Has the trade liberalisation that SA embarked on in the 1990s transformed production and exports away from mining and other commodities? The department of trade & industry (DTI) makes no bones about its belief that this has not happened.
The solution, according to the DTI, is to subordinate trade policy to its new industrial policy framework in order to drive economic diversification. It says the solution to SA's unemployment crisis lies in reviving manufacturing exports, as it believes this sector has the greatest potential to mop up the vast pool of low-level and unskilled labour in the country.
"Clearly, tariffs are an instrument of industrial policy, and therefore a strategic approach to managing them seems sensible," says Peter Draper, head of the Development Through Trade programme at the SA Institute of International Affairs (SAIIA). "However, unless the process is conducted transparently, there is the risk it may be captured by strong lobbies or rent-seekers."
Marcus Noland - Be careful of copying
Draper notes that the DTI's trade policy review document does not indicate when protection, if instituted, would be withdrawn, or how the intended benefits would be monitored. The same goes for subsidies to support targeted industries - another key instrument of industrial policy.
To examine these issues, SAIIA hosted a public forum in Cape Town last week. The guest speaker was Marcus Noland, deputy director of the Washington-based Peterson Institute for International Economics, one of the world's leading private, non profit, non partisan think-tanks.
Noland claims not to be an expert on SA, though he has been here several times. He has lived and worked in Asia and Africa, and written extensively on the economies of Japan, Korea and China.
He points out that in SA, where the average tariff is already as low as 8,2%, raising certain tariffs by 5% - as the DTI proposes to do in clothing, for instance - is likely to make very little difference to SA's industrial performance. He suggests that the DTI's energy might be better spent elsewhere.
"Raising tariffs by 5% isn't going to shake the foundations of the economy," he told the FM. "It will be smothered by the increase in the rand. The issue of tariffs is peripheral to SA's real problems; talk about the labour market, educational performance and savings. These are the real issues."
Trade & industry minister Rob Davies appears to agree on the importance of the currency. Speaking in parliament last week, Davies argued: "Unless we have a competitive exchange rate, what we do in industrial policy will be undermined."
He said: "The appreciation [of the rand] in recent months has made our industrial recovery and industrial exports more difficult. Successful industrialising countries have a much more competitive exchange rate than we have. In many respects, addressing this issue is as critical as anything else we can do in industrial policy."
Noland said he'd recently met a sophisticated multinational investor who was looking to establish a manufacturing assembly plant in Africa. It has chosen Mozambique, not SA. "If I were a South African, I would be appalled by this," he says. "The message is: SA isn't going to have the monopoly on the industrial base in Africa much longer. SA should be asking why that is the case."
Asked what lessons SA could learn from the East Asian economic miracle, Noland said it was a misunderstanding of how the world works to think that SA could just import policies from the rest of the world.
He dislikes the term "lessons" because it implies a level of transferability that doesn't exist. But if SA can learn anything from East Asia, he believes, it is that the solutions are very specific to local conditions and a country's historical legacy.
"The really crucial message one gets from East Asia is that getting the politics right is more important than the economics - because picking winners, in an industrial policy context, is always prone to political capture," he says.
According to Noland, the question South Africans should be asking is: how confident are we that our political system can pick winners, and manage a system of industrial subsidies and incentives, without [the process] falling prey to political capture ? If SA is not confident, it should be very cautious about heading down that road.
He admits that there is insufficient data to compare the degree of corruption and inefficiency of the state bureaucracy in SA to those of Korea, Japan and Taiwan of 30 years ago, when they were introducing significant industrial support measures. But based on a variety of comparative international data (not without limitations), SA appears to be more corrupt.
Japan is often cited in the academic literature as an example of a country where picking winners works. But Noland says in Japan it was coal mining and agriculture - highly inefficient sectors, with a high degree of labour union and farmer organisation respectively - that received 90% of the on-budget subsidies every year after World War 2.
The same pattern was discernible in off-budget support through Japan's development banks. In effect, the efficient manufacturing sector was taxed to pour money into these rent-seeking sectors. Within manufacturing, subsidies essentially went to textiles and not, as is commonly believed, into computers.
Another aspect of Japan's industrial policy that is often lauded is the strong support it gave to research & development and to research consortia. But Noland points out that this was to correct a particular failing of Japan's education system, which was surprisingly weak at university level. "It worked because it was designed to address a specific failing, not because it was a great policy," he cautions.
In this respect, the ANC's stated intention - expressed after the alliance summit last weekend - to reintroduce inspectors to the country's classrooms to start measuring teacher performance, is long overdue. It raises the hope that government may yet get to grips with SA's real priority - getting the basics in education right.
The summit also expressed support for "ramping up" industrial policy measures. The Industrial Development Corp and industrial subsidies are likely to play the leading role. If Noland is right, the obvious question is: who will capture the lion's share of such funds? Foreign companies in the automotive sector? Failing textile firms? Or promising young startups in the innovative sectors?
The bottom line, according to Draper, is that the criteria under which tariff protections, subsidies and favourable regulations are to be granted need to be made known, and subjected to transparent cost-benefit analyses.
"If taxpayers are to be asked to pay for these things, they should know what they are getting - and why."
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