MAT CUTHBERT: Time has come to ditch vertical industrial policy

SA actively pursued “vertical” industrial policy in the form of  industrial policy action plans (Ipaps) before the appointment of Ebrahim Patel to the “super ministry” of trade, industry & competition. Ipaps were the main focus of Patel’s predecessor, Rob Davies, with the first being issued in 2007.

However, under Patel industrial policy has become even more centralised (vertical) despite repeated warnings not to do so from businesses, economists and the opposition. But what is the difference between such vertical industrial policy and a “horizontal” approach, and why does it matter?

Think of horizontal industrial policy as the provision of crucial public goods such as network infrastructure (electricity, railways and road), public information, and law and order. This approach aims to improve the overall business climate and enhance competitiveness.

On the other hand, vertical industrial policy refers to the selection of specific industries or sectors by the state for development. This includes the provision of firm and/or sector-specific subsidies, tax incentives and grants.

The vertical approach followed by SA relies heavily on the notion of a developmental state, and this is justified by the immense success achieved by the “Asian Tigers” (Hong Kong, Singapore, South Korea and Taiwan), which made use of industrial policy to transform their countries from undeveloped backwaters to high-income nations.

However, in SA this approach is “augmented” with the inclusion of a few Soviet throwbacks and trade policy interventions such as central economic planning, master plans and import substitution on steroids, that is, localisation.

The relative success achieved in the automotive sector by way of an industry-specific approach has emboldened Patel and his technocrats in the department to roll this out in other industries, such as sugar, poultry, steel, textiles, furniture and forestry.

However, as noted by XA International Trade Advisors founder and director Donald Mackay in an article in Business Day earlier this year: “The love child conceived on the back seat of the automotive industry is the subsidies given to the sector. Our taxes help us export cars, not our trade unions, Eskom or failing ports” (“SA sticks to protectionist policy while Agoa slips through our fingers”, May 15).

My interpretation of this is that there is no inherent competitive advantage in the automotive sector, but rather it is a case of the government artificially propping up an industry that without the inducements provided by the government would hastily exit our shores.

In the more recent master plans, such as in steel, poultry and sugar, the government has made use of the remaining tools in the vertical industrial policy and trade policy tool kits, such as grants and tariff protection.

What has happened is that specific firms in these industries have been gifted generous lending terms from development finance institutions such as the Industrial Development Corporation and National Empowerment Fund to expand their businesses. Furthermore, they have been provided with tariff protection from international competition by the International Trade Administration Commission (often on spurious grounds), and they have had local content provisions put in place to limit what the state can procure, from whom.

SA does not have the benign dictatorship, technical expertise or emerging industry to replicate what was achieved by the Asian Tigers.

While the stated aim of this approach has been to compensate for market failures and to address negative externalities by enhancing competition, deepening local capacity and expanding our exporting footprint, it is going to fail, just as we said it would.

The government was warned by the opposition that prices would go up, competition and quality would be diminished, and jobs reliant on government protection would be lost. We were denounced and told that the economic orthodoxy did not apply to them and that we would be proven wrong.

Now, as several commentators have noted over the past couple of weeks, the proverbial chickens have come home to roost. First was the decision by President Cyril Ramaphosa to remove all local content provisions for the procurement of renewable energy supplies in the face of the electricity crisis. Then came the U-turn by Patel on poultry tariffs, much to the dismay of the poultry lobby. 

Government policy has run into a couple of hard economic realities. You cannot run an efficient and growing economy without electricity supply. And, consumers who cannot afford a staple protein source have no choice but to forgo the intake thereof and/or substitute it. 

Despite the government’s best efforts the market dicta that have prevailed over so many years have finally caught up with Patel and the government at large. In an economic climate characterised by high inflation spurred on by rising energy, food and transport prices, there was nowhere left to turn.

Now Patel’s department sits with a number of companies funded by development finance institutions under the auspices of master plans that have no policy certainty, nor the level of government protection they have became accustomed to.

I speculate that left to external market forces many of these companies will end up adding red lines to the balance sheets of the development finance institutions concerned, and much flowery language will be bandied about how the government needs to intensify localisation and so on.

Aside from the questionable economic assumptions used to justify the vertical approach the government has persisted with, SA does not have the benign dictatorship, technical expertise or emerging industry to replicate what was achieved by the Asian Tigers.

Instead we should be focused on stabilising electricity supply, developing and protecting critical network infrastructure, maintaining the rule of law and being transparent with market information. It is clear to me, and it should by now be clear to Patel, that it is time to ditch vertical industrial policy.

• Cuthbert is a DA MP and shadow deputy trade, industry & competition minister.