19 November 2008

A "New" Program of Auto Industry Support

It's been a long time coming. But in early September the dti finally announced the general architecture of its revised MIDP, now called the Automotive Production and Development Program (APDP). The official announcement is sketchy. Public support of the industry will be extended until at least 2020; the program will be "production neutral" (i.e. it will subsidize both exports and production for the local market) and so will be more WTO-compatible.

Other than that, the details, magnitude and impacts of the program will be very difficult for most observers to fathom. Two major studies commissioned during the three-year review process have not been released for Parliamentary or public scrutiny. The Industrial Development Corporation (IDC) conducted a "cost-benefit analysis" of the proposals for the dti, but that is also being kept under wraps.

Of course there will be few mysteries or surprises for the motor industry. The program was designed in close consultation with them by two teams of dti consultants and by the dti itself. This is what the dti calls "stakeholder consultations." But what about other important stakeholders -- Parliament and the consumers and taxpayers they represent, and who ultimately pay for these and other industry support programs?

Broader stakeholder discussion and understanding require much wider dissemination of information and analysis. Justin Barnes and Anthony Black, who have been involved with the MIDP since its beginning, shed some light on the thinking behind the new program in an opinion piece

This was the cue for a short article of my own, in which I draw out some implications of their observations and fill in a few blanks with my own estimates of the costs and magnitude of the subsidies provided under both the old and the new programs. The costs have been and almost certainly will continue to be high; catalytic converters -- canned platinum -- have received as much export support as automobiles; despite an apparent decrease in some of the rates, overall rates of subsidy for both exports and locally sold production will increase rather than decrease under the new program; the new incentives are likely to create a barrier to entry for new producers.

At least some of these consequences are unintended. But whether intended or unintended, appreciated or not appreciated, they are certainly not what has been advertised by industry advocates. 

When policy design and assessments are done behind closed doors, in consultation primarily with only the direct beneficiaries of the programs, questions are bound to be raised. From the information available in this case it appears either that the industry is not competitive and is unlikely to become so, at least for a very long time; and/or that consumers and taxpayers are being taken for a ride by giving unnecessary subsidies. In either case the argument for continued support appears to rest on very weak foundations.

A box in a recent OECD report on South Africa singles out the dti's support of the motor industry to illustrate the dangers of the "capture" of policy makers in the design and implementation of industry-specific industrial policy programs.

This is not to deny the role or importance of industrial policy. But industrial policy needs to be based not just on the influence of powerful industry lobby groups or on the inclinations or dreams of policy makers; it needs to be based on sound economic analysis. To avoid the dangers of capture, it also requires institutions and processes that are transparent and accountable. Policy reviews need to be made public; alternatives need to be presented and properly assessed in terms of their overall economic impacts. And industrial policy needs to be based on a recognition of the capabilities of the policy-making authorities to do the ongoing monitoring and assessment that are represented as a key part of the dti's own Industrial Policy Action Plan.