Industrial policy needs urgent review
In July President Cyril Ramaphosa declared a commitment to revitalising SA’s economy through “smart industrial policy” and promised that government would evaluate the efficacy of existing master plans.
This is not before time: findings from recent reviews conducted by a think-tank historically sympathetic to the department of trade, industry & competition’s policy approaches, Trade & Industrial Policy Strategy, suggest that sector-based master planning has had little impact on the industrial landscape and has not achieved its goals.
As the country grapples with precipitously declining manufacturing performance and limited export growth, it’s crucial to assess the flaws in the master plan system, which sits at the heart of the department’s approach.
A large and growing number of master plans are being developed by the department with industry stakeholders, each of which focuses on a particular sector and proposes sector-specific interventions. While each plan is different from the others, there are important commonalities.
Master plans tend to propose policy measures that have the purpose and effect of protecting domestic firms from foreign competition or encouraging local businesses (and government agencies) to shift more of their procurement to local suppliers.
To many, this sounds positive: protected firms with guaranteed local customers, they reason, would expand output and increase employment. And this is what the master plans say will happen. But this approach is bound to fail. And, according to Trade & Industrial Policy Strategy, the master plans have in fact had minimal impact, with many industries failing to achieve the expected growth or increased competitiveness.
The main reason for this failure is that protectionism only works in theory. While tariffs and preferential procurement could reduce foreign competition, they result in higher costs for consumers and downstream industries that rely on imported inputs. In a global economy where supply chains and competitive production are increasingly integrated, such protectionism ensures that domestic firms’ productivity begins to lag behind that of competitors. Disciplined by competition, those competitors must keep finding new ways to improve their product or lower their prices. The result? Protected firms’ competitiveness in export markets falls further behind.
Why should protected firms even try to compete with foreign firms if they can sell protected products locally at steeply inflated prices? And why should they innovate new products or change their product mix if new products will not automatically receive protection too?
There is no reason to assume that master plans will always offer protectionist “solutions” to industries’ challenges, but there are inherent biases in the process that mean this is a likely outcome. One of those is that most businesses in any industry exist primarily to sell to local customers. In fact, only 20% of SA manufacturing firms export at all, and more than half of these export less than 5% of their output. Given that most firms exist to sell to the local market, they have a common interest in minimising competition from abroad, and no shared interest in increasing competitiveness abroad.
A second reason master plans tend to be protectionist in orientation is that the process of master-planning is run by the department. This means the process will tend to surface proposals that are within government’s sphere of control. However much firms might want better logistics or cheaper electricity or amendments to the labour market regime, the department cannot deliver these. And often enough it will not even want to acknowledge these issues formally because of the implied critique of other government agencies.
Inevitably, master plans therefore tend to focus on what the department can do, such as imposing tariffs and designating goods to be purchased by government agencies from local suppliers.
Another problem with master plans is that they are sector-focused. This seems the obvious approach, and it is one other parts of government have adopted too — we have Sector Education & Training Authorities (Setas), for example, and collective bargaining is also sector-based.
But is it really true that industrial sectors are the most appropriate organising category for making policy? This elevates the commonalities of firms within a sector but ignores the vast differences in what holds back small, new firms relative to mature, large firms. It also ignores differences between the needs and priorities of firms in Johannesburg and firms in eThekwini or Gqeberha, and between firms that do and do not export.
Then there is the vexed question of how to think about the needs of companies that do not yet exist. Sector-based master plans are not much good for this because inevitably the only people in the room representing employers or labour are already participants in the industry. It is unlikely that their needs coincide with the needs of firms that might come into existence if attention is paid not to what incumbent firms want, but to what is needed to maximise an expanding and innovative economy.
This shift in strategy would allow policies to be crafted around enhancing competitiveness and expanding exports and export potential, rather than shielding existing firms from competition.
The Centre for Development & Enterprise is therefore proposing that master-planning processes be redesigned and reconfigured, and that they be replaced by productivity councils. Unlike master plans, productivity councils would adopt a broader, value chain focused approach, rather than one that is premised on the needs of specific sectors. They would gather stakeholders across various stages of the supply chain — from raw materials production to retail, and encompassing every intervening step — to address systemic issues that lead to high production costs, low rates of firm entry or survival, infrastructure and skills deficits, and regulatory barriers.
This shift in strategy would allow policies to be crafted around enhancing competitiveness and expanding exports and export potential, rather than shielding existing firms from competition. By concentrating on factors that directly influence productivity and cost-efficiency, productivity councils could drive industries to adopt cutting-edge technologies, improve logistics and increase their capacity to compete internationally.
Critically, the focus would not be the production of a plan and a series of intra-industry commitments. Instead the councils would be mandated to ensure continuous engagement and adaptation, ensuring that policies remain relevant and effective as industries evolve.
Ultimately, whether SA’s manufacturing sector grows will depend on its ability to enter export markets, where competition is ever-present and pressures to become increasingly productive are fierce. The current approach, which protects firms from this competition, is bound to leave them with increasing productivity deficits compared with foreign competitors. Master plans have been a platform on which this failed approach has been built, and we need urgently to find new ways for government and business to interact.
Encouraging export-led growth would drive productivity improvements and lead to more jobs. When firms are able to compete globally they can expand operations, hire more workers, and contribute to a more dynamic economy overall. By focusing on export-specific challenges — ports, access to trade finance, skills development and regulatory support for intellectual property — SA can support firms across various sectors in becoming globally competitive players.
SA’s manufacturing sector faces an urgent need for reform, and the shortcomings of the master plan approach underscore the importance of adapting industrial policy to meet economic realities. By transitioning to productivity councils and fostering an export-led growth model, SA can strengthen its industrial base, create more jobs and improve its economic resilience.
• Bernstein is executive director of the Centre for Development & Enterprise. This article draws on a new CDE report, ‘Rethink growth, jobs and the DTIC’, the seventh in the centre’s Agenda 2024: Priorities For a New Government series.
This article was published on Business Day