Department of Trade and Industry on Industrialisation and Industrial Policy, and on Technical Infrastructure: Workshop

Meeting report

Committee matters
Tabling of Information about Colloquium
The Secretary noted that there were only a limited number of responses. Information was received from SASOL, but it had not yet been submitted.

The Chairperson said that value addition and the value chain had to be added to the colloquium.

Mr B Mkongi (ANC) said he was concerned that SASOL was not taking the Portfolio Committee seriously.

The Chairperson asked whether all Members’ questions and responses to SASOL had been accommodated. Engagement with SASOL was an ongoing matter. The business behavior of SASOL was alarming, with respect to discounted prices to polymers. SASOL was unresponsive and more time was needed with them.

Consideration of Committee Programme
The Chairperson referred to the National Gambling Board (NGB) - the legal position of the Committee was clear. There was a concurrent mandate. Gambling matters had to be left to the provinces to deal with. Provinces had to comply with norms and standards set down by the NGB. It would be best to ask the NCOP to deal with the matter. The Committee could deal with it legally, but it had to be dealt with constitutionally. The NGB had been suspended. Challenges had to be identified- it was a governance issue and it did not arise overnight.

Mr D Macpherson (DA) noted that the KZN Gambling Board was being dissolved. He advised that the MEC be called in to brief the Committee. The Minister had to explain why the NGB was dissolved. It had been reported in the media on 19 September. But the Minister had to say why it happened, and what the allegations were.

The Chairperson responded that the Minister had in fact informed her, under obligation.

Mr Macpherson asked why the media had to be relied on for information about the matter.

The Chairperson responded that it was the first Committee meeting since reports appeared in the media. She had chosen not to send out emails, but to broach the matter at a meeting.

Mr Mkongi objected to using the Committee to summon the Minister and questioned why it was being made into an issue. It was not necessary for the Minister to come if the Department was coming anyway. There was an obsession to summon people before the Committee.

Mr Macpherson protested that there at least had to be a response in writing.

The Chairperson replied that she did not run the Committee in that manner. The Minister had been officially informed, and was given time to speak. The matter was closed. The NCOP and the MEC would be invited to a session about gambling.

The Committee programme was agreed to and adopted.

Department of Trade and Industry: Industrialisation and Industrial Policy
Mr Nimrod Zalk, Industrial Development Policy and Strategy Advisor, explained that manufacturing transformed raw materials into value-added products. There were inputs from upstream sectors like agriculture and mining, and forward linkages to new industries and diversification. There were direct and indirect employment creation effects, and export earnings.

A case study of the steel value chain was presented. Value was added through stages in the progression from iron ore to capital equipment, with an exponential increase in jobs per 1000 tons per year. There was a need for industrial policy. There was the danger of developing countries getting locked into low value activities. There had to be coordination; price and non-price mechanisms, financing and the support of industrial learning. Key elements of industrial policy were tariffs; subsidies; concessional finance; infrastructure and skills; domestic rivalry and export markets.

A case study of industrial development in Ethiopia was presented. Ethiopia had formulated an industrial development strategy in 2003. Textiles and leather were singled out for value-added development. There was direct state investment and joint ventures in textiles. The strategy for leather included upgrade tanneries and finished products, and the discouraging of hide and skin exports through 150 percent export tax. There was support for training and world class manufacturing. The government later recognised the potential of cut flowers. There was provision of land; long term credit and air transport. The cut flower industry flourished, with Ethiopia becoming the fifth largest exporter to the EU.

There was a need for policy integration in the South African context. Important factors were interest and exchange rates; savings and investment; finance; infrastructure; competition policy; education and skills, and technological innovation. Industrial policy instruments were industrial finance; procurement; trade policy, regional integration; investment and export promotion; financing and skills for black industrialists, and intellectual property.

Discussion
Mr Mkongi asked about rawhide and skins in relation to leather and shoes.

The Chairperson asked if cut flowers were produced far from the airports in Ethiopia. Time was of the essence when working with flowers. She asked if the airways established airfields in that country.

Mr Zalk replied that the cut flower farms were situated near Addis. It was transported through Addis airport.

Dr Z Luyenge (ANC) noted that one had to ask whether policy initiation in developing countries was political or administrative. Initiation of policy had to be located. Industrialisation was a bone of contention where a developmental state was being built. In South Africa, the rural poor had to be of primary importance in policy.

Mr F Shivambu (EFF) remarked that industrial policy had to be located in a broad political framework. That framework had to be compatible with heterodox economics. There was a push for free markets in the late 80’s and early 90’s. But the fact remained that there was state intervention and protection in countries like Argentina, The USA, Germany and Belgium. Industrialisation was helped by the central government in those countries. The state provided protection through tariffs and other means. The state played a central role in the protection of industrialisation. There were critical sectors in South Africa that had no state protection. The state had to drive industrialisation as well, through trade policies and subsidies. The question was whether Africa could do it. In South Africa tariffs on furniture could affect eight million households. There had to be a state procurement drive in South Africa. Free markets could not drive or protect industrialisation unaided.

Mr Zalk replied that the Department had tried to provide alternatives regarding the role of the state in manufacturing, to provoke discussion.

Ms P Mantashe (ANC) asked why hides and skins had made little progress in Ethiopia. It was a strong asset in South Africa.

Mr Zalk replied that leather, hides and skins was in fact the more interesting story about Ethiopia. Flowers were simply a success story, but skins were not a complete failure. The point was that Ethiopia had stepped back from an entrenched position. The export of hides declined there because of export taxes. The Ethiopians wanted leather and footwear to take off more rapidly. When it did not perform as hoped for, they reflected on what to do. Weaknesses were identified and logistical issues were dealt with. It was not know if they revisited the issue of export tax. They tried something and it only worked up to a certain point, and then they asked what had to be done then. It was an exercise in adaptation.

Mr Mkongi said that there had to be a distinction between industrialisation as being led by government or by government policy. There were challenges related to firms not accepting government policy. He agreed with Mr Shivambu about policy issues. Maximum expansion had to be led by the state. There had to be decisions about a policy stance.

Mr Zalk replied that in Ethiopia industrialisation was both government and party led. The new industrial programme had been started under the previous prime minister, and was fundamental to the ruling party. It was rolled out in government. The Ethiopian approach was above all pragmatic. The State and the private sectors invested in different areas. The Ethiopians were also very pragmatic in the international political arena, and had a working relationship with the United Nations. Pragmatism in geopolitical issues included cooperation with the USA against war and terror.

Mr Macpherson referred to the steel value chain. There were a lot of factors related to the amount of regulation and tax policy. The question was whether the problem was properly understood. There were problems related to getting to the capital equipment stage

Mr Zalk agreed that that the steel value chain had been presented in a simplified way. It was not meant to imply that there could be easy progress from iron ore to sophisticated capital equipment. The exponential power of value addition depended on the application of knowledge in the manufacturing process. More value levels had to be added. There were many issues related to structural transformation. Conditional support and interventions were required. The structural steel level was highly important, provided that prices were not monopolistic. Processes like foundry casting also added value. Cast engine blocks could be used as components for capital equipment. The two levels could be complementary. Intermediate managerial capacity was need at the structural steel level.

Mr Macpherson asked if the case study of textiles in Ethiopia showed what Ethiopia wanted the world to see, or what South Africans needed to see. The position with regard to textiles in South Africa was a bad one. Opportunities had been missed in KZN, where there was a proposal to grow cotton. The price of cotton was one dollar per kilo at the time, and it very soon increased to three dollars per kilo. There had to be inputs and investment in production.

The Chairperson concluded that issues had to be thrashed out. Not everyone was familiar with the meaning of heterodox economics. Everyone had to be taken on board. The whole Committee had to be brought on board with a shared understanding. Parochialism linked to parties had to be avoided. Intervention by the State in market economies was a fact, and certainly so in the case of the USA.

Mr G Hill-Lewis (DA) remarked that industrial policy in South Africa was not confined to the DTI. Industrial policy was transversal, and spanned different departments. Infrastructure was critically important. The importance of industrial policy was too often taken for granted.

Mr Zalk replied that there were indeed other departments involved. There were areas where the DTI had a more direct control of policy instruments. There were also macro-economic factors at play. There was a need for policy integration.

Mr Hill-Lewis remarked that he had recently spent a month in the USA to review state level investment policy. It was ubiquitous at the state level in that country. The debate thus far had pointed out that it was not healthy to have an entrenched position. There had to be a willingness to change a position in response to evidence. He wondered about the choice of Ethiopia as a case study- rather success stories like Australia and Korea. Ethiopia was authoritarian, and there was no union activity. It was a one party state with a controlled exchange rate and a high level of inflation. The poor suffered because of that. There were better examples of the use of industrial policy from South East Asia.

Mr Hill-Lewis referred to a book by Professor Chang. The book dealt with the question of the position of traditional industries. It advised that it was not feasible to sacrifice settled industries, but rather to use them as platforms for further development. Traditional industries had to provide jobs and foreign exchange. Export taxes and price controls undermined investment in industries. It would do well for South Africa to invest in industries where the country was a world leader. According to Professor Chang, during the beginning stages of industrialisation, industry had to provide foreign exchange. It was worrisome that mining exports were used to fund the deficit- it was not feasible to jeopardise traditional industry. New industries took time to develop. Export earnings had to finance new industries.

Mr Mkongi remarked that government led industrialisation drove industry in strategic sectors. Government drove policy and got society to accept . The Ethiopian example was apt- a policy decision was taken about leather. Economics was a science, as the DA Member had pointed out, but it was a social science. Care had to be taken as regards social relations= it had to be known how social relations functioned. Political will was needed on the part of political representatives, as well as national will, for industrialisation to succeed in South Africa. There were attacks on the process in the media and this showed that there were people who did not want it to succeed. National interests were of utmost importance in indistrialisation. Agreeing with Mr Shivambu, heterodox economics could provide solutions. Mineral resources were going to other countries with no beneficiation locally. Raw materials from South Africa were used to the benefit of other countries. It was a case of classical colonialism.

Mr Macpherson remarked that during industrialisation there were opportunities that arose only once in a generation. When embarking on industrialisation, those who drove it had to have their ducks in a row. What was missed out on would be gone forever. South Africa had to look at best practice worldwide. There was a tendency in the country to look for shadows where none existed. Boogeymen appeared everywhere. It was risky to use industrialisation as a political football. A common thread of best practice had to be identified. Opportunities were not to be missed.

Mr Shivambu said that export taxes were mainly levied on primary commodities. It had to be difficult to take minerals out of the country. In the long run it only contributed to the earnings of foreign countries. Primary commodities had to be kept inside the country to process and industrialise it. Trade policy had to allow for identification of goods and services that could as well have been made locally. The import basket had to be l reviewed. South Africa was exporting raw plastics that could be used for local plastic commodity production. South Africa could learn from late industrialisers. Examples from the post second world war era provided better lessons. There were countries that had to catch up with the supremacy of Europe and the United States. South Africa also had to catch up. In East Asia success was due to the development of strong developmental finance institutions. In South Korea an industrial bank was created to finance catchup industrialisation. Risks had to be taken. There were no quick returns on industrial financing and there was little faith in the IDC. There was supposed to be oversight of the Industrial Policy Action Plan (IPAP), but the DTI and the Department of Economic Development could not agree on what the IDC had to do.

Dr Luyenge remarked that industrialisation in South Africa was no new thing. Much work had been done. The country was in fact more highly industrialised than currently, in the old Bantustans. People were working. Factories were closed down after 1994 by owners. The government was saying that factory production had to be revived, with feasibility studies carried out. The role of the IDC was questioned-it was not beneficial to the poor. Medical doctors were establishing private hospitals funded by the state.

Mr Zalk replied that the DTI did not want to define what industrial policy had to be like in South Africa. There had to be informed thinking about industrial policy. The case study of Ethiopia was chosen precisely because it had been one of the poorest countries, who had nevertheless been able to mount a successful industrial policy. Their growth rate had been more than 10 percent per annum. One could go back in time to find role models. In the 1960s Ghana had a better GDP than South Korea. But there were no lessons that could be transported wholesale from one country to the next. It was so that Ethiopia was not democratic. It did not adapt its political system. Principles could be drawn out from case studies of role models. The fact remains that Ethiopia had had unpredictable success. The levels of coordination were there to make progress happen. There was ambition, and a willingness to learn by doing. The position of leather in Ethiopia was ambiguous it was neither a success nor a failure. The question was how the Ethiopians would adapt their programme- instruments had to follow strategies. Export tax could be the correct instrument in the right context. The Committee could invite Professor Chang to speak on the matter of it not being necessary to destroy a traditional industry.

Department of Trade and Industry: Technical Infrastructure
Mr Tshenge Demana, Chief Director, Standards and Quality Issues, noted that globalisation was increasing the demand for countries to show that they had a quality system to guarantee that products originating in their territories were safe and fit for the purpose it was created for. The quality infrastructure allowed an economy to set norms and standards and to test against them. Quality systems were critical for development. Standards, quality assurance, accreditation and metrology activities were instrumental in developing manufacturing capabilities. Technical infrastructure was relevant to trade; medical devices and scales; safety; and environmental protection. The technical infrastructure framework consisted of the South African National Accreditation System (SANAS); the South African Bureau of Standards (SABS); the National Metrology Institute of South Africa (NMISA) and the NRCS.

Mr Demana took the Committee through relevant Acts; regional and international linkages; the role of the World Trade Organisation; government coordination, and reporting structure (see document).

Discussion
Ms Mantashe was asked to act as Chairperson for the session.

Mr Mkongi remarked that there had to be instruments to drive and assist industrial policy. The capacity and reliability of technical infrastructure was of great importance. There was some concern about the quality of imported goods, as the success of future industrialisation depended on value addition. Capacity had to be known.

Mr Demana replied that capacity had to be built during the drive for value addition, to beneficiate new areas. Capacity was lacking in areas where there were no manufacturing. Technical infrastructure had to be aligned with the sector capacity to test.

Ms Fubbs remarked that standards were critical. There were technical issues at stake, but technical infrastructure was primarily there to serve people. The standards, quality assurance, accreditation and metrology entities (SQAMs) carried out quality inspections. Health services used instruments verified by SQAM. Babies had died because of faulty measuring instruments in the Eastern Cape. There were wrong specifications for buildings in the Eastern Cape. In Gauteng buildings had fallen down. Inspection was an issue. The question was who tested imported goods. Was the country of origin indicated on imported goods, and what recourse could be had against the country of origin?

Mr Demana replied that it was a struggle to inspect goods that entered the country. Goods had to come to port with descriptions. If there was a clear indication that the product was an electric plug, for instance, it could be tested. But there were false descriptions and declarations. There was cooperation with SARS and customs- inspections could improve. The NRCS could explain about that. Products made in South Africa were usually compliant; problems were with goods from elsewhere. Once a certificate had been obtained to bring goods in, it was valid for three years. There was the practice of sending a golden first sample, with diminished quality afterwards. There were no problems with the quality of local cement. But watering down of cement used could cause buildings to fall. If goods from other countries did not comply, it could be sent back to the country of origin or destroyed. Recourse was not clear in South Africa- the importer was held responsible. If the Act was contravened the agency could take action. Technical infrastructure was a risk management system, standards agreed upon were used. The problem was coordination across government, especially in the case of building regulations.

Dr Luyenge agreed with Mr Mkongi that the reliability of technology was crucial; infrastructure could be a life or death matter. Was the right mood in place to ensure that South Africa was up to scratch with infrastructure? Was there a moratorium on local bodies to check standards and what instrument and sanction could be used against infrastructure s decay?

Mr Demana replied that there was close alignment with work done in Europe. People had been sent to Germany to study.

The Chairperson asked if the DTI was developing skills to anticipate disasters in mines. The Department had to develop such skills.

Mr Demana replied that every agency had to develop such skills.

Ms M Tsopo (ANC) remarked that Parliament and the legislature were weak to follow up on the implementation of Acts and asked if the DTI was contributing to the implementation of the Acts it had referred to. Did the DTI engage municipalities, which understood the erection of structures? In the big municipalities people did not know what was expected of them in terms of adhering to regulations- were there educational programmes, and were the Acts were understood by people on ground?

Mr Demana answered that the DTI did engage municipalities about building. There was a proposed building control officer’s convention coming up. Not every municipality had a building control officer. Acts could be revised to address crucial areas.

Ms Fubbs asked if standards set by the WTO were adhered to. Standards did not have a long shelf life, before they were placed on a higher shelf. National building standards legislation fell under the DTI, but it had to have a broader reach. She requested that the Department supply an Organogram to the Committee- Trade and Industry was only dealing with 30 percent of the legislation it was responsible for.

Mr Demana replied that the Building Standards Act might have to be moved away from the DTI. There were many role players, and some had Acts. It was difficult to coordinate.

Dr Luyenge said that he had come across two different brands of cement in his constituency. He was told that the one brand could be used for bricklaying, but not for plastering. He could not check where it had been made. The question was where that could be reported.

The Chairperson adjourned the meeting to reconvene later.

Department of Trade and Industry: International Trade
Ambassador Faizel Ismail, Special Advisor: Department of Trade and Industry, took the Committee through the presentations on international trade. He provided a brief history of the GATT and its concepts before proceeding to discuss the regulations of governing international trade. He drew the Committee’s attention to the theories of international trade, particularly, Ricardo’s theory of comparative advantage and competitiveness theory. Ricardo advocated his theory 300 years ago-it denoted that trade would be beneficial if each country or a nation specialised in that economic activity where it was less inefficient. For instance, England could produce cloth and Portugal could produce wine relatively more efficiently. Ricardo’s theory was counterintuitive. Erik Reinert critiqued the Ricardo’s theory. If United States of America had followed Ricardo and allowed the Soviets specialise in space technology, it would not have launched NASA in 1958.

In 1980s, economists adopted Ricardo’s theory of comparative advantage in the ‘Washington Consensus.’ The World Bank argued for economic reformation based on trade liberalisation, privatisation, deregulation, etc while various economist theories advocated for free trade. They believed that free trade would lead to increased growth and welfare. They critiqued Ricardo’s theory, stating that it would lead to economic inequality among nations. If, for example, Portugal would have focused on producing wine, Portugal would have diminishing returns and increasing costs. Portugal would, as a result, become a poor country. On the other hand, England could have become rich for cloth production. More conceptual critique was alluded to, including historical and ethical critique. Economic historians indicated that USA, Germany, Japan and East Asia defied the Ricardo’s theory and did not apply it.

Suggestions on the way forward included- Developed countries needed to focus on long-run (not just today) and dynamic (higher value-added) competitiveness theory (which is alternative to comparative advantage theory); Trade reform needed to be managed gradually and carefully; Trade policies should be tailored to the particular circumstances of countries; and Compensation should be for adjustment costs to countries (in terms of revenue) and works (in respect of social safety nets).

The Chairperson requested members of the Committee to engage with the Department on the presentation.

Discussion
Mr Mkongi commended the presentation and its interrelation with other presentations, while expressing concern about Ambassador Ismail’s remark that developed countries needed to focus on long-run and dynamic competitiveness theory. What was the difference between comparative and competitive advantage theories?

Mr MacPherson remarked that Pakistan had managed to diversify its cotton market and asked whether Ambassador Ismail had reviewed how they developed their economy.

Ms Mantashe sought clarity on why South Africa allowed import of cheap products if the countries needed to focus on long run competitiveness advantage theory. Import of cheap products led to the people losing their jobs.
 
The Chairperson sought clarity on the policy that was applied by Ethiopia concerning the production of coffee. The history of commercial entity had not been unpacked in the presentation;the WTO (World Trade Organisation) prevented South Africa from taking certain actions and South Africa was a party to WTO agreements- what were the advantages and disadvantages of being part of the WTO? What is the difference between comparative advantage theory and competitive theory; is there any conflict? Ambassador Ismail had made a great point in stating that trade policies should be tailored to the particular circumstances of the country. In South Africa, the issue of unemployment should be taken into consideration. Short term competitive theory would create jobs.

Mr Hill-Lewis stated that every single economic decision made in the world is about increasing turnover. One could not say that because people were losing jobs it was a bad decision. Rather, many factors ought to be taken into account. Such factors would be very complex and could not be debatable in a sitting.

Ambassador Ismail replied that the comparative advantage theory had a long history. The alternative to that theory was to be more cautious and careful, particularly with regard to how South Africa deals with the World Trade Organisation. Every WTO sector has its own conditions  all aimed at competitiveness. Mr Michael Potter, who was a business consultant, came up with competitive advantage theory. It is not a theory per se but a consideration of how to harness production for today and tomorrow. It was about considering targets and how to achieve them. Admittedly, Pakistan had done well in some sectors but not in other sectors was fragile. 

Department of Trade and Industry: Regulation of International Trade
Ambassador Ismail gave a brief history of General Agreements on Tarrifs and Trade (GATT) and noted that South Africa played an important role in adoption of international agreements. To begin with, the League of Nations, the forerunner of the United Nations created in 1918 was influenced largely by Ian Smith. GATT takes root in the 1941 negotiations which resulted in the Atlantic Charter. In 1946, UNECOSOC began negotiations for the International Trade Organisation (ITO) that negotiated Havana Charter. In 1947, GATT was adopted to liberalise trade. In 1950, ITO was rejected by the US Congress. The US Congress reaction did not put an end on the GATT project. There were three major obstacles to developing countries’ participation in the process of tariff bargaining or exchange of concessions. They were the principle of reciprocity, the principal supplier rule and the focus on tariffs only in the negotiations. The negotiations of tariffs took place in 1947 at Geneva, in 1949 at Annecy, in 1951 at Torquay, in 1956 at Geneva, in 1960-1961 at Geneva (Kennedy Round), in 1964-1967 at Geneva (Tokyo Round), in 1986-1994 at Geneva (Uruguay Round). Tokyo round codes created plurilateral agreements whereas the Uruguay round focused on services and intellectual property rights. It also created the WTO. Early GATT focused on tariff negotiations. Kennedy and Tokyo rounds focused on creation of discipline in domestic regulations, inter alia, anti-dumping, countervailing and safeguarding non-tariff barriers.  on the presentation also discussed discipline in domestic regulations (see attachment: Regulation of International Trade).

Discussion
Mr Hill-Lewis sought more clarity on reciprocity, countervailing duties and safeguarding and asked whether it was possible for South Africa to use these measures.

Mr MacPherson asked how the SADC would fit in the GATT and how South Africa could do better in the context of WTO.

The Chairperson sought clarity on dumping in respect of some products in export market. Could South Africa could subsidise its agricultural products and if not, why was the US was getting away with it? 

Mr Mkongi remarked that South Africa had entered into some agreements which were to its disadvantage. Was it possible to withdraw from those agreements that were working in negative context? If South Africa withdraws, what could be the legal consequences? With regard to safeguarding and dumping regulations, which could be referred to as predatory pricing, how could South Africa protect its textile industry? What was the role of the International Labour Organisation (ILO) in respect of international trade?

Dr Luyenge sought clarity on whether there could be a negative impact on South African economy caused by foreign nationals who traded in South Africa and sent the proceeds to their home countries or kept the proceeds in hard cash at their homes.

Ambassador Ismail responded that the European countries were attempting to reduce discretion in subsiding products. These countries were trying to reduce the standards of accepting products so that developing countries could produce the same products, which were not previously accepted due to their failure to meet the set-out higher standards. However, where there was no competition, they retained their discretion.   In the context of TBT, there was a necessity test and scientific test- these two criteria had to be met. In respect of agricultural products, they had introduced signs and precaution principle. The precaution signs could be used in circumstances where it was beleived that agricultural products could be harmful. In these negotiations, the USA had an agricultural firm policy. USA used discretion to remove sensitive products from the market. Brazil was however leading in agricultural products. Brazil retained the Sanitary and Phytosanitary Measures (SPS) agreements for national security. These measures were also applied to USA; they were initially developed by the Europeans. At Uruguay Round, agricultural products became part of negotiations. They came up with three boxes: Amber box, blue box and green box. Amber box implied that the products were bad to be subsidised . Blue box meant that they are not good or bad whereas the green implied that they could be subsidised. In this respect, USA kept changing the codes and proclaiming that its products were green and t they posed no harm. Again, the USA was obsessed with reciprocity. USA could not enter into agreement without indicating what it would get in return.  Anti-dumping agreement was negotiated as a code. The question of incorporation of labour standard was very complex and the WTO was negotiating with trade unions. There were difficulties that need to be debated on. Immigration and emigration was growing bigger. However, they were very good. With reference to sending money home,  this was a source of growth in the migrants’ countries- policing this issue should be widely debated.

The Chairperson thanked the ambassador for the presentation.

The meeting was adjourned.