AN EVALUATION OF INDUSTRIAL POLICY PERSPECTIVES IN THE SOUTH AFRICAN CONTEXT

CASE STUDIES: MALAYSIA, MAURITIUS AND IRELAND

Malaysia

Malaysia is often characterised as a 'late-industrializer', in the second wave of Newly Industrialised Countries (NICs). It has recorded very high growth rates for more than twenty years and has moved from being primarily a producer and exporter of products such as timber and rubber to mainly exporting manufactures, led by electronics, textiles and clothing. Electronics assembly and manufacture was a particular focus of Malaysian industrial policy with multinational firms being attracted to locate in Free Trade Zones (FTZs) and Licensed Manufacturing Warehouses (LMWs). The Malaysian government has also strongly promoted ethnic Malay (Bumiputera) ownership in the economy, and has dramatically reduced levels of poverty and inequality.

Unlike other NICs, Malaysia has significant natural resources. But, these natural resources did not retard manufacturing growth. The resources are relatively diversified so that foreign exchange earnings were not dependent on a single commodity, and exchange rate over-valuation due to resource exports was prevented.

Very high growth rates were achieved in manufacturing, led by electronics & electrical equipment, textiles & garments and transport equipment (including automotive). For much of the 1970s and 1980s these industries had annual growth rates of output in excess of 10% and major expansions of employment, at similar rates. By 1990, electronics and electrical equipment alone accounted for 25% of manufacturing output. In electronics and textiles & garments the growth was strongly export-oriented, with 94% and 86% respectively of output being exported in 1990. This was associated with the FTZs and LMWs after their establishment from 1972. These arrangements allowed for duty free import of inputs for products that were to be exported. Food products also grew strongly, but this growth was based mainly on local demand.

In contrast with the first wave of NICs (especially South Korea and Taiwan) Malaysia actively sought foreign direct investment. Exporting industries located in FTZs and LMWs were mainly owned by multinational companies and had few links with the domestic economy. These industries benefited from a range of incentives, infrastructure and effective provision of services provided under designations of Pioneer Industry status. They also benefited from the relocation of industries from Japan and South Korea.

At the same time, the government gave far-reaching support to heavy industries in which there was local and state ownership. These industries included cement, basic iron and steel, motor vehicles and sugar.

It is important to recognise that Malaysian policies and objectives were laid out in the New Economic Policy (NEP) programme initiated in 1971 after the major ethnic conflicts of 1969. The NEP linked poverty eradication, economic restructuring and the improved participation of ethnic Malays in the economy such that economic status and race did not continue to coincide. The growth of manufacturing was an important part of the policy. Targets, and mechanisms for their achievement, were embodied in successive five-year development plans, which guided areas such as the provision of infrastructure.

In the early years, the government spent heavily in developing agriculture, with support for irrigation and small-holder development alongside land-reform. The main products (such as rice) were also protected during this period. The reductions in inequality were therefore not just due to a manufacturing strategy, but interventionist measures in other areas of the economy. The promotion of Bumiputeras participation in the economy was also achieved through state institutions extending finance, and regulations on firms requiring minimum equity stakes. Alongside these nationalist measures were measures such as the banning of trade unions in the electronics sector until 1989.

Subsidies for training and research and development encouraged the development of broader-based production capabilities. But, while MNC owned operations benefited from this support and the availability of research and testing facilities, linkages with the domestic economy remained relatively weak. With the Industrial Master Plan and Promotion of Investment Act in 1986 stronger emphasis was placed on local participation and linkages. Strategic industries were designated for incentives and domestic content conditions added to programmes. Local content has also been promoted through state participation in, for example, the auto-sector, although questions remain about the effectiveness of this.

In 1990 the New Development Policy was introduced after the achievement of most of the twenty-year targets of the NEP. While introducing liberalisation and privatisation, the state continues to play an important role, and to respond proactively to challenges. State capacity in Malaysia in terms of designing and implementing plans and delivering infrastructure is undoubtedly very strong, and is the result of government actions.

The Malaysian experience demonstrates what can be achieved with indicative planning that primarily operates through state planning of infrastructure, education and skills development and regulatory mechanisms to ensure consistency of business and government decisions towards national priorities. Government can shape private sector patterns of development without necessarily intervening directly throughout the economy. The Malaysian example also indicates the ways in which policies promoting wider participation and reduced inequality are linked with long-term growth.

Questions have been raised by commentators on the sustainability of an MNC-centred export strategy where linkages with the local economy are weak. Such a strategy is at risk from the rise of other lower cost destinations (such as China) with good infrastructure and generous incentives. However, the government has shown its ability to use measures to influence the behaviour of corporations in this regard, as well as to intervene in the foreign exchange markets to maintain an appropriate macroeconomic environment. Lastly, the Malaysian case also illustrates that firms will invest where there is a strong growth record and profitable opportunities despite the rent-seeking and corruption that may arise from negotiating firm-specific arrangements with multi-national and local business.

Mauritius

The economy of Mauritius underwent major structural changes in the last three decades of the twentieth century. Until the late 1960s it was an agricultural monocrop economy, dominated by sugar as the main crop. The manufacturing sector was small and consisted of small industries engaged in food, beverages, tobacco, footwear and the repair and assembly of machinery and transport equipment. Between 1964 and 1972 sugar accounted for over 25% of GDP, while manufacturing contributed about 7% to GDP (WTO, 1995).

By the end of the twentieth century, the economy had transformed to a more diversified structure, resting on four "pillars" - sugar production and export, clothing exports, tourism and off-shore services. Sugar accounted for 90% of exports in 1970, but represented 25% of exports in 1995 while clothing exports have "boomed". More recently, priority has been placed on promotion of the service sector, particularly tourism and off-shore business activities. Earnings from tourism have doubled since 1987 and the share of the services sector in GDP is more than 50% and accounts for 35% of total trade.

Structural changes in the economy and the dramatic growth of the clothing industry have been attributed to a unique combination of internal and external factors.

External factors include Mauritius' membership of various international agreements and a range of economic and political factors.

Mauritius has enjoyed preferential access to European markets as a result of its historical relationship with its former colonial power (France). Mauritian sugar enjoyed a guaranteed market and enjoyed preferential prices through various agreements such as the Imperial Preference Regimes, the Commonwealth Sugar Agreement and the Sugar Protocol annexed to the Lome Convention.

The stable level of earnings from Mauritius' membership of the Sugar Protocol has underwritten the economic development of Mauritius. It has contributed to the financing of the manufacturing sector, particularly in the EPZ.

Subsequently the Lome Convention created considerable advantages for Mauritius, particularly for its textiles and clothing exports, as exports of textiles and clothing from non-ACP countries are liable to a 17% duty entry into European markets. The first Lome Convention was signed in 1975 and the fourth Lome Convention was in force from 1990 to February 2000. The Lome Convention has now been replaced by the Benin/Cotonou Convention, which expires in 2008.

This preferential access to European markets also encouraged businessmen from the Far East to relocate to Mauritius. The European Union still accounts for over 70% of merchandise exports although new markets in the USA and eastern and southern Africa are growing.

A combination of lower oil prices and lower debt servicing (arising in part from the depreciation of the US dollar after 1984) eased the country's foreign exchange problem.

An export processing zone (EPZ) was established in the 1970s with a number of incentives designed to attract investment, both local and foreign. After 1984 demand in European and American markets increased sharply, particularly with the appreciation of European currencies in relation to the Mauritian rupee causing Mauritian goods to become more competitive.

In the same period, the appreciation of the Taiwanese dollar meant that Taiwanese products became less competitive, encouraging Taiwan investors to set up industries in Mauritius.

Political uncertainty during the 1990s over the future of Hong Kong's reintegration into China encouraged business people to look for a safe haven for their capital and manufacturing operations. Investors brought capital, know-how and marketing networks and, in return, gained access to European and American markets by relocating to Mauritius.

Certain internal factors also played an important role.

There was substantial investment by local entrepreneurs in the Mauritian EPZ. By contrast, most EPZs around the world rely heavily on foreign investment. In addition joint ventures between local and foreign investors made a significant contribution. While foreign investment was extremely important for the initial take-off of the clothing industry, for example, the measure of success achieved would not have been possible without the involvement of the local business community.

Real linkages between the activities of foreigners and Mauritians developed and have been crucial for Mauritian firms to acquire the know-how. Some of the largest clothing firms, for example, are owned by Mauritians who have now become international industrialists.

Domestic policies in the form of incentives have attracted local and foreign investment. Investors benefit from low corporate tax and foreign investors are free to repatriate funds. Government invested in infrastructure in the EPZ. There was also a combination of cheap, but literate and moderately skilled labour.

Hence, the membership of Mauritius to important trade and aid instruments (Sugar Protocol, Lome Convention, etc) helped to mitigate the inherent disadvantage which Mauritius suffered as a small island economy. It has contributed significantly to the transformation of the economy from an agricultural monocrop economy based on sugar production and export to one where manufacturing for export has become the leading sector.

However, a number of vulnerabilities and shortcomings in this strategy have become apparent, leading to recognition that the manufacturing sector has reached a turning point. This has stimulated the development of a new strategy. These include a number of factors.

The preferential trade agreements enjoyed by Mauritius are being eroded as a result of developments in the global trade environment in the wake of the GATT/WTO agreements, the North American Free Trade Agreement, the creation of a single Europe and the advent of market economies in the East and Central European countries. Since the Uruguay Round of the GATT agreements, the trade preferences enjoyed by Mauritius under the Lome Convention are being eroded. Mauritius is also being affected as a net-food importing country.

EPZ manufacturing for activities are highly concentrated in textile manufacture which are prone to a number of adverse effects on the international market, including demand fluctuations in the US and EEC, shortage of labour on the local market and the international competitiveness of Mauritian exports.

Manufacturing firms are increasingly relocating to low-wage African countries, particularly in the SADC region, such as Botswana, Tanzania and Mozambique. However the strategy of these firms has been to use these new locations to produce low cost garments at the lower end of the market, while restructuring their operations in Mauritius to focus solely on producing high quality garments for the upper end of the market.

Since 1990 however, it has been recognised that Mauritius cannot sustain its growth by relying solely on the agricultural and manufacturing sectors, particularly in the lower-value segment of the clothing commodity chain. With the liberalisation of global trade, it can no longer rely on preferential trade agreements. It has had to implement strategies for shifting the focus of manufacturing production to production of higher value-added garments and diversifying its industrial base through the promotion of the service sector, particularly tourism and utilising its location to provide off shore services.

The shortcomings of many aspects of a dual economy that exists in Mauritius have also led to the introduction of measures designed to redress the dualism encouraged by EPZ schemes and to integrate the EPZ and non-EPZ sectors of the economy.

Ireland

Ireland's rapid growth in the 1990s has led to the country being described as the 'Celtic Tiger'. In the ten years after 1987, Ireland's GNP expanded by almost 70%. In contrast to Malaysia, for example, the country is also often cited as an example of successful policy formulation though processes of social partnership - particularly since this led to wage restraint in an attempt to attract more investment. However, because of this emphasis, the broader structural changes that took place in the Irish economy are sometimes underplayed - particularly the fact that the country was able to use its integration into the European Community to its advantage.

Already in the 1960s and 1970s, Ireland invested heavily in education. It also introduced a zero rate of corporate tax on profits earned from manufactured exports in an attempt to attract the 'right' kind of foreign investment. In spite of these attempts, the Irish economy was not able to create the number of jobs needed to improve living standards. The unemployment rate in the late 1980s was close to 20%. Multi-national corporations that did invest in Ireland, tended to locate low value-added activities in the country. Hence, in the early 1980s, there was an attempt to facilitate the growth of locally owned industries.

However, during the 1980s, Ireland entered a period of recession, leading to even higher levels of unemployment, as well as the emigration of professionals. Overall employment levels fell by 6%, and employment in manufacturing by 25%. The state maintained high levels of spending, and this led to state borrowing to levels of almost 16% of GNP in the late 1970s and early 1980s. By the late 1980s, there was general consensus that Ireland was in a state of economic crisis.

Yet, during this period, remarkable structural changes took place in the economy. These changes resulted from integration into the European economy. Exports increased from 38% of GDP in 1973 to 67% in 1989. The share of exports to the UK fell from 61% in 1972 to 35% in 1988. The share of exports going to the EU other than the UK increased from 17% in 1972 to 39% in 1988. This built the foundations for the spectacular economic recovery in the 1990s.

In 1987, the first of a number of three-year agreements between the government, employers, trade unions and farming interests were signed. The social partners agreed to wage moderation in return for tax reform, the maintenance of social welfare payments, spending on health, etc. The intention was to arrest high levels of inflation, and to prevent the devaluation of the currency. An important factor in the recovery of the Irish economy was the use of infrastructure funds from the EU that enabled the state to reprioritise spending - such as tax cuts to moderate wage demands.

Whereas investment in the 1970s and 1980s locked Ireland into low value-added activities, the new wave of investment, specifically from the US, located high-tech activities there to access European markets. Often, these multi-nationals formed partnerships with locally owned firms. Investments flowed into sectors such as pharmaceuticals, electronics, software, financial services and call centres, the last specifically to serve European customers of US companies.

Irelands illustrates how successful industrial policies, along with sound macro-economic and social policies can create the conditions for economic recovery, especially when these policies are not imposed, but broad consensus is sought. But it is also important to note Irelands specific geographical location with regard to major European markets, as well as the benefits for smaller economies of EU membership.

In light of the dynamics illustrated by the three case studies, as well as the theoretical perspectives discussed in Section B, we now turn to an analysis of more recent developments in industrial policy analysis in the South African context.