By Saliem Fakir · 2 Jun 2009
No sooner had Zuma confirmed his cabinet and a select few in the whining caucus already started complaining that industrial policy is best left to the private sector to sort out. All government needs to do is dish out the incentives, lower the taxes for exporters and ensure wage expectations are kept to the minimum.
So long as government does this, the private sector will do its level best to pick the winners. Such cynicism against government intervention must be met with counter-cynicism. Industrial policy doesn’t happen in a vacuum where government does one thing and the private sector another. This is a recipe for disaster.
The unexpected 6% drop in GDP demonstrates the extent to which we are vulnerable to the effects of the slump in global economic growth.
We are officially in a recession.
The growing industrial dominance of China is already devastating our textile industry. But we can’t always blame China and others for our woes. We need to learn to adapt to a changing world.
There is a great hurry, at present, by our new Ministers of Trade and Economic Development, to secure and price a bailout of the textile firm Frame -- about 1400 jobs are at risk. The textile industry is only one sector; the automobile, agriculture and mining sectors are also bleeding jobs.
This sudden vulnerability should bring to bear the best of our minds from both the public and private sectors.
The design of industrial policy should not just be to ensure the prosperity of exporters, but also to create opportunity for the country’s workforce by diversifying the productive capacity and deployment of capital.
Foreign trade is only one element of an industrial development strategy.
Strengthening our domestic base is the other dimension by using expanded manufacturing capacity to catalyse entrepreneurship, create the conditions for raw and young talent to ply their skills and to ensure that latent energy, which has been locked for so long is released for the overall benefit of the national economy.
It would be better to invest, often idle and free roaming finance capital, in the real economy rather than in speculative and risky ventures.
Stats SA has recently reported that manufacturing capacity has shown a year-on-year contraction of about 11.7%. Job losses stand at 200,000, eroding the gains of last year.
The Trade and Industry Minister, Rob Davies has already pointed out that he has two challenges: preventing South Africa’s further deindustrialisation and expanding our manufacturing capacity by putting in place a sound industrial strategy with private sector and labour’s input.
The rush to create jobs requires co-ordination between different parties. There are four issues at hand: 1) bailing out key and strategic industries if their long-term sustainability can be assured; 2) developing a robust new industrial policy and strategy that helps us build a stronger and less vulnerable economy; 3) using our R787 billion infrastructure programme to ensure that procurement policy is designed to maximise input from local firms rather than have our capital exported and bringing to nought the benefits of such large infrastructure spend to the local economy; 4) revisiting our commitments to the WTO by ensuring that the liberalisation of tariffs is not done in a way that harms South Africa’s own economy and growth prospects.
All of these are inter-related issues and require clear heads as well as co-ordination. This being said, we must be mindful of the overall purpose of industrial policy and trade.
No nation can do without trade, and no nation is willing to trade with others to its own disadvantage. The only means of protecting itself from rapacious and unfair trade is being able to measure its relative trading position and economic power relative to the other trading partner or bloc.
The German Economist, Friedrich List (1789-1846) asserted that poorly designed free trade and industrial policy can lead to a greater disequilibrium between nations because nations are unequal as a result of political power, the endowment of natural resources, labour, knowledge and infrastructure.
The key here is to ensure that our industries are not cannibalised by predatory corporates or nations whose relative power and productive capacity outweigh our own. A countervailing industrial and entrepreneurial base is always handy against predatory inclinations.
List’s main thesis is that the wealth of a country is determined by the nature of how it deploys its productive assets, both human and natural towards the production of goods of value. List was interested in the performance of the collective, not that of individuals. Individuals, as far as List was concerned, were not supreme.
List's arguments were not novel. They were inspired by one of America’s founding leaders and first Treasury of State, Alexander Hamilton. In following in the tracks of Hamilton, List learnt the art of what is called 'strategic economics'.
A nation’s relative economic power is calculated against the relative economic power of a trading partner. Asymmetric relations always invite exploitative terms, not always at the best of national interest. It is always better to reduce the asymmetry so there is more flexibility to bargain.
List's framework seeks to differentiate between different interest: private, national, and cosmopolitan (international) -- which all require attention in trade and industrial policy.
List was a nationalist and believed that the home front was primary before any new fronts within a cosmopolitan system of trade could be embarked upon. While List recognised the value of individual 'privations' he believed that national aspirations, which must hold sway over individual interest is the only manner by which to guarantee the welfare of future generations.
List wrote, "…under the existing conditions of the world, the result of general free trade would not be a universal republic, but on the contrary, a universal subjection of the less advanced nations to the supremacy of the predominant manufacturing, commercial and naval power…"
For List then, the power of the state is a key to ensure a nation’s self-development and the terms with which it exchanges with other nations -- all of which is gauged against the prism of its own national interest, rather than for the sake of some blind following of global cosmopolitan virtue in the face of unequal power.
List’s prognosis of countries that are purely agriculturally dependent for their economic well-being is that they will always remain poorer and less capable of acquiring sufficient power within the cosmopolitan economy because of the lack of a manufacturing base that expands the scope of the overall economy and acts as another pillar of support together with agriculture and mining.
For List, wealth resides not in the net value of natural wealth but in the net value of productive assets. This capital can only be created out of the mixing of natural and mental capital. The quantity of mental capital, for List, is the key factor that moves economies from underdevelopment to development.
List was also of the view that the home market was far more important than the external market. List suggests that without the diversification of the productive base of the economy into other sectors, an agriculturally dependent economy "cannot determine for itself how much it will produce; it must wait and see how much others will buy from it."
And, he goes on further to note that ‘their power of effecting sales' is dependent on the good or bad harvest of the agricultural-manufacturing nations and then too "they have to compete in these sales with other purely agricultural nations."
List saw in diversification, like the adoption of manufacturing, the inspiration for new kinds of intellectual development that agriculture, because if its nature, would restrict.
Yet, it is not manufacturing that is only lifted, but agriculture and other sectors as well, "…agriculture itself is raised to a skilled industry, and art, a science."
What List offers is a wider lens under which to place a country’s industrial policy and strategy. The idea of nation building and strengthening our domestic economy should take priority over the selfish interests of exporters and stronger trading parties and we should be mindful in the end that manufacturing boosts the application of the constellation of associated mental capital needed to achieve the manufacturing interest.
More importantly, as much as we should use manufacturing to strengthen our productive capacity we must never use it to displace the importance of agriculture, as it is still a major source of livelihood for many of our people.
If anything, manufacturing should lead to the further diversification of the agricultural and mining base.