RPP: Guest post Reply

RPP is our code for the weekly blog post, op-ed by the School’s celebrity economist / pundit / opinionista, but he will probably only start writing in August, so in the meantime we are filling in with some guest posts.

This week: Waldo Krugell on Industrial policy, IPAP-2 and the North West Province:

In an earlier post I wrote about the return of industrial policyand ended by asking what does it means for South Africa? In today’s RPP Guest post I want to take the next step and write about the IPAP-2 and its possible place in the North West province (if you have read this at Eat, Sleep, Blog, Economics, please excuse the cross posting).

Lifting manufacturing

Government’s broad approach to industrialisation is set out in the National industrial Policy Framework. The implementation of policy is set out in the Industrial Policy Action Plan (IPAP). IPAP-2 is an action plan designed to help build South Africa’s industrial base in critical sectors of production and value-added manufacturing, which are largely labour-intensive industries. IPAP-2 is therefore designed to address the decline in industrial and manufacturing capacity and contribute to the reduction of chronic unemployment.The IPAP-2 sets out to contribute to rural development, advanced technological capabilities, downstream minerals beneficiation, promotion of energy efficient goods and services, strengthened linkages between tourism and cultural industries, interaction between sector strategies and the creation of sustainable jobs. To make these contributions, each of the above can be related to key sectors on which the IPAP-2 will focus. These can be clustered into three groups shown in table 1.

Table 1: Sector focus

The policies outlined above clearly have to be formulated at the national level (competition, regulation, trade policy), but have particular sub-national impacts. The implications for economies at provincial and local level are closely linked to the location of the sectors identified in IPAP-2. The firms that produce the goods and services are located in specific provinces, cities and towns and while the pursuit of the different IPAP-2 polices may be driven by national government, it has implications for provincial authorities.
To link the IPAP-2 to the North West province one first needs to consider the nature of the provincial economy. First, the North West province is a relatively small player in the national economy. In terms of population the province ranks seventh out of nine provinces with approximately 7.1 per cent of the population. The population density is low at 32 people per square kilometre. The province’s Human Development Index score of 0.51 is slightly below the national average of 0.56. In terms of contribution to the national economy, the North West Province does well. The Gross Value Added per capita is approximately R46 684. It is below the national average of R49 344 in 2010, but the province ranks fourth out of the nine provinces.
The second point to consider is the unique make-up of the provincial economy that has particular implications for the interpretation of the IPAP-2. The following figure shows the primary, secondary and tertiary sectors’ contribution to gross value added in 2010.

Figure 1: GVA sector share of provincial total, 2010

In the North West province the primary sector plays a larger role than in any of the other provinces. Along with the Northern Cape and Limpopo provinces the secondary sector (manufacturing) makes up a small part of GVA (8.2%). The tertiary sector contributes half of the provincial GVA. When the provinces’ share of national total GVA is examined in the following figure, it is clear that the North West makes the biggest contribution to primary sector GVA. Following the Northern Cape it makes a very small contribution to secondary sector GVA. Even though the tertiary sector accounts for half of the provincial GVA, the tertiary sector in the North West contributes only 5 per cent of the national gross value added.
A detailed breakdown of GVA and employment in the North West province confirms the large contribution of the primary sector, specifically the mining sector to GVA and employment. The sectors that are grouped together as the tertiary sector, from retail to transport and communication, finance and real estate, education and health etc., make up 49 per cent of value added and almost 45 per cent of employment.

Figure 2: Provincial share of national total GVA, 2010

The implication for the interpretation of the IPAP-2 for the Province is that the manufacturing focus of the IPAP-2 has only a limited footprint in the province. Since the manufacturing sector is small, the gains from industrial policy are likely to be limited. For the province the challenge will be to identify linkages between the primary and secondary sector and to consider the product space and scope for down-stream beneficiation, linked to national and international opportunities for such products.
The table below shows that matching of the sectors for which data are available at provincial level and the IPAP-2 clusters of sectors. It is not possible to clearly match the IPAP-2’s green and energy saving industries, automotive components and vehicles, bio-fuels and business process servicing to the available industrial classification of sectors from the Regional Economic Explorer database. The whole of cluster 3; nuclear, advanced materials and aerospace can also not be matched at provincial level. For the other IPAP-2 sectors there are close-enough proxies in the REX database. Cultural industries and tourism is matched with hotels and restaurants, which is not a close match, but also not too unreasonable to work with.
Taken all together the match between the IPAP-2’s focus sectors and the current state of production in the North West province is limited. Cluster 1 industries represent 2.6 per cent of value added and Cluster 2 industries make up 3 per cent of value added.

Table 2: Sectors’ share of provincial total, 2010

It is possible to have a closer look at the component sectors of clusters 1 and 2 in terms of their contribution to the provincial economy in 2010 and growth in GVA, employment and gross operating surplus over the period 1996 to 2009.The table confirms the fact that the sectors in the IPAP-2 clusters make small contributions to the economy of the North West province in terms of value added, employment and gross operating surplus. The cultural industries and tourism seem to be slightly more labour intensive. The table below shows the growth rates over the period 1996 to 2009.

Table 3: Sectors’ growth rates, 1996-2009

Thus, my point is that there is only a limited match possible between the IPAP-2 and the small manufacturing sector of the North West province. Industrial policy may be back in fashion, but national and provincial politicians have to be careful when pursuing it. Targeted support of industries, or special economic zones may fail simply because there is no viable cluster to support.  So-called localisation (import substitution by any other name) is also likely to fail without the elements that make up a successful agglomeration: a pooled labour market, specialised suppliers of intermediate inputs, knowledge spillovers, and infrastructure. In the North West province policies focus should be on the factors that drive long-term competitiveness. More often than not, these falls outside of the parameters of industrial policy, or sub-national policy for that matter. It brings us back to the basics of education, health care, maintenance of infrastructure and a stable policy environment that encourages private sector activities. There is still lots of scope for research and blog posts.

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