Manuel denies being opposed to industrial policy, as OECD slates the plan

15th July 2008 By: Terence Creamer - Creamer Media Editor

Finance Minister Trevor Manuel has moved to strongly deny the persistent suggestion that he does not support South Africa's National Industrial Policy Framework (NIPF), but he stressed on Tuesday that all government programmes had to be "costed and viable" before the National Treasury would agree to provide funding for their implementation.

Speaking at the release of the Organisation for Economic Cooperation and Development's (OECD's) economic assessment report for South Africa, which heavily criticised the Department of Trade and Industry's (DTI's) industrial policy vision, Manuel said it should not be forgotten that he was once Trade and Industry Minister, and that his "DNA" was all over some of South Africa's largest industrial-policy interventions.

This, he noted, included the Motor Industry Development Programme (MIDP), about which the OECD report also raised several questions. In fact, the report, which was released at a joint briefing attended by Manuel and the OECD secretary general Angel Gurria, suggested that a more detailed cost-benefit study be undertaken to establish the validity of the DTI's argument that the maintenance of support for the industry remained worthwhile and should, thus, be extended beyond 2012.

DTI director-general Tshediso Matona recently defended the economics behind sustained automotive-industry support, telling Engineering News that the new programme, which would be unveiled later this year, would seek to shift the emphasis away from the current export focus, to one that emphasised ‘scale' in the production of vehicles, and was supportive of the development of world-class component manufacturing.

"Through the MIDP, we know now that we have the capacity to produce high-quality cars for export.

"We now need to develop the economies of scale so as to reduce production costs and to deepen the components industry.

"Those are the two main pillars of the new support instrument," Matona told Engineering News, adding that this also implied greater levels of investment by the industry, skills development, and a stronger emphasis on industrial upgrading in the components sector.

This was also in line with a recent review by a panel of Harvard economists, which acknowledged the automotive industry's potential to become globally competitive, with the proviso that the domestic supplier base was more fully developed and modernised.

But the OECD was unconvinced saying, "such a support programme is often justified by the 'infant industry' argument. The extent to which such an argument may apply to a sector essentially driven by foreign direct investment is, however, questionable, as is the quasi-permanent character of the subsidies".

The OECD study saved its venom for the NIPF itself, suggesting that it bore the hallmarks of apartheid-era protectionism and that its aims appeared to be in conflict with the country's stated aspiration to boost the overall competitiveness and competitive pressures.

"The emphasis on industrial policies risks preserving the apartheid-era pattern of protected national champions insulated from foreign competition and enjoying high mark-ups. This runs counter to the acknowledged need to enhance the level of competition in the economy," Gurría said in his remarks on the issue.

The study argued that the NIPF was also contradictory in that it noted the negative affects of monopoly pricing on the one hand, but listed preferred sectors that were likely to receive further and enhanced protection.

"If such a strategy of protecting established businesses is applied, there is a risk of a waste and misallocation of resources, as these policies often further distort competition between industries or firms," the OECD report contended.

Its preference would be for policies that sought to improve the competitive conditions, which, combined with market liberalisation, would "best serve" the goals of employment and transformation.

Meanwhile, Manuel gave some fresh insight into why there appeared to be some conflict between the DTI and Treasury over the NIPF and its associated action plan.

"Unless people can put a business plan on the table, that is costed and viable, where the benefits to all of us as citizens of the country are explained, you shouldn't expect us to give the taxes that you earn and pay over to the State to ill-considered proposals," Manuel said, adding that it was not about "blocking things that can make a difference", but about raising the bar.