Trade and Industrial Policy in South Africa

TIPS Forum 2008

Frank Flatters and Matthew Stern

Outline

• Part 1 – International experience• Part 2 – South African experience– Tariffs and trade policy– Sector targeting– Tax incentives– Government procurement– Development finance– Strategic infrastructure investment

• Part 3 - Lessons learned

International experience

PART 1

International experience / themes

• Cheap points or to real lessons? (post hoc ergo propter hoc fallacy)

• The question is not big state vs. small state; intervention vs. no intervention; markets vs. governments; or industrial policy vs. no industrial policy

• The real issue is effective policy vs. ineffective policy

International experience: the role of trade

• Fragmentation and global production networks

• Import-led growth

International experience: policy-making in the real world

• All governments make mistakes• All policies have unintended, and often

unwanted consequences• How to minimize the costs and maximize the

benefits?

Asia: successes and mistakes

• Tax incentives – varieties of experience in ASEAN

• Beneficiation – forest products• Motor vehicles – Indonesia and Malaysia • Capital controls and the Asian crisis• Import regulations and administration• Human capital – basic health and education

International experience: keys to success

• Ability to assess overall economic consequences of policy actions, ex ante and ex post

• Institutions and processes that ensure a role for independent economic analysis and monitoring of policy impacts

• ‘Eternal vigilance’ and opportunism in policy design

• Ability to listen to and learn from ‘stakeholders’ while avoiding capture by special interests

The South African experience

PART 2

Trade and Tariff Policy – initial reform

• The average tariff fell from 23% in 1994 to 8.2% in 2004 (Edwards 2005)

• Increased openness across all manufacturing:– Export orientation rose from 16% to 30%– Import penetration rose from 23% to 36%

Trade and tariff policy - stalled• But performance disappointing; SA’s share of world

exports fell from 0.7 to 0.5 percent over the post-1994 decade.

• Why? The reform programme stalled:– The number of MFN bands has increased– SA has become a prolific user of anti-dumping duties– PTAs are the major focus of ‘reform’; but partial and

ambivalent (rules of origin, NTBs, distrust of implementing agencies)

– Tariff ‘concessions’ saved as negotiating ‘weapons’– Selective, made-to-measure tariff reform and rebates;

ERPs have risen across many manuf. sectors

Sector targeting – the motor industry

• The great South African success story• Unintended consequences:– High costs– Catalytic converters the largest beneficiary

• Weak monitoring; no transparency; economic cost benefit analysis questionable at best

• Capture– Transitional assistance morphed into “strategic”

industry; support levels increasing

Tax incentives – international experience

• Not necessary and largely ineffective, especially for ‘good’ investments

• Costs are generally large and usually not transparent

• Discretionary authority is often abused• Tax system should not be a substitute for

dealing with underlying investment problems

Tax incentives – SA experience

(the SIP)• R10 billion in tax allowances for strategic

investments• Favoured capital intensive and up-stream

industries• Tailored to meet specific projects• Claims of job benefits exaggerated• Independent review never published

Government procurement – industrial offsets

• NIPP obligations apply to all government purchases of more than US$10 million

• Core principles:– No increase in price– Mutual benefit– Sustainability– Responsibility– Additionality– Causality (SPAs excluded)

NIPP ‘Success Stories’• Ferrostaal will provide a ‘secured loan at a preferential

rate’ to a polyester plant in Gauteng– Euros 2 million in investment credits– Euros 12.5 million in sales

• Volvo ‘has convinced Acerinox to favour Columbus Steel as their sourcing partner’– R1.8 billion in export credits

• Various other obligors are involved in a wide range of projects– BAE/SAAB ‘spearheading’ tourism in PE– Ferrostaal testing and sealing condoms– Augusta spinning and knitting Mohair– Thyssen producing wheat beer

Development Finance – the IDC

• IDC internal review (2005):– The IDC has failed to diversify out of its core

metals and chemical interests– Future role lies in correcting for ‘the intrinsic

failures of the private financial sector’– The IDC’s knowledge base and appetite for risk

enable it to fund projects that would not be considered by commercial sector

– The IDC has a dual role as both a ‘policy actor’ and a ‘development agency’

The IDC – mission confused and conflicted?

• The recent performance of the IDC does little to suggest that it is doing more or less than what the private sector is already doing– Preoccupied with large BEE deals– Dominated by mining and telecomms interests– SMME financing down

• For the IDC to be involved in the design and implementation of industrial policies and not compete with the private sector raises potential conflicts of interest.

Strategic investment – Coega• Government investment– R8 billion

• The feasibility of the project hinges on an anchor aluminium smelter– SIP– Subsidised electricity– 60 to 75% local (IDC, Coega and other) equity

• Private sector investment– Claims 9 investment deals worth R21 billion– Of which just R500 million seems secure

Strategic investment – Blue IQ

• 11 strategic investments over five-year period– The Innovation Hub– Gauteng Automotive Cluster– Wadeville Industrial Corridor– JIA Industrial Development Zone

• Measures of success– No attempt to justify the economic value of investments– Investment/output multiplier lower than the rest of

economy– Impact on private sector investment lower than

government expenditure on social services

Lessons learned

PART 3

Systemic problems

• Confusion over the role of trade • Anti-labour bias • Sector-specific focus• Lack of capacity for policy analysis • High risk of capture• Lack of institutional coordination

The way forward

• Industrial policy in SA must be targeted at job creation and poverty reduction. This requires:– Real and objective economic analysis– Honest and independent reviews– Serious consideration of the community of

stakeholders• And it needs to be thought of much more broadly

than simple sector strategies – the overall regulatory and investment environments; human capital; infrastructure; and above all competition