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Simon Roberts: GROWING PAINS
15 Oct 2004 00:00
In 1994 the World Bank concluded that South Africa’s industrial development had historically been capital-intensive because of cheap finance. The bank argued that raising interest rates above the rate of inflation and reducing government intervention would prompt firms to use more labour relative to capital, creating employment while fighting inflation.
Despite this, the first 10 years of South Africa’s democracy have seen a similar pattern of growth in capital-intensive industry and poor per- formance by labour-intensive firms.
In fact, the more capital-intensive the industry, the higher the output growth recorded.
Non-ferrous metals and basic chemicals notched up the highest output growth, and are also the most capital-intensive undertakings. They are followed by the motor vehicle sector and basic iron and steel, also very capital-intensive.
At the other end of the scale, labour-intensive sectors such as footwear and clothing, with just R28 000 and R12 000 of fixed capi- tal per employee respectively, have done badly. The footwear sector has almost vanished, and clothing has been through torrid times.
As a country with an already well-developed industrial base and good infrastructure, South Africa should be worried by the performance of sectors such as metal products and machinery. These are quite labour-intensive, but the ability of firms to compete rests on a combination of competitive input costs, firms’ capabilities and skills. Output growth of these industries has averaged just 2% a year over 10 years, and employment has stagnated.
What explains this, and what are the implications for industrial policy? The World Bank was partly right. The growth of capital-intensive sectors such as basic iron and steel, non-ferrous metals — mainly aluminium — and basic chemicals has been on the back of finance provided by the parastatal Industrial Development Corporation (IDC).
The IDC continued to lend to highly capital-intensive mega-projects in steel, aluminium and chemicals in the mid-1990s. These have few or no benefits for downstream manufacturers, as firms such as Iscor and Sasol price their products at the same level as imported ones, and include all the notional import costs of freight and insurance.
The World Bank was wrong, however, in thinking that changing the relative costs of capital and labour was the answer to employment creation. In the real world, firms do not have a menu of different technologies to choose from. Especially with the increasing international integration of the South African economy, companies must match international standards of quality and delivery. To do this they must keep up with developments in machinery and production techniques.
Recent research on East Rand industries for the Ekurhuleni Metro reinforces the basic point that labour-intensive undertakings need to invest to grow. Making it more costly for them to invest inhibits job creation.
Investment in upgraded plants is necessary for international competitiveness and is strongly associated with training and work creation.
The main motivation for investment by firms to achieve these outcomes is local demand, while exchange rate instability is viewed as the key obstacle to investment planning.
What does this mean for industrial policy? A broadening of manufacturing activity, particularly in downstream industries such as plastic and metal products and machinery, requires an understanding of how firms build production capacity. Firms tend to under-invest in training and research to develop and improve products. And the capacity of each individual firm depends on being able to source inputs, machinery and technical services from other firms and institutions.
This requires coordination of technology, skills and industrial policies. While the Department of Trade and Industry’s Integrated Manufacturing Strategy and the Department of Science and Technology’s Advanced Manufacturing Technology Policy aim to develop manufacturing capacity and encourage greater beneficiation of local materials, concrete action has been slow to materialise. Nor do the links between them seem effectively managed.
The only sector with a clear development plan is the motor vehicle industry. The Motor Industry Development Programme (MIDP) has married a gradual phasing out of protection with the increasing encouragement of local linkages with input suppliers.
In the initial stages, the local components exported under the MIDP were catalytic converters, seat leather and alloy wheels. Recent research has revealed a far-reaching impact on the foundry industry, with engine components and pistons being cast.
The auto sector’s demand for local components has driven an upgrading of capabilities in a significant number of South Africa’s foundries and has stimulated investment in improved machinery and skills development.
Unfortunately, the auto industry is, in many ways, exceptional. It is well organised and driven by international assemblers, who know how to develop a programme and sell it to the government. Collective action does not miraculously happen in other industries, especially those with larger numbers of small and medium firms. It has not been extended to the foundry industry’s non-automotive products, such as machinery and equipment components.
International experience suggests that local action is required to build networks of companies, which can learn from each other and draw on local institutions for training and product development.
This requires local governments that are able to anticipate opportunities, identify areas for action, and coordinate the activities of local actors. Included in this is the development of local transport, which our research has found is a major impediment to firms running three shifts and increasing employment with the existing capital stock.
Unless workers can move safely between their homes and the workplace, firms must run two shifts of 12 hours or more, or run below capacity. Public transport is an important industrial policy.
International competitiveness depends on building local production capacity. To change South Africa’s industrial development path requires purposeful action, based on a ‘bottom-up” understanding of the nature of industries, and company decision-making in those industries.
Johannes Machaka, Grace Mohammed, Thandi Phele and Simon Roberts work for Wits University’s corporate strategy and industrial development research project. Research to develop plans for action is under way on foundries, mining machinery and plastic products, supported by Ekurhuleni Metro and the Commark Trust
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