recent economic trends

We here review trends in key economic indicators – employment, incomes, inflation, growth and investment. These trends demonstrate the need for a shift in economic policy in order to address unemployment and poverty more decisively and directly.

Formal employment has fallen rapidly since 1990. Combined with the growth in the labour force as the population expands, this led to a dramatic rise in unemployment, especially young people.

Between 1995 and 2001, according to figures from Statistics South Africa, unemployment rose from 16 per cent to almost 30 per cent, using the narrow definition that does not include people too discouraged to keep looking for work. The data show that just between February 2000 and September 2001, unemployment rose from 26,7 per cent to 29,5 per cent.

High structural unemployment leads to effective queuing for jobsparticularly affects those who have not worked before, and so hits the young much harder. In 2000, for people under 35 year old, unemployment by the expanded definition (which includes people too discouraged to continue looking for jobs) was 46 per cent, compared to 24 per cent for those over 35. Unemployment has disproportionately affected Africans and women, and especially people living in rural areas.

A study by Michael Schussler for Tradek reports that formal employment dropped by almost 20 per cent between 1989 and 2000, while labour productivity rose at 2,3 per cent a year and wages dropped massively in dollar terms. COSATU’s analysis shows that, since 1996, the biggest losses of formal jobs have been in manufacturing, mining and the public sector. Manufacturing has lost close to 3 per cent of total jobs every year.

Source: Statistics South Africa, long-term data on formal employment, at www.statssa.org.za.

a. figures for first quarter of each year. b. a negative sign on the percentage of change means that in numerical terms employment grew in the sector concerned.

At the same time, a growing number of formal jobs were part-time and casual. The share of part-time work in total employment doubled between March 1998 and March 2001, reaching 8,4 per cent. In retail trade, the number of part-time workers rose from 20 to 30 per cent in these three years alone.

Government sometimes argues that an expansion in informal employment offset the loss of formal jobs. Yet the recorded informal jobs are increasingly just survivalist activities. As the following table shows, almost 20 per cent of the informal-sector jobs recorded by Statistics South Africa paid no income at all, and a further 40 per cent earned under R500 a month. That compares to only 11 per cent of formal jobs earning less than R500 a month.

Source: Calculated from, Statistics South Africa, Labour Force Survey, 2000, Table 3.5.

a. Calculated as percentage of all workers who specified their income.

As might be expected with such high levels of unemployment and underemployment, the available evidence suggests very little improvement in income distribution since 1994. According to the UNDP, South Africa still has amongst the worst distribution of income in the world. The substantial and welcome improvement in government services to the poor has been offset by the massive loss in formal jobs and rising unemployment, which in turn threatens to reverse the roll-out of services as people increasingly default on payments.

Statistics South Africa’s 2000 Labour Force Survey, which includes both employed and self-employed people, shows that:

• Over one in ten workers earned no income. Of these, 90 per cent were employed or self-employed in agriculture.
• A quarter earned under R500 a month. Some 80 per cent of these workers were domestic, agricultural and retail workers.
• One in seven workers earned between R500 and R1000 a month.
• A quarter of workers earned between R1000 and R2500.

Studies have also repeatedly shown that the poorest of the poor survive on old-age pensions and remittances from workers. In other words, a shrinking pool of employed workers must support increasing numbers of people.

Inflation has accelerated significantly in the past year. COSATU does not believe that this the increase justifies the current policy of raising interest rates. But it is centred on food price hikes, and therefore has extreme implications for the poor.

The latest CPI figures show that in the year to March 2002, inflation for food rose by 13,6 per cent, compared to 5,4 per cent for non-food items. Poor people spend more of their income on food, so this means their cost of living rose fastest. Specifically, the cost of living for the middle income group – earning around R1000 to R2500 a month – rose 8,9 per cent; for the very poor, it increased 10,1 per cent; and for the very high income group, it rose only 5,8 per cent. Since the overall CPI is weighted by total spending, which is disproportionately controlled by the very rich, it rose only 6,8 per cent.

News reports have blamed food inflation on the depreciation of the rand. Research by COSATU and FAWU, however, suggests that the main causes in fact are speculation and free-market agricultural policies. Specifically, although South Africa does not have to import maize this year, producers are charging local consumers import-parity prices, meaning a 30 to 50 per cent increase in food prices.

Economic growth slowed markedly after 1997. In the past year, some recovery emerged, although less than the government initially hoped. Still, in per person terms, the economy has shrunk slightly since 1994, with the gains in 1994-’96 and in 2000 wiped out by the downturn in 1997-’99.

As the following table shows, a trend of jobless growth emerged particularly strongly from 1996, including in manufacturing. As the following table shows, the sectors that grew employed relatively few workers and did not create many jobs.

Source: SARB, Quarterly Economic Review, September 2001, www.resbank.co.za; for employment except agriculture, Statistics South Africa, long-term data on formal employment, at www.statssa.org.za; for employment in agriculture, Statistics South Africa, Labour Force Survey 2000, www.statssa.org.za. a. Value added. b. For employment, first quarter 2000 to first quarter 2001.

In 2000 investment relative to GDP fell to the lowest level since 1993, although some signs of a recovery emerged in the first half of 2001. Investment must approach 20 to 25 per cent of the GDP in order to ensure growth; it is currently at about 15 per cent, having peaked at around 17 per cent in 1998. There was some recovery in the year to 2001, but the September 11 events in the U.S. may have affected it.

The trends in investment are related to substantial fluctuations in foreign investment. Between 1999 and 2000, portfolio investment into South Africa fell from R83 billion to R12 billion, while investment by South Africans abroad declined very little. As a result, 2000 saw a net capital outflow of R10 billion.

In the first half of 2001, a net capital inflow of R1,6 billion emerged – still far lower, on an annual basis, than in any year since 1994. The 2001 figures are, however, heavily distorted by the restructuring of Anglo American and De Beers. In the long run, this transaction seems likely to aggravate the outflow of resources in the form of profits and dividends.

Source: SARB, Quarterly Economic Review, September 2001, www.resbank.co.za

A growing concern relates to the continued high levels of foreign investment overseas by South African companies and individuals. Between 1994 and 2000, some R54 billion rand left the country in direct investment, while only R45 billion came in.

In sum, the years since 1994 have seen mounting formal job losses, stagnant investment and slower-than-hoped growth. As the DTI document indicates, these trends show that existing policies have not been sufficient to address the structural problems left by apartheid.

We here first review trends in employment and income, and then consider economic growth, investment and the rand. The final section points to important developments in the structure of capital and labour.

Employment

Formal employment had fallen rapidly since 1990. Combined with the growth in the labour force as the population grows, this led to a dramatic rise in unemployment. Between 1995 and 2000, unemployment rose from 16 per cent to over 25 per cent, using the narrow definition that does not include people too discouraged to keep looking for work. (Calculated from SSA 2001a and 2001b)

As the following table shows, formal job losses continued through 2000. Between the first quarter of 2000 and 2001, formal employment dropped over 2 per cent. This was a slight improvement on the previous three years.

Source: Statistics South Africa, long-term data on formal employment, at www.statssa.org.za.

a. figures for first quarter of each year.

In 2000-2001, virtually all job losses occurred in manufacturing, the government service (the public service and municipalities) and the parastatals in transport and communications.

Source: Statistics South Africa, long-term data on formal employment, at www.statssa.org.za.

a. figures for first quarter of each year. b. a negative sign means employment grew.

Manufacturing employment fell particularly heavily after 1996, losing close to 3% of jobs every year. In 2000/1, the biggest job losses were in clothing and footwear, food production, and basic metal products. These sectors accounted for four out of five lost jobs in manufacturing last year, although only half of manufacturing employment.

At the same time at the number of jobs fell, employers began to informalise and casualise labour, in an effort to avoid laws giving workers rights and to undermine worker organisation. As the following table shows, the share of part-time work in total employment doubled between March 1998 and March 2001, reaching 8,4 per cent. In retail trade, the number of part-time workers rose from 20 to 30 per cent just in these three years.

Source: Statistics South Africa, long-term employment data from STEE, www.statssa.gov.za. Figures for March. *under 50

The data show an expansion in informal jobs after 1997, but many are merely survivalist activities that cannot raise national productivity or generate an adequate income. As the following table shows, almost 20 per cent of the informal-sector jobs recorded by Statistics South Africa paid no income at all, and a further 40 per cent earned under R500 a month. In other words, six out of ten of those recorded as employed in the informal sector earned under R500 a month, compared to just over one in ten of those in the formal sector. Some two thirds of informal employees in 2000 were in agriculture and retail – that is, mini-farmers and hawkers.

Source: Calculated from, Statistics South Africa, Labour Force Survey, 2000, Table 3.5.

a. Calculated as percentage of all workers who specified their income.

Growth in the labour force with stagnant employment opportunities fuelled the extraordinary rise in unemployment in the past seven years. This tendency emerges clearly if we break down unemployment by age. For people under 35 year old, unemployment by the expanded definition (which includes people too discouraged to continue looking for jobs) was 46 per cent in 2000, compared to 24 per cent for those over 35.

In sum, the economy lost formal jobs steadily in the 1990s, with some acceleration after 1996. Downsizing in manufacturing and the public sector became the leading cause of job losses in the past year. Statistics showed some offsetting increase in the informal sector, but most of those jobs were at best survival strategies providing under R500 a month.

The report on unemployment released a few weeks ago by Statistics South Africa revealed that the ‘official’ figures, which exclude ‘discouraged job seekers’, show a rise in unemployment from 26.4% in February 2001 to 29.5% in September 2001. If we take the more realistic figure, which includes those not seeking work, the increase was from 37.0% to 41.5% over the same period, a rise of 4.5%. That means the total number of unemployed is 7,69 million.

The recent Mesebetsi report indicated that unemployment is between 32% of the labour force, excluding those not actively seeking work, and 45% including all those without work. The survey also reveals a continuing racial and gender bias in unemployment, with women, rural people and Africans most likely to be unemployed or marginal members of the labour force. Over 60% of African women are unemployed, compared to 10% of white men.

Incomes

The available evidence suggests very little improvement in income distribution since 1994. The substantial and welcome improvement in government services to the poor has been offset by the massive loss in formal jobs and rising unemployment. In itself, these severe inequalities form a critical blockage to economic growth.

Statistics South Africa’s 2000 Labour Force Survey, which includes both employed and self-employed people, shows that:

Over one in ten workers earned no income. Of these, 90 per cent were employed or self-employed in agriculture.

A quarter earned under R500 a month. Some 80 per cent of these workers were domestic, agricultural and retail workers.

One in seven workers earned between R500 and R1000 a month.

A quarter of workers earned between R1000 and R2500.

Table 4, above, points to extraordinarily low incomes in the informal sector, as well.

The data demonstrate substantial differences between sectors, due more to the legacy of apartheid labour relations than skills or productivity. For instance, skilled agricultural workers earn less than unskilled workers in other sectors.

Economic growth and investment

Economic growth slowed markedly after 1997. In the past year, some recovery emerged, although less than the government initially hoped. Still, in per person terms, the economy has shrunk slightly since 1994, with the gains in 1994-’96 and in 2000 wiped out by the downturn in 1997-’99. Moreover, in 2000 investment relative to GDP fell to the lowest level since 1993.

A trend of jobless growth emerged particularly strongly from 1996. The sectors that grew tended to employ relatively few workers, and growth did not create many jobs. As the following table shows, the fastest growing sectors contribute heavily to the economy, but provide only about a sixth of employment. Moreover, only trade and accommodation generated new jobs last year, despite rapid growth in other service sectors. All the other sectors except electricity, gas and water downsized employment.

Source: SARB, Quarterly Economic Review, September 2001, www.resbank.co.za; for employment except agriculture, Statistics South Africa, long-term data on formal employment, at www.statssa.org.za; for employment in agriculture, Statistics South Africa, Labour Force Survey 2000, www.statssa.org.za. a. Value added. b. For employment, first quarter 2000 to first quarter 2001.

Investment has declined sharply in the past two years, although some signs of a recovery emerged in the first half of 2001. At the same time, foreign investment in South Africa dropped sharply. This drop was reflected in the 20-per-cent decline in the rand against the dollar in the first ten months of 2001.

In 2000, investment relative to the total national income fell to the lowest levels since 1993. Investment must approach 20 to 25 per cent of the GDP in order to ensure growth; it is currently at about 15 per cent, having peaked at about 17 per cent in 1998. There was some recovery in the year to 2001, but the September 11 events in the U.S. may have affected it.

The trends in investment are related to substantial fluctuations in foreign investment. Between 1999 and 2000, portfolio investment into South Africa fell from R83 billion to R12 billion, while investment by South Africans abroad declined very little. As a result, 2000 saw a net capital outflow of R10 billion.

In the first half of 2001, a net capital inflow of R1,6 billion emerged – still far lower, on an annual basis, than in any year since 1994. The 2001 figures are, however, distorted by the restructuring of Anglo American and De Beers. Because Anglo American is now based in London, when it bought out De Beers, it appeared as a substantial increase in foreign direct investment (investment where companies obtain at least a 10-per-cent share in a company) and an apparent repatriation of capital by South African companies. At the same time, it was combined with a large outflow of portfolio capital – that is, essentially speculative investment in stock and bond markets – plus an increase in payments of dividends abroad by De Beers.

Overall, the De Beers transactions did not ensure a substantial net inflow of capital even in the first half of 2001. The large inflow of direct investment was offset by an almost equally large outflow of portfolio investment. In the longer run, the transaction seems likely to aggravate the outflow of resources in the form of profits and dividends.

Source: SARB, Quarterly Economic Review, September 2001, www.resbank.co.za

The immediate factors behind the extraordinarily rapid decline in foreign portfolio investment in 1999-2000 are not very clear. Still, the basic cause of the stagnation in foreign investment in the late 1990s was slow economic growth. In effect, restrictive fiscal and monetary policies, by dampening economic growth in the name of ensuring stability, also discouraged foreign investment. Experience around the world indicates that strategies that stimulate economic expansion directly are far more effective in attracting foreign capital. These strategies include moves to strengthen the domestic market through social development and less restrictive fiscal and monetary policies, combined with an effective industrial strategy.

A growing concern relates to the continued high levels of foreign investment overseas by South African companies and individuals. Between 1994 and 2000, some R54 billion rand left the country in direct investment, while only R45 billion came in. The Anglo American/De Beers transaction alone saw the repatriation of investment worth more than the total investment into South Africa over this period – but the inflow was offset by portfolio outflows.

Increased foreign investment by South African companies appears to be related to:

• The restructuring of large South African mining and financial companies, which have moved substantial operations and financial activities overseas, as with the De Beers restructuring and listing abroad.
• The development of financial networks and the elimination of foreign-exchange controls, which facilitate the transfer of individual savings abroad.
• The devaluation of the rand, which encourages investment by the rich and large companies in foreign currencies.

1. Conclusion

The years since 1994 have seen mounting formal job losses, stagnant investment and slower-than-hoped growth. These trends suggest that existing policies have not been sufficient to address the structural problems left by apartheid. The following section explores the direction restructuring must take, using the concept of a growth path.

1. Conceptualising a post-apartheid growth path

This section aims to contextualise industrial policy within the broad framework of a growth path. The growth path concept seeks to highlight the main drivers of growth. By giving a schematic overview of economic developments, it aims to support discussion of strategic issues. Although it should derive from in-depth analysis, the description of a growth path typically aims for simplicity and conciseness. We start by setting out the key aspects which characterise a growth path, and then assess the historical development of the economy in these terms and look briefly at recent developments. We then propose the important elements of a developmental growth path for the future.

1. The concept of a growth path

The growth path concept seeks to highlight the main drivers of growth. By giving a schematic overview of economic developments, it aims to support discussion of strategic issues. Although it should derive from in-depth analysis, the description of a growth path typically aims for simplicity and conciseness.

Key dimensions that define a growth path are:

1. Relationships between the main economic sectors, and how they fit into an accumulation structure that shapes the investment structure and incomes.
2. The nature of the main markets, including the articulation with the regional and international economy and whether production targets basic necessities or the high-income group.
3. Regional development in terms of both spatial development within the country, which is particularly important for developing economies, and links to neighbouring economies.
4. Class and economic power – that is, the nature of ownership and control - which determine key decisions on investment and markets as well as who benefits from growth.
5. The state typically plays a critical role in sustaining and directing the growth path, by defining property and power relations, and by how it directs services spatially and sectorally. This role in most important in countries in transition from one socio-economic order to another.

1. The Apartheid growth path

We here first review the apartheid growth path, which began to fail in the mid-‘80s as a result of a combination of economic, political and social factors. COSATU’s proposals for an industrial strategy arise out of analysis of the current economic structure, which in turn was shaped by the history of apartheid colonialism. This approach underscores the inadequacy of a competitiveness strategy, given massive structural unemployment and unusually high levels of poverty. It indicates that an effective industrial strategy must shift production to more labour-intensive sectors; build strategically on the opportunities offered by improvements in social protection; and, in order to broaden economic power, seek especially to strengthen collective and social capital as well as SMMEs. We therefore here first review the apartheid growth path, which began to fail in the mid-‘80s as a result of a combination of economic, political and social factors.

Sectoral dynamics: Exports of gold and other minerals essentially financed the growth of import-substitution manufacturing as well as infrastructure, and paid for the imports these industries needed. To this day, over half of all exports are minerals based. From this standpoint, South Africa was a classic resource-based economy, using its abundance of minerals and energy for large scale, often relatively capital-intensive export production. It had weak downstream linkages from minerals beneficiation and did not create enough employment. But it generated substantial investible surpluses. Upstream, mining led to the establishment of advanced but narrowly focused inputs industries.

Markets: Gold and other minerals were exported internationally. . Domestic demand was limited due to unusually large inequalities in income. Manufacturing focused on relative luxuries for the high-income group, with exports centred disproportionately on southern Africa. Domestic demand was limited due to unusually large inequalities in income.

Regional: Spatial inequalities were integral to the apartheid growth path. On the one hand, the homelands stood apart both administratively and economically. They became extraordinarily impoverished regions with particularly corrupt, underfunded and understaffed government services and weak infrastructure. On the other hand, South African mining capital and trade dominated much of the region, while from the mid-‘70s military attacks undermined neighbouring economies.

Class power: Mining-based economies are typified by relatively large-scale production and capital-intensive refining. These factors tend to generate substantial inequalities in income and wealth, which apartheid aggravated. Mining and agriculture relied on cheap unskilled labour generated largely through the migrant labour system, with the concomitant impoverishment of black rural areas. This system led to strongly gendered patterns of employment and unemployment and of ownership. A narrow complex of large-scale mining and financial enterprises emerged, while small-scale producers remained relatively weak. State-owned enterprise organised vast new manufacturing and beneficiation ventures by supplying infrastructure and capital. Commercial agriculture also enjoyed substantial state support. Foreign investment was large compared to the rest of Africa, mostly in the form of loans, holdings of gold shares, and direct investment, especially in mining, manufacturing and the financial sector.

Role of the state: State action largely shaped the growth path, providing cheap labour, investment capital, subsidised infrastructure and energy, and tariff protection for domestic manufacturers.

This growth path ran into trouble from the mid-1980s. Gold mining faced a decline at least from the early 1980s. In 1985, the economy suffered a massive outflow of foreign capital. A few years later, as apartheid ended, it experienced rapidly intensified engagement with the global economy, largely on unfair terms for agriculture and light industry. The lack of recognised skills in the labour force proved an on-going problem, as did weak middle-management and supervisory skills in both the private and public sector. Finally, from the mid-1980s and especially after 1994, the state ended or reduced many long-standing forms of support for big business, including parastatal investment in infrastructure, tariff protection, laws that suppressed labour and agricultural marketing.

After 1994, in an attempt to transform the economy, the democratic state adopted five somewhat contradictory strategies:

1. Improvements in social protection (that is, basic infrastructure, social security and social services) for the poor.
2. Labour laws modelled on the ILO’s standards for labour rights combined with a strong skills development strategy.
3. A restrictive fiscal and monetary policy, which led to real cuts in spending in the late 1990s. This policy largely undercut efforts to enhance social protection. Expenditure only began to grow in 2001.
4. Measures to establish free markets in the name of enhancing competition, by cutting tariffs, deregulation, ending price stabilisation measures in agriculture, and commercialising and sometimes privatising parastatals. This free-market approach co-existed uneasily with the more interventionist labour-market regime.
5. The introduction of supply-side measures to replace export and regional subsidies for manufacturing, as well as financial and technical support for SMMEs. As the DTI document notes, these measures were not widely effective because of many groups found them difficult to access.

Taken together, these strategies did not suffice to address the crisis left by apartheid. They did little to point to new directions for growth. Overall, they restricted aggregate demand, without equalising incomes sufficiently to provide new markets. The persistence of massive income inequalities, aggravated by continued job losses, meant that business doubted the state’s ability to maintain conservative economic policies. In these circumstances, deregulation and cuts in tariffs added to uncertainty. Business responded, overall, by cutting investment and unskilled jobs.

We can analyse the business reaction in terms of its main fractions. From the mid-‘90s, big mining and finance capital began to move overseas, expanding their international interests rather than developing South Africa. Local manufacturing firms often shrank or even closed down under pressure from foreign investors and imports. Only a few, disproportionately in auto-related fields, managed to gain a foothold in foreign markets. Commercial agriculture saw a rapid shake-out, with plummeting investment and stagnant output, and reportedly rising concentration. Finally, parastatal management faced mixed messages on whether it should seek to maximise services or profits, leading to contradictory measures and massive downsizing for African workers, especially in rural areas.

1. Elements of a post-apartheid growth path

To accelerate growth and development, the state must intervene more decisively to restructure the economy. To provide a framework for these efforts, this section sets the broad parameters of a post-apartheid growth path that can ensure more rapid and equitable economic growth. The next part of the paper then explores in more detail some of the implications for economic policy.

We can summarise the proposed growth path in terms of the dimensions developed earlier as:

Sectoral structure: The strongest parts of the economy – the mineral sectors - are highly capital-intensive, creating relatively few jobs while enhancing the concentration of capital. It is important to strengthen the linkages with these and other sectors, along value chains. Measures are needed to shift toward more labour-intensive growth overall, primarily by supporting a shift in production toward more labour-intensive sectors built largely on down- and upstream linkages from mining and agriculture, plus services and infrastructure. This needs to be complemented with the use of more labour-intensive technologies in all sectors of the economy, where viable, consistent with our relative factor abundance.

Our detailed proposals around sectoral restructuring are contained in sections 5.13 and 5.4 of this submission.

Markets: What is essentially needed is increased focus on producing to meet basic needs for the majority, while stabilising transforming and developing export markets in the region and maintaining growth in exports overseas.

South Africa must engage with world markets both because it depends on some imported inputs, including petroleum and many capital goods, and to keep up with technological advances. At the same time, international markets remain unstable, speculative and subject to unfair trade practices. By extension, we must find ways to ensure more robust domestic markets, providing greater stability, while increasing the value added of exports.

Regional structure: Special measures to support development in the poorest areas of South Africa – that is, the former homeland regions – and to develop the southern African region

Overcoming the apartheid past is particularly urgent in respect to the former homeland areas. These regions are characterised by weak social and economic infrastructure and services and dependence on survival and micro enterprise.

Generally, we need to integrate sectoral strategies and regional development programmes, including Spatial Development Initiatives (SDIs), local government Integrated Development Plans and the integrated rural development strategy.

More explicit policies must manage rapid rural-urban migration, as well as ways to accelerate rural development. We need to assess the effectiveness of the integrated rural development strategy in addressing this problem. Effective measures must include much more rapid extension of basic infrastructure (which has cost implications), a clearer programme on land reform and agricultural development, and much more attention to the provision of education and skills.

Class power: We need support for new centres of economic power, in particular through the state, a vibrant co-op movement, land reform and other types of support for SMMEs. To achieve dynamic growth linked to more equality in incomes and wealth, the new growth path must transform both capital and labour. That means

• Ensuring that existing large-scale capital in the private and public sector contributes more to growth and redistribution;
• Developing a co-op movement;
• Supporting the growth of small and micro enterprise;
• Broad-based black economic empowerment;
• Transformation of gender relations;
• Restructuring financial investment; and
• Building a skilled labour force with far higher levels of employment.

Land reform is often presented as the critical way to create jobs and expand the asset base of the poor. The current process, however, is far too slow to dent unemployment; and does not appear to be a conscious strategy to uplift the masses of the rural poor it is not clear that the unemployed are interested in farming. We need urgently to clarify what we expect from land reform.

State: Developing The power of the state needs to be enhanced and used to support this growth path based on increased co-ordination between departments, and the establishment of effective sectoral consultative structures.

The new growth path requires consistent state intervention in four key areas: to reshape sectoral dynamics; to set an appropriate fiscal and monetary framework; to provide an adequate social protection; and to ensure that the poor have increasing access to income generating opportunities by supporting greater access to wealth and skills.

The role of the state around industrial policy in particular is discussed in the next section of the submission.

1. COSATU’s overall approach to Industrial Policy

1. Conceptualising industrial policy

There is divergence, both in South Africa and internationally, as to what actually falls within the definitional realm of "industrial policy". As Ha-Joon Chang puts it,

At one extreme, there are those who define industrial policy very broadly and include in it every government policy that affects industrial performance, including even macroeconomic, infrastructural and education policies. At the other extreme, there are those who define it narrowly, and equate it essentially with a sector-specific "targeting" exercise. In between, there are those who see the "core" of industrial policy as targeting (or "selective" or "sectoral" industrial policy) but include other non-sector-specific policies (or "general" or "functional" industrial policy), such as generalizedgeneralised support for R&D or industrial training, in the definition.

For "industrial policy" to retain its specific analytical and policy meaning, it does need to refer particularly to the types of industrial support and development measures mentioned above. At the same time, it would be too limiting to discuss narrow sectoral measures in a vacuum, without examining the broad range of policy measures potentially available to government which can either assist or hinder industrial development, as well as shaping the type and location or production. Such areas of policy include macroeconomic policy, education and training, the role of state owned enterprises, policy around local economic development, and so on.

One objective of industrial policy is to drive a particular growth path or accumulation process which expands the capacity of the forces of production. In other words, policy needs to enable the economy to produce more. This is obviously not only a quantitative issue, as the nature of the accumulation process is paramount. The economy’s industrial base and productive capacity needs to be not only increased, but also moulded into a form appropriate for South Africa.

A basic strategic requirement for progressive industrial policy measures is for the state to play a planning, co-ordinating, and propelling role. Industrial policy measures need to have both a protective component, in maintaining existing production and employment, and a proactive role in identifying and dealing with blockages or opportunities.

One question specifically posed by the Committee in its invitation to these hearings, was "In what way and to what extent should we be acting with or ahead of the logic of markets in promoting industrial policy?". This is an important issue, relating both to our conceptual understanding of industrial policy and to what types of measures should form part of our industrial policy. COSATU would contend that an approach which leaves industrial development to "market forces" is in fact the absence of an industrial policy.

The essence of industrial policy could be seen as bringing about desirable effects in industrial and economic development which would not otherwise have materialised. As we have noted elsewhere in this submission, this has been the defining feature of all processes of successful industrial development internationally. This includes, for example, "free market" economies such as the United States, which have had highly interventionist industrial policies – both in the early stages of industrialisation, and during periods of intense restructuring such as under the Reagan administration.

State intervention beyond or ahead ofr the market serves several purposes. Firstly, as with any area of policy, every government has national objectives which it needs to carry through. In relation to industrial policy, these may include the particular development of certain regions of the country, certain industries, or certain types of enterprises; as well as broader policy objectives such as employment creation and redistribution. Such objectives may or may not coincide with market outcomes, and it is through directed state intervention that the chances of them being realised are maximised.

One of the key lessons of the East Asian experience of industrialisation has been the role of the state in "picking winners". What this meant was that the state actively identified sectors for promotion, which ultimately became success stories and contributed to the overall phenomenal economic growth of these countries. Without this sectoral targeting and promotion policy there is no reason to believe that these sectors would necessarily have been "winners". This demonstrates the necessity of the state acting ahead of the market – even contrary to market signals at a particular point in time.

COSATU believes that what is appropriate for South Africa at this point in time is not necessarily a top-down approach as per the East Asian experience. Together with the role of a strong state is the need for a collective of key national stakeholders in identifying priority areas and acting together. This is discussed further in section *** of this submission.

Sectoral strategy as part of broader industrial strategy also requires a dynamic conception of industrial and economic development: taking decisions with a view to the long term benefits (and costs of not acting). South Africa need not accept that our comparative advantages are static, based on existing factor endowments. Forging a trade and industrial strategy based on existing price structures (allocative efficiency) tends to reinforce existing biases in our production structure. It also gives rise to a contradictory situation, where we export capital intensive goods despite our massive labour endowment, apparent in the extremely high unemployment rate.

An alternative approach of "dynamic comparative advantage" would not confine itself to the existing price and production structures, but would seek to maximise creative efficiency. For example, potential forward and backward linkages along value chains can be actualised achieved through strategic state intervention.

One of the key constraints on domestic industrial development and economic growth is limited and skewed domestic demand. This problem is also identified in the DTI document. Given low incomes for the majority, expanding domestic markets requires greater emphasis on providing basic goods and services. Redirection of investment to these ends should gradually lower the cost for most South Africans of food, infrastructure, transport and domestic appliances. If combined with measures to fight poverty, including an increase in the social protection, this strategy will over time expand the domestic market. It should also cut the cost of living, leading to a more efficient economy overall.

A critical element in this strategy is to rethink the provision of household infrastructure to expand demand for domestic inputs while maximising the overall employment effect. Infrastructure must increase opportunities for home-based production by improving the supply of electricity, basic telephony and water. Moreover, housing must be located close to jobs, rather than – as is now often the case – far from the industrial centres.

The establishment of a high-productivity, high-wage labour force is also necessary to ensure growth benefits the majority of our people. This is only possible if the economy is restructured to expand employment on a mass scale. It also requires accelerated implementation of the skills development strategy.

 

2. Competitiveness strategies

A competitiveness strategy generally seeks primarily to enhance efficiency across the economy. As a rule, export success is used as the main measurement of efficiency. Supporters argue that a more efficient economy must, in the long run, create jobs and alleviate poverty and inequality. In effect, they offer a trickle-down solution. In contrast, a developmental approach sees the problem as high levels of unemployment and poverty. It argues that by itself, strengthening the most efficient enterprises will do little to address these issues.

Competitiveness strategies typically concentrate on cutting the cost of doing business. Key measures include streamlining the economic bureaucracy, cutting tariffs, taxes and cross-subsidies to the poor, increased investment in modern infrastructure and training, and sometimes limits on labour rights. In other words, the strategy usually boils down to a free-market approach with targeted interventions to enhance infrastructure and skills development.

The competitiveness approach has major shortcomings for developing economies. In particular, the near-exclusive focus on export sectors risks short-sighted measures that enhance inequalities and unemployment.

• First, it can mean government neglects production to meet domestic basic needs, resulting in rising food prices, homelessness and similar ills. This can cause greater inequality as well as driving up wage costs. Thus, newspaper reports have suggested that the rise in meat prices after November reflected, at least in part, an export drive in Europe and the Middle East.
• Second, a singleminded export drive typically encourages larger producers to invest in labour-saving technologies from countries with higher priced labour, resulting in rising unemployment. In South Africa, virtually every COSATU affiliate in manufacturing reports that exporting companies have shed jobs, not gained them. Even the auto industry, our strongest export sector, has lost some positions. The following table shows that even very rapid growth in exports in dollar terms did not prevent job losses. Indeed, the three sectors that saw the fastest growing exports all lost substantial numbers of jobs. Iron and steel, motor vehicles and basic non-ferrous metals, which are the largest exporters in manufacturing, experienced a loss of almost 32 000 jobs between 1996 and 2000.

Source: TIPS website. a. negative figure means employment grew. *under 0,5%

• Third, a singular focus on exports may mean government ends up supporting large, formal-sector producers able to compete internationally, shutting out smaller enterprises and generally fostering concentration of ownership.
• Finally, single-minded dependence on international markets weakens the position of producers in competition with others worldwide. Where Third World producers lack a domestic or regional base, multinational companies can make them compete with each other in a race to the bottom. As CEPPWAWU’s input noted, this has already happened with some South African furniture producers.

We can understand the shortcomings of a competitive approach in developing countries by using the concepts of intensive and extensive growth.

• Intensive growth occurs principally through increasing productivity and efficiency
• Extensive growth arises primarily through higher output. That could take place through simply expanding production. It could also involve a shift to more labour-intensive sectors or the involvement of SMMEs. In that case, it would bring about greater equity and GDP growth at the cost of at least a temporary slow down in factor productivity.

Given constant or only slowly growing demand, intensive growth will produce more or less the same output with lower factor demand. The result will be job losses. In contrast, extensive growth will maximise employment – but requires a continual growth in sales. That, in turn, requires expansion in both domestic and foreign demand. Ways to achieve this are discussed below.

If a country is on its production possibility frontier – that is, it is already using all factors of production as fully as possible – then the only choice is intensive growth, and by extension a competitiveness strategy. But a country with massive unemployment, like South Africa, must include new factors in production. That means its growth strategy must involve some elements of extensive growth. Unless demand is booming, a pure competitive strategy may bring about some growth, but it will not generate sufficient jobs or bring hope to the least developed regions.

A second problem with most competitiveness strategies lies in the assumption that foreign direct investment is both necessary and invariably beneficial. It is now common cause, however, that foreign investment typically follows growth, rather than kick-starting it. By extension, we cannot look to it to fill in the resource gap left by low domestic investment.

For COSATU, however, a greater concern arises from the belief that foreign investment is essentially just a neutral source of capital. Our affiliates, especially in manufacturing, banking and other services, have a different experience. In several sectors, including dairy, chemical and appliances, given essentially stagnant domestic demand, foreign investment has undercut and ultimately led to the closure of local firms. That is, it has not led to increased employment or production. Furthermore, in some of these cases, local production and exports have been reduced as a result of the foreign partners’ international marketing strategy. In these cases, the foreign investor has effectively weakened the local value matrix, rather than strengthening it.

The DTI document is by no means a pure competitiveness strategy. The DTI document does identify some key structural problems in the South African economy. Above all, it points to the need to shift production to more labour-intensive sectors, improve production of basic goods and services, support SMMEs, improving skills development, and resolve spatial inequalities. It explicitly argues for measures to create jobs and enhance equity.

In contrast to its overall framework, however, its proposals generally retain an unbalanced support for exports and liberalisation at the cost of other economic aims. This is particularly true of the specific proposals for individual sectors, in sections xx. Similarly, the proposal for restructuring state assets (para xx) through managed liberalisation ignores the inability of competitive markets to provide basic services to the poor, who cannot pay for them in full. Government should reconsider these proposal to ensure that they reflect the broader and more inclusive approach adopted in the document’s overall framework.

The apparent disjuncture between the analysis of the document and its proposals arises from two methodological shortcomings.

• First, the document does not provide an adequate framework for sectoral discussions. It lays out existing proposals for some sectors, without discussing how the key stakeholders should be brought into them. But sectoral conditions – which vary greatly - ultimately shape the concrete measures for such broader programmes as BEE and support for co-ops. Absent strong sectoral policies, these programmes remain excessively vague.
• Second, the document does not analyse the nature of capital, focusing instead on the structure of production, markets and spatial development. As a result, it cannot propose concrete strategies for interacting - and transforming - those organisations that effectively control the economy. In particular, to bring about structural change, we need to understand the role and interests of mining and financial capital, as the dominant sectors; the parastatals; commercial agriculture; and the multinational companies that increasingly dominate manufacturing. Only on that basis can policy interventions redirect investment to bolster local production, especially in ways that can create employment. A developmental approach requires, in particular, that big capital be compelled to invest in new ways, using a combination of carrots and sticks. It also requires much more rigorous redirection of resources to new types of enterprise.

A developmental approach, in contrast, argues that the basic causes of unemployment and poverty lie in the broad structures of the economy, which the market will generally replicate. By extension, the state must step in to act ahead of the market, redirecting growth to achieve national goals. In must play a planning, co-ordinating, and propelling role. The elements of an alternative developmental approach are proposed in the subsequent sections of this submission.

1. Specific aspects of industrial policy

COSATU would now like to discuss various areas of industrial policy, including those specifically flagged by the Committees for public comment.

1. Sectoral structure and strategy

We do not believe that industrial policy can hope to succeed without a detailed understanding of the dynamics within sectors and the relationships between sectors, and a clear and implementable vision of how these should be restructured.

One of the objectives of industrial policy should be to shift toward more labour-intensive growth overall. One aspects of this would be a shift in production toward more labour-intensive sectors built largely on down- and upstream linkages from mining and agriculture, plus services and infrastructure. This needs to be complemented with the use of more labour-intensive technologies in all sectors of the economy, consistent with our relative factor abundance, insofar as this is viable.

One element of building the domestic manufacturing base would be realizing up- and down-stream linkages between different activities along value chains. We need to move away from a situation where primary products are exported and finished products imported. The fact that these linkages have not yet materialised to the extent that is needed, is indicative of the limitations of the market in connecting potential value chains in production relationships. This points to the need for active intervention in building strong domestic value chains. This would strengthen our manufacturing base and increase output and employment.

We note that DTI is already examining at value chains in various sectors and looking at ways of strengthening the weak links, for example where output prices at one stage mean high input costs at the next stage; and welcome this focus. Parastatals and public development finance institutions also have an important role to play in strengthening value chains.

Relatively labour-intensive sectors include both potentially competitive activities, that can produce for export or to replace imports, and industries that are largely directed at domestic production and consumption. Of course detailed sectoral proposals can only derive from consultation with stakeholders, but we would put forward some broad proposals here.

Potentially job-creating competitive sectors include:

• food production and processing, especially in horticulture;
• the fabrication of metals and chemicals based on downstream linkages from minerals and petrochemical refineries;
• many services, including tourism and communications; and
• cultural industries.

Labour-intensive sectors oriented to the domestic market and to some extent the region include:

• most construction of housing and infrastructure;,
• production of basic food, appliances and services;,
• the retail sector; and
• commuter transport.

These industries provide opportunities for micro and small enterprise, both as producers and by providing key inputs for home-based production of goods and services. Available estimates suggest that they have the greatest potential for creating employment, especially in agriculture (with land reform), construction and services.

This approach needs to be linked to an overall strategy of promoting labour intensity in the economy as a whole, and strengthening linkages with traditionally strong sectors.

Restructuring the economy toward more labour-intensive sectors requires, first, a redirection of both public and private resources to restructure investment. Government should support a shift in the trajectory of growth through sectoral agreements and, on that basis, the redirection of state services, including infrastructure, training, organisational support and incentives.

This approach requires a flexible and practical approach to the definition of economic sectors, which is not bound by standard classifications. The determination of sectors for policy purposes must depend on the potential for achieving national aims.

Often, the interlinkages between traditionally defined sectors prove critical for restructuring the economy. Generally, we need to build on the strengths of the economy. In particular, we can develop new projects

• using the sophistication now found in industries upstream from mining and, to a degree, agriculture, and
• benefiting from inputs produced by our minerals, petrochemical and agriculture industries. This could often mean supporting capital-intensive investments so as to generate more labour-intensive activities in related sectors. In contrast to the past, however – for instance with Columbus Steel - we need to ensure that the hoped-for employment multiplier in fact occurs before we commit any resources.

The retail system also requires restructuring as part of our industrial strategy. The existing retail system is divided between highly concentrated chains and corner stores. It is not friendly to SMMEs, increasingly import oriented and apparently has fairly high mark-ups. These tendencies limit job creation and raise the cost of wage goods.

To take advantage of domestic and export markets requires a strategy for redirecting and strengthening retail trade. This is a particular problem in townships and rural areas, where informal marketing is associated with a high mark up, raising the cost of living and cutting domestic markets. Retail also forms an essential link between micro producers, including farmers and cultural workers, and consumers at home and abroad. A policy in this area should cover measures to reduce the cost of basic necessities to households, support small and micro enterprise, and market manufactures and services abroad.

The Competition Commission could investigate whether the big chains collude to keep up the price of wage goods. More fundamentally, as noted above, we need to explore the potential of marketing co-ops to reduce the cost of living and support local producers. In addition, we need to see if it is possible to improve the use of e-commerce by small producers so that they can gain access to marketing outlets. We also need to develop policies to support the extension of retail outlets in poor communities.

To support sectoral strategies, government has access to a variety of tools, including:

• Development of a shared vision for major sectors with business and labour, with specific commitments on that basis.
• Skills development programmes geared to new sectoral developments.
• The provision of infrastructure.
• Measures to increase the funding of sectoral activities or investment, through incentives and/or tax relief, as well as lowering the cost of credit. Possibilities include community re-investment rules, institutional changes in the financial sector, and directed investments and credit. In addition, the state can affect investment directly through the IDC and DBSA, which act as merchant bankers mobilising resources around important projects, as well as direct participation in strategic projects.
• Expanding markets for local producers through government procurement, tariff policies and "Buy South African" campaigns, as well as improved marketing systems and strategies. This could also include strategies to counter subsidised exports from industrialised countries, notably in agriculture and steel.
• Measures to raise productivity and encourage the use of more labour-intensive technologies, where appropriate, through work reorganisation, improved management and technology and expanded research and development. These measures could include regulations, tariffs, incentives and disincentives, as well as state investment in infrastructure and production. They also involve the use of conditional licensing to ensure desired changes. Other possibilities include competition policy and the regulation of quality standards.
• Finally, we need to assess and guide the national science, engineering and technology capacity to facilitate the growth strategy, encouraging greater investment in appropriate R&D and high-level HRD.

Many of these proposals would be needed across industries, and are discussed further in the relevant sections of this submission. However,, the purpose of targeting particularly necessary in the context of limited resources and capacity particular sectors could bewould be to prioritised restructuring and growth in these areas, with positive spin-offs for the economy more broadly. Targeting is particularly necessary in the context of limited resources and capacity.

It takes at least five to ten years to change the sectoral structure of the economy substantially. Effective interventions must be geared consistently and systematically toward the new growth path. Far-reaching restructuring of the economy cannot be achieved if we frequently change direction because of lobbying or hopes for short-term gains.

1. Engaging on sector restructuring

An important obstacle facing the shift to a higher growth path remains the lack of a shared vision with all stakeholders. Economic restructuring requires changed behaviour from all participants. In effect, to some extent all participants must accept "second-best" solutions from their standpoint in order to maximise overall social gains. No one sector should be expected to bear the brunt of restructuring, without deriving overall benefits. Virtually all successful industrial strategies internationally have largely developed from consultative structures at sectoral level.

As the DTI document notes, improved consultation is critical to improve government policy making. Yet experience at NEDLAC and in the National Framework Agreement on State-Owned Enterprise demonstrates the need for government to refine its approach to engagement. In particular:

• Government must improve mandating procedures so as to allow some flexibility and co-ordination across departments. Currently, government officials almost invariably can speak only for their departments, and see themselves as defending fixed positions rather than finding mutually beneficial solutions.
• Government departments must budget the time and resources needed for consultation. It is easy to praise consultation in a document, but very hard to accept the amount of energy, time and capacity required.
• Government leadership must develop a culture that supports engagement, stressing that officials can and must learn from consultation. Otherwise officials treat engagement at best as a wearisome burden, and at worst as a threat to their power to control policy development.

Overcoming these obstacles requires that government give a strong lead on overall policy direction while bringing in stakeholders to ensure their buy in and take advantage of their information. As noted in sections 5.3 and 5.4, this means government must provide strategic guidance at national level, engage in the development of sectoral strategies, and support restructuring at enterprise level.

The commitment to collective economic action in the DTI document has to be beefed up and given direction. Not all collective action is desirable or even legal – price collusion, for instance, is frowned upon. We need to distinguish between different levels of "collective action" so that there is a common understanding of what is meant, and important action can be prioritised. Possible dimensions of collective action include:

• Collective action between individual businesses, to take advantage of economies of scale and to pool productive capacity, for example in the meeting of large export orders. Export Councils would have an important role in this regard.
• Collective input into the functioning and regulation of the economy. Sector summits, and the follow-up processes arising from them, would be a key vehicle for this form of collective action.
• The challenge of collectively mobilising people to support and participate in development, for example through local economic development and co-operatives.

The tripartite sector job summits agreed on at NEDLAC in 2000 give an opportunity for systematic consultative decision making with stakeholders at the sectoral level. In this context, we define sectors as groups of producers of similar goods, plus other parts of their value matrix where appropriate. The scope of a sectoral process should be defined by the potential for developing effective measures to enhance output, investment, job creation and incomes, not by textbook definitions.

The sector job summits must provide detailed policies that together constitute an integrated development strategy. As far as possible, they should ensure that each sector

• Protects and creates sustainable employment;
• Meets basic needs better, by cutting prices or improving the quality of goods used by the poor;
• Contributes to rural and regional development, and improves the position of women;
• Supports greater productivity and efficiency, leading to greater competitiveness for the economy as a whole; and
• Supports greater equity in ownership and skills development.

Sectors are an important link in economic policy, providing a sound basis for targeted and coherent policies. They overcome the limitations of work at the enterprise level, where key policy decisions remain out of reach. Consultative sectoral committees were critical for successful industrialisation in South East Asia. After all, it is obviously difficult, if not impossible, for government officials to define the needs of sectors without consistent interaction with business and labour.

COSATU affiliates have engaged in innumerable company restructuring exercises, many of which fail because there is no scope for addressing shortcomings in existing policies. In contrast, at the sectoral level we can forge a longer-term growth trajectory based on our overall development strategy, supported by a common commitment and practical measures.

Sector summits provide a critical vehicle for ensuring that sector strategies both gain support from and build on the experience of key stakeholders. The experience of the cluster studies shows that commissioning consultants’ studies with little buy in or participation by business, labour and government will not yield much in the way of practical results. The success of the MIDP arises from its support from stakeholders combined with its adaptation to the unique nature of the auto sector, which permitted it to take advantage of the international strategies of the big German car companies. Sector summits should initiate similar processes for other major sectors.

DTI has argued that sector summits do not yield strong results and involve too many stakeholders. In the absence of alternatives for developing realistic sectoral policies, we need to find solutions to these problems. Specifically:

• Obviously, it is incumbent on the parties to the sector summits to make them yield strong results. In the case of the financial sector summit, where business, labour, government and community have put in strong teams, we have already begun to move towards agreeing on specific legal changes relating to third-tier and co-operative banks as well as credit bureaux.
• Even more important, however, is to understand that the sector summits must not be a once-off event. Rather, their real import is to establish more stable structures to manage sectoral development. That will provide the opportunity to continuously enrich and improve sectoral policies. Indeed, every sector summit to date has established a sectoral forum to permit monitoring and on-going co-operation.
• The real problem is not too many stakeholders, but rather that business is often poorly organised, government does not have capacity or mandating structures to participate meaningfully, and labour historically lacked policy capacity. The agreement to convene sector summits through NEDLAC – a process already underway with the ICT and Financial Sector Summits – should help constituencies overcome these problems. In addition, for its part, COSATU has already taken steps to improve its participation at the sectoral level. We raised funds from the DTI’s Sector Partnership Fund to employ researchers for all our manufacturing affiliates; established a unit to support them at Naledi, our research institute; and ensured support from policy co-ordinators as well as leaders at COSATU’s head office.

Within the sectoral strategies developed through sector summits, it will be important for individual enterprises to also put in place restructuring towards growth and equity.

COSATU believes that the Growth and Development Summit also has a crucial role to play in agreeing to appropriate socio-economic policy measures. These will include supportive macro-economic policies, active industrial policy, a vision for the role of the state at all levels, and a social protection framework to lift people out of absolute poverty and support equitable development.

1. Specific aspects of industrial policy

COSATU would now like to discuss various areas of industrial policy, including those specifically flagged by the Committees for public comment. This presentation does not seek to exhaust or finalise our inputs on industrial strategy, but rather notes

some important points that may require further elaboration.

Permeating all of these areas of discussion is the need to address the issues of race, gender, and class discussed earlier in this submission. For us the focus is on broad-based redistribution, in particular through assess to and ownership of productive assets and through mass employment creation that especially benefits groups which have been marginalized from the economy.

]

1. Role of the Cross-cutting sectors: the financial sector and retail

Clearly, investment is a major challenge for industrial policy. It is very low; focused on relatively capital intensive activities; depleted by substantial foreign investments by South African companies; and destabilised by international portfolio flows, which, for instance, dropped from R80 billion in 1999 to R11 billion in 2000. The proposed growth path requires that additional investment be redirected in particular tofrom mining and refining to more labour-intensive sectors, and generally toward co-ops, the public sector, and SMMEs. These aims are linked, since SMMEs are only viable in more labour-intensive industries.

The structure of investment is intimately linked with the nature of the financial sector, which is highly concentrated. In 2000, the commercial banks reported deposits of R560 billion; the four biggest banks - Absa, Standard, FirstRand (FNB until 1998) and Nedcor - controlled 70 per cent. They held over 90 per cent of government deposits, and 80 per cent of deposits by individuals.

These large organisations have not adequately served SMMEs and low-income households, and have not prioritised innovative activities that can create jobs. A drive towards SMME promotion has been frustrated in part by the structure and practices of the financial sector. Small entrepreneurs, especially blacks and women, struggle to access finance and when they do the costs are generally very high, contributing to the frequent failure of these enterprises.

Measures are also needed to increase financial services for SMMEs and co-ops. This could include pressure on the formal institutions to lend directly or to on-lend to specialised institutions. In addition, we need a better understanding of the legal, economic and social obstacles facing progressive micro lending institutions.

One of the key measures which COSATU has proposed to encourage redirection of productive investment is the reintroduction of prescribed asset requirements (PAR’s) for retirement and long-term assurance funds. Taken together, these funds have about R1 trillion in assets. PAR’s of up to 50% have been used historically in South Africa to channel assets of the financial sector in particular ways. PAR’s of even five or ten per cent would leverage enormous funds for investment in social and economic infrastructure.

For these requirements to be effective and equitable, they would need to be compulsory across-the board, rather than voluntary. Measures to direct them toward more desirable investments must, however, protect workers who belong to pension and provident funds; such as a government-guaranteed minimum real rate of return. This proposal is part of the contribution of labour to the reconstruction and development of South Africa.

Section 3 of this submission examined the capital flows to and from South Africa. COSATU has argued that we need a tighter capital and exchange control regime, including mechanisms such as "speed bumps", to hinder the outflow of capital.

More broadly, we need more open and participatory regulatory and policymaking structures for the financial sector.

The next section of this submission deals with the role of public development finance institutions, specifically the IDC, which also form an important part of the financial sector.

Labour, government, business and community are currently engaged in a process under the auspices of Nedlac towards a Financial Sector Summit. The terms of reference of the summit cover a number of the challenges discussed above, as well as the role of development finance institutions (addressed in section 6.2 below). We believe that the summit, and further processes that may arise from it, will play a critical role in the transformation of this pivotal sector and in positioning it to contribute to growth and development.

Marketing systems are also an important element for industrial strategy, as the DTI document acknowledges when it emphasises these factors as key areas for improving knowledge intensity. Currently, the retail system is divided between highly concentrated chains and corner stores. It is not friendly to SMMEs, increasingly import oriented and apparently has fairly high mark-ups. These tendencies limit job creation and raise the cost of wage goods.

Inefficient retail systems are particular problematic in townships and rural areas, where informal marketing is associated with a high mark up, raising the cost of living and cutting domestic markets. Retail also forms an essential link between micro producers, including farmers and cultural workers, and consumers at home and abroad. The retail sector affects women in particular – both as the people generally responsible for buying household goods, and as operators of small and micro retail outlets. A policy in this area should cover measures to reduce the cost of basic necessities to households, support small and micro enterprise, and market manufactures and services abroad.

In this context, we need to explore the potential of marketing co-ops to reduce the cost of living and support local producers. The unions could play a central role in this type of development, which has been successful in Scandinavia. In addition, we need to see if it is possible to improve the use of e-commerce by small producers so that they can gain access to marketing outlets. We also need to develop policies to support the extension of retail outlets in poor communities.

2. Section *** of this submission deals with the role of public development finance institutions.The role of Development Finance Institutions

Public development finance institutions (DFI’s) have a critical role to play in industrial development. The IDC in particular obviously has a special role to play in industrial policy. It has a major influence on our industrial structure and development by virtue of the massive resources at its disposal and the impact of its investment decisions on sectors, regions, and other enterprises. This includes average direct annual financing of over R4 billion per annum. The IDC is responsible for almost 6% of national fixed investment in the economy.

On the 21^st of August 2001 COSATU made a submission to the Trade and Industry Portfolio Committee on the Industrial Development Amendment Act – the legislation governing the Industrial Development Corporation. We proposed a range of amendments to the Act aimed at positioning it to more effectively contribute to national objectives. These proposals included:

• Broadening the Objects of the Act to make employment retention and creation an explicit objective of the IDC, which is currently not the case; as well as extending the objective of promoting SMME development to include co-operatives.
• Strengthening the reporting requirements of the IDC to Parliament.
• Setting out the broad criteria which the IDC would use to evaluate projects and allocate resources, which would go beyond "economic merit" to include various factors relating to economic growth and development.
• Promoting compliance with applicable labour legislation for IDC-funded projects.
• Improving the representivity and accountability of the Board, and building in various safeguards as is the case with legislation governing similar types of institutions.

DTI and the Committee felt that the bulk of the proposals tabled by COSATU went beyond the scope of the Amendment Bill as envisaged by government, but acknowledged that the Act was in need of a more comprehensive review and that various of the proposals tabled by COSATU did have merit. A commitment was made to undertaking an overall review of the Act. We have not heard of any developments since then. We would like to take this opportunity to seek clarity as to the progress with this process. COSATU would also want to be part of the redrafting process.

Other development finance institutions such as the Development Bank of South Africa (DBSA) and the Land Bank also have a critical role to play in our industrial development. They too need some reorientation in favour of the types of objectives discussed above in reference to the IDC; greater integration with overall industrial policy; and greater levels of accountability.

2. Policy co-ordinationFiscal and monetary policy

COSATU believes that increased co-ordination is required between government departments and policy initiatives. This includes both vertical co-ordination, between different levels of government, and horizontal co-ordination between departments. We have observed numerous instances in the past where policy pursued by one organ or government undermines or fails to support a key initiative led by another organ. Some of these cases have been raised in the submissions of our affiliates.

The ability the economic ministries to intervene decisively to restructure the economy must be improved. This requires both enhanced capacity and improved co-ordination on economic policies. It also requires more systematic consultative structures, as discussed in the previous section.

Policy co-ordination also involves the strategic role of state owned enterprises and public development finance institutions in industrial strategy. Government should use its control and/or leverage over these bodies to advance national objectives. This issue is discussed further in section **6.7** of the submission.

A key challenge in terms of co-ordination between different elements of economic policy lies in ensuring that macroeconomic policy is supportive of industrial policy. COSATU does not believe that this is presently the case. Aspects of current macroeconomic policy such as fiscal austerity; high interest rates; and the liberalisation of exchange controls have undermined rather than supported industrial development.

There has been substantial debate around the relationship between macroeconomic (fiscal and monetary) and microeconomic policy. The DTI document suggests that we have now achieved macroeconomic stabilisation, and the focus needs to shift to microeconomic reforms.

COSATU welcomes a focus on industrial policy measures. However, for these to be effective, there needs to be a supportive macroeconomic environment. We do not agree that our current macroeconomic parameters are appropriate in this respect. The point is not that macro is now unimportant and we must carry on with the same macro framework while focusing on micro to get things right.

COSATU believes that, despite some recent relaxation, our current macroeconomic framework remains too contractionary, and actually constrains microeconomic interventions. A prioritising of industrial policy should mean a review of the extent to which current macroeconomic policies are able to optimally support this (as well as supporting other priorities such as the meeting of basic needs). To the extent that they are not, macroeconomic parameters need to be adjusted. Without this flexibility, we do not believe that we will be able to realize accelerated industrial development and economic growth.

Excessively tight fiscal policy hampers industrial strategy in four main ways:

• By reducing domestic demand
• By limiting measures to alleviate poverty, and consequently limiting overall productivity, narrowing demand for basic goods, and encouraging crime
• By reducing funding for supply-side measures and other government interventions in support of restructuring
• By limiting the ability of the state to "crowd in" the private sector through investment in infrastructure and key productive projects. Historically, in South Africa, econometric analysis shows that public investment is the strongest stimulant of private capital formation.

A presentation of the Department of Trade and Industry’s MTEF budget to the Trade and Industry Portfolio Committee highlighted how fiscal austerity is undermining government’s own flagship economic initiatives. The document notes cuts in programmes such as Investment Support, Industry Development and Promotion, Technology Enhancement, Small Business Promotion, Business Regulation and Consumer Services. The DTI notes consequences such as a lagging behind in Information Technology, a breach of contractual obligations in terms of investment support, a negative effect on foreign direct investment, a slowing down of local investment in manufacturing decreasing opportunities for job creation, monitoring of industrial development projects and quality of business plans will suffer, standards and conformance activities will cease to function effectively, a negative impact on technology development, limiting the ability to execute their mandate on SMME promotions, and serious delays in the development of better consumer and company law.

This example demonstrates the problems of an excessively conservative fiscal policy can constrain the potential of "microeconomic" industrial policy priorities. This does not mean, of course, that unlimited borrowing or taxation is possible. But a modest increase in the deficit to around 5 per cent of GDP and a 1-per-cent hike in the tax rate would increase the funds available to government on the order of R25 billion. Projections by the Economic Policy Research Institute suggest that the resulting stimulus to overall growth would ultimately lead to a decline in the deficit relative to GDP. In other words, this modest relaxation of fiscal targets would have immense social and economic benefits, without in any way leading South Africa into a debt trap. Indeed, by international standards, IMF figures show that both debt and taxes remain low in South Africa.

One of the key aspects of macroeconomic policy which has a direct effect on industrial policy is the level of interest rates. South Africa has exceptionally high interest rates, both by international standards and in terms of our own historical trends. The prime interest rate is consistently 4 to 6 per cent above the repo rate.

There is a direct inverse (negative) relationship between the level of interest rates in the economy, and productive investmenteconomic activity. The higher interest rates are, the higher is the cost of capital to finance either new investment or the expansion of existing production, as well as even the maintenance of existing production. This translates directly into lower levels of overall investment in the economy, and lower rates of growth and employment. A further causal link is through the dampening of consumer demand in the economy. High interest rates make debt-financed consumer purchases more expensive. Reduced domestic demand thus has a further negative effect on production and employment. Moreover, in the long run, it will raise the cost of interest payments to the state, potentially slowing the expansion in spending on real services.

A major concern is that faced with external shocks – specifically, the impact of the depreciation of the rand on domestic prices - the Reserve Bank persists in raising interest rates. That strategy is designed precisely to slow down economic activity, which effectively undermines the proposed industrial strategy while aggravating unemployment.

COSATU argued against inflation targeting precisely because of the risk that it would lead to inappropriate increases in the interest rate. At the time, we were assured by the Reserve Bank and the government that the policy contained sufficient escape clauses to avoid this outcome. Nonetheless, we are now confronted by interest rate hikes at a time of soaring unemployment and slow growth.

Successful industrial development will require a more conducive interest rates regime. The overall level of interest rates in the economy needs to be significantly lower. Furthermore, we have proposed the use of differential interest rates as a key tool of industrial policy, in promoting particular sectors, geographical areas, enterprise sizes, production technologies, and structures of ownership. Differential interest rates have been extensively utilised in successful processes of industrialisation such as in East Asia. In South Africa, the extensive network of state-owned financial institutions provides a basis for this type of measure.

Similarly, the exchange control regime has a direct impact on issues of industrial policy. The availability and cost of capital is influenced by interest rates, as discussed above, but also by the system of exchange and capital controls a country has in place. As discussed elsewhere in this submission, South Africa has seen huge outflows of capital, particularly direct investment. This has robbed our country of much-needed resources, and limited the capital available to finance domestic production. An exchange and capital control regime is needed which will maximize the capital available for domestic investment. COSATU believes that this would entail a tightening of capital and exchange controls.

The issues of interest rates and exchange controls, and their direct bearing on industrial policy is a case of the interface of macroeconomic and industrial policy. It points to the need for policy co-ordination across departments, and including institutions such as the South African Reserve Bank, in the interest of overriding policy objectives.

A presentation of the Department of Trade and Industry’s MTEF budget to the Trade and Industry Portfolio Committee highlighted how fiscal austerity is undermining government’s own flagship economic initiatives. The document notes cuts in programmes such as Investment Support, Industry Development and Promotion, Technology Enhancement, Small Business Promotion, Business Regulation and Consumer Services. The DTI notes consequences such as a lagging behind in Information Technology, a breach of contractual obligations in terms of investment support, a negative effect on foreign direct investment, a slowing down of local investment in manufacturing decreasing opportunities for job creation, monitoring of industrial development projects and quality of business plans will suffer, standards and conformance activities will cease to function effectively, a negative impact on technology development, limiting the ability to execute their mandate on SMME promotions, and serious delays in the development of better consumer and company law.

How can we hope to build a strong economy with the government’s economic programmes being emasculated by fiscal austerity? This example demonstrates the problems of an excessively conservative fiscal policy can constrain the potential of "microeconomic" industrial policy priorities.

2. Trade policy

For many years, COSATU has argued that South Africa’s trade policy must be driven, not by an abstract commitment to free trade, but by a well-defined industrial strategy. From this standpoint, the DTI makes important steps forward, by

• Proposing that future changes in tariffs should follow from sectoral strategies,
• Supporting increased trade within the Southern African region in the context of stronger regional value matrices, and
• Calling for stronger capacity to enforce trade measures, including by bolstering Customs and Excise.

COSATU believes that South Africa’s trading patterns should not be coincidental, purely a function of historical/colonial relationships, or based solely on grounds of maximum economic gains. Our trade relations need to be defined by our conscious choices as a nation: choices around which countries and regions we wish to forge stronger relationships with, and choices around the type of domestic economy we want to promote.

Trade relations are dynamic and that the relative importance of trading partners changes over time. In the long term, COSATU feels that it is appropriate for South Africa to cultivate stronger trading relationships with other developing countries, particularly those with which we share a similar world outlook. We take note of policy initiatives within the DTI to cultivate increased trade with the developing world, and we support further accelerated progress in this regard

An export strategy based on primary products makes the South African economy particularly vulnerable. There is a general decline in the world prices of primary commodities (or at least these prices have not increased in line with the prices of manufactured goods), which has negatively affected developing countries reliant on them. Furthermore, the booms and slump of primary commodity prices (often over an approximately seven year cycle) can be destabilising for the economy, as can the inherent vulnerability of the agriculture sector.

A pattern of exporting principally capital-intensive primary goods while importing principally labour-intensive manufactured goods also deepens our balance of payments vulnerability. Domestic economic growth increases the demand for high value-added imports , worsening our balance of payments position.

South Africa need not accept that our comparative advantages are static, based on existing factor endowments. Such an approach would tend to favour for example the export of mineral based primary products, based on our endowments of mineral supply and exceedingly cheap electricity. Forging a trade strategy based on existing price structures (allocative efficiency) tends to reinforce existing biases in our production structure. It also gives rise to a contradictory situation, where we export capital intensive goods despite our massive labour endowment, apparent in the extremely high unemployment rate.

An alternative approach of "dynamic comparative advantage" does not confine itself to the existing price and production structures, but seeks to maximise creative efficiency. For example, potential forward and backward linkages can be actualised through strategic state intervention. COSATU acknowledges the sensitivity of DTI to this debate, and the commitment of the government to move South Africa up the value-adding chain.

Gradually, exports should include more relatively labour-intensive products using local raw materials – essentially agricultural and fabricated metal goods, services and cultural products. The industries upstream from mining – capital goods and chemicals, in particular – can provide another basis for increased exports. Tourism should also form a growing source of foreign income.

As our affiliates have noted and as the table in section 5.2 demonstrates, increased exports do not always lead to increased employment. In fact, in many cases the opposite happens – a shift to export orientation at enterprise level actually leads to a restructuring of production in a way that sacrifices jobs.

Gradually, exports should include more relatively labour-intensive products using local raw materials – essentially agricultural and fabricated metal goods, services and cultural products. The industries upstream from mining – capital goods and chemicals, in particular – can provide another basis for increased exports. Tourism should also form a growing source of foreign income.

We support a sustainable expansion of trade with the region. For many industries, especially manufacturing as well as some services and infrastructure, the rest of Africa already forms a critical market. But it is plagued by political and economic instability, and has a significant trade deficit with South Africa. We need to find ways to increase two-way trade and support sustained growth in the region. In the short run, that means supporting imports from neighbouring countries in ways that increase total employment in the region. Food and electricity have potential in this context. In the longer term, we need to develop more integrated production structures that support southern African development. That requires improving regional infrastructure, including communications and transport links.

Consideration needs to be given to South Africa’s capacity, particularly in the short and medium terms, to take up the export opportunities which are opened up through trade agreements. It is thus imperative that, in the implementation of agreements, risks and negative effects are minimised and their consequences buffered, while growth opportunities are maximised. In terms of policy sequencing, wherever possible attempts should be made to enhance industrial capacity in advance of agreements kicking in.

Tariff policy can be a key component of an overall industrial strategy, providing tools through which government can actively guide the economy and assisting in the promotion of, prioritising and cultivating certain industrial sectors. Tariff liberalisation – particularly where such liberalisation is not South Africa’s own initiative but is in response either to WTO rules or to a bi/multilateral negotiations process - inhibits the capacity of government to do this.

Government has argued that job loss in manufacturing is as a result of South Africa's structural adjustment to global trends in manufacturing and is not due to poor sequencing of tariff reductions and supply-side measures. However concrete experience at sectoral level is notboth only that jobs have been lost and jeopardised concurrently with tariff reductions, but and also that tariff reductions have arguably slowed down the rate of new job creation. This pattern flies ingoes against the argument that increased competitiveness will lead to increased exports, which in turn will lead to expanded production for the expanded market, which in turn will lead to increased job creation. More often than not job losses have a disproportionately negative effect on women workers. The job losses in the clothing and textiles industry, which have largely affected women, is one example of this.

COSATU does agree that there is currently considerable inefficiency in South African industry, particularly at the level of managerial inefficiency, and that considerable restructuring is required. Rather than simply presuming that industry will develop if it is exposed to the ‘cold winds of competition’, an approach is needed which nurtures domestic industry through selective use of protective measures, as well as deliberate industrial strategies aimed to build up domestic capacity. The catalyst for such restructuring should not be just opening up to unregulated competition – which may well have the effect of shutting down South African companies rather than making them more productive. Restructuring should rather be guided by pro-active industrial policy initiatives, such as those which share information about international best practice in particular production lines.

In COSATU’s view existing tariff policy should be modified along the following lines:

• South Africa’s general tariffs should not be reduced at a rate faster than that required by our obligations to the World Trade Organisation;
• Tariff reduction should be preceded and concurrently supported by active industrial policies to promote competitiveness;
• Tariff policies should be particularly sensitive to the effects on groups which have been economically marginalised, particularly women.
• Concrete social adjustment programmes to transfer workers into new jobs must be introduced if tariff reduction leads to retrenchments;
• Where tariffs have been reduced too rapidly with negative consequences, we need to examine the prospects for mitigating these effects by increasing them, within the parameters of our international obligations; and
• Government should use tariffs strategically, reducing them to improve competitiveness, but also increasing them to protect jobs and promote industrial development.

International experiences of industrialisation, whether of the developed countries at earlier stages or more recently of East Asian countries, shows a consistent pattern of protection of domestic industries during development with tariff liberalisation only coming later, if at all. Even where there has been a strong emphasis on export promotion, this has been complemented by strong barriers against imports. A key problem with an excessive focus on exports is that scarce resources are mobilised into competitive, export-oriented, usually capital intensive, industries, while the resourcing of more labour-intensive forms of beneficiation adding value and industrial activity is neglected.

Instead of focussing exclusively on export orientation, a component of industrial policy should be to encourage import-substitution in order to assist in expanding the domestic traded goods sector. Expansion through import-substitution operates through reducing the propensity to import, reducing leakages from the domestic economy. Specific strategic sectors must be targeted for a concerted programme of import substitution. The chief criterion in selecting these sectors must be their ability to generate sustainable employment.

An appropriate balance between an export thrust and import substitution has important employment effects. Import substitution provides greater potential for the adoption of labour intensive techniques and employment generation than do export oriented industries which in order to be internationally competitive tend to focus on cost cutting through the adoption of the most efficient production technique.

As part of taking forward the commitment to subsume trade policy to industrial strategy, the DTI must do much more to examine the impact of changes in tariffs and other trade measures. Currently, these proposals are routinely tabled at NEDLAC without any information on their implications for trade flows, employment or economic growth. In light of these circumstances, it remains unclear how the DTI ensures rational trade negotiations at all. In some cases, for instance in clothing and textiles, they have accepted apparently minor changes in trade rules without much research, only to find that there was a substantial potential for job losses as a result.

South Africa must also do more to understand WTO rules and how to manage them better. Many WTO agreements include clauses to permit countries to pursue their national interest, even if it means some obstruction to international trade. These clauses include, for instance, safeguard tariffs and, in TRIPS, the right to produce generics where there is a national emergency. Rather than seeking to free up markets at any cost, South Africa should be using these legitimate tools to strengthen domestic production until it can survive international competition.

Lastly, COSATU has proposed the inclusion of a social clause in all our trade agreements. A social clause is vital in ensuring that decent working conditions and human rights prevail, both for the sake of workers in our trading partners and to avoid downward pressure on wages and working conditions within South Africa. It would go some way towards ensuring that our trading partners at a minimum respect and fully implement the four core sets of internationally agreed labour rights. These are freedom of association and effective collective bargaining; no child labour; no forced labour; and freedom from discrimination. There should be adequate monitoring mechanisms which include legitimate trade unions, and arbitration on any disputes about compliance.

Finally, the DTI’s emphasis on e-commerce as an important part of the move to a more knowledge-intensive economy should be reviewed. The experience of SACCAWU, COSATU’s affiliate in retail trade, demonstrates that e-commerce is more likely to facilitate imports than to support sales. After all, only a small percentage of South African households have home computers.

2. Knowledge intensity

COSATU recognises the need for South Africa to continually upgrade its technological capacities, and the importance of "knowledge intensity" and information technology – both as a sector, and as a component in the enhanced competitiveness of all sectors of the economy. For exports, information and communications technology (ICT) and transport infrastructure are critical for efficiency. The global economy relies on ICT to make possible rapid knowledge of and response to changing prices and conditions, as well as for production. Furthermore, given the location of our key industrial centres far from the sea and the need to stimulate rural production, it is also important that we bolster transport infrastructure, especially rail and the ports.

Having said this, we believe that a focus on ICT needs to be in the context of a realistic understanding of the current stage of development of our economy and the needs of different sectors. We are pleased to see that this version of the DTI document has a considerably broadened scope from the previous version tabled at Nedlac, and is less fixated exclusively on knowledge-intensive industries. In our view, however, there is still an excessive focus on this area. Or rather, perhaps, an inadequate focus or other areas of the economy – notably the traditional primary sectors of the economy and labour intensive sectors. Any technology should be appropriate to our relative factor abundance, and should not be job-displacing.

As the document itself states in its introduction, "At the core of the accelerated trajectory is knowledge intensity, which means utilising and developing the knowledge and skills of our people in order to integrate ICTs, technology, innovation and knowledge-intensive services into the functioning of the economy as a whole."

Improvement in skill levels on a broad base is vital for enhancing both productivity and equity. The skills development strategy must be fully implemented, reaching workers and the unemployed historically denied formal training and qualifications. That requires a clear link to sectoral strategies. It will also require more dedicated capacity from the state and from unions to ensure that the SETAs function well and that sectoral skills plans are realistic and adequately integrated into sectoral strategies. For their part, the sectoral strategies must include clear directions on skills development.

More support is needed from government for the development and implementation of sectoral and workplace training plans, ensuring that they are linked to sectoral growth strategies. The problem here is not funding, but increasing capacity through provision of skills, systems and techniques for developing plans. Accelerated work is also required on developing the qualifications framework. We propose that the SETAs be charged with generating standards, at least for general and further education.

A decisive improvement in skill levels will also require an overhaul of the education system. A particular problem is that relatively few black South Africans and women in particular have access to ICT training or employment. Unless we address this shortcoming rigorously, measures to expand ICT thus risk reinforcing existing inequalities. Critical measures include

• ensuring employment equity in ICT companies;
• acceleration in skills development for ICT under the Skills Development Act;
• support for public-sector, co-operative and black-owned private enterprise in ICT, through regulations and procurement measures as well as incentives.

If South Africa is serious about enhancing knowledge intensity, we need to do much more to upgrade our schools and curricula. Historically, most African schools did not have electricity, much less computers; nor did they teach mathematics, science or design – all of which are important for modern ICT.

According to the 2000 school register of needs, there were around 27 000 schools overall, about a third of which were high schools.

• 43% of schools had no access to electricity (compared to 58% in 1996)
• 36% of schools had no telephone of any kind, including cellphones, compared to 60% in 1996 – the improvement is mostly due to cellphones.
• 24% had computers for any purpose; 12% had computers for teaching purposes. The number of teaching had risen fourfold since 1996.
• Almost 95% of schools in provinces that incorporated significant "homeland" regions (notably the Eastern Cape and Limpopo) had no computers, compared to between 40% and 50% of schools in Gauteng and the Western Cape.

About 55% of all learners take maths (either standard or higher grade), suggesting that probably at least a third of schools do not teach maths at all. Furthermore, the pass rate in the provinces that incorporate major homeland regions is very low. In the Northern and Western Cape plus Gauteng, the pass rate for maths is close to 75%; in the rest of the country, it is about 30%. In part, this reflects the reliance on poorly qualified maths teachers in the former black schools. In terms of gender, girls in particular are often not encouraged to follow maths/science streams and this has a direct influence on their future economic possibilities.

We also need to look at how universities and technikons can provide bridging courses. Otherwise we lose a generation, since it is clearly going to take many years to ensure universal access to ICT relevant subjects – even if the DOE programme is accelerated.

In addition to formal education, expanding knowledge-intensity in an equitable fashion requires substantial improvement in skill levels on a broad base. The skills development strategy must be fully implemented, reaching workers and the unemployed historically denied formal training and qualifications. That requires a clear link to sectoral strategies. It will also require more dedicated capacity from the state and from unions to ensure that the SETAs function well and that sectoral skills plans are realistic and adequately integrated into sectoral strategies. For their part, the sectoral strategies must include clear directions on skills development.

More support is needed from government for the development and implementation of sectoral and workplace training plans, ensuring that they are linked to sectoral growth strategies. The problem here is not funding, but increasing capacity through provision of skills, systems and techniques for developing plans. Accelerated work is also required on developing the qualifications framework. We propose that the SETAs be charged with generating standards, at least for general and further education.

2. Supply-Side measures and offerings

COSATU has advocated an active role for the state in driving industrial policy. We do believe that incentives have a role to play in such a policy. Incentives are can potentially be useful tools for promoting particular sectors, ownership forms, regions, or production structures. Incentives should clearly not be used to subsidise activities which would have taken place in any event. Furthermore, given resource scarcity and the fact that incentives are publicly funded, they should obviously only be channelled to subsidising activities which are priorities for industrial and economic development. We must be certain that the incentives will lead to gains, which would not have been realised in the absence of the incentives, which will outweigh this lost revenue.

Incentives should be structured in a way that the benefits are broadly shared and have wider positive effects in the economy. Detailed ongoing monitoring of incentive use is required to ensure that they are not abused and that the desired objectives are indeed met. The role of incentive "carrots" in industrial policy should also be complemented by appropriate "sticks", for example in terms of regulation or tax penalties.

More specifically, given the unemployment crisis facing South Africa, industrial policy needs to be geared primarily towards employment retention and creation. Incentives can contribute to this by favouring relatively labour intensive sectors, promoting labour-intensive production methods within any sector, and building in concrete incentives for quantifiable and sustainable job creation. While there is certainly a role for "mega-projects", some of which may have an inherent bias towards capital intensity (particularly in certain sectors), every effort should be made in the structuring and implementation of the incentive to ensure that employment is a priority rather than an "optional extra".

There is a general concern that existing incentives do not do enough to promote labour-intensive production and employment generation more generally, and in some cases actually lead to greater capital intensity. Employment considerations are often subordinated to the growth objective. We propose that both economic growth and employment generation should be requirements for qualifying projects. This should be reflected in the criteria and allocation of points for the various incentives. There should be a minimum level of job creation that projects must achieve in order to qualify for incentives. The structuring of incentives should also the promote the creation of permanent jobs, to encourage the creation of sustainable and quality jobs rather than casual or temporary job creation.

There is also a need for an emphasis on training and skills development in the structuring of incentives. This would also enhance the long-term viability of projects. While there are other mechanisms such as the Skills Levy targeted at skills development, we believe it would also be strategic to build in particular requirements for skills development for companies receiving incentives.

Furthermore, it should be an explicit requirement that projects benefiting from incentives are in compliance with their statutory obligations in terms of labour legislation and contributions such as Skills Levy, UIF, and Workers’ Compensation. This would avoid a situation where tax rands subsidise companies which violate our labour legislation. Companies which fail to comply with training requirements, statutory or labour law obligations, or fail to employ the number of people initially projected, should also be subject to withdrawal of the benefit or other appropriate punitive measures.

We propose that the spatial dimension of economic growth should be one of the factors which should also be considered in the structuring of incentives. An aspect of government’s industrial policy, as well as broader socio-economic policy and for example the Rural Development Strategy, is the targeting of particular undeveloped areas. Incentivising anchor projects in such areas could potentially kickstart development there.

Detailed ongoing monitoring of incentive use is required to ensure that theyse are not abused and that the desired objectives are indeed met. Independent auditing assessments of major projects would be advisable preferable in this regard. Furthermore, given that companies will be benefiting from significant public resources, there should be an explicit requirement for projects to publicly report to stakeholders, including Parliament (of course with due regard to corporate confidentiality) on the use of incentives and benefits arising from them.

COSATU recognizes that different incentives have different objectives and priorities. Nevertheless, we believe that the issues discussed above are important to be taken into account in the structuring of the entire package of measures as well as in the detail of specific offerings.

One of the major problems with the current offering is that they are perceived by business to be inaccessible. Many of the enterprises which could potentially benefit from incentives are also not aware of them. While noting the somewhat improved take-up rates, this remains a major challenge

COSATU proposes that a detailed assessment needs to be conducted of the existing supply-side measures which DTI has in place, in terms of the extent to which they have met objectives. This should precede and inform the introduction of new measures. In particular, it would be important to quantify the effect of the various incentives on production; employment; and exports, as well as their role in enhancing skills.

3. The role of Sstate-owned enterprisesOE’s and DFI’s

As discussed aboveearlier in this submission, industrial policy cannot be discussed in isolation of other areas of policy, particularly economic policy. Parastatals in particular have a central role to play in our industrial strategy. They have a direct impact on the provision, location, and costs of infrastructure. State owned enterprises can either assist or deter both domestic and foreign investment, as well as influencing the type and location of this investment.

Current proposals for restructuring state assets revolve largely around the introduction of private partners to provide assets and/or management, and the introduction of private competition. They may well improve infrastructure for the top end of business and well-off communities. Autonomous, competitive companies are, however, unlikely expand services for the poor majority, which is critical for improving living standards, expanding home-based enterprise, and raising labour productivity. The division of existing enterprises into many small, competing companies may reduce the state’s ability to undertake large-scale strategic investments.

Before embarking on restructuring toward competition, it is critical to define whether the state has the capacity to develop and enforce appropriate regulations or contracts. In any case, the division of existing enterprises into many small, competing companies may reduce the state’s ability to undertake large-scale strategic investments.

The goods and services produced by SOE’s have a direct impact on industrial and economic development. We share the concern of DTI around the costs of these inputs produced by SOEs for industry. For example, rapid price increases in the transport and communications sectors this year have contributed to inflationary pressures in the economy. Our concern is that in many cases these price increases are linked to a shift to commercialisation and intended privatisation of these enterprises. Huge price increases are often justified in terms of the need to eliminate cross-subsidies and bring prices in line with "market levels" in preparation for competition, and to improve enterprises financial standing in order to maximise revenues when they are sold off. This is a demonstration of the inappropriateness of a state asset restructuring policy which focuses narrowly on privatisation and the bringing in of market forces, rather than on broader socio-economic priorities. It also conflicts with the strategy of lowering the costs of basic goods and services for the majority, and expanding the domestic market – see section 5.1 above.

The relevance of SOE’s to industrial policy goes far beyond the effect on input pricing, which seems to be the emphasis in the way they are dealt with in the DTI document. SOE’s have a crucial role to play in infrastructural development and the crowding in of productive investment. We would thus want to see the document engaging much more substantively with this area of policy.

Public development finance institutions (DFI’s) have a critical role to play in industrial development. The IDC in particular obviously has a special role to play in industrial policy. It has a major influence on our industrial structure and development by virtue of the massive resources at its disposal and the impact of its investment decisions on sectors, regions, and other enterprises. This includes average direct annual financing of over R4 billion per annum. The IDC is responsible for almost 6% of national fixed investment in the economy.

On the 21^st of August 2001 COSATU made a submission to the Trade and Industry Portfolio Committee on the Industrial Development Amendment Act – the legislation governing the Industrial Development Corporation. We proposed a range of amendments to the Act aimed at positioning it to more effectively contribute to national objectives. These proposals included:

• Broadening the Objects of the Act to make employment retention and creation an explicit objective of the IDC, which is currently not the case; as well as extending the objective of promoting SMME development to include co-operatives.
• Strengthening the reporting requirements of the IDC to Parliament.
• Setting out the broad criteria which the IDC would use to evaluate projects and allocate resources, which would go beyond "economic merit" to include various factors relating to economic growth and development.
• Promoting compliance with applicable labour legislation for IDC-funded projects.
• Improving the representivity and accountability of the Board, and building in various safeguards as is the case with legislation governing similar types of institutions.

DTI and the Committee felt that the bulk of the proposals tabled by COSATU went beyond the scope of the Amendment Bill as envisaged by government, but acknowledged that the Act was in need of a more comprehensive review and that various of the proposals tabled by COSATU did have merit. A commitment was made to undertaking an overall review of the Act. We have not heard of any developments since then. We would like to take this opportunity to seek clarity as to the progress with this process. COSATU would also want to be part of the redrafting process.

Other development finance institutions such as the Development Bank of South Africa (DBSA) and the Land Bank also have a critical role to play in our industrial development. They too need some reorientation in favour of the types of objectives discussed above, greater integration with overall industrial policy, and greater levels of accountability.

2. SMME’s and co-operatives

A co-op movement is an important way of developing new centres of capital. Such a movement involves an array of interdependent co-operatives and service organisations in establishing a new, dynamic sector. To promote such a movement, we need a consistent framework to support producer and consumer co-ops, including more appropriate legislation, definition of their role in sectoral strategies, and priority access to programmes to support small enterprise. In addition, unions can establish consumer co-ops, reducing the cost of living to members and providing an outlet for domestic producers.

In an economy dominated by capital-intensive sectors, it is difficult to imagine substantial growth in SMMEs. Opening the door to smaller scale production requires accelerated development of the more labour-intensive sectors of the economy, particularly in manufacturing, services and agriculture. Sectoral changes must be accompanied by measures to encourage smaller producers of goods and services. This process must be linked to rising employment and growth, or we risk merely replacing better-paid formal jobs.

Active promotion of SMMEs and co-ops is one way of empowering women economically. This requires a special focus on promoting women as owners and managers of these types of enterprises. This would include better access to finance and skills.

We also need stronger strategies to upgrade survivalist and informal enterprise. In this context, the development of the co-op movement should provide the basis for greater economies of scale. Additional steps include:

• The expansion of household infrastructure, especially water, electricity and telecommunications. The current proposals to commercialise or privatise many of these services seems likely to limit access by poor households, making home-based production much harder.
• Transformation of the retail sector, as discussed elsewhere inin section 6.1 this submission.
• Transformation of the financial sector (as discussed in section *** 6.1 above) to ensure credit becomes available to smaller borrowers, including home-owners, micro enterprise and co-ops, and to support land reform and improvements in infrastructure. That requires a review of ownership and operations in the banking sector.
• Ensuring that SMMEs implement minimum labour standards and are brought into the broader regulatory net of government.

In terms of the promotion of black economic empowermentownership, COSATU believes that this should focus on the creation of new productive capacity rather than on takeovers and acquisitions. Instead of investing scarce capital in "warehousing" shares for listing by empowerment groups as it has done in the past, the IDCThe focus should be investing in black-owned SMMEs, co-operatives, and large enterprises which will create jobs and contribute to South Africa’s economic development. Such an emphasis is consistent with the thinking in, for example, the report of the Black Economic Empowerment Commission.

9. The role of social protection

Social protection comprises government services and grants that keep people out of poverty. Mass poverty in itself forms a barrier to rising productivity and employment, by reducing access to skills and undermining health and security. Furthermore, where homes lack basic infrastructure, more time must be spent on household labour and the potential for home-based production is limited. For example, childcare and hairdressing are important sources of income for many poor women – but they become virtually impossible in the absence of running water and electricity.

It follows that, although social protection aims principally to alleviate poverty, it should simultaneously provide a crucial impetus to development and growth. That means that measures to improve it – in particular through health, education, welfare, policing, housing and municipal services, which form the bulk of government spending – must be reviewed to ensure that they fight poverty in ways that contribute to economic activity and efficiency.

For instance, locating housing far from jobs adds to the cost of employment. Similarly, electrification often gives only enough power for lights. Women and children must then still spend enormous amounts of time gathering fuel, and the potential of home-based production remains limited. The new policies on pricing electrification, which will raise costs substantially for households and rural users, seem likely to have a devastating impact on economic reconstruction.

The character of strategies for providing social services and infrastructure have major implications for women. In particular, adequate household infrastructure for cooking and home-based production both reduces the burden of collecting water and fuel and opens opportunities for generating income. The provision of primary health, child-care and educational facilities also lessens the burden of reproductive work. Finally, women have special requirements from the police, including protection during family disputes and secure neighbourhoods.

As improvements in social protection modify demand – for instance through infrastructure and housing programmes – sectoral strategies must restructure production. To that end, they must overcome supply rigidities and reduce the costs of basic necessities. The blockages in providing housing to the poor suggest the challenges that may emerge in this connection.

A tighter linkage between economic requirements and social protection is also necessary. These linkages relate amongst others to the location of infrastructure; the level of infrastructure and social services provided to households; the nature of education and formal qualifications; using sectoral policies to ensure cheaper inputs for social protection – for instance, bread for feeding schemes and construction materials – and more careful procurement to ensure employment creation is maximised.

Towards collective action

An important obstacle facing the shift to a higher growth path remains the lack of a shared vision with all stakeholders. Economic restructuring requires changed behaviour from all participants. In effect, to some extent all participants must accept "second-best" solutions from their standpoint in order to maximise overall social gains. No one sector should be expected to bear the brunt of restructuring, without deriving overall benefits. Virtually all successful industrial strategies internationally have largely developed from consultative structures at sectoral level.

The tripartite sector job summits agreed on at NEDLAC in 2000 give an opportunity for systematic consultative decision making with stakeholders at the sectoral level. The sector job summits must provide detailed policies that together constitute an integrated development strategy. As far as possible, they should ensure that each sector

• Protects and creates sustainable employment;
• Meets basic needs better, by cutting prices or improving the quality of goods used by the poor;
• Contributes to rural and regional development, and improves the position of women;
• Supports greater productivity and efficiency, leading to greater competitiveness for the economy as a whole; and
• Supports greater equity in ownership and skills development.

In this context, it is important that all the stakeholders establish high-level negotiations teams to ensure strong outcomes. COSATU and its affiliates have already committed substantial energy and resources to preparing for the summits, in terms of building our own capacity and developing proposals.

Within the sectoral strategies developed through sector summits, it will be important for individual enterprises to also put in place restructuring towards growth and equity.

COSATU believes that the Growth and Development Summit also has a crucial role to play in agreeing to appropriate socio-economic policy measures. These will include supportive macro-economic policies, active industrial policy, a vision for the role of the state at all levels, and a social protection framework to lift people out of absolute poverty and support equitable development.

Collective action thus needs to span all levels, from national to enterprise. COSATU is committed to the implementation of sustainable solutions to the challenges of poverty, low growth, unemployment, and inequality. We believe that the proposals which we have outlined in this submission go some way towards these ends.

6. Overall Comments on the DTI document

The DTI’s latest input on industrial strategy is certainly an improvement on its initial discussion document. Its main strength is that it introduces a new approach to industrial strategy. It does not, however, spell out measures that can take this forward.

The DTI’s new approach is characterised, first, by engagement with the real problems facing South Africa – that is, the need to ensure quality employment and enhance equity. As the document points out eloquently, in the long run economic expansion will not be possible unless these challenges are addressed. The analytical section of the document is notable for its detailed assessment of South African and global realities, providing a concrete basis for evaluating proposals.

This more practical approach has important implications. In particular, as the document notes, it means that government must pay greater attention to production for the domestic market, in order to meet basic needs and reduce the cost of living. That contrasts with earlier efforts by the DTI, which appeared to emphasise exports to the exclusion of all other concerns.

Three reasons warrant increased attention to more efficient and extensive production of basic necessities, which include food, basic infrastructure, clothing and cheap appliances and transport equipment.

• In order to raise living standards for the majority of our people, which is in itself crucial for both political-economic and human reasons
• To provide a larger and more stable domestic market, hedging the risks of excessive dependence on foreign markets, which include international downturns, foreign-exchange risks and competition with other countries
• To reduce the cost of living for South African workers, which in turn enhances the efficiency of the economy as a whole.

If industrial strategy begins to pay more attention to basic necessities, then the link to social measures comes to the fore. Efforts to redistribute income through government services must be shaped to enhance economic development and employment. Central issues include procurement practices by government departments and parastatals, and the impact on settlement patterns.

It is of serious concern that a document which is aiming to be a comprehensive approach to restructuring all sectors of the economy tends to focus on the manufacturing sector, particularly given that other sectors such as services have a critical role to play in employment creation,

The DTI’s new approach is also characterised by an emphasis on the need for partnerships, which it also calls "collective economic action," and consultation. The decision not to finalise the document until after discussions at NEDLAC and these hearings forms a concrete expression of this more consultative strategy. The central role of NEDLAC for consultation, which the document notes, is worth re-emphasising. It has permitted consensus-building around a range of contentious issues. Indeed, international experience underlines the importance of consulting with major stakeholders, especially organised business and labour, to achieve economic aims. We hope that submissions made through these hearings as well as inputs through other parallel processes will be incorporating in the reworking of the document.

The document’s focus on structural issues – underlined by the emphasis on the value matrix methodology - is valuable. This approach both permits a concrete approach to restructuring the economy, and gives a method for tracing the impact of sectoral measures on broader outcomes. In this context, the decision to ensure that trade policy aligns with sectoral strategies is particularly welcome.

Two specific proposals are also worth mentioning. First, the document commits the DTI to support for co-operatives. A co-op movement could provide a key strategy for meeting the needs of our people, providing employment and ensuring greater equity. Second, the document emphasises the need to make supply-side measures more easily and reliably accessible. In the past, these worthwhile programmes have been undermined because it was so difficult to access them.

In short, the DTI document’s strengths lie in the introduction of a new methodology, defining appropriate objectives and a more consultative approach that looks in detail at sectoral needs and impacts. Its weaknesses mostly reflect the failure to apply this approach consistently in its proposals. Generally, the proposals remain extremely vague, even for a broad strategy document.

The vagueness and inconsistency of the DTI’s proposals reflect, in part, its failure to define specifically how it will combine its structuralist methodology with a continued emphasis on competitive fundamentals. Generally, structuralist approaches to industrial strategy argue for conscious state intervention to transform the structures of production and ownership. In contrast, competitive strategies emphasise cutting costs and improving efficiency throughout the economy. The economic structure would then follow from the decisions of private business in this context, rather than from a government strategy.

These approaches are not invariably contradictory. A structural approach must address cross-cutting obstacles to efficiency, for instance in terms of infrastructure or financial markets. But in the DTI document, the proposed structural approach, with its focus on addressing poverty and unemployment through economic transformation, is sometimes overshadowed by the persistent and unqualified emphasis on cutting costs and increasing exports.

This ambiguity follows, in part, from the failure to deal concretely with the nature of capital in South Africa. The heavy concentration of ownership and power in the formal sector, notably in the mining and finance houses, obviously has a major impact on the direction of development. That means we need to develop more conscious and effective strategies to address the negative implications of corporate decision making.

Examples include measures to reduce the outflow of capital and redirect investment in ways that create jobs and enhance equality. We also need strategies to foster more participatory decision making about the economy. These approaches must go beyond support for SMMEs and co-ops to building a stronger state sector, tripartite policy making and skills development. Proposals on collective economic action and consultation should be located more clearly in such a strategy.

One of our central concerns with the document is thus its apparent discontinuity between the analysis of the deep structural problems of the South African economy, and the type of policy measures which the strategy tends to focus on.

COSATU has argued that an appreciation of the depth of the unemployment crisis, and decisive steps to deal with it, need to permeate all aspects of government policy. In particular, this needs to be a core objective of industrial policy. However, reading the DTI document, one does not get a sense that the Department has a clear idea of how to stem the loss of jobs which we have seen over the past few years, and to create new jobs on a massive scale. We would have wanted to see a much stronger emphasis on employment retention and creation throughout the document, particularly in terms of proposals.

In terms of the specifics of the document, a particular concern is that the proposals on consultation and collective economic action remain too broad to operationalise easily. In taking these ideas further, government must look in detail at how to allocate resources and organise engagements with partners. A key problem at NEDLAC has been that government mandating structures are apparently slow and inaccessible, leading to rigidities in negotiations. Moreover, government teams are often overstretched and unable to unify departmental perspectives. A serious effort to improve engagement around the economy would have to ensure more responsive mandating and co-ordination.

It is also worrying that the proposals on specific sectors continue to over-emphasise exports as the key indicator. We need to do more to think through the implications of producing to meet basic needs and create employment. The indicators used to asses outputs and outcomes need to reflect an understanding of the key challenges facing the South African economy – in our view, low growth; poverty, unemployment; and inequality.

The section on food processing underscores this concern. The recent escalation in food prices has led to a host of severe problems, ranging from interest rate increases to rising malnutrition. Moreover, we have seen plummeting employment in both agriculture and food processing, as FAWU discusses in its input. Yet the DTI document concerns itself almost exclusively with increasing exports, adding food security clearly as an afterthought. The need to review this strategy is illustrated by the current crisis: one reason behind soaring meat prices since November is reportedly an export drive in Europe and the Middle East.

An area that remains very unclear is the stress on improving the knowledge intensity of the economy. The DTI needs to do more to define this concept. In its current form, it does little to guide economic decision making.

Finally, despite the adoption of a value matrix approach, the document does not spell out the implications for sectors outside of manufacturing. Efforts to maximise equity and employment need to look more concretely at the relations to primary sectors and services. For instance, we need a better strategy on the links between agriculture, heavy chemicals and food processing; energy, fuel and refining; and mining and other sectors. We also need to look at the implications of industrial growth for the current discussions on restructuring the financial sector.

In short, the DTI document provides an important start, giving us a methodology that permits more targeted and appropriate government support for manufacturing. But a great deal of work still needs to be done to give this approach practical effect.

1. Comments on specific sections of the document

This section attempts a detailed critique of the DTI document. The headings below refer to the headings in the DTI document. Because the document emphasises different issues in different places, however, and because the proposals do not follow rigorously forom the analysis, it is sometimes difficult to understand the nature of the strategy itself and how it will be implemented.

The forward of the document lays out the processes that will be followed in finalising it. COSATU particularly welcomes the commitment to in-depth consultation through both Parliament and NEDLAC. The relationship to the Growth and Development Summit must still be defined, however.

The introduction summarises the strategy as follows:

This summary appears to describe the strategy as essentially a competitiveness strategy based on enhancing knowledge intensity – which, again, remains very vague. A risk here is, as noted above, that the result could be measures focusesd primarily on intensive growth, which would do little to address unemployment and poverty. At worst, it could lead to neglect of the depressed rural areas as well as micro enterprise and co-ops.

The document then argues that to succeed, the strategy must ensure a balanced approach to domestic and foreign markets, and ensure improved equity and employment. These are critical guidelines for economic policy.

The introduction cites the Microeconomic Reform Strategy as the context for the integrated manufacturing strategy. That Strategy has not been published or tabled at NEDLAC. We are pleased that government decided on a more open and consensual approach to the industrial strategy itself.

Turning to methodology, the introduction argues that, as a strategy, the document should define our common challenges and then appropriate responses by citizens and the DTI. The attempt to root proposals in a situation analysis is very welcome. The problem, as noted above, is that the proposals in the document do not follow logically from the assessment of the challenges.

The introduction also notes the inherent limitations on a document concerned with manufacturing. Indeed, it is a problem that the industrial strategy is not preceded by a broader developmental strategy. This means that the public does not know how the industrial strategy will be complemented by measures in other sectors as well as by macroeconomic and social development programmes. By extension, it is difficult to judge the adequacy of the strategy in addressing the core problems of unemployment and poverty.

The first part of the document provides a situation analysis, starting with a history of manufacturing development in South Africa. Despite some shortcomings, this section of the document forms an important basis for understanding the problems the industrial strategy should address.

The document essentially argues that manufacturing in South Africa grew out of an import-substitution strategy based on high levels of protection, combined with apartheid measures that depressed wages and skills. These arguments are certainly valid, but they do not adequately spell out:

• Other factors behind low labour absorption, including the domination of mining and refining in the economy, cheap energy, and government’s focus on capital-intensive strategic investments.
• The nature of ownership and control, and in particular the role of the dominant mining and financial institutions as well as foreign investors, and how that affected the structure of manufacturing.
• The impact of unusually high income inequalities on production structure. This situation limited the domestic market while skewing output toward production for the well-off minority.

In the absence of a more in-depth discussion of these critical issues, this section implies that simply ending trade protection and apartheid would ensure a robust manufacturing sector. As we have experienced since 1994, that is simply not the case. Far more deliberate and effective efforts are needed to restructure the economy toward growth, equity and employment creation.

The document notes that the democratic government came to power at a time when globalisation was strengthening in terms of more rapid international capital flows; rising international trade; and inequitable international economic governance. Certainly these trends have occurred. Unfortunately, the document does not draw explicit conclusions about the implications for economic policy, so that the section remains somewhat confusing.

The document then argues that, in order to accelerate industrial growth, government initiated "important microeconomic reforms" located within "a broader strategy to transform the economy to improve the life of all our citizens, including macroeconomic interventions to address the debt and balance of payments crises threatening the sustainability of economic transformation." (p 11) COSATU's opinion of the macroeconomic strategy is well known. As discussed above, we find that the resulting fiscal and monetary policy was too restrictive to permit the necessary growth in the economy.

The document emphasises opening of the economy through the WTO and bilateral agreements as a key component in the microeconomic reforms. COSATU has always argued that in fact this opening up was too rapid and comprehensive, without providing either time or sufficient support for restructuring. As a result, manufacturing in particular suffered unnecessary jobs losses and reduced capacity. Still, we welcome the commitment that, "Henceforth further tariff reform must now be related to specific objectives to support the Integrated Manufacturing Strategy." (p 12)

The document also points to the shift from GEIS to supply-side measures; the establishment of institutions to support small business; the restructuring of regulatory agencies; and the establishment of regional initiatives, especially SDIs. The need for reform to the supply-side measures is discussed above. In addition, COSATU is concerned that the so-called reform of the regulatory agencies has in some cases resulted in their becoming ineffective or has been used as a justification for privatisation. All too often, in other words, this reform process was really a way to initiate deregulation, with negative implications for development and, in some cases, for health and safety. Similarly, the document talks about reforms in agriculture (p 13) without noting that these were almost entirely linked to deregulation of food production.

The document also notes the importance of sectoral programmes for the auto and the clothing and textiles industries. As discussed above, COSATU agrees that this is a critical way to ensure the industrial strategy is effective and contributes to the restructuring of the economy.

We also welcome the document’s emphasis on social dialogue and partnership. In this context, the stress on NEDLAC is important and appropriate. As the document points out, NEDLAC has played a crucial role by institutionalising social dialog and, on that basis, making possible important instances of joint action. It would be useful to explore the implications of this experience, including the need to ensure stable forums for discussion, the need for research support, and the importance of the partners dedicating resources and time. The analysis of the 1998 Presidential Jobs Summit goes some way in this direction. A critical conclusion is that, "It is clear that the alignment of government programmes and the outcome of any summits is fundamental to the success of both." (p 14)

This section (p 15 ff) provides a very useful overview of developments in manufacturing since 1994. Key insights include:

• Growth has been particularly slow in wage goods, capital goods and resource-based sectors. The document does not spell out the implications, but clearly the slow growth in wage goods reflects the failure to link growth and redistribution, while slow expansion of capital goods production points to failure to complete value chains.
• The growth in the auto industry, which the document attributes to the MIDP. Again, this shows the potential effectiveness of sectoral strategies.
• The growth in exports and in overall export orientation in manufacturing. Unfortunately, the document does not explore the implications of this in much detail. In particular, it fails to discuss whether it was related to other, more negative trends, such as rising unemployment and the shift away from wage and capital goods. Certainly COSATU is concerned, as noted above, that a one-sided emphasis on exports undermined the broader base of manufacturing and led to reduced employment.
• Similarly, the document notes low overall investment, but does not adequately explain the reasons. Yet a sound analytical basis for an industrial strategy must surely address the key question of the level and structure of investment.

The section on productivity and employment (p 17 ff) is particularly useful. It notes that job losses in manufacturing relate to

For unclear reasons, the document concludes that the skill composition of new jobs is particularly important. In fact, COSATU's analysis suggests that the central problem has been a failure to develop labour-intensive sectors geared to producing wage goods, rather than focusing excessively on relatively capital-intensive minerals-based and export activities. In other words, the RDP’s proposals on linking growth and redistribution fell by the wayside, with extremely severe effects on the employment situation.

In terms of equity and economic participation, the document focuses on SMMEs and black control of listed firms. A concern here is that BEE is apparently defined only in terms of ownership of enterprise. COSATU has argued strongly that this approach is too narrow, and might effectively benefit only a tiny elite. Rather, BEE must be understood as part of the national liberation struggle, involving the upliftment of the majority of our people through improved employment opportunities, stronger democracy, more equality in incomes and assets and higher education and skills levels.

The document notes that black rural women, in particular, have borne "the brunt of poverty and our failure to fully transform the economy." (p 19) This is indubitably true. Unfortunately, the document does not point to specific measures to address this problem.

In short, the assessment of manufacturing development since 1994 points to some important problems. Unfortunately, it stops short of analysing them in ways that points to policy solutions. As a result, although very important in providing a focus for the strategy – pointing in particular to the need to do more to address unemployment as well as racial, gender and spatial inequities - it does not point a clear direction for new policies.

This section (p 21 ff) starts by arguing that South Africa can no longer expect to compete based on raw materials, cheap labour, proprietary production technology or privileged access to markets. While this argument is certainly true, it is also somewhat sweeping. Above all, the risk is that it will tempt policy makers to ignore the realities – that the South African economy remains based heavily on mining and agriculture. We need to find ways to manage this situation as the basis for diversification, not act as if it were going to disappear in the near future.

The document argues that the only way forward is thus to improve our technological basis, especially information and communication technology, in the context of improved overall efficiency and responsiveness to market changes. (pp 22-3) The document then notes that a strategy which does not ensure development and equity will fail. Yet at no point does it discuss how its emphasis on technological advancement can create employment or equity.

As discussed at length above, the risk is that a simplistic competitiveness strategy could lead to job losses and rising inequalities. It is thus worrying that this section fails entirely discuss how to ensure that a knowledge-intensive strategy in fact empowers the majority, many of whom lack skills and even access to electricity and telecommunications.

As noted above, there is a marked disjuncture between the first and second part of the document. While the first part emphasises the need to ensure the strategy addresses employment and equity – without necessarily pointing to specific strategies to achieve that end – the second ultimately provides a competitiveness strategy with some commitment to BEE (in the sense of empowering black entrepreneurs) and support for SMMEs.

The section starts by emphasising the importance of the state in any successful industrialisation. COSATU welcomes, in particular, the recognition that this may require the maintenance and establishment of SOEs. (p 27)

The document then describes the Microeconomic Reform Strategy. As noted above, it is highly problematic that this strategy, which is already being implemented, was never made public or discussed with the NEDLAC constituencies.

COSATU is concerned that, as described, the MRS remains both vague and excessively focused on an abstract competitiveness. The document does not give sufficient detail on the programmes on BEE, SMMEs or spatial development to permit assessment. The section on employment reads:

Clearly, this does not promise much in the way of relief for South Africa’s millions of unemployed. Surely the point of the industrial strategy is that government must go beyond ensuring there is no "anti-employment bias" to restructure the economy to create employment. Moreover, in the short-run, we need public works and community service programmes that can create opportunities, especially for the youth.

The document continues,

COSATU agrees that all these issues are important. Again, however, there is too little attention paid to how these "fundamentals" can be shaped to ensure employment creation and equity. Thus, the discussion of technology nowhere mentions the introduction of appropriate technology for smallholders and micro enterprise. Nor does it explore how to ensure that future technological advances to not effectively displace jobs.

This contradiction comes to the fore in the discussion of transport, electricity and telecommunications, all of which are essentially controlled by parastatals. The document argues that,

COSATU welcomes the commitment to ensuring access by all South Africans to these sectors. However, in the event the programme of "managed liberalisation" has been associated with deepening commercialisation. That, in turn, has meant that parastatals are under pressure to maximise profits and compete with the private sector, constraining their ability to meet the needs of poor and rural households and micro enterprise. Far from ensuring greater equity and employment, we have seen a slowdown in provision of basic services for the poor and downsizing of employment. Indeed, as discussed above, the public sector remains one of the main areas of job losses.

Finally, the document argues that "the trajectory envisioned for the economy as a whole by government [is] beneficiation of natural resources, knowledge intensity, and export orientation." (p 31) This approach is nowhere else mentioned in the document. COSATU is highly concerned that it does not in any way provide a basis for enhancing employment and equity. In particular, by focusing on heavy, high-tech industry and exports, it under-emphasises production for the domestic market as well as relatively labour-intensive sectors. We would like clarity on whether this is indeed government’s vision for the economy, and if so how, concretely, job creation and equality will be addressed.

Finally, the document begins its presentation on the industrial strategy proper. It proposes that,

Unfortunately, as discussed earlier, unless managed appropriately, there may be a contradiction between enhanced competitiveness, employment creation and improved equity. Indeed, South Africa’s experience of the past seven years has been rising competitiveness – demonstrated by growing export orientation – combined with slow growth, job losses and increased inequality. To avoid replicating this experience in future, we need a much more practical and explicit discussion of the factors behind these trends and how to deal with them in future.

The section on market access (p 33-34) demonstrates the document’s shift to a simplistic focus on competitiveness. It adds on access for SMMEs to domestic markets only as an afterthought. Yet study after study demonstrates the effective exclusion of SMMEs from procurement by the private sector, parts of the public sector and the formal retail sector. A later section on market access, limited to manufacturing, has no reference at all to domestic markets. (pp 48-9)

Still, COSATU welcomes the commitment (p 34) to improving trade administration, and especially Customs and Excise. The extremely weak enforcement of trade measures has certainly had a negative impact on jobs.

The sections on regional development, beneficiation, equity and economic participation and knowledge participation, which follow, remain extremely vague. They provide little more than commitments to develop more specific measures some time in the future.

One of the only specific proposals relates to increased support for co-operatives. (p 37) COSATU strongly supports this initiative, and will do what it can to assist it.

As noted above, the section on knowledge intensity suffers because knowledge intensity remains poorly defined. The section itself is contradictory, both arguing that knowledge intensity is not only about high-tech firms, and simultaneously only giving examples related to computer-aided processes.

This section contains a comment that COSATU finds worrying.

This view buys into the argument that BEE is only about ownership of enterprises. In many cases, outsourcing serves primarily to remove workers from their bargaining unit, reducing their security of employment, incomes and access to training. The total effect is then effectively to disempower the workers concerned, which is hardly supportive of BEE. Moreover, in the long run, it can reduce productivity as well as increasing unemployment and inequality. In short, this general endorsement of outsourcing sits poorly with the overall commitment to enhanced equity and decent work.

The section on value matrices (p 39) suggests an interesting methodology for defining specific industrial strategy tools in future. Certainly COSATU supports proposals to build on and maximise linkages between enterprises and sectors in ways that support growth and employment. But the section as it stands remains academic. It does not adequately unpack "collective economic action," as noted above; and it does not propose processes or forums to encourage it.

The document then turns to proposals for implementing the integrated manufacturing strategy. It argues that the DTI’s role is to provide leadership, champion competitiveness and providing broad-based products.

COSATU supports the proposal that DTI work more closely with sectoral groups. But we are concerned that:

• As noted above, competitiveness by itself can run counter to employment creation and equity. The list of objectives for this type of sectoral work, on page 44-5, does include employment creation and ownership trends. But it leaves out any discussion of meeting basic needs and enhancing skills development (as opposed to analysing skills needs).
• The proposed "partnerships" remain vague and apparently subject to the DTI’s decisions. The document does not say how these partnerships will be structured. In particular, it does not discuss how the DTI will ensure that they empower stakeholders other than business. Nor does it detail how they will be initiated.

These concerns are strengthened by the document's summary of proposals for individual sectors – clothing and textiles, agro-processing, metals and minerals, tourism, automotive and transport, crafts, chemicals and biotechnology, and ICT and electronics. The proposals (p 46 ff) emphasise exports almost to the exclusion of all other objectives. Even in discussing food production, the importance of meeting needs locally is clearly an afterthought.

The document concludes that, "Interventions that do not encourage enterprises or sectors in the direction of knowledge-intensive, value-adding growth with equity will also not be considered." (pp 47-8). This raises the question about how the DTI would react to a project that would create employment and provide incomes at a low level, but do very little to increase knowledge intensity and value addition - for instance a basket-weaving project for rural women. The fact that the answer is not obvious underlines the failure of the document to provide guidelines on how to manage the potential contradictions between competitiveness and equity.

The document proposes improved access to international markets, more efficient regulation, investment promotion, access to finance and policy coherence as broad-based measures going beyond its sectoral support programmes. (pp 47 ff) Again, the proposals remain too broad for much engagement. They do not appear to add anything very new to government’s programmes. We assume that the emphasis on improved and more efficient regulation does not simply mean deregulation, which would undermine the leading role of the state that the DTI document affirms.

The section on access to finance (p 50) does not mention the Financial Sector Summit. The DTI has not been present in that process, which is focusing on ways to ensure that financial sector activities contribute to restructuring the economy toward employment and equity. This obviously opens the door to contradictory approaches in future.

The strengths and weaknesses of the document’s overall approach to partnerships – or collective economic action – have been discussed above. Certainly COSATU agrees on the importance of partnerships, and NEDLAC in that context. But this section does little to discuss how they should be strengthened or initiated. The section on interactions within government discusses existing practices and efforts, without indicating if they are adequate or how they can be strengthened.

The emphasis on including participation by the historically disempowered is welcome (p 54); but again, we need to discuss how it can best be institutionalised. We also welcome the commitment to ensuring that local governments do not compete with each other in a "race to the bottom." (p 55)

COSATU also welcomes the section on monitoring progress, and particularly the decision to include indicators reflecting employment and equity. (p 56 ff) We hope that the DTI will discuss its targets at NEDLAC, to ensure that they reflect the constituencies concerns and expectations. Similarly, the proposed strategy review (p 59) is an important tool for improving policy, but should include a 360-degree assessment involving all major stakeholders.