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A flight into the future: Lessons for South Africa’s industrial policy

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Ahrlac Paramount

Yesterday was a proud moment for African aviation, as the first wholly built African aircraft successfully undertook its maiden public flight in Pretoria. The aircraft, Paramount Group’s Advanced High-Performance Reconnaissance Light Aircraft (AHRLAC), is a “revolutionary new African-designed and developed aircraft”, as their website explains, “destined for a significant role in a wide range of military, policing and civilian tasks around the world. The two-crew aircraft can carry out a wide range of operations including surveillance, policing, border/coastal patrol and anti-smuggling; armed patrol and counter insurgency operations; disaster relief and emergency supply to remote areas; and intelligence gathering.” Or just watch this video (which feels a bit like the demo for a video game). Or read this.

The fact that South Africa can build its own military aircraft has a lot to do with our history. One of the unintended consequences of the increased international isolation South Africa faced after exiting the Commonwealth in 1960 and the sanctions imposed against the apartheid state in the 1970s was the development of an technologically-advanced weapon industry. Not only did South Africa build an atomic bomb in the 1960s, but new weapons like the Casspir (a truck specifically built to protect passengers against land mines which later became synonymous with controlling township unrest) and the Rooivalk (an attack helicopter designed to operate for prolonged periods without sophisticated support) were engineered to deal with the internal and external threats of the apartheid government. The expertise built up during the isolation years was not only limited to the military. Much of Sasol’s technology was development, for example, because of the curb on South Africa’s oil imports. But with the transition to a new government in the early 1990s, the opening of South Africa to international markets, and a shift away from government expenditure on military expenditure (which had some component of research and development) to social spending, much of this ‘forced’ innovation slowed down or stopped completely.

While military innovation ended, the innovators remained behind. Consider, for example, Kobus Meiring. Meiring studied engineering at Stellenbosch University and was a key member of the team who created the Rooivalk during the 1980s and 1990s. After 11 years of service, he needed a new challenge and became the project leader of SALT, the largest single telescope in the southern hemisphere (situated close to Sutherland and certainly worth a visit). After completing SALT, he moved on to design South Africa’s first electric car, the Joule, which was unfortunately closed down in 2012 after government, so to speak, pulled the plug. There are others like Meiring, who worked at the forefront of military technology in the 1970s and 1980s and then found alternative outlets for their skills after the transition, either in manufacturing (such as the motor-vehicle industry) or in South Africa’s burgeoning ICT industry, with companies like Vodacom, MTN and even DStv now providing services across Africa.

Yet the ‘success’ of the sanctions in building South Africa’s technological capacity leaves economists with a conundrum. Free trade and open borders are usually considered to be a pillar of a strong economy. But the apartheid example also suggests that there is a role for the state to incentivise the creation of local technologies, as Dani Rodrik and others have argued. It seems that the state indeed has a role to play: both Sasol and Denel certainly wouldn’t have been able to develop the technologies they did without huge state investment. Yet once the technology exists, commercialising the technology requires a free market. The comparison between Denel and Sasol is a case in point. Sasol, now a publicly traded company, has been much more successful than Denel in globalising its technology after South Africa opened up; it now has 34000 employees and trades in 38 countries. For much of the 1990s and 2000s, Denel operated at a loss, supported by tax payers. It has still not been successful, despite the widely-acclaimed potential of the Rooivalk, to sell the technology to an international market.

Economists also know that once governments start supporting businesses, it is extremely difficult to remove those incentives: the South African clothing and textile industry has, for example, received support since the 1930s! Dani Rodrik argues that while it is true that the state cannot pick winners, the only real requirement is that the losers must be let go. Well, given the support of the clothing industry has received over the years, there is little evidence that this would be possible here. (Meiring’s Joule, of course, suggests the opposite. It boils down to the political support trade unions in the clothing and textile industry have vis-á-vis workers in the electric car industry…)

Trade

Product space of South Africa and South Korea. Source: The Observatory of Economic Complexity

So perhaps the best the state can do is to not pick individual winners, but to support the skills that create winners. For example, state supported hubs of advanced engineering will go a long way into improving South Africa’s manufacturing malaise. The graph above shows South African exports on a product space compared to South Korea. Note all the blueish dots for South Korea. That represents manufacturing exports. South Africa’s only real manufactured export is motor vehicles. Our main exports are low-value added minerals and agricultural goods. (Note also how dispersed our exports are across the map. That suggests that there are few linkages between our different industries. South Korea, in contrast, focus more on products that have synergies and their dots are therefore more closely situated in the product space.)

Much has been made of the government’s attempt to increase beneficiation, an ugly word that means to add value to our exports. So instead of exporting unrefined iron ore, we should be exporting manufactured goods that use iron. But such a strategy miss the point of how manufacturing work. Consider again the AHRLAC (also an ugly name). Was it built in South Africa because of cheap resources? No. It was built here because we had the engineering capacity to design a technologically-superior light aircraft.

Not only is the creation of an African aircraft a proud moment, but it should also serve as a signal to policy-makers that manufacturing is based not on politically-appealing beneficiation strategies, but on getting smart engineers to work on new technologies. Only then will the manufacturing sector, exports and our economy take off.

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