The Portfolio Committee on Trade and Industry and the Select Committee on Economic and Foreign Affairs held public hearings at Parliament on industrial policy from 23^rd April to 7^th May 2002. Submissions were invited to address a range of issues related to industrial policy and to comment on the discussion document of the Department of Trade and Industry titled Accelerating Growth and Development: the Contribution of the Integrated Manufacturing Strategy which was released in April 2002.

The Committees report as follows:

Submissions and evidence were presented by the following in oral and written form:

Textile Federation

Small Business Project

Business South Africa

South African Federated Chambers of Commerce

George Kean, Consultancy and Commentary

British Chamber of Business in Southern Africa

American Chamber of Commerce in South Africa

Caroline Skinner and Imraan Valodia, University of Natal

Chemical, Energy, Paper, Pulp and Allied Workers Union

South African Transport and Allied Workers Union

Congress of South African Trade Unions

National Education, Health and Allied Workers Union

Food and Allied Workers Union

National Union of Metalworkers of South Africa

National Labour and Economic Development Institute

Department and Ministry of Trade and Industry

Foundation for Education, Science and Technology

Competition Commission of South Africa

Department of Arts, Culture, Science and Technology

Nedlac

South African Communist Party

Motor Industry Development Programme of the DTI

Industrial Development Corporation

Council for Scientific and Industrial Research

Commission on Gender Equality

The hearings were held to assess the broad industrial policy framework and were not limited to the document released by the Department of Trade and Industry titled Accelerating Growth and Development: the Contribution of the Integrated Manufacturing Strategy (hereafter referred to as the IMS). The document, however, clearly represents an important development in government’s thinking on industrial policy and much of the engagements were centred around the core issues identified in it. The release of the document just prior to the hearings unfortunately limited the ability of several stakeholders to engage with it in detail. The hearings and this report therefore represent an initial basis for ongoing engagement.

The essence of a manufacturing or industrial strategy is to address the existing industrial structure and its implications for the possible future development paths of the economy. It should outline choices and set out the priorities of government together with a co-ordinated plan of the main areas in which actions will be taken. South African industry includes sophisticated production activities and developed heavy industries but in the last decade has failed to create employment, meaning that many engage in survivalist activities to make ends meet. Economic participation inevitably reflects the historical control over resources along the dimensions of race and gender. The challenges for an industrial or manufacturing strategy are therefore both great, and urgent.

The Committees noted with concern the low level of participation by business. This was reflected both in the shallow engagement with the country’s industrial policy framework by the business organisations which did make submissions, and the lack of participation by firms and representative organisations at the sector level (apart from the textile sector). The withdrawal from the hearings of organisations representing black business meant that the voice of this important stakeholder was absent from our proceedings. The Committees noted the importance of engagement by business if the new industrial policy framework is to realise its objectives.

The Committee also noted that while institutions falling within the Council of Trade and Industry Institutions (COTII) did make general comments on the manufacturing strategy in their submissions, in most cases their representations made did not address the specific roles of their institutions within the new framework. The activities of these institutions are self-evidently an important and integral part of government’s industrial policy framework.

The main themes from the submissions are now outlined, followed by the conclusions, which draw together key points on which broad consensus emerged and the main tensions which were explored.

The Committees found that there was broad consensus around the need to develop a manufacturing/industrial strategy that sets out key objectives and priorities for an industrial development path and the role of different groupings in it. There was agreement that this means moving beyond dialogue to collective action, and that the state has a key leadership role in achieving this.

There was a high level of agreement that the new draft of the DTI policy in the IMS represents a significant advance on the previous policy outline produced in May 2001. This is reflected in the identification of the main challenges and priorities, and the need to move from macroeconomic stability to microeconomic action. The step towards customised offerings for the pursuit of strategic goals was also welcomed. As such, it is believed that the framework provides a solid basis from which to proceed.

This report now outlines the DTI submission and the main industrial policy themes raised in the hearings, with reference to the various submissions made. The main areas of tensions where further analysis and debate are required are highlighted.

The DTI submission was based on its document, Accelerating Growth and Development: the contribution of the Integrated Manufacturing Strategy, which is linked to the Microeconomic Reform Strategy, also tabled by the DTI in the hearings. The IMS provides the basis for ‘a collective government position…[to] co-ordinate a set of actions across government’. It also provides guidance as to what ‘economic citizens can expect from the dti over the next few years’.

A strategy is defined in the IMS as a ‘long-term plan for future success or development’. It therefore implies anticipation of the future and how it may be influenced, which in turn necessitates the collection and analysis of information, and the co-ordination of actions (as part of having a coherent plan). As such, the IMS is a crucial platform on which to build a collective approach to achieve the goals of employment generation and broad-based, more equitable, growth.

The Microeconomic Reform Strategy sets out a vision for 2014 for ‘a restructured and adaptive economy characterised by growth, employment and equity, built on the full potential of all persons, communities and geographic areas’. The requirements to realise this vision include:

• A geographic spread of social and productive investment
• An integrated manufacturing economy capable of high degrees of value added
• An extensive ICT and logistics system capable of speed and flexibility
• A high degree of knowledge and technology capacity
• Greater diversity of enterprise type and size
• Skilled, informed and adaptable citizens
• An efficient, strong and responsive state structure

The Strategy identifies the challenges in terms of the dualistic nature of South Africa’s economy. It therefore seeks the improvement of cost competitiveness in the developed economy, and the realisation of potential in the underdeveloped part of the economy which represents the experiences of a large proportion of South Africans.

The performance of the South African economy is a starting point for the microeconomic reform strategy as well as for several submissions. This performance is characterised by weak growth, declining investment and savings rates, low levels of investment in research and development, falling formal employment and high levels of unemployment, especially among black people and women across racial groups. These characteristics are manifested in, and reflect, the high levels of inequality and poverty.

The strategy is an important part of the integrated action plan announced by President Mbeki in February 2001. This plan outlines the need for co-ordinated government interventions. Areas which are highlighted include technology, human resource development, access to finance and infrastructure.

The DTI approach identifies competitiveness (required for increased production and employment) as to do with a range of factors which impact on the ability of firms to produce and sell products. These include the prices of inputs, infrastructure, technology and innovation, skills and effective regulation. Central to the impetus for growth in this approach is improved efficiency through integration with the international economy and increased knowledge intensity. Technology, innovation and information communication technology (ICT) are emphasised as major drivers in this strategy. This is contrasted particularly with the past reliance on natural resources and cheap unskilled labour for competitiveness.

The DTI proposes a framework of value matrices for addressing the vertical and horizontal relationships involved in increasing value-added across sectors, and the links with areas such as agriculture, beneficiation, ICT and tourism. Eight sectors are identified for promotion using customised services: clothing and textiles, agro-processing, metals and minerals, tourism, automotive and transport, crafts, chemical and biotechnology, and knowledge-intensive services. The DTI will also continue to pursue broad-based programmes related to competitive market access, the regulatory environment, investment promotion, access to finance, and policy coherence.

The key performance areas are black economic empowerment, small business development, employment and the geographic spread of economic activity. Targets are to be set, with an effective monitoring and evaluation framework to be put in place.

In its response to the hearings, the DTI argued that South Africa was already well on the way to becoming a knowledge economy and that the promotion of knowledge-driven activities, such as innovation and marketing intelligence, were a key to further development in all sectors. The Department also argued that a knowledge economy needs to draw on the experiences and capacities of everyone, and that in this context one of the major challenges was to more effectively upgrade the skills and capacities of our people, many of whom were at present not just unemployed but lacked the skills to take up employment.

The key themes raised by the DTI’s submission were the focus of much of the debate around the subsequent submissions, and they were returned to in the response of the DTI at the end of the hearings.

The DTI places manufacturing at the centre of the economy, and emphasises the need to increase value-addition. The strategy also incorporates the need to promote diverse areas such as the beneficiation of natural resources and tourism. There was broad agreement on the need to examine linkages between cross-cutting areas, such as ICT, and the development of different sectors of the economy. This did, however, raise the question as to whether industrial strategy is not a more appropriate term as it connotes the influencing of different industries’ development paths in line with national socio-economic priorities. These are not limited to sectors which are clearly delineated in economic terms as constituting manufacturing. This is also consistent with industrial policies as being the set of interventions to realise a particular vision for industrial restructuring.

The need for a coherent plan to take collective actions forward to implementation is a core element of the strategy. The DTI submission clearly articulates that they act as a facilitator for the Microeconomic Reform Strategy and will champion competitiveness and equity in the economy. This they aim to do through partnerships in designing the interventions required. The emphasis on a stronger state leadership role was widely welcomed, to ensure the move beyond dialogue is achieved. The rationale for leadership is based on the intrinsic features of the South African economy, rather than a narrower understanding of state action being limited to addressing ‘market failures’.

Submissions from Nedlac and the various social partners noted that the experience of collective engagements indicates that there are three key factors for success. First is the power of constituencies to drive the issue in question and to follow through. Second is leadership and constituencies’ capacity to act, in particular government. Third is the sharing of information. Experiences of weaknesses across all constituencies were noted by Nedlac. However, particular concerns exist around the fragmentation of business. These concerns include difficulties in getting mandated positions and the weak capacity of small and medium business to effectively engage on key policy issues.

In this regard, the DTI noted that their ability to move forward with collective actions would depend on the coming together of different stakeholders within sectors to move beyond narrow interests and lobbying to concrete analysis of the challenges and mapping out of the future development path. Sector job summits needed to fulfil this role if they were to be a mechanism for determining collective action in industrial policy.

The relative success of the Motor Industry Development Programme was contrasted with other sectors such as clothing and textiles. These examples highlight the importance of well-organised constituencies, such as exists in the motor sector. But, if a developmental industrial policy is to be taken forward which meets the objectives outlined by the DTI such as employment creation, increased participation and equity, then the constituencies which should benefit most are not necessarily those which are strongest. This further emphasises the key leadership role of government in co-ordinating and delivering on agreed actions, and in not being limited to a reactive role to the demands coming from sectors.

The differences between sectors also highlights the importance of taking sector specific characteristics into account in the more targeted approach adopted in the strategy. The design and implementation of customised services by the DTI and the value-matrices framework enable these sector specific factors to be carried through into appropriate measures. This was widely welcomed.

The roles of parastatals such as the IDC and other institutions across government must be part of a co-ordinated approach. In this regard, while the IDC has evidently played a leading role in large-scale beneficiation projects, which would not have taken place without its participation, there is concern as to progress in other areas. For example, IDC activity in small and medium enterprise finance appears to be largely reactive.

The weak representation at the hearings of other institutions within the Council of Trade and Industry Institutions (COTII) is of concern given the need for effective co-ordination. Indeed, this is also an area of the DTI strategy where almost no detail is provided, and yet it aspires to lay the foundation for an integrated and co-ordinated framework. As the DTI itself notes in the strategy, the co-ordination and oversight of the COTII is ‘a significant challenge to the dti and requires that dti be equipped with the requisite capacities to meet this challenge.’

Clarity on the process of further engagement to develop the strategy is required. It was noted by Nedlac and the constituencies that the engagement to date had been on the previous version of the strategy released by the DTI in May 2001.

Exports are identified by the DTI as a target sector in its own right. Export performance and potential is also one of the grounds for identifying specific value chains for promotion. The DTI further argue that exports have been encouraged by trade liberalisation and that sectors with improved export performance have also recorded better performance in terms of employment. Other submissions, including those by Cosatu and affiliates question this. Data on manufacturing sectors indicate that the best performing export sectors in recent years have recorded employment losses. And, sectors recording the largest net increases in jobs (plastics and wood products) have not had particularly strong export performance.

While there was consensus that export competitiveness is an important aspect for improved industrial performance, the causal links do not appear unambiguous. The recently released UNCTAD Trade and Development Report 2002 explains why significantly increased exports by developing countries in the past two decades has not produced the same improvements in growth. Even in hi-tech exports, the production activities being located in developing countries are often limited to assembly operations, with multinational corporations being attracted by low wages and investment incentives. Indeed, there is a risk of a ‘race to the bottom’ with countries competing with each other as an investment location by offering incentives, competing on lower wages, and compromising labour standards. As long as developing countries remain in activities at the bottom of the value chain, exports may not contribute significantly to growth. In addition, the ‘fallacy of composition’ means that if countries are following similar approaches it will be self-defeating – what works for one country will not necessarily work for many as an oversupply of an exported product will lead to falling prices in world markets.

While the liberalisation of trade has been linked to the imperatives of globalisation, submissions by the South African Communist Party and trade unions argued strongly that the different processes subsumed under the heading of globalisation have tendencies to reinforcing marginalisation. The outcomes therefore depend on the nature of engagement with these processes. For example, export performance is not a short-hand for success in industrialisation. It is possible to have improved export performance without increased production or employment, as has been the case in metals products, highlighted in the submission of NUMSA. Increased imports have gone hand-in-hand with increased exports. Import penetration in metal products has been most marked in the engineering and foundry products sub-sector meaning that a tendency to more basic processing has been reinforced rather than the increased beneficiation which is an objective of the manufacturing strategy. Links between exports and technology are similarly not straightforward and need to be understood in more detail.

Trade liberalisation has forced companies to compete with imports and improve efficiency levels. At issue is the nature of the restructuring responses of firms and the costs in terms of employment and production. In particular, concerns were raised about the adequacy and sequencing of support measures for industries. Growth-oriented restructuring requires high levels of investment to increase productive capabilities and expand employment. With the relatively low levels of investment which have prevailed, firms in sectors such as textiles have upgraded machinery and raised productivity but in the context of static production, yielding reductions in employment. In the motor vehicle sector, measures designed to address the specific restructuring requirements in that sector have had a greater measure of success.

Rather than a false dichotomy being drawn between exports and the domestic market, an alternative emphasis proposed by Labour and the SACP is for a developmental strategy underpinning competitiveness – where links between domestic demand, meeting basic needs and production are developed rather than a narrow focus on exports. For example, products such as fridges are primarily oriented to the domestic market. There are also linkages between products such as metal pipes and tubes and infrastructure investment.

There was broad agreement over the worrying implications of the decline in research and development expenditures in the economy to around 0.7% of GDP (compared with the 2% commonly targeted by industrialising countries). There was also agreement over the need to recognise the increasing application of information and communication technologies to production, and the need to improve South Africa’s skills base, especially in science, engineering and technology related disciplines. The DTI places increasing knowledge intensity at the centre of the manufacturing strategy as perhaps the prime driver of growth. This is founded on the belief that ‘Old Ways Don’t Work’ anymore such as strategies based on raw materials or labour costs. Instead it is the development and application of ‘knowledge intensity’ and ICT that are viewed as key for the development of ‘integrated value-matrices’. The response of DTI to submissions re-emphasised their view that economic participation required appropriate skills for the new economy.

Strong submissions by the Department of Arts, Culture, Science and Technology (DACST), the Foundation for Education, Science and Technology (a DACST agency) and the CSIR further developed the issues of research and development (R&D) and the application of technology. These reinforced the need to have a clear strategic understanding of developments in this area. The R&D policy framework being developed by DACST will complement the IMS while the CSIR is engaged in a range of concrete initiatives. The development of such strategies is evidently of importance, as the reductions in R&D expenditures in recent years are exactly the opposite of what is required for the DTI’s strategy.

The causes of lower R&D expenditure were identified in the submissions as to do with both the private and public sectors. In both cases, however, the absence of a clear set of priorities for industrial development is an important factor. Public sector expenditure has declined largely as a result of shifts away from the apartheid priorities, without a redirection of efforts to priorities identified for broad-based and more equitable development. In the private sector, the competitive pressures of liberalisation have led to firms cutting costs, including research budgets. The ‘hollowing out’ of corporate research has also been linked to the acquisitions of South African firms by multinational companies whose research capacity is situated primarily in their home-base. In extreme cases, the multinational companies have closed significant production capabilities in South Africa and used the South African subsidiary as an assembly and ‘warehousing’ operation for mainly imported components and products. It is worth noting that it is precisely the application of ICT which enables the more effective control by multinationals of operations in different countries. Gains from the technologies of globalisation therefore require a clear strategy of engagement. The counter-example of Sasol – with very high local research investments – illustrates the importance of domestic capabilities, and the possible results of state action.

It was also emphasised that it is the application of technology and R&D which is the objective and not higher R&D activities for their own sake. Developing countries typically have a higher proportion of R&D spending undertaken by government. Examples were given of Korea (with a manufacturing leadership focus), Malaysia (aiming to be a fast-follower in the effective application of technologies, rather than primary research) and Australia (with an explicit focus on resources and agriculture). In this context, it is evidently important to avoid portraying the strategy as a choice between either resource beneficiation or knowledge-intensity – the application of technologies is important for increased beneficiation and value-added. The strategy being formulated by DACST has three focus areas: achieving mastery of technological change in the economy; increasing investment in South Africa’s science base; and strengthening and realigning the science and technology machinery of government. At present, the research community is predominantly white, and aging, with research areas that reflect the previous government’s priorities.

According to DACST the local research community at present communicates mainly with overseas research groupings. South African firms also communicate mainly with overseas producers for technologies. Apart from notable exceptions, such as Sasol, there is therefore an ‘innovation chasm’ between local research and its application in local production. Application of technology also requires increased investment expenditures in new and more advanced machinery and equipment. This is easier to achieve in an expansionary environment.

Submissions by both labour and industry emphasised that, rather than treating technology independently, it must be linked into the wider issues of the strategies of firms and their investment and training decisions. Technology is not inherently biased to different segments of the economy. Its application can yield very significant gains in rural and small-scale economic activities, and can therefore contribute to increasing integration of the South African economy rather than fragmentation. But, application in these areas requires government leadership to a greater degree as there are economies of scale in research activities and upfront costs which make R&D less likely in smaller entities. In addition, while the gains to the economy as a whole are potentially very large, the financial rewards to an individual enterprise may not appear to be large (and therefore an incentive to invest in research activities).

Similar issues were raised by the CSIR submission and subsequent deliberations by the Committees. While the many areas of consensus with the DTI strategy were highlighted, the CSIR’s focus was on the need to view technology as a process from development through to application as part of enterprises’ production strategies and employment decisions. There is a need to identify key issues within selected industries and related to key technologies, and to design interventions. Identification of these will be enhanced by business intelligence at both a global level and on domestic value matrices, which needs to be made available to the organisations with responsibilities in the field. Similarly linkages between initiatives such as Industrial Development Zones and Spatial Development Initiatives need to be spelt out.

Initiatives such as the Auto Industry Development Centre and the Light Metals Development Centre in which the CSIR is engaged along with firms and other institutions provide examples of partnership in practice. However, the need to raise the majority of its funds from fees charged to the private sector raises questions as to the effectiveness of the CSIR in its role of proactively ‘leading’ developments that are in line with national priorities and the future development path, rather than ‘following’ private firms. In most industrialising countries. Research to support long-term priorities is given much greater state support in order to provide services as a ‘public good’. For example, the USA’s programmes in defence and space provide major support to industries engaged in areas such as materials development. More effective use of the CSIR as a public institution could be viewed as it constituting a major supply-side measure.

There was broad consensus about the poor investment performance in recent years, and the need for the investment rate to be significantly higher if stronger growth and employment generation are to be attained. Both Business and Labour submissions argued that more effective co-ordination of government activities across different departments and public institutions was necessary for higher investment rates. There was also widespread agreement that poor investment performance was due to the decisions of private firms rather than a lack of funds. Low levels of investment by government and parastatals in the last decade was noted as one of the factors underlying low investment rates in the economy.

There was also consensus that foreign direct investment is attracted to economies which are growing rather than FDI being the catalyst for growth. The potential threats from FDI in the form of mergers and acquisitions were highlighted by several submissions by trade unions. In both the metals and dairy sectors there have been cases of foreign acquisitions leading to South African subsidiaries being converted into ‘warehousing’ operations for imported products. The failure to realise the benefits to the South African economy from foreign listings was also noted.

The Business submissions put forward a general platform arguing for lower taxes and privatisation rather than engaging with the implications for industrial policy specifically. Submissions by the SACP and Labour argued for the need to understand the patterns of capital accumulation and investment decisions as part of evolving corporate strategies. Given widespread market failures in financial markets there is a need to ensure that public development finance institutions, especially the Industrial Development Corporation, are oriented towards industrial development goals. Government infrastructure investment, including in spatial development initiatives, also has an important role in crowding-in private investment. By providing greater certainty as to future developments in these areas, government also reduces perceptions of risk around investment decisions by private firms.

The need to explore measures such as prescribed assets to ensure that financial resources are deployed to long-term growth objectives was also raised by Labour and the SACP, both of whom also saw a need to underpin industrial policy with a comprehensive restructuring of the financial sector.

The DTI strategy raises the pricing of inputs as an important area for government attention, with particular reference to services such as transport and telecommunications. The Competition Commission and others also noted the negative implications of import-parity pricing for the development of broad-based manufacturing, but few details were provided on actions in this area. Import-parity pricing is widely practised and effectively means that there are no cost advantages for manufacturing firms using South African produced material inputs as they have to pay prices equivalent to the costs of importing (including the transport, tariffs and related costs that they would have to incur). This price may be significantly above the price which South African producers are charging in the export market. A value-chain approach, which examines linkages between different stages of processing from raw materials through to finished products could address such issues, provided concrete mechanisms are in place to enforce remedies.

The poor progress in black economic empowerment is highlighted in the IMS, as is the lack of progress in ensuring equitable participation by women, with black rural women in particular bearing the brunt of ongoing poverty. A four-pronged approach is to be adopted towards black economic empowerment including new offerings, a partnership programme and a non-statutory black economic empowerment advisory council. Support measures and access to finance will be designed to increase the participation in the economy of black people and women. Other submissions noted the importance of integrating meaningful empowerment measures into government’s industrial strategy. The Labour submission noted the need to adopt a broad definition of empowerment that extended beyond increased ownership to effective participation of the mass of the population.

The lack of effective treatment of relationships between gender and industrial strategy in the various submissions was, however, highlighted by Committee members. As noted by the Commission on Gender Equality, the roles of women are influenced by traditional and modern practices of patriarchy which include access to economic assets such as finance and land. The continuing gender division of labour means that women (and black women in particular) tend to work in lower paid and less secure employment, as well as undertaking unpaid work in the household. The gender division of labour is integrally linked to the development path of the economy and continuing high levels of poverty.

Industrial restructuring has evident effects on women, and their participation in the economy. This applies to patterns of employment and unemployment and, for example, the effects of increased practices of casualisation and outsourcing in sectors such as clothing and retail. Concerns raised by the Commission on Gender Equality include: the need to be more explicit in the definition of beneficiaries; ensuring that strategies designed for sectors under customised programmes promote the development of industries in a transformative manner; and that women’s organisation need to be taken more into account in economic decision-making. There are implications for measures addressed at micro-enterprises, small firms and co-operatives, access to training, participation in policy formulation, elimination of occupational segregation, and the monitoring of policy impacts.

Union research indicates that there are already effects being felt of HIV/AIDS on skilled categories of workers. There are also indications through unions’ networks of shop-stewards that businesses are changing their decisions to take account of the perceived impacts of HIV/AIDS on purchasing patterns. That is, producers in sectors such as food and furniture are moving away from basic goods for low-income markets based on the belief that HIV/AIDS will mean declining demand in these market segments.

The Motor Industry Development Programme (MIDP) was initiated in 1996 based on an analysis of the key challenges facing the auto sector and was a result of industry and government agreement. It is viewed as a major success by DTI on the grounds that it has succeeded in stimulating exports, and preventing major employment losses. The auto firms have restructured to reduce the numbers of different models assembled in South Africa and have increased the volumes of those models which are produced and local component production. The main feature which has encouraged the restructuring is the rebate of import duties from the export of vehicles and components.

An important element of the programme is the integrative effects along the value chain. These arise from the groupings established, namely the Motor Industry Development Council of the main stakeholders, the MIDP as the main programme, the Strategic Investment Team which proactively identifies investment opportunities in components, the Auto Industry Development Council which links research, training, investment and corporate strategies, and the ‘benchmarking clubs’ which have been established to support components producers.

A key reason identified for the success of the programme is the leadership exerted by firms (especially the main German assemblers) and by government. The take-up of government support measures indicates the importance of a co-ordinated sector strategy for the effectiveness of government initiatives. In addition, through the Strategic Investment Team, potential developments are anticipated at the industry level through collective information sharing and links with government policies. Government exerts leverage through its specific programmes such as the Critical Infrastructure Fund.

Rather than being transplanted directly to other sectors, the lessons from comparisons with sectors such as clothing and textiles are that measures must be based on an understanding of the sector-specific challenges and that the commitment of the different constituencies to a commonly agreed set of concrete objectives is crucial. Questions were also raised about the concentration on a very small set of components exports (catalytic converters, seat-leather and exhausts) and the relatively limited employment creation as a result.

Submissions by the Food and Allied Workers Union (FAWU) and the National Labour and Economic Development Institute (Naledi) noted that deregulation and liberalisation mean that prices of food products in South Africa are now determined in international markets. This means that prices can fluctuate greatly from year to year and speculation may exacerbate the volatility of prices, such as when news of possible developments in other countries has a major impact on the prices of staple foodstuffs for low-income consumers.

It was also noted that trade agreements, such as with the European Union, have not yielded the expected gains. Studies have questioned whether overall impact for the South African economy will be positive, especially as the opening of the EU market to South African produce has been much slower than anticipated for a variety of reasons. The ongoing (and in some cases, increasing) subsidisation of agriculture in industrialised countries is also cause for concern.

The IMS notes the significance of small, micro and medium enterprises in the economy and identifies reductions in barriers facing their operations as a priority for empowerment. Measures to achieve this are to include a one-stop shop for entrepreneurs for access to finance, and attention to market access and unfair competition.

The submission by the Small Business Project proposed the need for a regulatory review to examine the ways in which regulations inhibited the growth of SMMEs. The submission also highlighted the lack of a clear plan and concrete measures for SMMEs in the IMS. Committee members noted the importance of viewing SMME development against the legacy of apartheid and the need for proactive government measures, including promoting greater access to affordable finance, in order to empower SMMEs to contribute to more equitable growth. It was noted by Labour representations that SMMEs did, however, tend to have a shorter-term focus and were therefore less likely to make investments in machinery and skills development required for long-term growth.

There has undoubtedly been a major increase in subcontracting and outsourcing by firms. This has ambiguous effects which need to be analysed. At one level, these processes may lead to increased participation by SMMEs owned by historically disadvantaged persons. However, there are a number of negative effects. The increased flexibility and increased insecurity resulting from such arrangements conflicts with a greater emphasis on R&D and skills development. Evidence was also presented in the written submission by Skinner and Valodia on the clothing sector in KwaZulu-Natal. Skinner and Valodia’s research found that firms are using outsourcing arrangements simply to by-pass labour regulations and health and safety requirements on a very large-scale. As such, these practices may simply be exploitative.

The DTI’s Integrated Manufacturing Strategy is undoubtedly a major advance in developing an appropriate industrial policy to reorient the economy to achieve the objectives of broad-based growth, employment generation and equity. In it the leadership role for the state is clearly established. The challenge is to take this leadership through to effective strategies at the sector level, through the collection and analysis of information, design of appropriate customised measures and co-ordination of the actions of different government departments and institutions. The urgency of these measures cannot be in doubt given the large job losses which have been sustained across industrial sectors.

There was broad consensus from the hearings that the value matrix framework was a useful approach for understanding the vertical and horizontal linkages between activities, within and across value chains. Similarly, a strong understanding of the various relationships between knowledge-intensity, beneficiation, investment, the financial sector (including the issue of promoting greater access to affordable finance by SMMEs) and increased participation in the economy is crucial for development and successful implementation of the strategy.

There was also consensus on the importance of effective collective action, led by the state, with customised measures based on the specific needs of different sectors. In addition, the focus on research and development and the effective application of technology to improve production capabilities is welcome to reverse the declines in investment in these areas.

There are also a range of tensions which reflect the realities of the South African economy. These tensions include that between the requirements of international competitiveness in established manufacturing industries, and the need to create employment and increase the participation of the mass of the population who are unemployed or under-employed. A similar tension exists between the emphasis on exports and production for the local market. It is important to note that submissions and subsequent debate in the hearings did not view these tensions as representing alternative choices. The high levels of poverty and unemployment are partly a result of the previous industrial policies which simultaneously supported the development of certain industries. And, meeting the imperatives to broaden access to resources, for example, in finance, education and infrastructure, is necessary to ensure the sustainable development of future productive capabilities.

Nor was it argued that exports and local production are mutually exclusive. Export capabilities depend on investment and productive capabilities which are founded on local economic strengths. Increased integration in the domestic economy through better infrastructure provision, affordable access, improved education and skills development, is a key part of the platform for sustained industrial growth and will be supported by an effective set of industrial policies. The application of knowledge also does not intrinsically mean a focus on only one segment of the economy. Indeed, without developing and applying knowledge appropriate to economic activities across the economy increased economic integration will not be achieved and high levels of inequality will be perpetuated. This relates to the concrete measures in implementing the industrial strategy, and the activities of institutions such as the CSIR and IDC.

Arising from the hearings and the Committees’ deliberations are the following recommendations:

• Further clarification is required as to how the value matrix framework is to be applied in practice.
• There is a need for further clarity on the precise mechanisms through which DTI will seek to promote more effective collective action, including how to overcome impediments identified by participants in the hearings.
• There is an urgent need to build capacity in the DTI to analyse the determinants of industrial development within and across sectors, and to design and implement appropriate policy measures.
• More effective co-ordination around the implementation of the IMS is required between different branches of government such as DACST and DTI, and between institutions within COTII. The challenge facing the COTII institutions is not merely to comment in general on the IMS document, but to identify in detail how their own activities will contribute to the advancement of the strategy. The Committees accept the point made in the Department’s response viz. that they too have an active role to play in ensuring the implementation of the strategy through, inter alia, "interrogating the mandates and activities" of the COTII institutions, and through the role they play in "debating and questioning all legislation that the dti and other economic departments table".
• The role of the IDC needs to be addressed in greater detail, as part of assessing the ways in which the IMS can impact on investment patterns and empowerment. In particular, the IDC’s operations in the SME sector and in empowerment must be reoriented to enable it more effectively to "identify and support opportunities not yet addressed by the market", just as it has historically done in large-scale upstream beneficiation.
• Specific measures to increase research and development activities in South Africa, including additional direct funding by government, are urgently needed. Serious consideration should be given to the proposal by the CSIR to make R & D support a component of customised support packages made available by government to support the IMS. A particular focus needs to be the development of technologies appropriate to the challenges of development and the promotion of employment.
• Visible and concrete benefits from the industrial strategy must be realised in under- developed and rural areas of the economy.
• The promotion of cooperatives and other forms of collectively owned enterprises needs to be fostered and encouraged as a major component of SMME and empowerment strategies.
• There is a need to take empowerment into account in more concrete terms and particularly to address the absence of a substantive treatment of gender. In this respect, the recommendations of the Commission for Gender Equality to engender the IMS merit careful consideration. There is a need, in particular, for customised support programmes to take account of the current gender profiles and problems in promoting gender equality that are specific to industries or sectors to which they are applied.
• The roles of different levels of government in industrial strategy must be determined. The effectiveness of many measures, such as linkages with infrastructure provision and the operation of industrial development zones, lie in the hands of provincial and local government and municipalities. It is therefore necessary to ensure a high level of coordination between a national IMS and the policies and programmes of provinces and local governments. The Committees recommend that as part of the ongoing process of consultation, particular steps are taken to engage with the provincial and municipal spheres of government, as well as with other stakeholders operating at these levels.

The Committees welcome the interaction and look forward to further debate and engagement in order to strengthen the industrial policy framework. In particular, the Committees will seek to promote further discussion and debate on implementation of industrial policy as well as on the interrelationship between industrial policy and:

• The development of a supportive macro-economic framework;
• Measures to promote greater access to affordable finance for development;
• Empowerment and Training Programmes;
• Further extending the state’s developmental role, including that of para-statals.

The Committees wish to thank all those who made submissions as well as the European Union Parliamentary Support Programme which made available financial assistance for research support.