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Industrial Policy in East Asia:. Implications for South Africa Shahid Yusuf October 27 th 2011. South Africa’s Objectives. Sustained doubling of GDP growth rates over the 15 year average of 3.3 percent per annum Labor intensive growth drivers to reduce unemployment, currently 26 percent
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Industrial Policy in East Asia: Implications for South Africa Shahid Yusuf October 27th 2011
South Africa’s Objectives • Sustained doubling of GDP growth rates over the 15 year average of 3.3 percent per annum • Labor intensive growth drivers to reduce unemployment, currently 26 percent • Export orientation and competitiveness to sustain growth of expanding industries.
Growth Model • East Asian tiger economies that achieved 7 percent growth rates during 1965 – 1997 • Relied upon manufacturing industries and export successes to enter ranks of high income countries • Korea and Taiwan (China) the principal role models.
Sources Tiger Economy Performance • Globalization of trade, increasing access to US market facilitated buyer driven trading networks, FDI and outsourcing • Focused development strategy and political commitment to rapid development reinforced by external pressures • Investment and export incentives • Emergence and growth of firms responsive to incentives • Improving quality of industrial workforce which buttressed manufacturing capabilities.
Key Policy Enablers • Trade oriented industrial policy • Political imperatives: with regime survival and national security linked to growth performance • Expanding, literate, disciplined industrial workforce • Entrepreneurial and technical skills aiding entry of firms and building of manufacturing capabilities.
Characteristics of Industrial Policy • Functional: Providing relatively uniform incentives to all manufacturing activities using fiscal, financial, education, vocational training, science and trade facilitation policies • Targeted: Singling out selected industries of strategic significance, with better long term growth and technological spillover prospects.
IP in Korea and Taiwan • Mainly functional in the 1960s when developing light industries • Increasingly targeted in the 1970s through the 1980s when creating transport, chemical, ferrous metal and engineering industries • Reverting to mainly functional policies after mid 1980s • State sector played lead role in metals and chemicals sectors; private sector in others. In Taiwan, state directly assisted electronics industry.
Did IP Work? • Established a number of capital intensive and high tech industries with the help of directed fiscal incentives, financing from government and banks and technical support from public research institutes • IP costly and industries had long gestation lags • Few spectacular success stories e.g. Pohong Steel in Korea, TSMC in Taiwan • Shift to functional IP in 1980s to ease budgetary burdens, pressures on banks, and reduce allocative distortions.
IP Redux • Functional IP widely employed to limited effect • China’s industrialization associated with selectively targeted IP • Middle income countries seeking high income status through faster growth rates • Middle income trap, frequently voiced concern: IP viewed as possible solution.
Can Middle Income Countries Accelerate Growth? Past rapid growth in some countries a function of: • Resource transfer from primary to urban sectors • Exploitation of natural resources and energy • First round of industrialization involving transfer of codified light and assembly based manufacturing assisted by capital and technology funneled through FDI • Russia, Mexico, Chile, Indonesia, South Africa and Botswana in this category • Low hanging fruit approaching exhaustion; growth regressing to global mean of 3-4 percent.
Can targeted IP Improve the Odds for SA? • Functional IP widely exploited; countries about evenly balanced – however, scope for improving business environment, logistics, and infrastructure services • Growth record of targeted IP questionable, costs substantial and WTO disallows certain subsidies for middle income countries • Global manufacturing overcapacity and medium term trade trends make it difficult to identify winners – more so than in the 1990s • Costs more apparent than long term gains.
Policy Options for SA Strengthening functional IP: • Improving quality of scientific, vocational and soft skills • Increasing productivity and commercial outcomes from R&D • Enhancing labor market flexibility • Enriching urban-industrial ecology through lowering of entry barriers, financing, BDS and use of UILs and science parks to stimulate clustering of SMEs. • Leveraging technological and production capabilities of mining and affiliated manufacturing industries • Exploiting potential of green technologies optimized for African conditions.
Could this Double Potential Growth Rates • Improving quality of skills is a long term project • Current rates of investment and saving will only support growth rates of 4 percent or less • Raising TFP via technological advances requires a large increase in R&D and research talent • Global trading environment clouded: medium term trends point to greater South-South trade with uncertain implications for growth.
