Conference on the Regional Industrial Development Strategy, Johannesburg
(Midrand)
10 July 2006
Honourable MECs
Honourable Premiers
Provincial HODs
Honourable mayors
Foreign ambassadors
Government officials
Industry representatives
Ladies and gentlemen
12 years after South Africaâs democratic transformation it is apparent that,
despite impressive growth and employment creation in the national economy,
significant disparities persist at a regional level and may even have been
enhanced in areas that are lagging. This is the result of the two-fold process
of growth accelerating in the dominant economic cores, which are well connected
to the global economy, while in areas marginalised both by apartheid and now by
mainstream developments in the economy, the wealth and employment disparities
have increased.
Our research shows the heavily biased distribution of economic activity in
South Africa, with the majority of Gross Value Add clustered around three major
metropoles, and the share of the three main metropolitan areas and functional
hinterlands representing close to 65% of Gross Domestic Product (GDP).
Our studies also demonstrate the vastly different growth rates of districts
between 1996 and 2004. It is clear from this analysis that there are a number
of districts in economic decline. A worrying factor from our analysis is the
fact that medium or high economic growth districts are only contributing more
than 0.05% of the national Gross Value Added (GVA) while low-base districts
contributed less than 0.02%.
In 1996, the medium and high base areas represented 93.93% of national GVA
which increased slightly to 94.65% by 2004. Consequently, the share of the low
base districts which represented 6.07% of national GVA in 1996 fell to 5.35% in
2004. Our analysis also indicate that the sectoral composition of the economies
of our regions is skewed towards tertiary and secondary industries, dominating
in the major metro-poles while primary industries play a much greater role in
the economies of outlying districts.
These lagging regions, however, which include most of the former homelands,
have few economic assets, are characterised by stressed natural environments,
and often have very high population concentrations. In addition, they include
areas which have experienced recent economic shock, e.g., as a result of the
significant loss of mining or industrial activity, particularly where such
activities were the leading sector and or where towns were established because
of the presence or potential of such resources and activities.
The challenge for the democratic government is to ensure that all regions
and their residents attain their full economic potential. In order to achieve
this, blockages and barriers to the effective operation of the market need to
be addressed. The dti is committed to the principles of the National Spatial
Development Perspective (NSDP) and the attainment of a market-driven economy
which places emphasis on knowledge-based development, innovation and
competitiveness, and which provides opportunities for a range of enterprises
linked to higher value-adding. This is in line with the Microeconomic Reform
Strategy which seeks to address both overall industrial development and
associated spatial imbalances.
The Regional Industrial Development Strategy (RIDS) has been framed in order
to give effect to these goals and to help close the gap between regions which
partially reflects the first-second economy division. Such a strategy focuses
fundamentally on addressing the key obstacles to the functioning of the
economy, primarily through infrastructural interventions which will enable all
regions better to access markets and resources and to attain the full economic
potential of which they are capable. The purpose is to provide a bottom-up
rather than a top-down strategy, emphasising the importance of working with the
local private sector and existing institutions, programmes and initiatives.
The strategic objectives are to attempt, as far as is possible to reduce
economic disparities between regions, address the needs of both the first and
the second economies, and narrow the gap between them. Whilst paying particular
attention to the needs of those regions which are lagging behind the national
norms, we will seek to enhance current regional strengths and lead sectors of
the economy, and promote sustainable economic growth and employment in
provinces and municipalities, as well as build regional competitive
capabilities and firm-level support measures that enhances regional performance
in attracting foreign direct investment.
We will achieve this through localised direct support to the small and
medium enterprise (SME) sector using technical assistance funds to provide
business advisory services, and upgrade overall productive capability,
development and training, as well as providing comprehensive advisory services
including the maintenance of a database on developments. RIDS will be embedded
in a system where support is assured throughout the operating cycle in the
regional economy. Key to this strategy will be creating a predictable regional
investment and business climate to attract private sector investments that do
not rely on public-sector guarantees and increasing production in, and improve
competitiveness and diversification of, regional markets, especially in
agro-industrial, manufacturing and services sectors with potential for export
and employment.
We will accelerate the dialogue between government and the private sector to
develop a shared vision of regional economic development strategy and remove
constraints to growth. Building an effective industrial, trade and productive
capacity needed to ensure optimisation of production and product
diversification will characterise this strategy.
RIDS accepts the principle of investment being driven by the private sector,
but recognises, that in some situations and regions, the public sector could
and should take the lead. RIDS proposes to work through Regional Growth
Coalitions operating on the basis of strategic partnerships between the public
and private sectors.
We believe that our regions need to improve their productive capacities to
be competitive in a changing global environment. With the increasing impact of
globalisation on regions, the scope for competition is no longer limited by
national boundaries or by the definition of a particular industrial sector.
This implies, among other things, that it has become imperative to develop and
maintain regional competitive advantage, since assets that can lead to the
development and successful industrialisation of our regions are now developed
and managed by regional stakeholders.
Competitiveness at the level of the region or a spatial economic unit is of
utmost importance. In the olden days, access to cheap raw materials, access to
cheap unskilled labour, access to proprietary production technology and
privileged access to markets were driving regional industrial competitiveness.
New drivers are those related to the ability of our regions to produce goods
and services that represent the good value (not necessarily the lowest price)
in relation to comparable products of other regions around the world.
Our aim is to build regional economies that produces goods and services, of
high value relative to price, support the export economy of the region, making
it more competitive, as well as directly raising the quality of life and
standard of living for people who are living in the region.
Our regions are becoming more exposed to global forces, as the nation state
becomes more open to capital and trade flows. This represents both the threat
in that market and investment conditions change rapidly subjecting our regions
to potential negative impacts, and opportunity region, now that we have more
scope to develop our own regional development strategies and access world
market, labour, and capital. The greatest challenge that Southern African
regions are facing is that they only control some of the factors, which
determine their competitiveness.
National policy frameworks and socio-economic conditions are also very
important e.g. national taxation, human resource development, tariff,
microeconomic, industrial incentives, and policies. However, in many countries
the national factors are becoming relatively less important of global forces,
e.g. trade liberalisation that make trade tariffs less important, or because of
internal changes, e.g. decentralisation which may result in the devolution of
responsibility for critical competitiveness factors, e.g. education of
technical personnel, to locals levels.
Our regions, through local governments, public-private partnerships, or the
local private sector, typically have considerable influence over local
infrastructure and amenity, industrial estate, office complex development,
community networks/forums etc. In many regions, other important competitiveness
functions, formerly under the purview of the national government such as
technical education, management of airports, are coming under the control of
stakeholders in the regions. The above dynamics mean that sub-national
capability, both institutionally, and in terms of technical skills, to
undertake industrial development and implement it is needed now more than
ever.
Dynamic industrial development requires deliberate action by both government
and private sectors in order to stimulate and support firms in their effort to
create competitive advantages. In other words, it is the outcome not only of
the invisible hand of the market but also of governance. Governance of
industrial development today has to be based on a participative model in which
social actors interact with the state in defining strategies and policies. This
kind of model has emerged spontaneously in the industrialised countries as a
reaction to increasing social complexity and the limited success of state
interventionism. It is emerging, though hesitantly, in the developing world,
especially in those countries where democratisation processes have opened some
scope of action for civil society, and where the limited competence and
inactivity of the state has created opportunities for nongovernmental
organizations.
RIDS differs considerably to other regional development interventions of the
past, in that we focus on building systemic competitiveness of our regions, by
developing a comprehensive strategy that focuses on building both trade and
industrial productive capabilities that enables our regions to respond to
global opportunities. This long-term perspective implies the need to reduce
ecological impacts and resource intensity to a level at least in line with the
carrying capacity of the nationâs ecosystems.
As the complexity of our regions increases, the systemic nature of regional
industrial development interventions becomes more important. We will build
innovative industries by ensuring that suppliers of intermediary goods and
machinery, demanding consumers, specialised business services and other factors
that make up a supporting business environment is present.
We will ensure that some mature production processes locate to green-fields
sites, which lack most elements of a modern supporting business environment, by
providing resources necessary to realise social rate of return. Working with
Department of Provincial and Local Government (DPLG) and district
municipalities, we will ensure that a comprehensive plan consisting of access
to international airports and ports, electricity and minimal education of the
workforce are sufficient conditions to attract such industries are some of the
key drivers of regional industrial development.
Our research has found that, even relatively complex state-of-the-art
production processes and modern management methods have successfully located to
green-fields sites in developing regions. Whilst these examples may refer to
more mature industries which can be built up by transplanting knowledge
embodied in blueprints, machines and operation manuals, we have found that
blueprint industries do not conduct any substantial Research and Experimental
Development (R&D) and will as a rule not even produces much incremental
technological change, either.
In addition, despite the general trend toward tariff reduction, certain
industries oriented toward the domestic markets of developing countries are not
fully exposed to international competition. This is especially true for the low
ends of product markets. Firms can therefore perform fairly well even if the
supporting environment is weak. This is due to the fact that there are entry
barriers to the domestic market, which trade liberalization, does not
eliminate. Examples are:
* high transportation costs
* deficient communication systems
* a market size too small to be interesting for potential foreign
investors
* underdeveloped marketing systems with large parts of demand being served by
street vendors or on the basis of informal credit arrangements
* special local consumption patterns.
Critical to RIDS is the issue of targeted interventions. With the success of
a number of generic interventions, RIDS will focus strongly on targeted
interventions. There have been instances in the past where national governments
have created industrial sectors from scratch. Doing that always had a spatial
implication, as can be seen in places like Richards Bay. However, there have
been no instances where local governments have created industrial sectors from
scratch. Thus, RIDS is not proposing a âlocal industrial policyâ that aims at
creating a local aerospace, petrochemical or nanotechnology industry from
scratch, as it is recognised that this would not be feasible.
However, local governments routinely come up with targeted interventions,
for instance, to meet the specific needs of a region, or a local cluster, in
terms of road infrastructure, water supply, electricity supply, training
facilities and other factors. Local governments often do this in an ad hoc way.
The key challenge is to approach these issues strategically, i.e., to
understand the evolution of a strong local industrial base means for the local
demand for services such as water in five or ten yearsâ time. The dti will
assist local government in formulating their regional industrial roadmaps scan
dynamisms in the local economy, and formulate regional industrial development
plans that not only respond to the needs of emerging sectors but actually
anticipate them, especially in terms infrastructure and knowledge development
requirement.
Apart from targeted interventions that address tangible location factors,
the dti is already working with the provincial and municipalities to look at
such issues as business networking, cluster initiatives, regional value-chain
initiatives or initiatives to strengthen regional innovation systems, and we
have pulled in neutral facilitators and we have funded these activities for a
certain period of time.
RIDS will be based on pre-selection of sectors through research and clearly
defined criteria. However, often a more promising approach is to set the stage
for âself-discoveryâ. A typical approach consists of the promotion of proactive
contests, where the Department of Trade and Industry (the dti) offers targeted
support and calls on local growth coalities to submit their industrial
development plans for support.
Targeted interventions typically address two elements, namely, production
factors (growth constraints) and market failure. In addressing growth
constraints, the strategy would aim at building and upgrading advanced,
specialised factors for a local sector or cluster. The main focus would be on
knowledge, technology and innovation.
A guiding principle for targeted development interventions at a territorial
level will be to address market failure which is typically due to coordination
externalities, indivisibilities, information asymmetries, and similar problems.
RIDS will address such market failure and aims at building functioning markets.
Typical activities include networking initiatives, information sharing,
strengthening of business development services, and government support in
skills development, technology extension and metrology.
As we prepare to submit RIDS to cabinet for approval, we have taken the view
that it is important to take our stakeholders with us. RIDS will be implemented
through regional growth coalitions. The development of partnerships and growth
coalitions within regions are critical to the success of RIDS. Dynamic regional
growth will only occur with the organisation, cooperation and drive of local
stakeholders including the private sector, government institutions, departments
and civil society. The private sector is recognised as the key driver of
economic growth in the regions and will need to play a lead role in driving
these partnerships.
Ladies and gentlemen: Under my leadership, the dti cannot afford paragons of
laissez-fairism. We will build a highly capable regional competitive economy in
which the states plays a leadership role to ensure high levels of accumulation
of resources, technology absorption and penetration of foreign markets. Input
sectors and logistics and infrastructure lie within the domain of
government.
With âmarket failureâ so prominent and continues to pose a problem to our
democracy, government intervention is inevitable. Since such âfailuresâ differ
in intensity, scope and location, a selective set of interventions is required.
We need to learn the significant lesson from the Asian Tigers on how they
revived interest in some of the issues that were central to development such as
human capital, infrastructure investment; and regulating market imperfections
and failures, industrial policy, etc.
We will become active players in these growth coalitions. In regions with a
well diversified private sector, our involvement may be limited to encouraging
cooperation, assistance with additional support measures and ensuring an
enabling environment is created and maintained in regions with a few dominant
firms and/or strongly entrenched and outdated notions of cooperation and
development.
In any event, it is critical that the basis for RIDS revolves around
spurring the active participation and growth of the private sector. The role of
government will be to create an enabling environment at each regional level to
improve the systemic competitiveness of the region, the chances of success for
the private sector, and thus socio-economic improvement for the region.
I thank you
Enquiries:
Henriette van der Merwe
Tel: (012) 394 1640
Cell: 082 572 8184
Bongani Lukhele
Tel: (012) 394 1643
Cell: 083 291 8680
Bethuel Mnguni
Tel: (012) 394 1647
Cell: 083 624 8888
Donavan Jacobs
Tel: (012) 394 1641
Cell: 082 751 1078
Issued by: Department of Trade and Industry
10 July 2006
