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

2. 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

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

4. 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

5. 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.

6. 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.

7. 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.

8. 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

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

10. 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?

11. 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

12. 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?

13. 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.

14. Thank you!