Thursday, 19 July 2012

A teaching update

I am teaching again this semester and we are kicking off tomorrow, so I thought I should tell everyone!

It is the ECON621 course to the Honours (4th year-level, if you're not from SA) students in International Trade and in Risk Management. It is called International Monetary Relations, but it is not the sort of Obstfeld and Rogoff stuff that you would expect from such a name. It's more of an international macro, with focus on the issues of the day. A nice opportunity for hand-waving discussions about things that are happening now (global slowdown, policy paralysis!) and everything I'm reading all over the web.

If you like, you can check out the course blog and I will be tweeting on the topics with the tag #621. If anything interesting comes up, I'll repost here.

Sunday, 15 July 2012

The IPAP-2 and the North West Province

Last week's World Economic History Congress once more left me convinced that I should stick to the things that I love and know a bit about: what happens where and the stories of sub-national growth and development. Earlier this year I wrote about:
Today I want to take the next step and write about the IPAP-2 and its possible place in the North West province.

Government’s broad approach to industrialisation is set out in the National industrial Policy Framework. The implementation of policy is set out in the Industrial Policy Action Plan (IPAP). IPAP-2 is an action plan designed to help build South Africa’s industrial base in critical sectors of production and value-added manufacturing, which are largely labour-intensive industries. IPAP-2 is therefore designed to address the decline in industrial and manufacturing capacity and contribute to the reduction of chronic unemployment.

The IPAP-2 sets out to contribute to rural development, advanced technological capabilities, downstream minerals beneficiation, promotion of energy efficient goods and services, strengthened linkages between tourism and cultural industries, interaction between sector strategies and the creation of sustainable jobs. To make these contributions, each of the above can be related to key sectors on which the IPAP-2 will focus. These can be clustered into three groups.

The policies outlined above clearly have to be formulated at the national level (competition, regulation, trade policy), but have particular sub-national impacts. The implications for economies at provincial and local level are closely linked to the location of the sectors identified in IPAP-2. The firms that produce the goods and services are located in specific provinces, cities and towns and while the pursuit of the different IPAP-2 polices may be driven by national government, it has implications for provincial authorities.

To link the IPAP-2 to the North West province one first needs to consider the nature of the provincial economy. First, the North West province is a relatively small player in the national economy. In terms of population the province ranks seventh out of nine provinces with approximately 7.1 per cent of the population. The population density is low at 32 people per square kilometre. The province’s Human Development Index score of 0.51 is slightly below the national average of 0.56. In terms of contribution to the national economy, the North West Province does well. The Gross Value Added per capita is approximately R46 684. It is below the national average of R49 344 in 2010, but the province ranks fourth out of the nine provinces.

The second point to consider is the unique make-up of the provincial economy that has particular implications for the interpretation of the IPAP-2. The following figure shows the primary, secondary and tertiary sectors’ contribution to gross value added in 2010.

In the North West province the primary sector plays a larger role than in any of the other provinces. Along with the Northern Cape and Limpopo provinces the secondary sector (manufacturing) makes up a small part of GVA (8.2%). The tertiary sector contributes half of the provincial GVA. When the provinces’ share of national total GVA is examined in the following figure, it is clear that the North West makes the biggest contribution to primary sector GVA. Following the Northern Cape it makes a very small contribution to secondary sector GVA. Even though the tertiary sector accounts for half of the provincial GVA, the tertiary sector in the North West contributes only 5 per cent of the national gross value added.

A detailed breakdown of GVA and employment in the North West province confirms the large contribution of the primary sector, specifically the mining sector to GVA and employment. The sectors that are grouped together as the tertiary sector, from retail to transport and communication, finance and real estate, education and health etc., make up 49 per cent of value added and almost 45 per cent of employment.

The implication for the interpretation of the IPAP-2 for the Province is that the manufacturing focus of the IPAP-2 has only a limited footprint in the province. Since the manufacturing sector is small, the gains from industrial policy are likely to be limited. For the province the challenge will be to identify linkages between the primary and secondary sector and to consider the product space and scope for down-stream beneficiation, linked to national and international opportunities for such products.

The table below shows that matching of the sectors for which data are available at provincial level and the IPAP-2 clusters of sectors. It is not possible to clearly match the IPAP-2’s green and energy saving industries, automotive components and vehicles, bio-fuels and business process servicing to the available industrial classification of sectors from the Regional Economic Explorer database. The whole of cluster 3; nuclear, advanced materials and aerospace can also not be matched at provincial level. For the other IPAP-2 sectors there are close-enough proxies in the REX database. Cultural industries and tourism is matched with hotels and restaurants, which is not a close match, but also not too unreasonable to work with.

Taken all together the match between the IPAP-2’s focus sectors and the current state of production in the North West province is limited. Cluster 1 industries represent 2.6 per cent of value added and Cluster 2 industries make up 3 per cent of value added.

It is possible to have a closer look at the component sectors of clusters 1 and 2 in terms of their contribution to the provincial economy in 2010 and growth in GVA, employment and gross operating surplus over the period 1996 to 2009.

The table confirms the fact that the sectors in the IPAP-2 clusters make small contributions to the economy of the North West province in terms of value added, employment and gross operating surplus. The cultural industries and tourism seem to be slightly more labour intensive. The table below shows the growth rates over the period 1996 to 2009.

Thus, my point is that there is only a limited match possible between the IPAP-2 and the small manufacturing sector of the North West province. National and provincial politicians have to be careful when pursuing industrial policy. Targeted support of industries, or special economic zones may fail simply because there is no viable cluster to support.  So-called localisation (import substitution by any other name) is also likely to fail without the elements that make up a successful agglomeration: a pooled labour market, specialised suppliers of intermediate inputs, knowledge spillovers, and infrastructure. In the North West province policies focus should be on the factors that drive long-term competitiveness - lots of scope for research and blog posts!