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Reconfiguring Industrial Policy: A Framework with an Application to South Africa

Literature › Works

Ricardo Hausmann; Dani Rodrik; Charles F. Sabel (2008). Reconfiguring Industrial Policy: A Framework with an Application to South Africa. Paper presented at the 25th Celebration Conference on Entrepreneurship and Innovation, Copenhagen (revised version dated 31 August 2007). Copenhagen Business School conference (unpublished paper).
Type conference paper
Scope Post-1994 South African economy
Method policy analysis
Period studied 1995–2007
Regions South Africa
Themes manufacturing industrial policy, business and state, comparative theory, transition post apartheid
Citation key hausmann2008b

Argument

The authors argue that industrial policy should be understood as an institutionalised collaboration between government and firms that searches for market failures (self-discovery externalities, coordination externalities, missing public inputs). It should not be a fixed menu of tariffs, subsidies or priority sectors. They propose a two-pronged design: policy 'in the small' (deliberation councils, a central fund for public inputs, quality reviews) and policy 'in the large' (strategic bets run like a public venture fund, e.g. through development banks). They judge that South Africa's institutions at present fail the test of ongoing dialogue and self-correction. They recommend a central fund, reorienting the IDC, reforming the MIDP and CSPs, and avoiding forced beneficiation. An appendix applies a simple panel regression and welfare framework to the motor industry's import-duty rebate scheme (IRCCs).

Evidence and method

No archival or survey data are presented. The authors rely on their earlier conceptual writings (Rodrik 2004; Hausmann and Rodrik 2006), discussions with South African business and government officials, and site visits. The appendix uses an unreported panel regression across three-digit manufacturing industries with a post-1995 auto dummy, plus illustrative 2005 figures on auto employment, wages, IRCC value and tariffs.

Findings

  • Industrial policy is defined as speeding up structural change toward higher productivity activities. (p. 2)

    We take the main purpose of industrial policy to be to speed up the process of structural change towards higher productivity activities.

  • Self-discovery is identified as a core market failure, one of three that justify industrial policy. (p. 3)

    Learning what new products can be produced profitably in an economy, and how, is an activity whose social value greatly exceeds its private value.

  • The authors judge South Africa's current institutions to fail their tests of public-private dialogue and selective, quick response. (p. 6)

    Our impression is that the answers in South Africa to both of these questions are, at present, no and no.

  • The test of industrial policy is letting losers go rather than picking winners. (p. 13)

    The ultimate test of whether industrial policy is working is not whether a government can reliably pick winners (no government reliably can) but whether a government is able to let losers go.

  • A central fund financed by cluster department budgets is proposed to pay for public inputs identified by the private sector. (p. 14)

    We propose that every year a certain share (4%) of economic cluster department budgets be allocated to a central fund the main purpose of which is to finance specific public inputs.

  • The IDC should act as a venture fund, not a commercial bank. (p. 15)

    Essentially, we would like to see IDC act much more like a venture fund and much less like a commercial bank.

  • The MIDP is assessed as having succeeded in retaining an auto industry, but not yet in making it competitive without support. (p. 15)

    has fulfilled its goal of retaining and growing an auto industry that has the potential of becoming competitive in the global industry without government support—but the industry is not there yet.

  • Forced beneficiation is rejected as a policy. (p. 17)

    We think that beneficiation, in the sense of incentivizing the domestic processing of natural resources, is not a sensible policy.

  • The panel regression finds the MIDP raised auto employment by about 15 percent. (p. 19)

    It also has had an employment boosting impact in the auto industry of around 15 percent.

  • Even under maximal assumptions the employment gain from MIDP is small, about R2 bn a year, against the IRCC transfer to foreign OEMs. (p. 21)

    Since average labor remuneration in the sector is R144,000 per annum, the (maximal) net employment surplus stands around R2 bn.