The relationship between industrialisation, trade and investment policy Portfolio Committee on Trade and Industry Trade and Investment Policy Training Workshop 21 July 2015 Nimrod Zalk, Department of Trade and Industry 1 DISCUSSION DOCUMENT: CONFIDENTIAL

The importance of manufacturing Physical transformation of raw materials into value-added products Knowledge and learning Linkages Backward linkages Inputs from upstream sectors like agriculture and mining Forward linkages New industries / diversification Demand for associated services Direct and indirect employment creation and effect Export earnings and balance of payment

The importance of manufacturing Growth rates by sector: countries post WWII experiencing high and sustained growth 2008 Commission on Growth and Development (World Bank & Commission on Growth and Development, 2008) identified common features of countries that have achieved ‘episodes of high and sustained growth’ since the end of World War II. Such a period is defined as being one of uninterrupted growth, in GDP per capita, in excess of 7% per annum for 25 years or more. Ten of the thirteen success stories were cases of manufacturing-led growth: Brazil, China, Indonesia, Japan, the Republic of Korea, Malaysia, Singapore, Taiwan, China and Thailand. The three exceptions are small, single-commodity exporters (Botswana and Oman) and Hong Kong, a small financial offshore centre. Two additional countries are potentially on track to achieve high and sustained growth: India and Vietnam, both of which having recorded rapid industrial growth up to the 2008 global crisis. This evidence is consistent with the view that manufacturing acts as the “engine of growth” associated with economists such as Nicholas Kaldor Kaldor argued that manufacturing leads or “pulls up” GDP growth through a range of productivity enhancing effects. Source: Growth Commission

The role of trade Trade has the potential to promote rapid growth through structural change Specialisation Economies of scale Export earnings Succesful late industrialisers have engaged strategically with external trade: Generate export earnings in order to purchase … … machinery needed to to upgrade to more sophisticated industrial structure Industrialisation objectives have led trade policy

The role of trade Trade liberalisation Could push industries close to international competitiveness the “last step” Could damage / destroy industries which are not yet close to international competitiveness Industries that are damaged / destroyed will not automatically be replaced by other more competitive industries Global value chains Increasing amount of global trade Participation depends on domestic industrial capabilities

The role of foreign investment Foreign investment could promote industrialisation, depending on … Supplement domestic savings for investment New technologies / production techniques Short or long-term? Portfolio Direct investment New investment? Greenfield Mergers & Acquisition

Regional industrialisation Increased African growth rates Commodity boom But limited diversification to greater industrialisation African countries generally export: primary and semi-processed mineral and agricultural commodities African countries generally import: final consumer goods and machinery Scope for lowering tariffs between African countries Fundamental constraint is mismatch between export and import patterns, requring investment: Diversified manufacturing capabilities Physical infrastructure

KENYA: EXPORTS TANZANIA: EXPORTS KENYA: IMPORTS TANZANIA: IMPORTS Source: Quantec Source: Harvard, CID, Atlas of Economic Complexity, 2013