An important challenge is that, even as it works to transform the sector, the Department of Trade and Industry needs to be careful not to increase the pressure too abruptly, writes Tumelo Chipfupa

IN 1994 senior officials in the Department of Trade and Industry liked to use the analogy of a frog in boiling water to explain the government’s decision to unilaterally reduce protective industrial tariffs to below what was legally required, speedily subjecting SA’s manufacturers to the full effects of competition from imports.

The idea is that if you drop a frog in a pot of boiling water, it will frantically try to clamber out. But if you place it gently in a pot of tepid water and turn the heat on low, it will float there quite placidly. As the water gradually heats up, the frog will sink into a tranquil stupor and, before long, it will allow itself to be boiled to death.

The analogy with manufacturing was that globalisation was inevitable and the best way to get manufacturers to begin adjusting was to dramatically ratchet up the competitive pressure. Twenty years, and millions of job losses later the folly of following the myth rather than the science is glaringly apparent.

But one of the most exciting developments in industrialisation policy since this year’s elections has been the department’s emphasis on creating a black industrialist class. It is fair to expect that the programme will have as one of its key objectives the growth of a critical mass of manufacturers and firms in other productive sectors of the economy owned and managed by black entrepreneurs.

Apart from correcting the injustices of our past, two inter-related and persuasive justifications for this stand out:

• Success in building a strong and vibrant manufacturing sector is key to accelerating SA’s development. An innovative manufacturing sector has been the ladder developing countries have used to climb from low and middle-income country status to developed-country status. In the medium to long term manufacturing is key to raising incomes and combating poverty and inequality; and

•The growth of manufacturing will for the foreseeable future require deliberate government intervention and support. Devoting a part of SA’s scarce resources to growing the manufacturing sector will be possible only if the programme has broad appeal and support from key interest groups. To the extent that ownership of productive assets in the manufacturing sector is seen as the exclusive preserve of local and foreign multinationals as well as historically white-owned medium-sized businesses, it will be difficult for any popularly elected government to attain and maintain the required level of support for the sector. Transforming ownership in the sector is thus a key requirement of continued government support.

Having acknowledged the importance of transformation, it is, however, important to note it will be a difficult balancing exercise. Manufacturing is in decline, facing intense and unrelenting competition from imports. International competition has cut profit margins for firms and reduced the relative weight of the sector.

The sector is also stymied by an uncompetitive local business climate characterised by unstable labour relations, rising input costs, inadequate infrastructure and a volatile currency.

An important challenge is that, even as it works to transform the sector, the department needs to be careful not to increase the pressure too abruptly, worsening the conditions for existing manufacturers and nullifying the effects of existing support programmes.

The department’s industrial policy incentives have taken a number of different approaches to ownership transformation and the creation of opportunities for black entrepreneurs. One approach is to create some support programmes exclusively targeted at black-owned companies.

Another approach is a carrot-and-stick approach that conditions the level of industrial policy support for large and medium-sized enterprises on their success in integrating black-owned enterprises in their supply chains.

What needs to be avoided is an approach that is all stick and no carrot, an approach that would create a destructive tension between, on the one hand, the need to provide industrial policy assistance to the manufacturing sector, and, on the other hand, the need to expand opportunities for black entrepreneurs.

It would, for example, be counterproductive for the department to set an arbitrary empowerment scorecard cut-off point beyond which companies would become ineligible for industrial policy assistance. While such an approach would dramatically ratchet up the transformation pressure on existing firms, it would risk throwing out the baby with the bath water.

• Chipfupa is co-director at Cova Advisory.