Policy implications and conclusions

Information technologies present an opportunity for SADC countries to become more closely integrated into the global production networks. However, with the exception of South Africa and Mauritius, most SADC countries look unable to take full advantage of these opportunities due to poor transport and telecommunications infrastructure and a lack of industrial capacity. It has been suggested that South Africa can play a pivotal role in integrating these countries through developing the regional production networks. These networks can serve to attract investment to build the capacity and learning to enable local firms to enter international supply chains. Policy should target both improving the infrastructure and possible providing incentives for firms to establish such networks.

The problems with SADC infrastructure stem from a lack of scale economies and poor regulatory and fiscal oversight. Transport and communications are scale-intensive network sectors. The low density of use in these countries raises the per-unit costs that in turn keep usage low. Greater levels of regional integration of transport and communication services may be a means to partially overcome this problem. In transport, this would allow the establishment of an efficient hub-and-spoke system to emerge in the region.

A more integrated regional market in these services would by necessity require a more liberal regulatory regime. Regulatory reform in itself can provide many other benefits in terms of raising the level of competition and efficiency of the operators in the region. This is especially important in telecommunications where inefficient state operators act as a drag on the whole economy. Reform of these sectors in other parts of the world has given us a good guide as to the type of regulatory reform that would be required. What has to be recognized in the case of poor developing economies is the difficult political economy considerations that such reform raises. In contrast to industrial countries, there are no social safety nets to soften the effects of any temporary adjustment costs. This makes sustaining a reform program politically difficult and is a primary reason why reform fails or stalls in many of these countries. Policy should focus on assisting these countries in this transition process, whether financially or in the retraining of workers that are likely to be retrenched. It is also important for policy to build capacity in the new regulators to enable them to make optimal decisions.

Building incentives for regional production networks is a more difficult task. 27An alternative perspective is that building regional networks may not be desirable. Evidence points in the direction that such networks develop when they are the most rational way of doing business. Policies aiming at reducing transaction costs, whether politically or technologically determined, is probably a good thing. However, some SADC companies, including South African apparently prefer to link up with overseas networks whenever they can. Aside from transport/communications infrastructure improvement, the FTA has been identified as a key variable in to induce South African firms to build such networks. High internal tariffs act as a barrier to regional outsourcing (by raising transaction costs) and low macro stability creates an uncertain environment for fixed long-term investment. Although the FTA is the ultimate goal of SADC, implementation has limped along compared to the rapid implementation of other trade agreements (e.g. the SA-EU deal). Again political economy considerations are informative here. Many SADC countries have resisted the implementation of the FTA because they fear that the small amount of industry they do have will either migrate to South Africa or be destroyed by competition from it. They are also heavily reliant on the fiscal revenues that internal tariffs provide. The FTA also comes at a time when countries are trying to cope with the adjustment costs of privatization and regulatory reform, compounding current difficulties. The South African government has also played a role in creating this resistance by holding back on liberalizing the clothing and textiles sectors where the rest of SADC will gain. The reasons are similar – the sector is already under pressure from WTO obligated tariff reductions and there are no safety nets to absorb the retrenchment shock to the country. However, South African firms in these sectors need to exploit different comparative advantages in the region if they are to survive themselves. Policy in this instance would suggest that the SADC FTA be restructured to enable it to be politically implementable and accelerate the emergence of production networks.

We have shown in this report that transport infrastructure is far from adequate, particularly in the land-locked SADC countries. Thus, substantial investments in infrastructure are needed in order for some of the SADC countries to respond to the opportunities that new information technology brings. Such investments have traditionally been undertaken by the public sector, often assisted by donors. At present, the governments in the least developed SADC countries have difficulties in raising funds for large-scale infrastructure investment, and donors have largely turned their attention to other sectors. Furthermore, over-investment in, among other areas, infrastructure and electricity during the 1960s and 1970s, combined with low administrative capacity, probably contributed significantly to the present financial distress in the first place. Private sector participation in infrastructure investment and operation is therefore necessary in order to raise sufficient funds. When resources are extremely limited, it may also be an option to introduce special development zones with good quality infrastructure and services provided in a concentrated geographical area in order to focus resources. Evidence point in the direction that these development zones are most likely to improve income in the country when they are part of a liberal trade and investment regime. If such zones attract some large-scale investments, there is a possibility that critical mass can be created and synergies exploited such that the lead-time for growth to take off is shortened, as discussed in section 2.2.

Turning to policy issues related to the WTO and the telecommunication sector, we have pointed out in section 2 that to what extent the diffusion of information technology will benefit the SADC countries depend on the quality and density of telecommunication networks, and the transport network. The SADC countries mostly have comparative advantage in the production of primary products and low-technology goods. As international production networks become more time-sensitive, frequent and timely delivery is a precondition for winning contracts. This obviously requires reliable transport networks. Furthermore, as searching, ordering and payments increasingly are conducted over electronic media, traders and producers need access to electronic financial services. Final modern equipment requires reliably electricity supply in order to operate effectively. The complementarity and synergies between telecommunication services, financial services, transport and electricity point in the direction of liberalizing all five sectors simultaneously, and introducing similar regulatory principles to all the network industries.

Both network economics and location theory predict that declining transaction costs tend to lead to agglomeration in the center when small steps are taken to lower transaction costs. Radical changes in transaction cost, on the other hand, benefit poor countries more than rich countries and leads to the narrowing of the income gap and decentralization of production networks. The implication of this finding is that, whenever possible, trade liberalization should be swift and comprehensive, and that long adjustment periods and exemptions for developing countries may not be in their best interest.

To summarize, what is really new about the "new economy" is still not quite clear. But a sharp decline in communication costs facilitating more specialized production networks that involve producers in many countries and fierce competition in quality, price and delivery reliability is certainly an important element of the new economy. We have seen that although the SADC countries lag far behind the frontier in terms of telecommunication penetration and access to the Internet the SADC area has embarked on a catch-up process. Furthermore, countries that have taken on radical reforms in the economy in general and the network industries in particular, have experienced spectacular growth in the number of Internet hosts and in the penetration of cellular phones. These countries have also experienced a significant increase in FDI flows. The data thus suggest that policy barriers may be as important as lack of industrial capacity or skills as far as benefiting from trade liberalization in telecommunications and taking part in "the new economy" are concerned. Poor infrastructure is, however a serious problem, particularly in the land-locked countries, and innovative solutions, involving the private sector are called for.