It is well known that the South African economy is enjoying a period of sustained, albeit relatively modest, economic growth that is unprecedented in recent times.
But hidden beneath the glow is a sick manufacturing sector that is continuing to make a declining contribution to GDP.
Manufacturing is declining despite the government lavishing support on industry through various subsidy and support programmes aimed at making manufacturing a key creator of jobs to tackle the country’s unemployment crisis.
High-growth sectors, such as relatively low-grade beneficiation of iron and steel and non-ferrous metals, are characterised by capital rather than labour intensity.
Labour intensive industries, such as footwear, have been decimated by cheap imports. Jobs have also been lost in the apparel industry.
Employment in manufacturing declined by 1,2% between 1994 and 2004, according to University of the Witswatersrand academic Simon Roberts.
Investment in manufacturing has also declined steadily from 5% of GDP in the 1970s to about 3% in 2003.
“Liberalisation and increased trade appear to have reinforced the existing patterns of comparative advantage based on natural resources, cheap energy and previous government support,” says Roberts.
Over the past decade, minerals and resource-intensive manufactures have constituted more than 60% of South Africa’s exports, he shows.
Since 1995 investment in manufacturing has stagnated, if investment in resource-intensive manufacture and motor vehicles is excluded, says Roberts. “The record over the past decade suggests that only concerted government action will change the trajectory,” he writes, arguing that otherwise, large resource-intensive companies will continue to determine industrial development.
A study by Deloitte for Sasol shows industry support programmes have cost R334-billion since 1989 — chiefly in direct payments to defence industries, but also in R90-billion in support for the motor industry and R11-billion in incentives from the Strategic Investment Programme. The latter is part of R30-billion that the government provided in support to manufacturing during this period.
“Manufacturing alone is probably not going to directly address our employment problem, but it still has significant contributions to make in generating employment and generating quality employment,” said chief director of industrial policy at the department of trade and industry, Nimrod Zalk.
Zalk said that the department still sees manufacturing “as the engine of the economy” because it creates forward linkages to the service sector and backward linkages to resources.
Labour-intensive manufacturing has suffered relative to capital intensive industries and those, such as chemicals, which received state support under apartheid.
One of the exceptions to this pattern is the furniture industry, which is highly labour intensive and has recorded rapid growth and a positive trade balance. Yet, Roberts explains, the success of furniture production is because of the dynamic in global markets and the dominance of a single dominant multinational manufacturer, Steinhoff, in South Africa.
Another consequence of opening the market in the 1990s has been the ability of South African firms to move abroad instead of reinvesting in South Africa, said Wits economist Seeraj Mohamed.
“Anglo American had more than 100 manufacturing subsidiaries, but now it is almost out of manufacturing and sees itself as a global mining company,” he said.
Another explanation for the poor performance of relatively labour-intensive manufacturing segments is the resource base to the economy.
“Dutch disease” is a term coined to explain the observation that countries with abundant natural resources do not tend to experience high economic growth. The term refers to the experience of The Netherlands and its discovery of natural gas.
Part of the mechanism by which resource richness undermines general economic growth is the overÂvalued exchange rate during commodity price booms, which makes manufactured exports uncompetitive.
Economists also point out that the share of manufacturing in the national income has declined because of the growth of services.
The services industry has replaced manufacturing as the main contributor to GDP from 1993 to 2005.
In South Africa market-based services account for 47% of total employment, directly and indirectly, while manufacturing generates only 14% of total formal employment.
The trade and industry department is currently drafting an industrial policy to stimulate the manufacturing sector.
Zalk said that the different departments within the government are currently discussing the policy, but President Thabo Mbeki has announced that it will be finalised by the end of the year. “The industrial policy is not going to be the government’s overarching economic plan, but the role that we believe it can play is to act as a focal point for a range of policy issues related to industrial development,” he said, adding that since 1994 there had been policy initiatives but no single statement of the government’s industrial policy.