AN INDUSTRIAL STRATEGY TO GROW THE SOUTH AFRICAN ECONOMY THROUGH DOMESTIC VALUE ADDITION TO CREATE JOBS

HON. LUFEFE MKUTU

Much has been made of the acute macroeconomic fragilities and challenges – such as a prolonged period of economic stagnation, an erosion of the standards of living, a shorter life expectancy compared to the world average, rising public debt and debt service, operational and maintenance failures in infrastructure networks, poverty that is pervasive, unemployment that is the second highest in the world, and inequality that tops the world charts – that beset our country.

Nowhere, perhaps, has this been more evident, and more consequential, than in today’s debate.

Whilst, of course, the standard view holds that macroeconomic fragilities and challenges can be attributed to South Africa’s subordinate position in a global economic hierarchy encompassing currencies, value chains, and financial markets, right-wing as much as left-wing parties in Parliament suggest that the ANC-led Government must take some share of the blame as the current economic turbulent times are understood to be the inevitable result of ill-suited specific macroeconomic policies that constitute neoliberalism, pursued and articulated by the Government.

Paradoxically, this aggression of right-wing and left-wing parties against the ANC-led Government does not provide the best analytical framework for understanding the catastrophic macroeconomic fragilities and challenges of the South African economy to offer a rational basis for policy discussion. For instance, whilst neoliberalism is still at best sceptical and at worst downright hostile to industrial policy, the ANC-led Government has openly come out in favour of it, which demonstrates that the Government often emphatically distances itself from the neoclassical framework. However, this does not imply that the ANC-led Government’s industrial policy has been enormously successful.

In fact, despite all its potential, industrial policy has not been more interventionist. Three obvious macroeconomic policies hindering a more interventionist industrial policy are the interest rate policy, the exchange rate policy, and the financialisation of the South African economy.

Firstly, the South African Reserve Bank’s (SARB) high interest rates have more negative impacts on investment in labour-intensive sectors of the economy, especially agriculture and manufacturing, where the requirement for borrowing is larger due to higher capital requirements. Consequently, most firms in the agriculture and manufacturing industries are unable to afford high lending costs. This goes on to suggest that bold structural reforms such as central bank credit policies, comprising, but not limited to, selective credit targeted to productive sectors and support for specialised credit institutions (i.e., Development Finance Institutions (DFIs)) to meet diverse credit needs are paramount. Such policies were credited with the rapid economic growth of the agricultural and manufacturing sectors and overall economic growth in countries like France and Japan wherein central banks used credit allocation policies to support industrial policy. Additionally, the central banks of Argentina and Bangladesh, for example, provide subsidized credit to small medium enterprises and domestic banks involved in long-term investment financing of industrialisation, thereby suggesting that these central banks are agents of economic development in the words of a heterodox macroeconomist, Gerald Epstein.

Secondly, the overvaluation of the Rand, aggravated by the exchange rate volatility, has important macroeconomic consequences that affect industrial policy. Specifically, it tends to negatively affect tradable sectors, particularly the agricultural and manufacturing sectors, thus thwarting the competitiveness and the elasticity of demand for these sectors’ products in the global market. In short, the exchange rate vulnerability, in concert with tight monetary policy, has led to South Africa’s de-industrialization and changing employment patterns in the tradable sectors, both to the detriment of labour. It is thus imperative that the exchange rate policy relaxes the balance of payments constraints so that macroeconomic policy can support in a positive way the Government of National Unity’s (GNU) efforts to integrate different Master Plans into a single overarching industrial policy for the country as outlined in the ANC’s 2024 Elections Manifesto.

Finally, South Africa’s integration with capital markets coincided with the international demand for the ‘shareholder value maximisation’ (SVM) corporate strategy which has changed the behaviour of non-financial corporations (NFCs) in the manufacturing sector. This financialisation of NFCs redirects precious NFCs’ resources away from productive and real investment and towards financial interests through paying high dividend payments and share buybacks to shareholders that, in turn, do not reinvest their rents where they are generated, thereby leaving the country with heavy job losses and low chronic economic growth. The unwillingness of shareholders to reinvest within the South African economy suggests that corporate savings are at their all-time high and holding corporate savings while there are available profitable investment opportunities means foregone profit which manifests in missing jobs and unsustainable industrialization efforts. More devastatingly, high corporate savings that are seldom reinvested accentuate rather than ameliorate speculative motives in the South African economy, whose industrial and developmental impact is most doubtful. Henceforth, prescribed assets on shareholders of NFCs which had earlier been phased out can therefore be mobilised to ensure that they direct their rents towards productive and real investment.

Further, this negative activism of blame and complaint by both right-wing and left-wing parties in Parliament whose main aim of political controversy is to see the ANC-led Government’s head placed on blocks and its integrity held up to intimate scrutiny has nothing to say about the fundamental micro and macro reforms implemented by the ANC-led Government before the advent of the GNU.

Most notable among the reforms is the Electricity Regulation Amendment Act which has led to over R100 billion investment in 6,000 MW of large‐scale energy projects.

More significantly, directing and sustaining strategic investments in renewable energy projects maintains the dominance of the Minerals-Energy-Finance-Complex (MEFC), but biases investment away from industrial policy, typically defined as the sustainable growth of a labour-intensive and vibrant manufacturing sector. Correspondingly, the centre of gravity of the South African economy has failed to diversify away from its reliance on the MEFC, thereby holding back rapid economic growth and employment creation while increasing inequality and poverty.

Thus, the immediate task of the GNU must be to maintain cohesiveness and implement appropriate growth policies to ensure that downstream manufacturing sectors, including renewable manufacturing with large positive externalities for local development, receive both private and public funding as they have the potential to increase the relative demand for low-skill labour and economic growth. Building a local renewable manufacturing sector rather than importing renewable components can be utilised to pursue the objective of local beneficiation. More fundamentally, public procurement can be used to reduce demand uncertainty in the local renewable manufacturing sector as it has played an important role in the development of renewable energy technologies, such as solar panels and wind power, in most developing countries. In turn, firms – small and large – in the local renewable manufacturing sector will take full advantage of the potential productivity gains made possible through leveraged public procurement for local beneficiation.

Another notable reform introduced by the ANC-led Government is the restructuring of State-Owned Enterprises (SOEs) so that they can be at the forefront of industrial modernization with a penchant for aggressive capital investments and modern technology. Full-scale privatisation of SOEs – which is the solution often recommended by unprincipled right-wing parties in the GNU – has been received with much critical scrutiny as evidence demonstrates that Asian Tiger Economies, for instance, achieved their economic “miracle” based on a large SOE sector and with little privatization. However, the causal relation between SOEs and improved economic performance hinges on appropriately targeted public investment as a control variable which enables SOEs to aggressively invest in capital equipment and physical infrastructure. In correcting the inefficiencies of SOEs, public investment should play a critical role in fostering long-term economic and industrial development. Unfortunately, the strong emphasis put on reducing the ratio of public debt as a share of GDP which undergirds the Debt Rule and the Budget Balance Rule intended to reduce discretionary spending means the Government has less incentive to increase public investment of all kinds. Therefore, GNU partners must overcome their ideological and historical differences to implement an expansionary fiscal policy that can improve the effectiveness of public investment in industrial development and provide flexibility in times of need through funding national development priorities, especially the areas designated by the Minister of Trade, Industry & Competition (DTIC) as Special Economic Zones (SEZs).

Thank you!