Responding to urban demand through domestic industry Prof FIONA TREGENNA South African Research Chair in Industrial Development University of Johannesburg ftregenna@uj.ac.za UN IDEP / ECA High Level Policy Dialogue, “Urbanisation and Industrialisation for Africa’s Transformation”, Addis Ababa, 11 December 2017

Topics Importance of industrialisation, structural change and industrial policy Urbanisation and industrialisation Role of the demand side Link between manufacturing and demand Local content promotion Policy coherence

Potential virtuous circle between industrialisation, urbanisation and demand But this is not automatic – depends on appropriate supportive policy INDUSTRIALISATION URBANISATION DEMAND

Importance of industrialisation & structural change How changes in sectoral composition of output & employment can increase growth and utilisation of underutilised resources, especially labour Shifting labour (and capital) to more dynamic activities; from lower- to higher- productivity sectors What is important is not only levels of productivity at a point in time, but scope for cumulative productivity increases Manufacturing has special role as engine of growth Structural change is key to development. Requires emergence of new activities (and new ways of doing old activities). But isn’t automatic or costless. One rationale for industrial policy and active role of the state

Importance of industrial policy Common denominator in successful growth experiences. Market failures. Spill-over effects (positive and negative). Absence or inadequacy of automatic adjustment mechanisms. Need for structural change. Costs and barriers to necessary structural change → need for state intervention. Different agents make economic decisions with different timeframes. Huge heterogeneity amongst sectors → need for differentiated policies. Promotion of manufacturing.

Historical lessons of successful industrial policy Role of the state. Importance of dynamic rather than static comparative advantage. Creating temporary monopolies, combined with regulation, to achieve advances in key areas. Provision of finance, at below-market rates, for key activities. Fiscal incentives for prioritised activities. Acceptance that there will be failures and resource wastage (within limits). Medium and long-term planning.

Historical lessons of successful industrial policy (cont) Strategic protection. Management of rents. Promotion of technology transfer & advancement, domestic innovation capacity. Gradual shift to activities with higher knowledge content. Importance of supportive macroeconomic policies. Recognise similarities & differences from earlier rounds of industrialisation & development.

Urbanisation and industrialisation Rapid urbanisation in Africa → growing domestic demand Can stimulate domestic production and support industrialisation, OR bring household indebtedness and balance of payments problems Spatial aspects industrial development and policy Maximising linkages, spillovers and economies of scale favour agglomeration, clustering and spatial concentration of industry Distributional and developmental arguments for spatial dispersion of industry – may be better achieved through other mechanisms

Role of the demand side Source: 2018 Industrial Development Report (UNIDO)

Role of the demand side (cont) To meet demand (both domestic and external) in a sustainable way, manufacturing has special role to play Not just level of demand that matters, also what kind of demand: Composition of demand by sector Met by imports or domestic production Demand from households, government or firms Distributional composition of demand How goods produced (including environmental aspect) How consumption financed (and whether by debt) Demand from external sector – exports to whom?

Local content promotion An important component of industrial policy Public procurement an important element of domestic demand Minimise leakages from domestic demand – maximise stimulation to domestic industry Easier to use direct leverage of state through local content promotion, than indirect policies in other spheres Key lever of industrialisation and reindustrialisation Constraints of WTO rules But still space – need careful and strategic policy design

Local content promotion (cont.) ‘Rent management’ – how to ensure that profits generated through LCP are reinvested in firms, leading to upgrading and competitiveness? Learning-by-doing, economies of scale, technological upgrading etc. Scope – ideally apply to all levels of government, public enterprises, other public institutions Careful policy design, implementation and monitoring to avoid ‘fronting’ of imported goods Stipulated minimum thresholds for local content Vary by type of product Increase over time How about a regional dimension to local content promotion?

Policy coherence To support potential virtuous circle of industrialisation, urbanisation and demand, need supportive industrial policy But also suite of complementary policies: Competition policy (keep the price channel working) Trade policy (minimise import leakages, avoid wholesale liberalisation) Macroeconomic policy (especially competitive exchange rates and interest rate) Spatial and planning policies Town planning and urban policies Technology and innovation promotion Skills development Distribution (more equal income distribution) Informal sector policy.

Thank you! ftregenna@uj.ac.za