1. Click to edit Master subtitle style 3/23/10 Prof. Fiona Tregenna Department of Economics & Econometrics University of Johannesburg Prepared for Trade & Industry Portfolio Committee 17 March 2010 COMMENTS ON IPAP

2. 3/23/10 Why industrial policy? (i)  No country has successfully grown without it.  Market failures.  Spillover effects (positive and negative).  Absence or inadequacy of automatic adjustment mechanisms.  Danger of being stuck in low-level equilibrium trap.  Need for structural change.

3. 3/23/10 Why industrial policy? (ii)  Costs and barriers to necessary structural change → need for state intervention.  Different agents make economic decisions with different timeframes.  Huge heterogeneity amongst sectors (…) → need for differentiated policies.  Promotion of manufacturing.

4. 3/23/10 SA manuf. value added pp vs. emerging Asia

5. 3/23/10 SA’s share of manufacturing internationally

6. 3/23/10 Why does manufacturing matter?  Important for long-term growth.  Deindustrialisation tends to be detrimental difficult to reverse.  Particular importance of level of sophistication in manufacturing exports.

7. 3/23/10 Historical lessons of successful IP (i)  Medium and long-term planning.  Role of the state.  Importance of dynamic rather than static comparative advantage.  Creating temporary monopolies, combined with regulation, to achieve advances in key areas.  Provision of finance, at below-market rates, for key activities.  Fiscal incentives for prioritised activities.  Acceptance that there will be failures and resource wastage (within limits).

8. 3/23/10 Historical lessons of successful IP (ii)  Strategic protection.  Management of rents.  Promotion of technology transfer and advancement, promoting domestic innovation capacity.  Importance of supportive macroeconomic policies (especially exchange rates and interest rates).  Gradual shift to activities with higher knowledge content.

9. 3/23/10 Potential state roles in IP  Regulator  Financial agent  Producer  Consumer

10. 3/23/10 Source: Peres & Primi (2009)

11. 3/23/10 Appropriate objectives for IP in SA [general]  Increase labour absorption.  Avoid (further?) deindustrialisation.  Put manufacturing on a long term growth path.  Regain lost world share of manufacturing value-added.  Move to more demand-dynamic products.  BBBEE, especially in actual production.  Promote diversification.  Support SA objectives in region & continent.

12. 3/23/10 Appropriate objectives for IP in SA [detailed]  Strengthen domestic linkages between sectors.  Promote sectors with desirable characteristics labour-intensive demand-dynamic products positive for balance of payments strong domestic backward linkages technologically progressive scope for cumulative productivity increases.  Discourage exports in relatively unprocessed form / encourage in more processed form.

13. 3/23/10 Constraints to successful IP in SA (i)  Macro, macro, macro! Exchange rate strength Exchange rate volatility High interest rates Low domestic demand.  High unemployment, & associated ‘trade-offs’.  Infrastructure.  Concentrated economic ownership & control.

14. 3/23/10 Constraints to successful IP in SA (ii)  High cost of capital, also problems with availability.  Skills.  State capacity.  Limitations of our private sector.  Productivity and competitiveness.  Path dependence.

15. 3/23/10 Strengths of IPAP  Detailed, concrete, with measurable outcomes.  Recognition of importance policy integration, especially micro-macro.  Leveraging procurement for IP objectives.  Emphasis on developmental trade policies.  Sectoral differentiation and targeting.  Targets range of sectors with different characteristics and implications for growth & employment.  Emphasis on importance competition policy.  3-tier clustering of sectors is useful.  Welcome ‘normalisation’ of economic debates in SA.

16. 3/23/10 Other comments / ideas (i)  Need significant upscaling of IP.  Need medium-term IPAPs with annual actions & review.  Implications of our high unemployment for IP.  Confront tensions and trade-offs.  Concern about micro-macro policy synchronisation in practice.  Consider a toolbox of possible measures without ruling any out ideologically.  Need clear criteria for sectoral targeting.  Asymmetry – very difficult to regain lost production capacity.

17. 3/23/10 Other comments / ideas (ii)  Needs to be stronger on financial sector.  Keep close watch on current account balance.  State-initiated or -housed manufacturing enterprises.  Joint government-business research initiative to identify feasible manufacturing opportunities.  Co-ordination on policy areas that are essential for success of IP but which don’t fall under DTI. IPAP needs to set out what needs to happen in other policy areas to meet specific IPAP objectives.