Too often public policies on individual industries swing between two extremes. Sometimes they aim to protect existing behemoths at any cost. Sometimes they seek to promote new product lines from scratch. Ultimately, both approaches define success in terms of maintaining or increasing production and employment.
Yet they seem blind to economic and social realities. In a mixed open economy, sustainable industries must be more competitive by reducing production costs and improving market access. That requires more consistent efforts to address systemic cost drivers, notably infrastructure and input prices, and factors that reduce market access, including logistics and export marketing.
The situation in long steel is typical of one in which nostalgia, rather than hard economic realities, shapes economic policy. In SA as in much of the world, the historic integrated mill at Newcastle, fuelled by huge, ageing coal-based oxygen-blast furnaces — an emblem of the industrial revolution — could no longer compete with new small companies using modern, cheaper, more flexible electric-arc technologies. It ultimately shut down, but only after a few years of dithering. Delays in taking tough decisions have made it harder to encourage new investors or cushion the blow to the Newcastle economy.
The core aim has to be solutions that build a more inclusive and dynamic economy based primarily on modern strengths, rather than propping up established or emerging enterprises that lobby effectively.
This outcome reflects a classic challenge for democratic economic policies. Inevitably, when long-standing industries cannot compete with new technologies they lobby for the government to block technological change. Instead of finding ways to cut costs or shutting down, they ask the government for subsidies, tariffs or other measures to shut out competition, leaving their customers or taxpayers to cover their higher costs. Yet it has long been clear that installed capacity for long steel far exceeds demand. Saving the Newcastle plant would thus require closing down newer, lower-cost mills with more workers.
Efforts to deepen pharmaceuticals production illustrate the other side of the coin. The government has for years sought to expand production of active pharmaceutical ingredients (APIs), also called basic drug substances, at a series of small, mostly state-owned companies. These projects enjoy heavy support from some foreign donors who hope to reduce Africa’s dependence on imported medications.
To date though, none of the new API projects has led to a sustainable expansion in production. A core reason is that each new API has enormous start-up and knowledge costs, which do not transfer easily between medicines. This is why almost every national pharmaceuticals industry relies primarily on imported APIs, mostly from China and India.
SA has extraordinary strengths in other parts of the pharmaceuticals value chain, notably for research, clinical trials and the fill-and-finish manufacturing that turns APIs into useable treatments. The largest SA pharmaceuticals company, Aspen, ranks about 35th in the world and is one of the top producers of generic APIs. It is building a big new complex at Gqeberha, mostly for export. More than 80% of its total manufacturing and 95% of its API output is located outside SA. An effective industry strategy needs to find ways to reinforce and leverage this kind of competitive strength.
Ultimately, these two examples reflect the challenges of industrial policy in a mixed economy. The core aim has to be solutions that build a more inclusive and dynamic economy based primarily on modern strengths, rather than propping up established or emerging enterprises that lobby effectively. When the economy was growing rapidly during the global commodity boom in the 2000s, SA could afford to protect incumbents and experiment with niche products. Now, after a decade of shrinking output per citizen, a stronger emphasis on upgrading overall competitiveness by addressing systemic cost drivers and more rapid responses to emerging difficulties and opportunities is needed.
That approach starts with bulked-up analytical capacity and efficient decision-making systems to ensure responses to business demands are more balanced and faster.
• Makgetla is a senior researcher with Trade & Industrial Policy Strategies.
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