South Africas industrial policy: progress and constraints Economic Association (IEA) / World Bank...

South Africa’s industrial policy: progress and constraints

Economic Association (IEA) / World Bank Roundtable

New Thinking in Industrial Policy22-23 May 2012

2

Context

• Apartheid industrial development trajectory (pre-1994)– Industrialisation built on ‘Mineral Energy Complex’ (MEC)

sectors: Mining + capital and energy intensive mineral processing sectors (steel, petro-chemicals, aluminium etc.)

– Unstrategic / incoherent approach to development of ‘downstream’ manufacturing sectors

– However, important capabilities were developed in a range of sectors, e.g. autos, agro-processing, metal fabrication, capital goods

3

Context

• Orthodox reforms (post-1994)– Monetary policy: inflation targeting, high real interest rates and

capital account liberalisation– Fiscal policy: debt reduction, weak infrastructure investment,

increasing social expenditure– Widespread tariff liberalisation with narrow pockets of sector

support: Automotives, Clothing / Textiles– Commercialisation of state assets, weak oversight and regulatory

mechanisms to discipline monopoly pricing– Skills: weaknesses in education and skills development institutions– *Black Economic Empowerment: narrow transfer of ownership

stakes in existing sectors and companies

4

SA’s industrialisation policy evolution

Average industrial tariff, 1990 - 2006

Source: ITAC

5

Industrial Policy Approach• National Industrial Policy Framework (NIPF): 2007

– Emphasises need for economy-wide policy coherence• Annual Industrial Policy Action Plan (IPAP)

– Three year rolling plan, updated annually, ten year outlook– Cross-cutting / transversal constraints, levers and policy proposals– Sector strategies

• High global growth and intermediate barriers to entry• “Self discovery” processes with sector stakeholders• Policy levers• Reciprocity requirements• Review / adaptation

– Capacity building– “Voice” in relation to intra-governmental co-ordination / “state failure”

• Implementation overlapped with large external (currency, global crisis) and internal (electricity price) shocks

6

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

19

70

19

71

19

72

19

73

19

74

19

75

19

76

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19

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19

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82

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00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

Tradeable Private non-tradeable Public non-tradeable Manufacturing

Diagnosis: employment

Ratio of semi- and unskilled labour in tradable and non-tradable sectors, 1970 - 2010

Source: Quantec RSA Standardised Industry Database

Tradable sectors critical in context of high unemployment and skills constraints

Diagnosis: role of manufacturingIPAP: value-added sectors with high employment and growth multipliers

Agriculture

Mining

Food Textiles

Wearing apparel

Leather & leather products

Wood & wood products

Motor vehicles, parts & accessories

Other manufacturing

Wholesale & retail trade Transport & storage

Financial services Government services

Paper & paper products

Basic chemicals

Basic iron & steel Basic non-ferrous metals

EGW Business services

Excl. medical, dental & vet

0

0.5

1

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2

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Employment multipliers

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Low employment multipliers & strong backward linkages

Low employment multipliers & weak backward linkages

High employment multipliers & strong backward linkages

High employment multipliers & weak backward linkages

1. Other chemicals & man-made fibers 2. Furniture3. Plastic products4. TV, radio and comm equip5. Electrical machinery and apparatus6. Paper and paper products7. Rubber products8. Non-metallic minerals9. Beverages10. Glass & glass products11. Professional & scientific equip12. Metal products excl. machinery 13. Machinery & equipment14. Footwear

1

2 34

5

6

7

8 9111

1 13

14

Sectoral growth and employment multipliers

Source: DTI, CSID7

Diagnosis: currencyPervasive currency overvaluation and volatility

Balance on current and financial account, REER 1990Q1 – 2011Q4, R’m / Index (1990=100)

8Source: SARB

0

25

50

75

100

125

150

175

200

225

19

60

19

61

19

62

19

63

19

64

19

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19

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19

90

19

91

19

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19

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19

94

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01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

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20

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11

Diagnosis: currencyStrong correlation with international commodity prices ...

Metals and Minerals Prices, 1960 – 2011, Index (2005 = 100)

9Source: World Bank

Diagnosis: currency... despite no real economy commodity boom ...

Mining country growth, 2001-2008, real US$

10Source: Global Insight

-

1.00

2.00

3.00

4.00

5.00

6.00

7.00

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

SA real short term interest rates vs Developing Countries

Mean Median SA

Diagnosis: currency... exacerbated by high real interest rates and quantitative easing

SA short term real interest rates versus developing countries, 2000 - 2011, %

11Source: SARB

-25000

-20000

-15000

-10000

-5000

0

5000

10000

15000

Agriculture, Forestry & Fishing Mining Manufacturing

Diagnosis: manufacturingManufacturing has borne brunt of currency overvaluation and global crisis

12Source: Quantec RSA Standardised Industry Database

Trade balance by sector 1995Q1 - 2011Q3, Rm

1050

1100

1150

1200

1250

1300

1350

q1 08 q2 08 q3 08 q4 08 q1 09 q2 09 q3 09 q4 09 q1 10 q2 10 q3 10 q4 10 q1 11 q2 11 q3 11

Diagnosis: manufacturingManufacturing has borne brunt of currency overvaluation and global crisis

13

Employment in the manufacturing sector, 2008Q1 - 2011Q4, ‘000

Source: StatsSA

Diagnosis: industrial financingRapid growth of private credit extension ... but not into fixed investment

Private credit extension, 1990 - 2010, R’m (2005)

14Source: SARB

-250 000

250 000

750 000

1 250 000

1 750 000

2 250 000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Investments Bills discounted Installment-sale credit Leasing finance Mortgage advances Other loans and advances

Diagnosis: industrial financingFixed investment sectorally concentrated in consumption-driven sectors

Change in capital stock between 2000 and 2009 across all economic sectors R’m (2000)


-40,000

-20,000

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0

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0

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General government services

Business services

Finance and insurance

Other mining

Transport and storage

Communication

Wholesale and retail trade

Electricity, gas and steam

Basic chemicals

Non-metallic minerals

Medical, dental and veterinary services

Motor vehicles, parts and accessories

Building construction

Other manufacturing

Paper and paper products

Water supply

Excluding medical, dental and veterinary services

Civil engineering and other construction

Other chemicals and man-made fibers

Catering and accommodation services

Wood and wood products

Food

Machinery and equipment

Printing, publishing and recorded media

Glass and glass products

Coal mining

Other producers

Metal products excluding machinery

Agriculture, forestry and fishing

Professional and scientific equipment

Plastic products

Television, radio and communication equipment

Leather and leather products

Tobacco

Rubber products

Furniture

Footwear

Other transport equipment

Wearing apparel

Textiles

Beverages

Basic non-ferrous metals

Coke and refined petroleum products

Basic iron and steel

Gold and uranium ore mining

Diagnosis: industrial financingIndustrial financing constrained not just by cost but by term

Nedbank distribution and term of loans, 2009, R’m

16

Rm 2009 % of TotalHome loans 149229 32%Commercial mortgages 76364 17%Properties in possession 887 0%Term loans 68321 15%Credit cards 7334 2%Overnight loans 12420 3%Overdrafts 11093 2%Other loans to clients 45382 10%Leases and instalment sales 64128 14%Preference shares and debentures 16633 4%Trade and other bills 282 0%Reverse repurchase agreements 8026 2%Gross loans and advances 460099

Rm <3 months>3 months <6 months

>6 months <1 year

>1 year <5 months >5 years

Non-determined Total

Cash and cash equivalents (including mandatory reserve deposits with central bank) 16 382 65 1 928 18 375 Other short-term securities 13 715 1 261 1 501 2 073 18 550 Derivative financial instruments 3 569 834 2 070 3 792 2 445 12 710 Government and other securities 537 2 020 7 607 18 660 7 159 35 983 Loans and advances 83 758 16 463 31 070 153 354 165 656 450 301 Other assets 2 261 32 523 34 784 Assets 120 222 20 578 42 248 177 944 175 260 34 451 570 703 Total equity 44 984 44 984 Derivative financial instruments 2 917 898 1 103 3 037 3 596 11 551 Amounts owed to depositors 338 632 50 084 57 810 19 888 2 941 469 355 Other liabilities 8 780 15 949 24 729 Long-term debit instruments 500 9 184 10 400 20 084 Liabilities and equity 350 329 50 982 59 413 32 109 16 937 60 933 570 703 Net liquidity gap -230 107 -30 404 -17 165 145 835 158 323 -26 482

Source: Letsema (Nebank)

Diagnosis: infrastructureLarge and rapid electricity price increases

Eskom tariff increases, 1996 – 2011, %

17Source: Eskom

$0.00

$100,000.00

$200,000.00

$300,000.00

$400,000.00

$500,000.00

$600,000.00

SANT

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LTIM

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NEW

YORK

Terminal Handling Charge Cargo Dues Sea Side Costs

Diagnosis: infrastructurePort charges amongst the highest in the world

Average cost per vessel, US$

18Source: AIDC Port Benchmarking Study, 2007

Diagnosis: infrastructureInfrastructure investment scaling up but de-linked from manufacturing

19Source: SARB, Quantec

Public investment and trade balance: metals and machinery1990 – 2009, R’m (2000)

-150000

-100000

-50000

0

50000

100000

150000

200000

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

R m

illi

on

s ( 2

005)

General Government Gross Fixed InvestmentPublic Corporations Gross Fixed InvestmentTrade Balance: Metal fabrication, Machinery, Transport Equipment

Diagnosis: manufacturingAuto’s and machinery major diversifiers since 1994

20

MVA annual average growth:1994-2011 and share 2011, R’2005 prices


Sector

MVA Growth

1994-2011

MVA Share 2011 Sector

MVA Growth

1994-2011

MVA Share 2011

Furniture 9.2% 1.1% Rubber products 1.4% 0.9%Other chemicals and man-made fibers 9.1% 6.9% Television, radio and communication equipment 1.3% 0.9%Basic chemicals 6.9% 5.8% Wearing apparel 1.2% 2.0%Machinery and equipment 6.8% 6.6% Other manufacturing 1.2% 6.8%Motor vehicles, parts and accessories 6.6% 8.0% Wood and wood products 1.0% 2.2%Basic iron and steel 5.8% 5.4% Glass and glass products 1.0% 0.6%Coke and refined petroleum products 5.6% 7.5% Non-metallic minerals 0.7% 3.1%Food 5.3% 12.5% Printing, publishing and recorded media 0.7% 3.0%Electrical machinery and apparatus 5.0% 2.9% Textiles 0.2% 1.3%Basic non-ferrous metals 3.3% 2.8% Tobacco 0.2% 0.7%Professional and scientific equipment 2.5% 0.6% Other transport equipment 0.1% 0.9%Paper and paper products 2.2% 3.3% Beverages -0.3% 5.6%Plastic products 1.7% 2.5% Footwear -1.1% 0.4%Metal products excluding machinery 1.5% 5.1% Leather and leather products * 0.4%

Diagnosis: economyTwo speed economy: consumption vs production driven sectors


-200 000

-100 000

0

100 000

200 000

300 000

400 000

500 000

600 000

700 000

800 000

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Agriculture, Foresty and Fishing Mining and Quarrying

Manufacturing Electricity, Gas and Water

Construction (Contractors) Wholesale and Retail Trade, Catering and Accommodation

Transport, Storage and Communication Finance, Insurance, Real Estate and Business Services

Balance on Current Account

Growth in production and consumption- driven sectors and trade balance, 1994 – 2010, R’m (2005)

22

IPAP: Progress – Transversal KAPs

• Leveraging Procurement– Amendments to procurement regulations: designation of ‘fleets’ for

local production• Rail coaches, wagons, locomotives• Electricity pylons• Buses• Clothing / Textiles / Footwear• Further designated sectors to follow

– Designation methodology and research• Industry capabilities and competitive structure• Appropriate level of local content• Modalities to avoid excessive price premia/ promote dynamic

competition• Scaling up over time

23


• Industrial financing– Re-orientation of Industrial Development Corporation (IDC)

funding• R102bn ($82bn) for IPAP and New Growth Path sectors over five years

– Manufacturing Competitiveness Enhancement Programme (MCEP)

• R5.7bn ($725m) additional funding to upgrade existing manufacturing capacity, new investments and expansions

• ‘Matrix’ incentive with various access windows– Investment: new, expansions, technology upgrades– Interest make-up and working capital– Firm and cluster competitiveness upgrading– Standards and conformity assessment– Feasibility studies

24


• Tariffs and standards– Strategic rather than “high”or “low”tariff regime

• Informed by sectoral analysis• Tariff reductions / rebates: intermediate inputs, especially in sectors with

market dominance• Tariff increases: sectors with potential for employment and value-added

improvements

– Green, energy and water efficiency standards• Required to create / facilitate new sectors: biofuels, renewable energy,

solar water heating• Increase energy efficiency in context of supply constraint and rising

electricity prices

– Stronger enforcement• Customs fraud• Non compliant products

25


• Competition policy– Focus of competition authorities on intermediate inputs

to production sectors and goods and services for poor and working class households

– Particular problem with import parity pricing of intermediate inputs due to lack of regional competition and high logistics costs

– Removed / reduced duties on most intermediate inputs: steel, chemicals etc.

– Priority to introduce greater competition into steel sector

26

IPAP: revamp major sector strategies

• Automotives– Inheritance of a deeply uncompetitive automotive industry in 1994– Motor Industry Development Programme (since 1995)

• Import Rebate Credit (IRCC) for exports, with declining tariffs (80% - 1994 to 25% - 2012)• IRCC useds: investment, import vehicles / components, sell to other importers

– Key achievements• Vehicle production increased from 388,442 in 1995 to 534,490 in 2007• Vehicle exports increased from 15,764 in 1995 to 239,465 in 2010

– Automotive Production and Development Programme (from 2013)• Investment Allowance (on budget) + IRCC earned against production / value added• Minimum volume requirement, targetting 1.2m vehicles per annum by 2020• Broaden scope to mini-bus taxis, buses and trucks

– Key challenges• High import penetration and intensity of production• Insufficient number of domestic Tier 1 component suppliers – MNC dominance

27

IPAP: revamp major sector strategies• Clothing, Textiles, Leather, Footwear

– Duty Credit Certificate Scheme (1995-2009)• Substantial decline due to fierce global competition (especially end of MFA in 2005), currency strength and

volatility, illegal imports and insufficient competitiveness• DCCS did not work – only applicable to small pool of exporters and promoted imports through duty credits

– Clothing Textiles Competitiveness Programme (from 2009)• Priority to recapture domestic market share through leveraging ‘economies of proximity’• Production credits earned which can only be redeemed against specific competitiveness enhancing

investments– Machinery and equipment– Process and product improvements– Skills upgrading– ‘Cluster’ initiatives e.g. IT systems linking retailers and manufacturers

– Key achievements• Arrested employment losses with modest increases by 2011• Buy-in of a number of domestic retailers

– Key challenges• Currency overvaluation• Illegal imports

28

IPAP 2012: Key sector focus

• Green industries and industrial energy efficiency– Solar and Wind generation componentry

• Leverage Renewable Energy Independent Producers Programme (REIPP) – procurement of 17.8GW by 2030

• Minimum and rising levels of local content with each round of procurement (approx. 1GW per round)

• Target componentry in Solar PV, Wind and Solar CSP• Develop financing mechanism for ‘lateral migration’ of companies with relevant

engineering, fabrication, casting capabilities• Develop financing mechanism for testing and certification to meet OEM standards

– Solar Water Heaters• New building regulations require most new buildings to install SWH or similar

technologies• Designation of SWHs purchased by public entities• Work with insurance industry to

– Industrial energy efficiency

29


• Metal Fabrication, Capital and Transport Equipment– Rail

• Leverage large rail upgrade capex• Designations related to key componentry into loco’s, wagons and coaches• Appropriate pre-shipment financing

– Electricity• Leverage large coal and nuclear upgrade capex• Designations in range of areas• Appropriate financing mechanisms

– Mining• Linkages to major mining company procurement chains• Beneficiation strategy / Mining obligations

30


• Agro-processing– Biofuels

• Drive technical work related to mandatory feed-in of minimum levels of biofuels into national fuel stock

• IDC financing for farming and refining operations

– Food-processing, Beverage and Confectionary• Identification of export opportunities in net food-importing countries• Product development• Standards

– Import replacement opportunities• Soybean meal and oil • Furniture• Processed food products

31

IP as “voice”: intra-governmental co-ordination / “state failure”

• “Voice” for co-ordination / remedial action within the state• Accelerated progress with respect to industries requiring

complex multi-departmental co-ordination, driven by Minister’s IPAP forum and through the Economic Cluster, such as– Renewable energy– Biofuels– Water licences for forestry, paper and pulp and agriculture

• Port tariff rebates for Manufacturers of R1bn• ‘Moderation’ of recent electricity price increases from 25%

to 16%

32

Capacity building

• Recruitment– Hire best senior management possible– Hire young Master’s graduates and ‘incubate’ with capable mentorship

• Dedicated university programme in economic development for internal capacity improvement / recruitment pool– Certificate– Honours– Masters

• African Programme on Rethinking Development Economics• Learning by doing / ‘economies of scope’ with respect to sector

strategy development• Dedicated internal training programme to be developed

33

Political economy considerations: can South Africa live rent-free?

• Rents are pervasive in SA economy (as elsewhere)• Currency overvaluation rents

– Currency speculation– Importers / retailers– Consumption boom fed by short term inflows– Rodrik: currency undervaluation rent linked to high growth

• Financial sector rents?– Puzzle of massive growth without corresponding increase in investment and

savings– ‘Internal Dutch Disease’ relative profitability of financial vs real investment

• State as site of accumulation– Corruption– ‘Tenderpreneurship’– Limited development of black entrepreneurs

• Industrial policy rents

34

Conclusions• Significant progress with development and implementation of industrial policy,

but serious constraints– Coincided with two major external and mutually re-inforcing external shocks:

currency overvaluation and global crisis; and– One internal shock: massive increases in energy and other prices based on ‘bunched-

up’ user pays approach to infrastructure finance• Mobilisation of key transversal policy instruments

– Industrial financing: IDC + on-budget– Procurement– Trade policy

• Capacity and experience for economies of scope in further sector strategy development / implementation

• Need policy macro / economy-wide policy alignment– Monetary policy and exchange rate– Fiscal policy, especially sustainable infrastructure financing

• Need to promote Black-owned and managed value-adding manufacturers

36

Appendix: Micro vs Macro explanations of manufacturing and economic underperformance

• Micro explanations– Manufacturing is over-protected– Weak education and skills system– Infrastructure constraints– Wages are too high, labour productivity too low

• Macro / economy-wide explanations– Orders of magnitude– Average tariff has declined by 71%: to 8%– Persistent currency overvaluation exerts a capital and skills bias– Short term capital inflows feed short term lending for consumption, not

directed to long term investment– Manufacturing relatively less skill intensive than non-tradable private

services– Internal ‘dutch disease’ relative profitability of real versus financial activities

37

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

South Africa HIC MIC LIC

1972 -76 1977 - 81 1982 - 86 1987 - 91 1992 - 96 1997 - 01 2002 - 06 2007 - 10

Appendix: growthSouth African GDP growth relative to high, medium and low income peers

Source: World Bank

38

0

5

10

15

20

25

30

35

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

11.0

12.0

13.0

GFCF/GDP Gross Saving / GDP Finance/GDP (RHS)

Appendix: finance, investment and savingsGross Fixed Capital Formation and Savings to GDP versus share of the Finance sector in GDP, 1970-2008 (%)

Source: SARB

Appendix: finance, investment and savingsRatio of FIRE GDP to non FIRE private fixed capital investment

39Source: SARB

40

1434809 1466303 1498941 1451851 1387039 1349207 1319141 1292798 1296857 1292247 1308566 1321676 1332199 1321176 12985701212049 1170543

0

2 000 000

4 000 000

6 000 000

8 000 000

10 000 000

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Agriculture, forestry and fishing Mining and quarryingManufacturing Electricity, gas and waterConstruction (contractors) Trade, catering and accommodation servicesTransport, storage and communication Financial intermediation, insurance, real estate and business servicesCommunity, social and personal services

Appendix: employmentFormal employment by sector


41

Appendix: employmentUnemployment and informality rates

Source:StatsSA

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

Unemployment rate - official Unemployment rate - expanded Unemployment rate - expanded plus informal

Case Study: Automotives

• Inheritance of a deeply uncompetitive automotive industry– Crude tariff protection– Proliferation of platforms and models

• MIDP: Motor Industry Development Programme– Export / import complimentation: import credits earned against exports in a

context of declining tariff s (80% in 1994 to 25% in 2012)– MNC assemblers and mix of MNC and domestic component suppliers

• APDP: Automotive Production and Development Programme– Production / import complimentation plus Investment Allowance:– Comparable with major competitors and WTO consistent– Target 1.2m vehicles per annum by 2020– Production based programme with minimum volume requirements

42Source: DTI

Case Study: AutomotivesAutomotive Tariff Regime 2004 – 2020

43Source: DTI

Case Study: AutomotivesTotal domestic production versus total exports 1995 – 2013*

44Source: NAAMSA

Case Study: AutomotivesTotal domestic market versus total imports 1995 – 2013*

45Source: NAAMSA

Case Study: AutomotivesCompetitiveness progress: component manufacturers (2004 to 2007)

46

KPI South African auto component firm

performance levels (n=78)

International firm

performance (n=81)

2004 2007 Improvement % 2007

Total inventory holding

(operating days)

38.8 34.8 10.3 32.5

Customer return rate (parts

per million)

1,170 400 65.8 579

Internal reject rate (%) 4.1 2.9 29.3 1.9

Internal scrap rate (%) 3.5 3.6 -2.9 1.1

On time and in full delivery

reliability (%)

91.9 94.5 2.8 93.2

Production lost to machine

breakdowns (%)

5.9 4.7 20.3 3.3

Absenteeism rate (%) 4.4 3.4 22.7 4.6

Source: B&M Analysts, SAABC database

Case Study: Automotives

Trade balance 2005 – 2010

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2005 2006 2007 2008 2009 2010ExportsVehicles 22000 24600 27500 50100 33200 38700Components 23277 30501 39100 44100 27800 30800TOTAL 45277 55101 66600 94200 61000 69500

Imports Vehicles 25800 32400 38000 31200 24000 35000Original Equipment Components 30600 35300 40500 48100 30000 37900Aftermarket Components 16000 20800 23700 29600 25900 27300TOTAL 72400 88500 102200 108900 79900 100200

Trade Balance -27123 -33399 -35600 -14700 -18900 -30700

Source: DTI, NAAMSA, Econometrix

SA Automotive Trade Balance Rm

Source: DTI, NAAMSA, Econometrix

Case Study: AutomotivesProgress and Challenges

• Key achievements– Production volumes / economies of scale

– Consolidation of platforms and models– Vehicle production increased from 388,442 units in 1995 to peak of 534,490

units in 2007– Vehicle exports increased from 15,764 in 1995 to 239,465 in 2010

– Increased efficiencies, effort and learning at both assembler and component levels

• Key challenges– Import penetration and import intensity of production– Insufficient number of domestic Tier 1 component suppliers – MNC dominance– Vulnerable subsectors: catalytic convertors, leather seats– Logistics costs

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South Africas industrial policy: progress and constraints Economic Association (IEA) / World Bank...

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