Opinion: Local content-driven industrial policy essential for the success of the Economic Reconstruction and Recovery Plan

3rd December 2020

In this opinion piece, Nelson Mandela University Infrastructure Development & Engagement Unit associate Bongani Mankewu writes that consistent and coherent industrial policy is indispensable if success is to be achieved in South Africa's infrastructure roll-out.

South Africa’s economic policy between 1994 and 2007, in particular, has been overwhelmingly dominated by orthodox economic reforms. As a result, these reforms were meant to achieve a step-change in fixed investment and thereby catalyze higher levels of growth and employment across the economy, including manufacturing.

Unfortunately,  these reforms have not delivered significant and/or sustainable investment, growth, and/or employment gains. South Africa dawdle in engaging a policy shift concerning industrial policy, that is even now in the nascent stage. For the suggested Economic Reconstruction and Recovery Plan through Infrastructure roll-out consistent and unambiguous industrial policy with considerably greater coherence and co-ordination between industrialization objectives and macroeconomic and other economy-wide policies are required.

In hindsight, glibness resulted in an industrial policy with no real focus on industrialization, misplaced to comprehend, there is exhaustive literature which emphasises that there is something special about the role of manufacturing in economic development associated with the Kaldorian view of the sector’s ability to generate dynamic increasing returns.

Therefore, infrastructure as an enabler of the economy and its blazing ability to contribute to the competitiveness of the manufacturing sector requires unyielding policy enforcement of localization. It is also vital to note that, key issues the industrial policy needs to address are ways to promote the manufacturing sector and transitioning from an imitation regime, based on cheap labor and imported technologies, to a skill-intensive innovation regime.

For sustainability of the planned investment in infrastructure, the policy instruments must undertake an approach to economic growth that manufacturing is the engine of economic growth, and manufacturing growth induces productivity growth that cut-across other sectors of the economy. This approach necessitates a market demand mobilisation - creation of demand with a focus on judiciously identified sectors of the economy as linchpins to create spill-overs to the downstream of the economy; convergence of market demand with the supply of finance; and sector clusters to build capacity.

The extant literature has consensus that infrastructure affects productivity and output directly as part of gross domestic product (GDP) formation and as an input to the production function of other sectors. It is therefore needed for raising economic productivity and sustaining economic growth.

It increases total factor productivity directly because infrastructure services enter production as an input and have an immediate impact on the productivity of enterprises. It thus fosters aggregate economic output given its contribution, on its own, to GDP.

In South Africa therefore it means industrial policy instruments have no option but to enforce localization as the driver if sustainable infrastructure investment is to be attained.