Familiar formulae

The draft National Strategy for Manufacturing, unveiled last week by the National Manufacturing Competitiveness Council (NMCC), is reassuring in many ways but disappointing in others. In a well-structured document, the Council lays out the rationale for its basic premise that the manufacturing sector must play a leading role in accelerating GDP growth in the coming years.

It develops a reasonable scenario in which the sector must grow at an average rate of 12 per cent over the next decade, ending that period with a 23 per cent share of GDP, as opposed to a rather sluggish 17 per cent today.

The recommendations are organised into a number of categories, each one addressing a particular constraint that is currently impacting the growth of the sector. Policies contributing to a stable macro-economy, which in turn will make the investment climate more hospitable, are emphasised.

Indirect reforms, based on expanding the scope and coverage of the VAT, can simultaneously increase the tax base and reduce the incidence on individual producers, thereby reducing costs while increasing revenue. Reduction of customs duties, so as to both reduce costs and increase domestic competition, is also part of the wish-list.

Reforms of labour market regulations are also stressed, with simultaneous movement on three fronts: reducing the role of inspectors; tightening the provisions of the contract labour regulations to make them more employer-friendly; and, the all-important elimination of the requirement for state government permission before terminating employees.

The strategy also focuses on two important dimensions of competitiveness, which tend to get underplayed in the public debate on the issue. It recommends a far greater alignment between the skill requirements of the manufacturing sector and the structure and functioning of the educational and training system. It also brings the innovation process to centre stage, arguing that a continuous flow of knowledge and technological upgrade through the entire system is critical to maintaining competitiveness.

All this, plus the emphasis on infrastructure, constitutes the reassuring element of the strategy. It is not really saying anything new; however, it adds weight to the view that there are simply no alternative paths to manufacturing competitiveness. All of these measures are "reformist" in the conventional sense of the term and should be welcomed by the reform lobby.

However, two sour notes stick out. The Council has taken an entirely unwarranted pro status quo position on public enterprises and the small-scale sector. On the former, it believes that greater managerial autonomy is enough to unlock the unfulfilled promise of the public sector. On the latter, it still sees the merit of a promotional policy, despite the overwhelming evidence from abroad of the importance of scale for competitiveness.

Clearly, political expediency was not the motivating factor here, because that would have led to a toning down of the recommendations on the labour front as well. All the more reason, then, to view these positions as contradictory to the otherwise sensible and practical tone of the strategy.

The challenge for both the Council and the government now is to translate all this into meaningful action. Given the multi-dimensional nature of the recommendations, a huge number of ministries and departments need to come on board if progress is to be made. Making this happen has proved to be a great failure in the past. What is being done to avoid repetition?