Opinionista Trudi Makhaya 21 June 2019

Let us dream of developing our productive capacity

What recent growth figures showed is the frailty of the productive base of our economy. Since the Great Recession, investment in South Africa has plummeted; as has the rate of productivity of labour and capital. Unemployment has remained persistently high. Any action to get us out of this rut must tackle directly the malaise afflicting our productive base.

I like to think of myself as a polite woman. So shortly after the GDP figures for the first quarter of 2019 came out, I asked the person on the other side of the phone line if swearing was allowed between us. I don’t remember the exact response, such was the heat of the moment, but it was enough for me to proceed to express myself with the requisite rhetorical colour.

In certain circles of economic orthodoxy, I would not be thought of as a polite woman at all. For over the past few months, a notion that is considered downright blasphemous in some parts has been flowing freely in my thought and speech.

What recent growth figures showed, quite starkly, is the frailty of the productive base of our economy. A truckload of studies have made that point quite clear. Since the Great Recession, investment in South Africa has plummeted; as has the rate of productivity of labour and capital. Unemployment has remained persistently high. We have lost ground in our share of the global market while the complexity of our export basket has deteriorated. Our ranking in global indices such as the World Bank Ease of Doing Business has fallen precipitously. And the economic patterns sketched by apartheid resist erasure as deprivation is passed from one generation to the next.

Any action to get us out of this rut must tackle directly the malaise afflicting our productive base. Some of this is the result of the evident deterioration, borne out by figures, of the last decade. But the explanation also lies in the long-standing structural dimensions of the economy. This remains an economy with high levels of concentration in key sectors and limited diversification, with exports still clustered at lower ends of global value chains. International multilateral organisations like the IMF and the OECD never tire of warning us of our product and labour market rigidities.

But back to the apparent unmentionables. How industrial policy became a dirty word takes us back to the later third of the 20th Century. Before then, countries in the now industrialised west consciously shaped market outcomes in support of their productive sectors, especially manufacturing. The East Asian miracle economies followed the same playbook. But as other developing countries sought to build their industry, their efforts faltered. Import substitution industrialisation came to be the unacceptable face of industrial policy. In various African, Latin American countries, and in India, inward-focused industrial policies did indeed result in severe economic distortions.

But is industrial policy still a dirty word? Do the failures even represent genuine industry policy?

In a working paper entitled The Return of the Policy That Shall Not Be Named: Principles of Industrial Policy, researchers from the IMF (whose disclaimer makes it clear that this is work-in-progress, not an official position that covers all factions in the organisation) present a good job of disentangling these disparate experiences of industrial policy across time and geography. In the analysis of Reda Cherif and Fuad Hasanov, “true industrial policy” is underpinned by the guiding principles of export orientation, vigorous domestic competition and interventions to fix market failures that get in the way of producers in sophisticated industries. In other words, industrial policy that delivers is performance-based, transparent and open to experimentation and learning.

Their argument also demolishes the myth that building international champions depends on stifling local competition in domestic markets. Effective competition at home provides the discipline to compete on a bigger stage and flushes out cronyism. However, I think this view has to be tempered with the need to achieve economies of scale, which means finding ways to make companies to compete for the market if not necessarily in the market.

Fact is, industrial policy still arouses some scepticism. Even as the authors remind us that initial conditions in East Asia were not too dissimilar to those prevailing in Africa today, or that you are never too poor to be innovative, many African countries are chided for having industrial aspirations. Even Mariana Mazzucato, whose work I distribute enthusiastically, thinks of innovation in the developing world as mainly about catching up to frontiers established by advanced economies. Whereas thinkers such as my mentor at Oxford, the late Sanjaya Lall, worked tirelessly to insert notions of technological complexity in studies of economic development in what his (my mother’s) generation called the “third world”. The IMF working paper argues that it is important for developing countries to reach just beyond their comparative advantage, to what is just outside their grasp.

A decade of macroeconomic easing in South Africa, with a significantly depreciated exchange rate and a doubling of the public debt to GDP ratio – inadvertent stimulus you might call it – did nothing to halt the decline in the productive sectors, including manufacturing capability.

In fact, a focus at the macroeconomic level, with largely indiscriminate policy levers, is likely to reproduce the patterns etched in the economic landscape. Policies that operate at the aggregate level, stimulating the status quo, do not address themselves directly to questions of productive structure. But true industrial policy does.

Long before the IMF working paper came out, deep sectoral work had begun in government and think tanks to map how to revitalise the productivity and competitiveness of the South African economy. In the public domain, there are studies such as Structural Transformation in South Africa: moving towards a smart, open economy for all by the Centre for Competition, Regulation and Economic Development and A Green Economy: Industry and Trade Analysis authored by Trade and Industrial Policy Strategies.

A focused approach is critical. Working with the private sector, it is important to nourish a select group of value chains. They can’t all be ‘moon-shots’ as grabbing low-hanging fruit is important and necessary in light of the ongoing labour market catastrophe. There are also great opportunities in breaking out of carbon-dependence in pursuit of green industrialisation.

Perhaps we shouldn’t call this programme of action “industrial policy” any more. If fact, the IMF pair offer that these ideas for developing productive capacity and sophistication can be characterised as “Technology and Innovation Policy”. But the message, whatever the lexicon adopted, is clear. We can never let anyone tell that us that we are too African, too resource-endowed or too stuck to dream big. With policy oriented towards action, with rigour in searching for priority sectors and activities, and continuous measurement of economic impact, we can claim our place in the club of nations that compete effectively in the global economy. DM

Trudi Makhaya serves as Economic Adviser to President Cyril Ramaphosa. She writes in her personal capacity.

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