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Posted on Wednesday, 14 June 2017 10:33

South Africa's industrial policy is bearing fruit

By Nicholas Norbrook

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South Africa's trade and industry minister Rob Davies​ speaks to The Africa Report about developing regional value chains and the importance of the state’s role in getting positive social and economic outcomes from the private sector​.

 While the mining sector is hurting due to low commodity prices and the low level of processing done inside the country, not all sectors of the South African economy are experiencing the same headwinds. Job creation and economic transformation are high on the government’s agenda as President Jacob Zuma tries to bolster his leftist credentials during his last year in office and amidst a string of problems that have sapped the administration’s focus. Rob Davies, the trade and industry minister, is working with his peers and business leaders to get the most out of the government’s interventions in the economy.

The Africa Report: Everyone is concerned about macroeconomic discipline, and South Africa has recently been downgraded by a few credit agencies. But in the 1970s, the way South Korea ­developed, for example, they were all over the place: inflation rates were pretty wild, their current account balances were also pretty high. And then you look at maybe Argentina or Brazil: they had similar macro­economic patterns, they were doing less constructive things with the money in their econ­omies and had problems around transparency. What is South Africa? Is it a South Korea or is it an Argentina?

ROB DAVIES: I think what we’ve been trying to do the last few years is to learn from some of [these countries] and particularly in the area of industrial policy. Even though we’re one of the most industrialised countries in Africa, we remain fundamentally and primarily a producer and exporter of primary products – mineral commodities – which is not the best place to be in the value chain. Even basic manufacturing is still not the top, but it’s better than being just a primary-products producer. [...]

We’ve been trying to improve our prospects for industrialisation with the work we’re doing in the region on regional integration. [Our strategy] has been to try to address the issues that the others were trying to address and learning from them as much as we can, but under our own circumstances, to apply some of the tools of industrial policy and industrial development.

We’ve adopted the developmental approach to trade policy. We deploy, without any apologies, tools like localisation. If a company is a foreign-owned company but is willing to come to our country and set up a manufacturing plant, they will qualify for the localisation requirements that we have for procurement by the public sector. We’re non-signatories and we will not sign the optional protocol in the World Trade Organisation on transparency and government procurement, which will end our ability to do this. And then on a case-by-case basis, we have incentive packages and support measures in place for industrial development. And some of those are sector specific and some of those are generic.

Are conditions the same today as they were when these other countries emerged economically?

The fact is that we’re doing it in very difficult circumstances globally. But also, what places like South Korea and even China more recently had which we don’t have is the opportunity to produce and export quantities of manufactured goods and sell them in the developed world. I think those opportunities are not there any longer. So other countries, like China, will turn to their domestic market, to domestic consumption. India has got a large domestic market. We don’t have that in our own country. We have a small market – 55 million people. [...]

So our quest is to develop regional markets – which have much larger populations, much larger purchasing power – and through that develop regional value chains and industrialise the continent with regional value chains involving enterprises in a number of different countries. So that’s the journey which we’re on. We’ve made some progress on that, and I think our industrial policy is starting to bear fruit. In many cases, many investors will want to look at that rather than the rating agency numbers. […] But many of the global trends that have been around, including the whammy that mineral commodity-producing countries suffered after 2012, we suffered from them too.

And can you point to a particular concrete fruit of your industrial policy?

We had a clothing and textile industry that was bleeding to death in the 1990s. And we had a programme there that was based on the wrong model, which rewarded people who exported in the form of duty credits. These duty credits were often sold to retailers who bought more finished products, which undermined the industry more and more.

So we changed that. We developed a competitiveness programme. We identified that one opportunity was called ’fast fashion’, which was to respond more quickly to the needs of retailers. And we’ve assessed that programme quite recently. [...] They saved 82,000 jobs and created 9,000 more. Now, in fact, we’ve grown. We’re seeing that retailers who were more than happy to buy imports are now seen valuing, even showing off that they are now procuring more and more local products. Some retailers invested in clothing making in South Africa. We’ve seen good examples in footwear, exotic leathers and things like that.

You also have an incentive scheme in the auto sector. That seems to be working to get the big players in, but how do you get the small engineering shops into these value chains?

The current programme expires in 2020. What’s going to take over? That’s the big debate. We want to deepen the level of localisation. That’s what it’s going to be because there are many more jobs and many more opportunities. […] Getting smaller companies, particularly black-owned companies, involved in component manufacturing will require some particular tools. One of them is that if we’re going to provide incentives to big companies, and we expect a quid pro quo in terms of black economic empowerment, some of that has to be implemented now in what’s called supplier development. Some of them are beginning to develop value chains with small-scale, black-owned manufacturers in components. And similarly with railways, so we have small black companies that do all kinds of things, for example, in locomotives.

“We want to deepen the level of localisation, because there are many more opportunities”

 

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