Terence Moll begins a monthly column on business issues in the new South Africa
THE gearwheel was exquisite. Painted grey and delicately engineered, it was an incredibly precise sculpture the size of a matchbox.
The factory manager stroked it fondly as he explained his dilemma. “We export most of these,” he said. “The world price is USD9,50. At the moment we produce it slightly more cheaply than that, so we’re making a small profit.”
Putting the gearwheel down, he shrugged and raised his hands in the air. “But we’re caught in a vice. On one side is the exchange rate. Even though it’s fallen in the last 18 months, it’s still too strong for us. Every time the rand strengthens, we suffer. On the other side we have Numsa, the metalworkers’ union. They want a 12 percent rise this year.
“The last few years were tough, but we survived. Now we’re tired of struggling.” He pointed to the computerised lathe alongside us. “Any more pressures on profits and we’ll take our factory, machines and all, and relocate somewhere East. Mauritius, perhaps, or India. The managers will go with. But 400 workers will lose their jobs.”
That would be a tragedy. Particularly so as his West Rand factory is impressive. It’s clean, it exports vigorously, it has sophisticated training programmes for the workforce, and uses advanced technology. It’s as near as I’ve seen to a new South Africa establishment.
But after the long 1989-93 recession and extensive rationalisation and retrenchments, no more cost-cutting is possible. And the factory operates within a toughly competitive world. Its competitors in the United States, Taiwan and Brazil are apparently profitable. If the domestic environment remains unfavourable, it might do better elsewhere.
This potential horror-story is not unique. Most of our industry faces foreign competition, either in export markets or from low-priced imports. Go into any toyshop and have a look at the plastic cars and trains. The chances are they were made in China. My hi-fi is from Japan, my TV from Korea. If domestic costs rise enough, and profits fall, our industries may end up being knocked out, one by one.
Meanwhile, our gold, iron ore and copper are running out. Holes in the ground can’t drive an economy forever.
What to do? For the manager, it’s easy. “I’d like the rand to be weaker, Numsa to accept more realistic wage-rises, and lower taxes,” he said promptly. Perhaps he’ll get the rand he wants, driven by falling foreign exchange reserves, but the other two won’t be easy.
As we’ve seen from the rash of strikes recently, trade unions also want their chunk of the new South Africa, and that means higher wages now. The government faces pressures to spend on the RDP and on other priorities, and can’t afford to cut taxes at present, even if it wanted to.
In the medium term, though, much could be done to encourage exports. Most obviously, South Africans need to accept that we live in a tough world in which business is free to move between countries. The local economic environment must be made sufficiently favourable to keep business investing here. In due course the government budget deficit should fall considerably, and taxes might have to come down.
By the same token, wage rises should be limited by productivity growth. Excessive increases now could lead to further job losses and yet higher unemployment.
Secondly, the exchange rate is the single most important means of keeping industry competitive. Countries like Japan, Taiwan and Malaysia made aggressive use of weak currencies to take over international markets. We should follow their example.
Finally, skills are crucial to industrial performance. In Malaysia and Chile, unskilled assembly-line workers often have eight or nine years of schooling. If the many unemployed South Africans are to get jobs in industry, they need — above all — to be literate in English, while skills training would also help. The government should take the lead in the educational field.
It’s all easier said than done, of course. But our choices are limited. The RDP, for example, can only succeed if the economy recovers, and the best way of ensuring growth is through exports. Either we come to terms with the world economy, or it conquers us.
Even if the government adopts a long-term exporting strategy, though, it might not save the factory I visited. Before leaving, I asked the manager if I could quote him. “It’s probably all right,” he said, “but I’ll have to check with the managing director first. He’ll be back from leave next week.”
I wondered if the MD was in Mauritius, perhaps enjoying a working holiday.
* Dr Terence Moll is an Old Mutual economist, who first attracted media attention for his incisive analysis of macro- economic policy.