Policies for South Africas Industrialisation

Written by Siyaduma Bi niza

1

Historically industrialisation is seen as an important process that both incentivised and
allowed the European expansion and the spread of capitalism (Boahen, 1987). And
economically, structural theories of development view industrialisation as a process that will
enable economic freedom for post-colonial countries, which are seen as underdeveloped
and structurally dependent on industrialised countries because of their integration into
global capital; thus is argued as the only way to transform post-colonial economies to
overcome structural inequalities of global capitalism which keep post-colonial countries
underdeveloped (Hunt, 1989). Therefore the successful implementation of the
industrialisation process is important for South Africa.
The South African economy has been criticised for industrially coherent linkages between its
economic sectors because of what the Mineral Energy Complex which has prohibited
industrial growth and the development of other industries unrelated to energy and minerals
extraction (Fine & Rustomjee, 1996); and in more recent years the economy has been
caught in a prolonged era of low growth, and growth without job creation where there has
been remarkable growth, which has led to deindustrialisation and unemployment
(Mohamed, 2011). Thus, this essay is a response to the complicated question of what set of
policies are necessary for successful industrialisation in South Africa.
Firstly, I would like to explain what I understand by the South African state. I understand the
state in Gramscian way. What that is that the state, or South Africa, is more than just
government and its institutions, agencies and enterprises; therefore the state is the nexus of
power in society and this includes both government and civil society (Gramsci, 2006).
Therefore, my idea of state power is based on a dialectical relationship between civil society
and political society (Gramsci, 2006). Practically, this is observable in the separation of

1
Corporate Strategy and Industrial Development Research Programme, University of the
Witwatersrand, Johannesburg, South Africa and masters fellow at the Public Affairs
Research Institute and Economic Research South Africa.


siyadumab@pari.org.za | siyaduma.biniza@students.wits.ac.za Scribd | Linkedin
powers between the parliament which is closer to civil society and the judiciary which is
between parliament and government (Gramsci, 2006).
Civil society is the place of ideology, socialisation, and hegemony because civil society is also
an environment of inequality despite the liberal view that civilians are all equal; and political
society is the state institutions and machinery of government (Gramsci, 2006). In this paper,
I take civil society to include what has been characterised as capital or business, i.e.
corporations that are owned by individuals who are part of civil society. So as mentioned,
the state is the nexus of power, which can also be understood as the dominant forces that
result from dialectical relationship between civil society and political society. But of course
this divide is not very distinct as some individuals may straddle across civil and political
society. For example, a firms decision to cut wages could result in collective action by the
workers to resist this through legislation which is then enforced by various state institutions
this is essentially what makes the state.
I use this conception of the state because a Weberian conception sometimes obscures the
reality of what happens in governance. The Weberian conception of the state often leads to
policy recommendations which implicitly assume that economic outcomes depend solely on
political will and policy. This obscures the very complex processes which take place in order
to achieve the goals of a policy. Policy outcomes depend on more than just political will to
pass legislation and policies. All this shows is that successful industrialisation and
development requires a high degree of co-ordination (Zalk, 2013) which exceeds political
will and the right set of policy. Moreover, the Weberian conceptualisation of the state
often leads to selective consideration of what matter and of course what matters is the
result of the dialectic relationship within the state, i.e. state power. Therefore I use the
Gramscian conceptualisation of the state because it offers a rich and neutral analysis. Thus,
in my conceptualisation of the state co-ordination between government and civil society is
co-ordination within the state. This means that recommendations will not be restricted to
policy in the conventional sense, but rather institutionalising new ways to mediate state
power in pursuit of certain economic outcomes. By institutionalise I mean creating new
rules that govern behaviour amongst individuals within society (Goetz, 2006).
Secondly, the idea that industrialisation requires co-ordination assumes a common goal.
Now, as already introduced, industrialisation is not strictly the end but also a means to other
ends. Industrialisation as an end means that the state would target a specific level of
industrial development, for example a percentage share of industrial exports, which is then
pursued as an end goal. Industrialisation as means stems from the understanding that
industrialisation can be a process that leads to economic freedom for post-colonial
countries because many of these countries are seen as underdeveloped and structurally
dependent on industrialised countries since they not industrialised (Ake, 1981; Hunt, 1989).
That means that industrial is associated with growth which is an integral part of
development (Todaro & Smith, 2003).Thirdly, since industrialisation can be instrumentally
useful as argued above, we can now unpack what industrialisation should entail in South
Africa. This will allow us to understand the criteria for successful industrialisation.
Background and Context: Sectorial Biases of the MEC
The South African economy is chaallenged by high unemployment and inequality. Dealing
with these two challenges is an explicit focus of most economic planning by the post-
Apartheid government; from the Growth, Employment and Redistribution (GEAR)
macroeconomic package to the most recent National Development Plan. Moreover, the
governments perspective is that full employment cannot be attained unless South Africa
can deal with the situation of fewer manufacturing jobs and increasing jobs in services such
as retail, personal services, security, domestic services and office-cleaning which all have
low productivity and slow wage-growth (National Planning Commission, 2011). In sum,
South Africa faces some persistent and structural economic challenges which have locked
the country in a vicious cycle of low employment growth and the worst socioeconomic
inequality globally.
Hence the various attempts to promote pro-poor and employment-creating economic
growth since sustainable economic growth and development are challenged by inequality
and high unemployment in the country (Patel, 2011). Pro-poor economic growth here
simply means economic growth that can benefit the poor by reducing poverty and
inequality. This can be achieved through increased employment opportunities and higher
wages (Mohamed, 2012). But this requires heavy investment. Therefore, various
government ministries have embarked on policies to stimulate investment and create
labour-absorbing economic growth. However, the South African economy has been
criticised for lacking economic linkages between its sectors due to something called the
Mineral Energy Complex (MEC). The MEC has prohibited the development of other
industries unrelated to energy and minerals extraction (Fine & Rustomjee, 1996); this has
had a lasting impact and in more recent years the economy has been caught in a prolonged
era of low growth, and growth without job creation where there has been remarkable
growth leading to deindustrialisation and unemployment (Mohamed, 2011).
The MEC is a concept coined by Fine and Rustomjee (1996) who argue that this
characterisation best describes the South African economy because the Apartheid regimes
policies supported mining and energy sectors which allowed for the development of heavy
industry, upstream processing of minerals and industries linked to these two sectors at the
expense of industries. As a result of complex struggle between English and Afrikaner capital
South Africas industrial structure was formed by state support for activities of the mining
and energy whilst excluding black South Africans who were exploited through the system of
migrant labour that maintained steady supply of cheap labour; which is sharp departure
from the state-market dichotomy of liberal economics (Fine & Rustomjee, 1996; Mohamed,
2012; Bonner, et al., 1993). There are two outcomes of this history that I wish to highlight.
Firstly the industrial development of South Africa has become biased against other labour-
intensive economic sectors. And the development of mining and energy were not based on
the efficient use of labour or industrial efficiency, instead the development of mining and
energy was based on the states ability to secure cheap labour through its system of racist
policies that allowed institutionalisation of cheap migrant labour to support mining;
meanwhile energy was a beneficiary of state support through subsidies as well (Bonner, et
al., 1993; Wolpe, 1972). Its important to understand that the bias here is institutional and
economic. By institutional I mean it has redistributed power in favour of certain segments of
civil society. And, partly as a result of this, the sectoral bias has throttled the development
of skills and learning which are integrally important for industrialisation (Amsden, 2001) and
the development of comparative advantage.
This is the first element that should be taken into account in constructing policies
industrialisation in South Africa. In other words, policies that intend to successful establish
industrialisation South Africa need to address the sectorial bias, the fact that mining sector
success was based on the sectors exploitation of cheap labour through the system of
migrant labour, and establish self-sufficiency that can allow for economic linkages within the
economy without exclusion of certain sectors and population groups.
The Implications of Liberalisation and Financialisation
The other outcome is related to the impact of neoliberalism and financialisation on
industrialisation. Although South Africa has formally instituted an industrial policy since
2007 (Zalk, 2013) the policy environment has favoured neoliberal policies and market-
orientated economics in South Africa. This has had a negative impact on achieving industrial
policy objective; and in my view this is due to the challenges related to the Weberian
conception on the state and coordination of the state (in a Gramscian sense of the state).
Generally, there are two dealing with issues of policy coherence and state co-ordination
through trade and industrial policy. On the one approach trade policy is seen as sufficient as
industrial policy and often this approach recommends trade liberalisation in order for
countries to gain from their comparative advantage. In other words trade liberalisation is
the only things countries need to do in order to stimulate industrialisation, which will be
determined by the relative factor endowments or comparative advantage of that country
(Leamer, 1995). On the other hand, trade policy is seen as being insufficient on its own and
often this approach recommends a coherent industrial policy that complements or is
support by trade policy (Rodriguez & Rodrik, 2000). Industrial policy is meant to assist in
developing value-added production and exports in order to benefit labour through
employment and society in general.
The big difficulty in understanding and analysing trade policy in South Africa is that there is a
split between the ideology and policy in practice. This split presents itself in the strong
industrial policy language of the strategic direction of the Department of Trade and Industry
(DTI) and the seemingly irreversible strong commitments towards trade liberalisation that
reached height during era of the GEAR macroeconomic package. Therefore ideologically,
South Africa has taken the latter of the two approaches described above and the strategic
direction has been driven by an understanding that trade policy needs to support or at least
be coherent with the countrys industrial policy, Industrial Policy Action Plan (IPAP). This
stance is clearly expressed in the dti Medium-Term Strategic Plan 2011-2014 which states a
strategic commitment to establish mutually-beneficial regional and global relations, to
advance South Africas trade, industrial policy and economic development objectives (DTI,
2011, p. 19). However, on the other hand, the policy environment has favoured neoliberal
policies and market-orientated economics in South Africa which is underpinned by the
former of the two approaches described above.
Government has embarked on a piecemeal removal of all regulatory restraints on
international capital flows and trade which was intended to attract foreign investment
(Vickers, 2002). South Africas liberalisation began in the 1970s but really culminated in the
strong liberalisation direction in the 1990s. South Africas trade liberalisation was based on
the premise that increased competition from imports would be an impetus for improved
efficiency which would result in higher exports from domestic producers of competing
industrial or manufactured goods. Therefore the main thrust behind trade liberalisation was
the pursuit of greater manufacturing competitiveness as a means of creating growth and
employment (Rangasamy & Harmse, 2005). But this was not achieved.
Instead, trade liberalisation had the impact of restructuring the composition of labour and
production in the economy (Edwards & Behar, 2006). The South African governments
commitment to trade liberalisation and global competitiveness pressures meant that many
domestic firms had to restructure through right-sizing and downsizing which led to
large-scale job losses (Satgar, 2012, p. 47). More importantly labour-intensive import-
substitution industries suffered the most whilst export-led industries failed to create job due
to a shift towards capital-intensity in order to retain competitiveness (Satgar, 2012). This has
had dire impacts on South Africa in terms of its employment because the country has an
abundance of unskilled labour which would mean its competitiveness is in labour-intensive
production. However, trade liberalisation has had a negative impact since South Africa could
not maintain its competitiveness in labour-intensive production and instead had to succumb
to international pressure and shift towards capital-intensive production to retain
competitiveness (Rangasamy & Harmse, 2005). This inability to compete globally is closely
related to the sector bias the developed through the MEC.
The ability to resist international competition and promote competitiveness of labour-
intensive production requires industrial policy in order to promote the development of
sectors involved in labour-intensive production and overcome the sector biases resulting
from the MEC. This case shows the clear insufficiency of trade policy as industrial policy
which shows the gap that requires industrial policy and coherent trade policy. In addition
the issue of industrial growth in relation to trade and global integration does not necessitate
blanket liberalisation or protectionism, this is a false dichotomy; instead the question should
be about the degree of liberalisation or protection, within which sectors and for how long.
Moreover, industrial policy should not be treated as separate from trade policy despite their
dubious separate treatment in liberal economics discourse (Deraniyagala & Fine, 2001).
Although financialisation is a complex concept, for the purposes of this essay, it will
sufficient to define it as the phenomenon where increases in financial accumulation do not
result in more real investment because the additional finance is directed towards financial
speculation as opposed to being invested in production (Ashman, et al., 2011b). Moreover,
the short-term profits of financial speculation entice productive capital to speculate with its
surplus earnings instead of reinvesting it (Ashman, et al., 2011b). This change did not simply
occur as a result in the profit-maximisation matrix of firms decision-making. Instead this is
the result of changes in the environmental constraints as embodied by economic policies
governing the rules of domestic and international finance; as well as the behavioural of
capital as embodied by the corporate governance of firms.
Economic policies governing the rules of domestic and international finance are important
in defining the relation between finance and the real economy. This is because the policies
define what and how finance can be utilised which determines the relation between finance
and the real economy, thus determining the structure of accumulation. For example, the
policies of international financial institutions such as the International Monetary Fund (IMF),
which promoted the deregulation of trade and finance, were forcibly imposed on debtor
nations which determined the economic reality in those countries to a large extent (Hudson,
1998). Although South Africa was not an IMF debtor nation, domestic examples of this are
macroeconomic policies such as GEAR which also promoted the same kind of policies within
South Africa resulting in jobless economic growth (Mohamed, 2011; Satgar, 2012).
Therefore, finance policies are important in determining what finance is spent on and where
finance can be spent, thus determining the structure of accumulation in the economy.
Another motivation for the process of liberation was to decrease the cost of investment for
foreign capital, which was assumed to be sufficient to promote investment (Zalk, 2013).
However this was not enough to promote investment, instead the neoliberal policies have
led to the process of financialisation which has strengthened the economic and political
influence of finance in the South Africa economy. Furthermore, although finance has
contributed towards economic growth in South Africa, this growth has not created sufficient
employment opportunities because of the rising dominance of financial capitalism and
financialisation (Mohamed, 2011). Hence there has been a growing preoccupation with
labour-absorbing growth in attempt to redirect the macroeconomic trajectory, which came
as a criticism of GEARs neoliberal policies that promoted finance-led economic growth
(Habbard, 2010).
In addition, these domestic policy reforms have affected corporate governance through the
deregulation of finance which has enabled shareholder-value-type models of corporate
governance that have also contributed towards the dominance of finance capital. Corporate
governance is important because the aggregate financial actions of firms also define the
reality of accumulation in the economy. Firms either invest in physical capital, in favour of
industrial capital, or they invest in financial speculation which favours finance capitalism.
Given the importance of corporate governance, South African firms have shifted towards
shareholder-value-type corporate governance which has resulted in rentier-type investment
and less real economic activity.
Shareholder-value-type corporate governance models are underpinned by the idea that, in
order to maximise the efficiency of resource allocation in firms, the interests of managers
and shareholders need to be aligned through remuneration in the form of stocks and share
options (Newman, 2012). Therefore driven by the pursuit of shareholder value, many firms
have focused on specialising in core business, selling off assets and shutting down
operations that do not contribute to shareholder value nor form part of the core business
(McKenzie & Pons-Vignon, 2012). The pursuit of shareholder value has thus led to firms
increasing their financial capital by buying back company shares in order increase stock
prices, reducing real investment and industrial capital in order to distribute financial gains as
dividends and acquiring of other firms that contribute towards narrowed-down operations
of the core business (Newman, 2012). And South African firms have increasingly pursued
shareholder value which is another characteristic of South Africas financialisation.
The implications of neoliberalism and financialisation in South Africa are that there has been
a decline in real investment and this is an integral part of industrialisation because it
requires investment. In more recent years the economy has been caught in a prolonged era
of low growth, and growth without job creation where there has been remarkable growth,
which has led to deindustrialisation and unemployment. Therefore there is a need to create
policies to require a certain rate of real investment from firms annual turnovers and this
can be done through pooling of funds for rigorously regulated real investment by the state
or in the form of compulsory growth in real capital accumulation and employment targets
for firms realising profits within South Africa.
Also, due to the liberal policy environment following South Africa neoliberalisation, there
was rampant capital flight which saw significant mining interest relist their companies
abroad (Mohamed, 2010; Ashman, et al., 2011b). The foreign listing of domestic firms which
continued to have their South African business as core operations means that significant
mining interests are now characterised as foreign direct investment (FDI). But this mode of
FDI has not contributed to any technological or skills transfer nor have they contributed
towards additional capital accumulation or new employment opportunities (Mohamed,
2010). Coupled with this, market-seeking mergers and acquisitions (M&As) which have
limited and even negligible direct impact on employment have been the dominant mode of
FDI in South Africa (Biniza, 2013). Besides the limited impact that FDI has had in creating
employment in South Africa; FDI has been criticised for crowding out domestic investment
especially in dairy, pharmaceuticals, steel, and electric and electronics sectors (Vickers,
2002). This crowding-out has had a negative impact on employment by forcing domestic
producers to downsize and shed jobs.
Therefore, in order to balance capital flight, South Africa has embarked on neoliberal
policies in attempt to stimulate FDI (Ashman, et al., 2011a; Zalk, 2013). But this has
attracted portfolio investment instead of FDI leading to the further financialisation in the
economy. This represents future possible risks for the South African economy given the
volatility and speculative nature of portfolio investment. Portfolio investment is short-term
and involves the transfer of capital for securities, stocks and bonds which primarily concerns
financial markets (CUTS, 2003). On the other hand FDI involves acquisition or creation of
real assets in a foreign country, instead of financial assets. Hence FDI is often seen as
conducive towards sustainable economic growth because of its non-liquid nature, as
opposed to portfolio investment which is volatile and highly liquid thus usually referred to
as hot-money (Sidorov, 2011; Mohamed, 2008). However, the implications here have
different nuances to the case of domestic finance, where the challenge is capital flight or
insufficient real investment, the case in international finance is insufficient kind of
investment.
The implication is that, because of the predominant mode of FDI, more volumes of FDI are
insufficient to alleviate unemployment and inequality. This will continually be the case
unless South Africa is able to attract efficiency-seeking FDI. In this regard the Motor Industry
Development Programme (MIDP) is an exemplary case with marketed success in investment
promotion. The MIDP is a system of export incentives designed for domestic car and
components producers which enables substantial employment to about 33 000 workers in
car production and 47 000 in components and tyre production (Vickers, 2002). The MIDPs
success offers invaluable lessons because the MIDP has succeeded in attracting export-
orientated FDI which has had the most significant direct impact on employment by
providing new opportunities and operations that have integrated domestic producers into
global supply chains (Thomas, et al., 2006; Vickers, 2002). However, there are some
challenges which relate to sustainability of the practice of off-setting local content with
exports under a regime of phasing down domestic tariff protection (Black, 2001; Zalk, 2013).
The Need for Coherent Co-ordination of Industrial and Trade Policy
Part of the challenge of the MIDP is related to co-ordination on policy. The outcome of the
import-export complementation was meant to stimulate competitiveness and promote
exports but mainly foreign owned firms with links to vehicle manufacturers instead of
traditional component producers dominated exports; as a result there was low investment
and low domestic market integration (Black, 2001). And those traditional component
producers who could export, a majority of exports was in peripheral components. The
result of state interventions to promote efficiency and exports are seemingly incoherent.
This is because, the set of import-export complementation made it easier for firms to import
vehicles and export peripheral components instead of investing in local production of
core components and steadily increase vehicle exports (Black, 2001). Therefore, the big
lessoned to be learned is that policy design needs to pay meticulous attention to the
implication of policies in order to ensure coherence of the industrial policy regime with
intended economic outcomes (Zalk, 2013). Moreover, there is a need implement dynamic
reciprocal control mechanisms between the state and recipients of state support in order to
minimise state failure (Amsden, 2001).
In addition the successes of MIDP are challenged by the domestic institutional make-up
which attract M&As and portfolio investment as opposed to the most impactful modes of
FDI. This has resulted in increased foreign ownership (Black, 2001); in an environment with
no capital controls which exposes South Africa to great risk which could be mitigated
through capital controls (Palma, 2000). Therefore I would recommend that South Africa
place certain policies in place in order to restrain financial capital, which would reduce
profitability in the financial sector, making other sectors more profitable in order to
stimulate investment in those sectors. But this is a very precarious route since the impact of
capital controls on FDI depends on external factors which cannot be controlled. This
suggests that this will be something that South Africa will have to learn through experience.
Moreover, capital controls pose an economic conundrum for South Africa. On the one hand,
financial regulation reduces profitability of the financial sector and its competitiveness
which dis-incentivises portfolio investment and that is a good thing in relation to reducing
speculative capital in South Africa. But on the other this would mean that South Africa
would not be able to mitigate its capital flight and repatriation of profits which could lead to
a deficit of payments which is potentially something harmful. However, with enough will
and experience an efficient balance could be attained. There are valuable lessons to be
learned from the MIDP as discussed above.
In conclusion, I have argued that the set of policies required for successful industrialisation
in South Africa need to address the sectorial bias resulting the minerals-energy complex and
ensure the establishment of self-sufficiency that can allow for economic linkages within the
economy without exclusion of certain sectors and population groups. This includes coherent
support by the state in labour-intensive sectors to establish competitiveness of our labour-
intensive industries. But more importantly this includes sensitivity to previously and
currently marginalised groups such as women and children.
The process of neoliberalisation has affected governance by reducing the extent and powers
of the state, thus redefining the bounds of what is private and public without any
consideration of the impact of this economic transformation on gender relations (Brodie,
1994). The institutions of neoclassical economics obscure the gendered aspect of economic
life and wage labour; especially those associated with the experience of economic
transformation such as the class-differentiated experience of women in core countries as
opposed to the men (Brodie, 1994); and the impact of changes in demand for labour on
women developing countries who are often exploited to maintain lower labour costs (Rai,
1996). Under these circumstances role of the state has been to facilitate the exploitation of
women in third world countries by multinational corporations (Brodie, 1994, p. 50).
Therefore, the state should allow the replacement of historically black male migrant labour
with female labour by obscuring the gendered impacts of economic change and not being
sensitive to the struggles of women and children.
In addition, I argued that the state needs an extensive industrial policy that is coherently
supported by trade policy in order to promote labour-intensive production and industrial
growth. This requires an understanding of how liberalisation or protection is needed, and
within which sectors and for how long. In addition, this requires co-ordinated effort by the
state and not just government or business. Moreover, policy regime coherence and
reciprocal control mechanisms are vitally important in order to minimise state failure and
promote developmental market functioning. I have also argued that the state needs to curb
the behavioural tendencies of shareholder value pursuit through a mandatory rate of real
investment based on firms annual turnovers and this can be done through pooling of funds
for rigorously regulated real investment by the state or in the form of compulsory growth in
real capital accumulation and employment targets for firms realising profits within South
Africa.
Lastly, I argued that the state needs to restrain financial capital, which would reduce
profitability in the financial sector, making other sectors more profitable in order to
stimulate investment in those sectors. However this is a highly contentious area of policy
because of the power of embedded interests within the state. But this is not something that
cannot be negotiated piecemeal and despite the many examples of success and failure there
are things the state will only learn through experience. And I as previously state this is not
the solution or a complete solution; instead this should be understood as possible response
amongst many possible responses to the question of industrialisation in South Africa. Thus,
South Africa can cross the river of persistent unemployment and inequality by feeling for
stones, such as the right combination of policies, to build strong foundations for the bridge
across.















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