AN EVALUATION OF INDUSTRIAL POLICY PERSPECTIVES IN THE SOUTH AFRICAN CONTEXT

PERSPECTIVES ON INDUSTRIAL POLICY IN THE SOUTH AFRICAN CONTEXT

The broad industrial strategy followed since the 1920s, even though not consciously framed in those terms, seemed to display three main characteristics.

First, it contained some elements of import substitution industrialization by means of protecting local industries from competition through import tariffs. However, the significance of these tariffs, and to what an extent they really protected local industries, are subject to debate (MERG 1994:214; Bell 1995; Fine & Rustomjee 1996).

Second, the state played a significant role in setting up corporations to drive a programme of industrialization. During the era of sanctions against apartheid, the state attempted to use corporations to supply key resources, such as fuel extracted from coal through Sasol, as well as arms for its war in Angola and other destabilisation operations in southern Africa through Armscor (Fine & Rustomjee 1996).

Third, a dual labour market was created, where white South Africans were incorporated into a limited welfare state and were accorded labour rights, whereas black South Africans were formally excluded through a repressive labour regime (Joffe, Maller & Webster 1995).

During the 1980s the industrial policy of the apartheid government started to shift towards a position where tariff reform and privatisation were supported. The militant labour movement also successfully challenged its labour repressive policies. However, decisive steps on economic reform, especially privatisation, could not be taken because of the illegitimacy of the government (Joffe, Maller & Webster 1995; MERG 1994:214-5).

As with all policy, the making of industrial policy does not take place in a social vacuum. Policy is always influenced by the articulation of vested interests. When it became clear in the early 1990s that South Africa would enter a transition process based on a negotiated settlement, industrial policy as a way to address the legacies of apartheid capitalism received renewed attention. Debates on the relationship between the state and market became an area of intense contestation. In this context, we will limit the discussion to four major perspectives that became influential in the 1990s. In each instance, we discuss the assumptions regarding South Africa's industrial structure, as well as policy prescriptions flowing from these assumptions.

The World Bank

The World Bank has published several discussion papers dealing indirectly with industrial policy in South Africa (see Levy 1992, 1993; Fallon & Pereira da Silva 1994; World Bank 1999). According to Fine (1997b:126-7), the World Bank's approach assumes that weaknesses in the South African manufacturing industry is the result of "protection from international competition". Also, real wages and capital costs are too high, and, as a result, South Africa shows a high rate of unemployment. The legacy of apartheid, specifically economic restrictions and a weak education system "inhibited the emergence of small- and medium-sized enterprises."

An industrial strategy would imply the liberalisation of trade and an emphasis on export-led growth. The strategy is focussed on "getting the prices of capital and labour 'right'" (Fine 1997b:126), but also on developing a more skilled workforce, while maintaining "prudent fiscal and monetary policies." Also, in order to stimulate growth, the South African government had to recognise that the "single most important ingredient is investor confidence". This was best achieved through "sustainable, consistent, and credible economic policies" (Fallon & Pereira da Silva 1994). Of course, in the World Bank's perspective, an industrial policy where the state plays a directive role in industrial restructuring is undesirable. This process is best left to markets.

The World Bank's approach is criticised for its assumption that economic restructuring, when left to markets, will lead to economic equilibrium. It does not take into account that the South African economy "has been built upon state intervention on behalf of, and in co-ordination with, large-scale corporate capital." A commitment to "undistorted prices" can therefore "not wish away" the economic power wielded by powerful vested interests in South Africa (Fine 1997b:126-127).

The post-Fordist approach

In the South African context, post-Fordism became prominent through the work of the Industrial Strategy Project (ISP). In the early 1990s the ISP, on request of COSATU, conducted detailed case studies of several of the South African manufacturing sectors in order to devise an industrial strategy to improve South Africa's manufacturing performance. Post-Fordism as a theoretical current became prominent after the publication of Piore & Sabel's (1984) The second industrial divide. Whereas the Fordist stage of capitalist development was based on mass production coupled with mass consumption, a new era, it was argued, that of post-Fordism, necessitated new approaches to production. The fact that mass markets were breaking down into niche (or specialised) markets, necessitated a move away from a rigid assembly-line based approach to production, as well as a more flexible labour regime.

Whereas mass production deskilled workers, post-Fordists argue, new production techniques based on flexible specialisation can foster an industrial relations dispensation based on trust between management and upskilled workers. Successful manufacturing will incorporate techniques such as just-in-time inventory management, multi-skilling and job rotation, computer-aided design and manufacturing, and smaller firms co-operating on a subcontracted basis in industrial districts (Rainnie 1991:52 Appelbaum & Albin 1989:247-265; Wood 1988:101; Hyman 1988:49).

According to the ISP analysis, South Africa's industrial structural deficiencies can be traced to the decline of the manufacturing sector brought about by the sustained regime of import substitution industrialisation. Since manufacturing firms were protected from global competition, the South African manufacturing industry relied on dated technology and managerial techniques. Even in firms where schemes such as "green areas, quality circles, suggestion boxes and briefing sessions" took place, success was limited because of racist supervisors who believed "that workers [did] not have insights to offer" (Joffe, et al, 1995:194-5). Also, because of unequal income distribution patterns (a system called racial Fordism), mainly in favour of white South Africans, local markets became saturated. Investment in the manufacturing industry, as well as productivity levels, declined (Joffe, et al, 1995:3-14).

According to the ISP, an industrial strategy had to focus on ways to move the South African manufacturing sector towards an Intelligent Production Strategy (IPS) through a range of industrial policy measures. Apart from a reduction in import tariffs, these included the creation of internal competition through competition policy, investing in human resources development and workplace innovation, and enhancing the country's technological capacity. Importantly, social institutions, such as NEDLAC, the state and parastatals had to be strengthened in order to bring about this successful focus on export-led growth (Joffe, et al, 1995).

The role of the state is conceptualised as one of intervention only "where it is clear that market imperfections and market failures produce sub-optimal outcomes... [A]n effective industrial strategy seeks to co-ordinate policy such that the state works together with, and indeed, seeks to improve the effective functioning of markets" (Joffe, et al, 1995:15).

The ISP has been criticised on several accounts, but two of the most important criticisms question its theoretical assumptions and the evidence provided for these assumptions.

Nattrass has criticized the ISP for not being critical enough in their reading of the supposedly "'growing evidence' supported by 'a wide body of literature' that the basis of competitive performance has been changing" (1994:522). She also pointed to the fact that economic restructuring could lead to a rise in the level of unemployment, and that flexible production patterns did not necessarily lead to enhanced worker participation (Nattrass 1994:522-523; Kaplinsky 1994; see also Maller & Dwolatsky 1993:70-86).

Trevor Bell (1995) questioned the main assumption of the ISP that South Africa's economic troubles resulted from slow productivity growth in the manufacturing sector. He disputed the assumption made by the ISP that trade liberalisation will lead to enhanced exports, instead of more imports and hence, a negative balance of trade. According to him, supply-side measures to enhance micro-economic performance cannot work "quickly and powerfully enough" to offset the negative effects of import liberalization (see Kaplan & Lewis 1996; Bell 1996; Valodia 1996).

The Porterist approach

Early in 1994, the then National Economic Forum commissioned the Monitor Company to conduct a study to assist the social partners in formulating an approach to a national industrial strategy. The assumptions of the Monitor Company's report are based on the work of Michael Porter (1990), specifically his book The Competitive Advantage of Nations. Porter was a founding director of the Monitor Company. Staff of the Industrial Development Corporation, the Department of Trade and Industry, Cosatu, and Business South Africa were seconded to Monitor in order to ensure that the methodology used in the study was "transferred" (Monitor 1995:5-6).

The consultants argued that their study looked at industrial strategy, as opposed to industrial policy. Industrial strategy they defined as "aimed at maximising the rate of economic growth for the country", whereas industrial policy would "take into account other goals, such as elements of the RDP" (Monitor 1995:6).

The Porterist approach to competitiveness assumes that it is "firms that compete.. and not nations". But the government still has an important role to play. A presentation by Monitor argued:

Government policy towards the economy is often framed as a choice between laissez-faire and direct intervention in industry. This dichotomy is inaccurate. The role of government policy is best understood by looking at how it influences [the platform from which firms compete]. Government at all levels, national, provincial and local, can improve or impede national advantage. Examples include its investments in factor creation, through its role as a buyer or influence of buyer needs and through its competition policies (Monitor 1995:13).

However, the consultants argued, the "most productive role of government is to improve the quality of the inputs (factors) firms can draw upon, and to define a competitive environment and rules of the game that promote innovation and upgrading" (Monitor 1995:13). However, competitive advantage does not only relate to individual firms, but also to co-operation between different firms in so-called "clusters". South Africa lacked a "strong machinery base", as well as supporting services, such as design, technical consulting, information services, and management consultants. According to the Monitor Company (1995:4), the state could play an important role in facilitating co-operation in certain "clusters".

Whilst referring to "platforms" on which firms compete, the Porterist school underestimates the embeddedness of production in specific labour regimes. In a study based on research conducted in two factories involved in the manufacturing of household appliances, one in Australia and the other in China, Rob Lambert and Anita Chan argue that "marked differences in regulatory regimes determine the character of corporate restructuring". They also argue that this process of corporate restructuring "is a powerful disciplining force on workers and has a profound effect on the production regime itself" (1999: 72). In the context of trade liberalisation, Lambert argues elsewhere, the reforming of labour market institutions is becoming a "significant terrain where struggles for international competitive advantage are fought" (Lambert, 1998: 271-272). When a process of migration of manufacturing capital from Australia to the export processing zones (EPZ's) of Asia started, the Australian government went through a process of labour market liberalisation, based on the systematic weakening of trade unions alongside the individualisation of contracts of employment (Ibid.).

This process puts two distinctly dissimilar production regimes in competition. The one is based on a democratic dispensation which recognises core labour rights, such as the right to form and join trade unions, and the right to free collective bargaining. The other is based on authoritarian dispensations where basic labour rights are systematically denied (Lambert & Chan, 1999). This competition is intensified as import tariffs are lowered and monetary exchange controls are relaxed.

Thus, the Porterist approach provides a useful framework to analyse certain sectors of the economy, however, a major problem is the fact that these studies of "clusters" do not provide a broad picture of how different sectors of the economy relate to each other. Hence, it remains a generic theoretical model that is "imposed" on reality.

The political economy approach

Fine and Rustomjee (1996; see also Fine 1997a; 1997b) have written the most coherent assessment of industrial policy in South Africa from a political economy approach. Their approach rejects the notion that the state and the market are two separate social entities. Instead, they argue, the interaction between state and market is a "complex product of the forces that are exerted upon them" and that "the most prominent of these are economic interests and imperatives that are attached to specific fractions of classes" (1996:52).

Whilst the ISP located the reason for South Africa's economic decline in the manufacturing industry, Fine and Rustomjee (1996) question the extent to which the manufacturing industry is central to the South African economy. Because of the dominance of mining and financial capital, and the role of the state's industrial policies, the South African economy is still dominated by what they call the Minerals-Energy Complex (MEC).

If South Africa successfully wants to build an economy of scope and scale based on manufacturing, they argue, industrial policy considerations have to take into account the influence of powerful corporate interests in the economy, and how these interests shape the role of the state.

Hence, one has to take into consideration what is included in, as well as what is excluded from industrial policy. Fine (1997a:6-7) argues that different components of industrial policy are prominent at different times. This has to do with differences in perceived economic problems at different times, changes in intellectual fashion, as well as vested interests. For example, in the context of apartheid South Africa, industrial policy has traditionally been equated with trade policy by the Industrial Development Corporation (IDC). This focus on trade policy to facilitate import substitution industrialization obscures the fact that oppressive labour laws, the building up of heavy industries around the mining and energy sectors, as well as the involvement of large state corporations in the economy, were all part of what is usually understood as industrial policy.

Therefore, definitions of industrial policy are not neutral, "because of what is included and what is excluded." When considering specific problems, Fine argues, a wide range of policy options that are relevant to issues at hand should be considered.

In formulating principles on which an industrial strategy and policy can be based, Fine and Rustomjee (1996:252-253) argue that South African material realities, and not generalised theoretical models, should be used as a starting point. They argue that the "evolution" of the minerals-energy complex entails both strengths and weaknesses for the economy. Their approach corresponds to the one adopted by the Macro-economic Research Group in the mid-1990s (see MERG 1994:211-242).

Economic strengths relate to "productive and infrastructural capacities that have been built up around... core sectors." Based on these strengths, Fine and Rustomjee argue that emphasis should be placed upon "a state programme of public expenditure to provide social and economic infrastructure." This has the potential to lay the basis for further investment, as well as the creation of economic demand.

A major weakness of the economy is the fact that the minerals energy complex failed to "be vertically integrated forward into the rest of the economy." Hence, the state has to selectively intervene "to ensure greater coherence in the economies of scale and scope that have previously been neglected" (Fine & Rustomjee, 1996:252-253).

Fine and Rustomjee's approach expands the definition of industrial policy as referring mainly to the targeting of industries through supply-side measures, to one where the state is also involved through the development of infrastructure and the creation of demand. This approach goes against the intellectual fashion of the state retreating in favour of markets (see Bell & Farrel 1997 for a critique of the evidence provided for their argument).

The implications of different perspectives for the making of industrial policy

All the approaches agree that it is important to strengthen manufacturing industry. In the context of a mineral rich country such as South Africa, policy measures can be aimed at moving up the value chain, i.e. focussing on adding more value to commodities through manufacturing before exporting goods or selling it to the local market. This form of industrial restructuring would attempt to strengthen the local manufacturing industry.

But the perspectives have radically different approaches to how this should be brought about, and what role the state should play. The World Bank approach follows the orthodox neoliberal approach where the market should determine the cost of labour and capital. The state's role is limited to that of a regulator. The Post-Fordist approach emphasises trade liberalisation, and supporting an export-oriented manufacturing industry through supply-side measures, human resource development, and technological policy. The Porterist approach corresponds to this to some extent, but the role of the state is seen as the creator of an enabling environment, with limited intervention through strengthening factor markets. The political economy approach of Fine and Rustomjee questions the assumption that South Africa has moved away from a minerals-based economy to an economy based primarily on industrial manufacturing. Industrial policy measures proposed include demand-side measures through the development of infrastructure, as well as the targeting of manufacturing industries that can build on the strengths of the minerals energy complex.

Table 1 compares the four approaches discussed here in terms of their basic assumptions on deficiencies in South Africa's industrial structure, proposed industrial strategies, assumptions on the role of the state, and appropriate industrial policy measures to facilitate industrial restructuring.

Table 1

A Comparison of Different Perspectives on Industrial Policy in South Africa

	World Bank	Post-Fordism (Industrial Strategy Project)	Porterism(Monitor Company)	Political Economy Approach (Fine & Rustomjee)
Industrial Structural Deficiencies	Labour and capital costs too high Manufacturing not competitive because of protection	Legacy of import substitution industrialisation Racial Fordism Decline in productivity in manufacturing sector	A lack of co-ordination of firms in economic "clusters" Firms focus on production for government, rather than on customers and competitors Exports focus on commodities, rather that adding value Lack of skills integrated with technological capacity Lack of competition in local market Lack of government bureaucratic capability	Economy still based on a dominant minerals-energy complex The influence of class interests linked to the minerals energy complex limited the ability of this complex integrating forward into a strong manufacturing industry
Proposed Industrial Strategy	Main focus should be on improving investor confidence to stimulate growth	Main focus should be to improve productivity and exports in manufacturing industry	Main focus on improving competitiveness through providing a market-based enabling environment for firms to operate	State-led investment in the development of infrastructure Selective intervention to integrate minerals energy complex into a manufacturing industry of scope and scale
Role of the State	State intervention should be reduced Creation of investor confidence through 'sound' economic policies	Intervene only in case of serious market failure Build institutional capacity	The state should only create a market-driven enabling environment for firms to compete Best form of intervention is to strengthen factor markets on which firms draw	The false dichotomy between state and market should be rejectedRole of state is central
Proposed Industrial Policy Measures	State's role limited to modest redistribution of land and improving skills base Trade and monetary liberalisation and adherence to fiscal discipline in order to improve investor confidence	Strengthening of markets through trade liberalisation, competition policy and enhancing role of SMEs Improving institutional capacity to enhance human resources development - i.e. training Enhancing technological capabilities through supporting research & development	The creation of an enabling business environment through increased local and international competition, the development of "clusters", moving up the value chain and the development of related and supporting industries	No specific proposals on industrial policy, but would include measures such as public works programmes and the targeting of industries

The Global Commodity Chain approach

According to Gibbon (2001: 345), the Global Commodity Chain² approach "focuses on the opportunities and constraints presented by the forms of global integration of production and trade in specific commodities, on the basis of careful case studies of the 'chains' in which this integration is embodied." This approach contains elements of both the political economy and post-Fordist approaches, as well as some elements of Porterism - specifically its emphasis on economic "clusters" (see Gibbon, 2001: 349).

2 This is also referred to as a "value chain" approach. See also Kaplinsky & Morris (2001).

Kaplinsky (2000: 121) defines a commodity (or value) chain as "the full range of activities which are required to bring a product or service from conception, through the intermediary phases of production (involving a combination of physical transformation and the input of various producer services), delivery to final consumers, and final disposal after use."

When analysing commodity chains, typically four important dimensions are taken into account:

• The input-output structure of a commodity chain,
• The territory covered by commodity chains,
• The internal governance structure of a commodity chain, and
• The institutional framework that identifies how local, national and international conditions and policies shape the globalisation process at each stage of the chain (Gibbon, 2001: 346-347; see also Gereffi, 1999).

This approach transcends the traditional analytical distinction between the primary, secondary and tertiary sectors. Indeed, it analyses carefully how these "sectors" are integrated and controlled. Industrial policy is not only a manufacturing policy, but one that addresses instruments that can influence the way in which national economies are inserted or integrated into global production systems. Thus, another major advantage of utilising the Global Commodity Chain approach to analyse a national economy, is that the global is firmly located in local dynamics, and vice versa. Also, this approach firmly recognises that the coordination of such commodity chains are subject to power dynamics - the chain is coordinated or controlled somewhere, and that this process is embedded in local structures and regulatory regimes. A key issue is "who controls global trade and industry", as well as how "agents locked into lower-value segments of trade can break out of this situation" (Gibbon, 2001: 346).

We argue that when this approach is adopted strategically, one can, to some extent, take on board some of the concerns of the major historical perspectives on industrial strategy, whilst addressing their major weaknesses.

The following three case studies illustrate how industrial strategy has been used in other countries, to various degrees of success, to bring about industrial restructuring. They illustrate the importance of securing a process of restructuring that takes advantage of global processes to position economic activity in the higher value-added segments of commodity chains.