Transcript Trade and Industrial Policy in South Africa

Trade and Industrial Policy in
South Africa
TIPS Forum 2008
Frank Flatters and Matthew Stern
Outline
• Part 1 – International experience
• Part 2 – South African experience
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Tariffs and trade policy
Sector targeting
Tax incentives
Government procurement
Development finance
Strategic infrastructure investment
• Part 3 - Lessons learned
International experience
PART 1
International experience / themes
• Cheap points or to real lessons? (post hoc ergo
propter hoc fallacy)
• The question is not big state vs. small state;
intervention vs. no intervention; markets vs.
governments; or industrial policy vs. no
industrial policy
• The real issue is effective policy vs. ineffective
policy
International experience: the role of
trade
• Fragmentation and global production
networks
• Import-led growth
International experience: policymaking in the real world
• All governments make mistakes
• All policies have unintended, and often
unwanted consequences
• How to minimize the costs and maximize the
benefits?
Asia: successes and mistakes
• Tax incentives – varieties of experience in
ASEAN
• Beneficiation – forest products
• Motor vehicles – Indonesia and Malaysia
• Capital controls and the Asian crisis
• Import regulations and administration
• Human capital – basic health and education
International experience: keys to
success
• Ability to assess overall economic consequences
of policy actions, ex ante and ex post
• Institutions and processes that ensure a role for
independent economic analysis and monitoring
of policy impacts
• ‘Eternal vigilance’ and opportunism in policy
design
• Ability to listen to and learn from ‘stakeholders’
while avoiding capture by special interests
The South African experience
PART 2
Trade and Tariff Policy – initial reform
• The average tariff fell from 23% in 1994 to
8.2% in 2004 (Edwards 2005)
• Increased openness across all manufacturing:
– Export orientation rose from 16% to 30%
– Import penetration rose from 23% to 36%
Trade and tariff policy - stalled
• But performance disappointing; SA’s share of world
exports fell from 0.7 to 0.5 percent over the post-1994
decade.
• Why? The reform programme stalled:
– The number of MFN bands has increased
– SA has become a prolific user of anti-dumping duties
– PTAs are the major focus of ‘reform’; but partial and
ambivalent (rules of origin, NTBs, distrust of implementing
agencies)
– Tariff ‘concessions’ saved as negotiating ‘weapons’
– Selective, made-to-measure tariff reform and rebates;
ERPs have risen across many manuf. sectors
Sector targeting – the motor industry
• The great South African success story
• Unintended consequences:
– High costs
– Catalytic converters the largest beneficiary
• Weak monitoring; no transparency; economic
cost benefit analysis questionable at best
• Capture
– Transitional assistance morphed into “strategic”
industry; support levels increasing
Tax incentives – international
experience
• Not necessary and largely ineffective,
especially for ‘good’ investments
• Costs are generally large and usually not
transparent
• Discretionary authority is often abused
• Tax system should not be a substitute for
dealing with underlying investment problems
Tax incentives – SA experience
(the SIP)
• R10 billion in tax allowances for strategic
investments
• Favoured capital intensive and up-stream
industries
• Tailored to meet specific projects
• Claims of job benefits exaggerated
• Independent review never published
Government procurement –
industrial offsets
• NIPP obligations apply to all government
purchases of more than US$10 million
• Core principles:
– No increase in price
– Mutual benefit
– Sustainability
– Responsibility
– Additionality
– Causality (SPAs excluded)
NIPP ‘Success Stories’
• Ferrostaal will provide a ‘secured loan at a preferential rate’
to a polyester plant in Gauteng
– Euros 2 million in investment credits
– Euros 12.5 million in sales
• Volvo ‘has convinced Acerinox to favour Columbus Steel as
their sourcing partner’
– R1.8 billion in export credits
• Various other obligors are involved in a wide range of
projects
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BAE/SAAB ‘spearheading’ tourism in PE
Ferrostaal testing and sealing condoms
Augusta spinning and knitting Mohair
Thyssen producing wheat beer
Development Finance – the IDC
• IDC internal review (2005):
– The IDC has failed to diversify out of its core
metals and chemical interests
– Future role lies in correcting for ‘the intrinsic
failures of the private financial sector’
– The IDC’s knowledge base and appetite for risk
enable it to fund projects that would not be
considered by commercial sector
– The IDC has a dual role as both a ‘policy actor’ and
a ‘development agency’
The IDC – mission confused and
conflicted?
• The recent performance of the IDC does little to
suggest that it is doing more or less than what
the private sector is already doing
– Preoccupied with large BEE deals
– Dominated by mining and telecomms interests
– SMME financing down
• For the IDC to be involved in the design and
implementation of industrial policies and not
compete with the private sector raises potential
conflicts of interest.
Strategic investment – Coega
• Government investment
– R8 billion
• The feasibility of the project hinges on an anchor
aluminium smelter
– SIP
– Subsidised electricity
– 60 to 75% local (IDC, Coega and other) equity
• Private sector investment
– Claims 9 investment deals worth R21 billion
– Of which just R500 million seems secure
Strategic investment – Blue IQ
• 11 strategic investments over five-year period
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The Innovation Hub
Gauteng Automotive Cluster
Wadeville Industrial Corridor
JIA Industrial Development Zone
• Measures of success
– No attempt to justify the economic value of investments
– Investment/output multiplier lower than the rest of
economy
– Impact on private sector investment lower than
government expenditure on social services
Lessons learned
PART 3
Systemic problems
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Confusion over the role of trade
Anti-labour bias
Sector-specific focus
Lack of capacity for policy analysis
High risk of capture
Lack of institutional coordination
The way forward
• Industrial policy in SA must be targeted at job
creation and poverty reduction. This requires:
– Real and objective economic analysis
– Honest and independent reviews
– Serious consideration of the community of
stakeholders
• And it needs to be thought of much more broadly
than simple sector strategies – the overall
regulatory and investment environments; human
capital; infrastructure; and above all competition