Rival crews can both steer by the star of competition

Image: Flickr, Flowcomm
Image: Flickr, Flowcomm

IT IS right that there should be a healthy debate about industrial and trade policy in SA.

These are not policy areas for purists but for pragmatists. In steering a course between the recent views of Finance Minister Trevor Manuel and Trade and Industry Minister Mandisi Mpahlwa, there may be more common ground than is apparent at first sight. But at the heart of the debate is the role competition should play in driving growth and development.

In his recent memoirs, Alan Greenspan muses that competition is the key to economic growth, and has been central to all successful development experiences. The engine is a process the Austrian economist, Joseph Schumpeter, termed “creative destruction”. The term points towards the unsettling social effects of greater competition induced by globalisation, and the different policy frameworks countries around the world must adopt to deal with them. The economic benefits of policies with a strong international bent are greatest in smaller economies, where there are fewer opportunities for internal trade and specialisation.

As Manuel noted in last week’s medium-term budget statement, global trade negotiations are unlikely to deliver much. As things stand, we cannot think of a single negotiation SA is involved in that is moving towards a successful conclusion, never mind an ambitious, competition-enhancing outcome. Much of this is beyond the government’s control, especially the World Trade Organisation (WTO) (too many players) Brazil/Mercosur, and India (reluctant liberalisers). The most ambitious negotiations — those with the US — were doomed to fail because of widely divergent expectations. Even recent negotiations with the European Union (EU) over economic partnership agreements may not reach a successful conclusion.

Therefore, we should not reject out-of-hand Manuel’s suggestion that unilateral trade reform is required to build our competitiveness. This would directly support Asgi-SA’s core interventions. Asgi-SA lays strong emphasis on promoting the competitiveness of the entire economy, building on the government’s stable macroeconomic policy of the past 10 years, if the economy is to reach its goal of 6% growth in the years ahead.

Trade liberalization is at once politically more palatable and economically more effective in raising productivity if it is implemented not as an initiative in isolation, but together with other growth-promoting changes. The industrial policy and trade interventions have thus been basically delegated to the trade and industry department’s subsequently produced National Industrial Policy Framework (NIPF).

There is much in the NIPF that is sensible and needs to be pursued urgently. For example there is the emphasis placed on boosting competition policy — and its enforcement — as this would contribute to achieving more competitive markets. Furthermore, the NIPF argues correctly that SA cannot indefinitely rely on commodity exports and hence needs to diversify its economic structure and export “basket”. Within this, manufacturing is correctly identified as a key driver, as it has the potential to promote the economy-wide productivity gains necessary to propel the economy to higher rates of growth, consequent diversification and employment generation.

However, the trade policy perspective emerging from the NIPF and Mpahlwa’s recent statements need more critical interrogation. The NIPF’s overall orientation is towards a particular, highly contested, interpretation of the east Asian development “miracle”, within which strategic industrial policy or sectoral interventions are seen to have played the decisive role in that region’s development. Thus, openness to trade, or encouragement of competitiveness, is not viewed as an end in itself but rather as a potentially hostile force to be “strategically engaged with”. The department of trade and industry consequently argues that import tariffs must be decided on sector by sector, reducing those on upstream inputs not produced in SA (including capital equipment), and treating downstream tariffs “more carefully, particularly those that are strategic from an employment or value-addition perspective”. This informs the review of the tariff book that is under way.

This approach has some obvious limitations. First, in the ( unlikely) event that the WTO’s Doha round does conclude, our tariffs will be cut on the basis of a formula concocted in Geneva. Our failure to unilaterally reform the tariff regime means the possibilities for “strategically designing” it would evaporate and an opportunity would be lost.

Second, it is reminiscent of old-fashioned central planning, within which the economy operates like clockwork and is amenable to endless bureaucratic tinkering. But modern manufacturing success is determined by minute subdivision of production tasks, supply-chain management, and trade facilitation. The NIPF’s sector approach to tariff reform does not sit comfortably with this reality. Yet if the government is set on sector-targeting then it should follow the advice of its Harvard panel of economic advise rs and ensure that such targeting is done on the basis of careful cost-benefit analyses subject to public scrutiny, and with in-built sunset clauses.

In our view, tariff simplification and liberalization should be pursued expeditiously. But trade liberalization generates winners and losers. Given SA’s present socioeconomic challenges, mechanisms for compensating or assisting the losers will have to be strengthened if the tariff-reform path is pursued.

Third, our manufacturing sector operates under major constraints, some to do with inadequate or misdirected state policies (transport and telecoms respectively) but more strategically to do with our location in the global division of labour. This is where the NIPF seems to be weakest. SA is far from major markets, transport costs are high, and we have considerable labour market challenges. Furthermore, as the NIPF points out, SA is squeezed between rich countries (control over advanced technologies) and “Chindia” (low-wage labour-intensive production). Hence, we do not see much scope for a huge expansion of manufactured exports, especially — and unfortunately — labour-intensive ones.

Fourth, in light of the limitations to our manufacturing growth path, the NIPF should focus more on the services sector. Of all the segments of the economy, services have demonstrated the most dynamism in recent years. They also provide crucial inputs — such as finance — into manufacturing. The services sector is central to our economic future and should receive far more attention than it presently does.

So where is SA’s trade policy going as we move towards 2008? Much of what we have outlined above constitutes a core agenda that is already captured in Asgi-SA. The quicker it is implemented the better for the economy, especially as SA is scaling down its growth forecasts. Asgi-SA is where Manuel and Mpahlwa may yet find sufficient consensus.

But business eventually also requires certainty and predictability in industrial and trade policy — even a less-than-ideal policy is better than a prolonged open-ended situation. Global experience suggests that it does not require policy miracles to produce good results. If key policies, such as trade policies, are largely in the right direction, then economic performance can be successful.