Cyril Ramaphosa’s ‘new dawn’ needs vision and smart programmes for reindustrialisation
At the heart of the upheaval in SA in recent years is the poor performance of the economy, underpinned by an evolving political settlement that has not benefited the majority. In his inaugural state of the nation address President Cyril Ramaphosa made industrialisation and increasing investment the main priorities for reviving the economy, announcing an investment conference and jobs summit to take place later this year. He has just kicked off an international drive to lure investors.
These are positive steps. The South African economy needs a substantial increase in investment for reindustrialisation to take place. But what is really required for Ramaphosa’s "new dawn" to be realised? A study by the Industrial Development Think Tank at the University of Johannesburg identifies key issues linked to "structural transformation" taking place in SA. This involves investment to move productive resources to more diversified sectors and sophisticated activities; producing a greater range of products; and developing improved industrial capabilities.
The manufacturing sector is central in these processes, since it has the ability to pull along growth through backward and forward linkages to the rest of the economy. Sectors such as mining and agriculture grow and transform on the back of developments in manufacturing, while services such as engineering and design have a greater likelihood to develop more innovative production processes.
It requires a new vision and programme for industrialisation under a political settlement that prioritises long-term investment in productive capacity and rewards effort and creativity rather than incumbency
While most middle-and upper-middle-income countries have continued to see industry leading overall growth, with high investment levels, one of the most striking features of SA’s economy is that it remains strongly orientated towards resource-based sectors. SA has in fact prematurely deindustrialised. While the financial sector has grown, investment levels in productive capacity and infrastructure have remained low. At the same time, concentration levels and profits have remained high. This has profound effects on the ability to generate jobs and support livelihoods.
The strong path dependency and lack of diversification of the economy is a result of a number of factors. First, it reflects the continued impact of historical support for resource-based sectors, including past provision of cheap energy. Second, macro policy allowed the exchange rate to strengthen in the 2000s during the commodity boom, and this led to a huge increase in imports and hollowing out of local capabilities. Third, there has been a failure to save and invest a substantial portion of windfall earnings from resources. Fourth, cartels extracted rents through higher mark-ups. Fifth, state capture, as well as simply poor co-ordination and conflicting policies, have undermined attempts to support industrial capabilities.
The poor outcomes reflected a political settlement that was in effect biased in favour of large incumbents.
The overall effect has been to reinforce rather than change the existing industrial structure. However, the current path is clearly not sustainable.
To realise the reindustrialisation envisaged in Ramaphosa’s "new dawn", investment in productive capacity is critical. It requires a new vision and programme for industrialisation under a political settlement that prioritises long-term investment in productive capacity and rewards effort and creativity rather than incumbency.
How do we achieve this?
• Building a broad coalition for reindustrialisation. The new political settlement must speak to and mobilise key constituencies, including black entrepreneurs benefiting from the opening-up of the economy, and workers in whom firms are investing in learning and skills upgrading.
Firms must compete on the basis of improving their product offering. While previous political settlements gave too many concessions to big business, the new settlement needs a quid pro quo with business, rewarding long-term domestic fixed investment, innovation and dynamic competitive rivalry with effective government policies in the areas of infrastructure, procurement, skills development, technology and opening regional and international markets.
• Committing to reindustrialisation. We need to make a commitment to industrialisation by placing it front and centre at the heart of our development strategy. Furthermore, if we are to make products and put them on shelves, we need the relevant government departments and policies to work together. This includes both a reshaping of departments that are critical to industrialisation — technology, industry, trade, development, finance and regulation of markets — as well as better co-ordination between departments so that inconsistent stances are not taken across government departments. These include departments responsible for energy, minerals, telecommunications, and transport.
• Leveraging the opportunities for industrialisation. Opportunities for industrialisation have been identified through detailed sector studies and should be leveraged and built on. In the agriculture sector, for instance, there has already been a movement from low-value agriculture products to higher-value ones such as citrus fruit and berries. These require considerable capabilities in the form of storage and cold chain facilities, and now account for the highest share of agricultural exports. The Southern African region also presents opportunities, given that it is the most important market for many of SA’s diversified products and services.
• Incentivising and investing in capabilities development. The fourth industrial revolution poses both opportunities and challenges. If businesses in SA are to meet these, there need to be strategies for building skills and capabilities in the economy, bringing together technology policy, investment and industry incentives. This includes the development of clusters so that there is shared learning, rapid diffusion of ideas, a critical mass of resources and reduced costs for businesses. SA has some successful clusters but needs to build more of these.
• Confronting concentration. Collusive behaviour has been uncovered in a wide range of sectors in SA, from bread to construction and including banking, cycling, and margarine and edible fats. Concentration in the economy means it is less dynamic, because entrants with new business models are blocked. It also means incumbents can earn profits without being more productive. Opening up the economy is a critical part of being more productive.
SA needs a broader competition policy that aligns with its industrial policy, and facilitates competitors and the entry of black entrepreneurs into the economy. For instance, there is a need for "patient capital" given the time that is needed to build the scale and reach required to be competitive. There is a role for other regulatory agencies too, especially in sectors where there are strong network effects such as telecommunications.
• Managing the money. Macroeconomic policy needs to facilitate industrialisation of the South African economy, and this includes a sustainable and competitive exchange rate. Given the critical need for investment in the economy, government should explore other instruments to help fight inflation. For example, excess consumer credit can be controlled through tighter supervision.
• Goga is a senior researcher in the Centre for Competition, Regulation and Economic Development at the University of Johannesburg.