More than 2 000 years ago, a teacher called Hillel the Elder was asked to explain the whole of the Torah — the first five books of the Bible — while he stood on one leg. Hillel answered: “Do unto others as you would have them do unto you. The rest is commentary; go and learn.”
In the same vein, the economist Steen Landsburg was asked to explain the whole of economics in less than a minute. He answered that economics could be summed up in four words: “People respond to incentives. The rest is commentary.” Inspired by this, I, too, asked on social media for people to use one word to describe the whole of economics. Some of the answers they provided included terms such as “nudges”, “speculation”, “behaviour”, “consumption”, “choice” and “incentives”.
Following Landsburg’s example, my own choice for a word that summarises the whole of economics while some figurative fellow stands on one foot is “incentives”.
There is an entire school of thought in economics that proclaims that incentives — prospective rewards, in other words — motivate people to behave in a certain way. If this is true, then nudges, speculation, behaviour, consumption and choice are secondary mechanisms, or indirectly support incentive.
The department of trade and industry launched the automotive production and development programme (APDP), which replaced the motor industrial development programme (MIDP) in 2012 as an incentive scheme to make South Africa an attractive location for manufacturing cars. As a result of this incentive, South Africa was exporting a record 344 859 vehicles by 2016, amounting to R171-billion in exports and comprising 15% of all exports. This is remarkable when you consider that South Africa has faced premature deindustrialisation and other sectors have declined.
Manufacturing, for instance, now contributes 13% to the country’s gross domestic product compared to 27% in the 1980s. According to the Manufacturing Circle, the association that serves as the industry’s voice, the contribution to GDP should be between 28% and 32%, given South Africa’s developmental stage, which would have created anywhere between 800 000 and 1.1-million jobs.
The government’s argument in the APDP was a simple recognition of incentives in economics. Greater tax incentives would keep these motor vehicle companies producing in South Africa, but they would need to double production levels and employ more South Africans. Almost R27-billion per annum goes to the motor industry, which contributes almost 7% to the GDP, supports 112 000 jobs and accounts for 50% of all vehicles sold on the continent. Seven motor vehicle companies, including BMW, Toyota and Mercedes Benz had, by the end of 2017, invested more than R32-billion in production facilities over five years in South Africa.
The same concept, I would argue, could be applied to the adoption of the fourth industrial revolution or 4IR technologies. In the past four weeks, I have been talking about the recommendations of the Presidential Commission on the Fourth Industrial Revolution — the PC4IR. The commission has made eight recommendations that will put South Africa’s fortunes on an upward trajectory. I have addressed four of these recommendations on this platform. The first is to build human capacity in the area of the 4IR; the second is to establish the National Artificial Intelligence Institute; the third is to create the Advanced Manufacturing Institute; the fourth is the establishment of a National Data Centre. This week I address the fifth recommendation, which is incentivising the adoption of 4IR technologies and the emergence of future industries and platforms.
How do we incentivise 4IR?
Already, intelligent automation is widespread in the automotive industry, but can this be expanded to other industries? What is the fast-moving consumer goods industry’s version of the MIDP, and what would be its implications for our exports? The South African economy has barely grown in the last few years and has been bleeding jobs is a logical next move. Will incentivising the adoption of 4IR technologies change that economic trajectory? Will automation in the textile industry resuscitate it?
While it is true that some jobs, both blue- and white-collar, will disappear in the move towards automation, as with previous industrial revolutions, there is also scope to drastically increase the number of jobs created as this paves the way for new occupations. There is also the potential to incrementally add 16% or around $13-trillion by 2030 to the current global economic output — an annual average contribution to productivity growth of about 1.2% over the next decade, according to a report by the McKinsey Global Institute on the impact of AI on the world economy.
Yet, South Africa has been slow to come to the party. In July of last year, a study by technology research organisation World Wide Worx and software company Syspro found that only 13% of corporates in South Africa were using artificial intelligence at the time, and, of the rest, only 21% planned to adopt it by 2021. The study found that the adoption of the 4IR technologies increased once firms were armed with education, awareness and knowledge. Should we then incentivise learning of 4IR technologies through mechanisms such as tax breaks for companies that prioritise this? Incentivising 4IR technologies can assist in making sure that we stay competitive in the context of deindustrialisation and a change in the global landscape.
Companies should be incentivised to use 4IR technologies to improve South African competitiveness. In particular, we should be looking at AI, blockchain technology, 3D printing and gene editing. These incentives should include additional 4IR-related tax incentives and support for research and development in the implementation of 4IR using organisations such as the Council for Scientific and Industrial Research, National Research Foundation, Medical Research Council, Agricultural Research Council and Higher Education Institutions. This would support the acquisition and application of advanced technologies in the manufacturing of goods and delivery of services. Part of this will include additional support to develop new Small, Medium and Micro-sized Enterprises and grow existing ones in the 4IR space to create solutions that address South Africa’s development challenges.
To achieve this, the ease of doing business must be improved. This should include allowing the registration of software patents which are currently not registrable in South Africa. Furthermore, it should consist of reducing the cost of 4IR businesses with regards to customs and taxes, thus enabling the ease of global competitiveness and expansion.
The Ease of Doing Business ranking examines the complexity and cost of regulatory processes as well as the strength of legal institutions in a country. Yet, South Africa has significantly lagged behind in these rankings. In 2019, South Africa fell two places in the World Bank’s Ease of Doing Business report to 84th out of 190 countries. This is the country’s lowest ranking yet. Even though we held our rank in 2018 and 2017, we have seen a significant shift in the past decade, considering that in 2008 South Africa was at 32 on the list. Although, under President Ramaphosa, the government has made a concerted effort to improve the country’s ranking in global business competitiveness measures, much needs to be done in state departments to simplify compliance, clear backlogs and improve efficiency.
Next, of course, is the challenge of establishing appropriate incentives, cognisant of the country’s precarious fiscal position. In the 2020-21 budget delivered in February, it was projected that growth would average slightly more than 1% over the next three years. This, of course, has been dealt a further blow from the fallout around Covid-19 which has seen much of the economy forced to come to a standstill. The revenue shortfall for 2019-20 came in at R63.3-billion while the budget deficit was expected to come in at about 6.3% of GDP. How do we reconcile these kinds of incentives in this context?
The argument is that 4IR incentives will provide further stimulus into the economy as these companies invest more in the country and ultimately become more productive. The trade-off now certainly seems precarious — but, in the long run, this will provide the economy with a much-needed boost. A study by The Pew Charitable Trusts found that incentives have a better outcome when a local economy is struggling. When unemployment is high, as it is in South Africa with the latest figure sitting at 29.1%, there is an increased likelihood that new jobs will be filled, given the large pool of job seekers, which ultimately boosts earnings and increases tax revenue. As the economist and author of the book Freakonomics, Steven Levitt, put it: “An incentive is a bullet, a key: an often tiny object with astonishing power to change a situation.”
This is the fifth in a series of eight articles unpacking the recommendations of the Presidential Commission on the Fourth Industrial Revolution. Tshilidzi Marwala is a professor and the vice-chancellor of the University of Johannesburg. He deputises for President Cyril Ramaphosa on the commission.