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Far from ideal

Mar 01 2011 21:59 Greta Steyn

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ON THE face of it, SA has implemented an aggressive industrial policy. But some sleight of hand was used by politicians to create that impression, with industrial policy in fact being fairly moderate in scale.

The impression that SA is getting an aggressive industrial policy came with the announcement in President Jacob Zuma's state of the nation address of a R20bn tax incentive scheme. No matter that this had already been announced in November by Trade and Industry Minister Rob Davies - it was exciting enough for some newspapers to use as a lead after Zuma's speech.

If there were indeed R20bn in tax incentives, it would merit a lead story. But the R20bn refers to the amounts invested by the companies claiming the tax relief. The cost to the fiscus is far less – only R5.6bn over the lifespan of the investment incentives to 2015.

If the cost to the fiscus had been R20bn, that would have been the equivalent of a cut of more than three percentage points in the corporate tax rate. Such a scale would have been very aggressive industrial policy indeed.

Purist free marketeers don't believe in industrial policy. Industrial policy is the approach of picking "winning" industries and then pushing them with tax incentives, subsides and import protection. Japan had a very active industrial policy in the years during which it grew to be an economic superpower. South Korea, too, has had a very strong industrial policy.

Critics claim that Japan and South Korea prospered despite, and not because of, their industrial policies. They argue, too, that the bureaucrats that staff Japan and South Korea's departments of trade and industry are skilled, whereas this might not be the case for other countries.

Skilled bureaucrats are necessary, because industrial policy depends on bureaucrats interfering in the market mechanism. Industrial policy means bureaucrats decide on how resources are to be allocated, instead of the market.

A purist free marketeer would say that the money spent and tax revenue foregone on these policies should rather be translated into a cut in the corporate tax rate, leaving it up to the market to determine the allocation of resources.

Though SA has supposedly chosen the South Korean route, it's not being done anywhere on the South Korean scale. However, every little bit adds up.

Big projects don't always mean big job numbers  

In last week's budget, Finance Minister Pravin Gordhan set aside about R10bn to be spent on industrial policy action plan investment promotion over three years, including the automotive production and development programme, clothing and textiles production incentives, the film and television production incentive and support for small manufacturing and tourism enterprises. Most of this money will, however, go to the motor industry.

Without industrial policy, SA would have no motor vehicle industry to speak of. It's a labour intensive sector and creates jobs in places like the Eastern Cape, where there's grinding poverty.

Gordhan also provided for R600m for enterprise investment incentives, R120m for the national tooling initiative, R282m for the microfinance Apex Fund and R55m for Khula Enterprises to pilot a new approach to small business lending.

There was some tinkering with the tax for microbusinesses, a learnership tax incentive and a youth employment subsidy. Though these latter aren't strictly speaking industrial policy, because they don't promote specific industries, I view them as part of industrial policy as they provide incentives to business.

The youth employment subsidy will cost R5bn over three years, and the learnership tax incentive cost the fiscus R324m in 2007/08. While all these bits and pieces add up, they don't amount to the equivalent of a huge cut in the corporate tax rate.

I disagree with the purist free marketeers who say the corporate tax rate should be cut and the economy then left to its own devices. The reason is that we saw in the boom years that growth on its own isn't enough to create jobs on a large scale. Specific interventions are needed to guide the economy.

But the system being designed in SA is far from ideal. The tax incentive scheme announced by Davies and then announced again by Zuma focuses on big, capital intensive investments. To qualify, a greenfields project must involve a minimum investment of R200m, and brownfields expansion and upgrade projects a minimum investment of R30m.

This is obviously aimed at big companies and big projects, which don't necessarily translate into big numbers of jobs because of the capital-intensive nature of the investment.

The budget's provisions for small business were disappointing. The "R20bn incentive scheme" is also disappointing, because it's aimed at big business.

SA's industrial policy should do more for small businesses. Still, the scale of the policy seems right for a country with SA's resources – both skills and finance.

 - Fin24   

pravin gordhan  |  sa economy  |  entrepreneurship  |  taxes
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