Industrial policy is back on the global economic agenda. The World Bank has released its industrial policy. The return is not accidental. In a world shaped by artificial intelligence (AI), the energy transition, climate change and geopolitical tensions, governments are once again asking an old question: how can the state shape markets and direct investment towards broader developmental goals?
A few days ago two important things happened in South Africa on the industrial policy front: the South African government adopted an industrial strategy, and South African business identified mining, tourism, infrastructure and agriculture as priority sectors capable of helping the economy return to a growth rate of about 3%. But identifying priority sectors is the easy part.
The harder question is whether the state has the capacity and political will to ensure private investment produces developmental outcomes such as raising industrialisation, employment, productivity and exports.
At the heart of industrial policy are questions that have not changed: Who directs investment? Who sets the terms of state support? Who carries the risks? Who captures the rewards? And who has the power to ensure that all parties deliver?
Historically, successful industrial policy has rarely consisted simply of government giving money to business or reducing input costs. It has involved a bargain: state support in exchange for economic performance.
States have shaped investment towards industrial development through strategic trade liberalisation and protection, subsidised credit, infrastructure access and lower input costs such as electricity. But these instruments work only with internal state co-ordination and external co-ordination with business, backed by monitoring, discipline and reciprocity.
That raises the central problem for South Africa today: how does the state and labour movement make a business sector deliver developmental outcomes such as industrialisation, employment, exports and technological upgrading? The answer lies in understanding when business has historically been willing to accept state investment direction.
Consider the East Asian Tigers. Their industrial strategies succeeded because domestic firms were strategically vulnerable to international competition and were interested in international markets, particularly the US. They therefore accepted state investment direction in exchange for state support. Governments could make assistance conditional on production and export targets. Firms that performed received support; those that failed could lose it.
Sweden offers a different example. The strength of labour helped produce a political settlement in which business accepted developmental obligations in return for labour peace.
The Covid-19 pandemic illustrates the same political economy. Governments protected vulnerable businesses from an unprecedented shock, creating an opportunity to tie public support to structural transformation and developmental outcomes. Yet in many countries subsidies and bailouts absorbed much of the risk without equivalent demands on business, while the gains largely accrued to private firms.
South Africa’s 44% unemployment rate and increasingly ethnicised and anti-African immigrant protests should also be seen as a threat to business. That necessitates a reciprocal industrial policy in which the state supports business in exchange for productive investment, industrialisation and employment.
The problem of leverage
The feasibility of active Swedish-type industrial development in contemporary times is increasingly questioned. Companies have more ability to relocate investment, while global supply chains make it harder for national governments to set the terms of production for wider economic benefit. Firms have access to private equity, international financial markets and sources of funding other than the state.
South Africa’s position is particularly difficult. Decades of neoliberal restructuring and state capture have weakened state capacity to demand reciprocity from business. The overall result is a shift in the character of industrial policy. States are increasingly providing support without demanding sufficient reciprocity.
Governments take on more of the risk, whether through infrastructure investment, guarantees, incentives or subsidies, while private capital is often left to appropriate a disproportionate share of the gains.
In democratic states such as South Africa, electoral cycles, pressure for rapid delivery and media sensationalism can drive decision-making towards short-termism and, at times, populism, undermining long-term structural change.
That cannot be a sustainable development strategy. However, the answer is not to abandon industrial policy or democracy. Nor is it to conclude that the South African state is powerless. Even under contemporary conditions the state and organised labour retain sources of leverage. The task is to identify them and use them strategically.
From incentives to reciprocity
South Africa needs to move away from an industrial policy based primarily on incentives and towards one based on economic developmental bargains.
If the government provides firms with tax incentives, subsidised finance, infrastructure, electricity support, access to land or other forms of public assistance, there must be clearly defined reciprocal developmental obligations from white and black businesses. These could include employment targets, local procurement, export performance, investment commitments, skills development, technological upgrading and participation in domestic value chains.
The principle should be simple. State support must purchase public outcomes. That requires a capable state that can monitor commitments and impose consequences when they are not met. Without monitoring and discipline, industrial policy risks becoming little more than corporate welfare or a business nanny state providing largesse, which results in huge wealth accumulation for the elite with less impact for the poor.
The policy also needs co-ordination, including macroeconomic policies supportive of industrial policy, infrastructure, energy, trade and skills development. Macroeconomic policy and industrial policy therefore need to be treated as complementary rather than separate domains.
Targeted approach
Industrial policy cannot support everything. Scarce public resources require strategic choices. South Africa should focus on sectors where the country possesses capabilities, strategic assets or opportunities to move up the value chain. That could include steel, electric vehicles, pharmaceuticals, agriculture, critical minerals and infrastructure, alongside mining and other sectors with significant potential for domestic value addition.
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Critical minerals are particularly important. South Africa should not simply export minerals needed for the global energy transition while importing the higher-value technologies and manufactured products produced from them. South Africa has not been able to capture more value domestically through processing, manufacturing and technological development because of unwilling business, the labour movement and a weakened state.
The same failure in agriculture can be attributed to this. The goal has simply been to increase agricultural output, but it has failed to widely develop deeper agroprocessing, logistics, technology, manufacturing and export capabilities around it.
Infrastructure is equally important. Reliable electricity, functioning ports and railways, efficient logistics networks and well-serviced industrial zones are not merely public services. They are productive assets that determine whether businesses can compete.
This requires long-term public investment financed through appropriate sources of patient capital, including development finance institutions and other long-term financing mechanisms. Again, this requires workers’ pension activism to advocate for infrastructure investment, among other core tasks for the trade union movement.
Economic growth compact
The revival of industrial policy therefore requires more than a list of priority sectors. It requires a new political compact between the state, business and labour. Business must recognise that public support comes with obligations. The state must demonstrate that it can co-ordinate policy, monitor performance and enforce agreements.
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None of this means returning to the industrial policy of the 20th century. The world has changed; capital is more mobile, production is more global and technology is transforming entire industries. But the fundamental political-economic question remains remarkably familiar.
Who takes the risk, and who receives the reward? If the South African state only assumes the risks while private capital captures most of the rewards, industrial policy simply enables a business nanny state, rather than transforming the economy.
If, however, state support is tied to measurable developmental outcomes, and if the state and labour can rebuild sufficient leverage over investment decisions, industrial policy can once again become an instrument of structural transformation.
Industrial policy is indeed back. The real question is whether the South African state, together with business and labour, can make it work for economic growth that includes high levels of industrialisation and employment.
Masondo is deputy finance minister. This article is a summary of a speech he delivered at the 20th anniversary event of the African Programme for Rethinking Development Economics on September 2.
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