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Policy synchronisation required to boost SA’s re-industrialisation

Jan 27 2020 11:05
Thobelani Maphumulo

Since the Great Recession of 2008, South Africa has experienced slow economic growth and a surge in unemployment. 

The lacklustre revitalisation of the manufacturing sector, combined with restrictive fiscal and monetary policies, has not augured well for the economy’s upward trajectory. 

Consequently, the synchronisation of macroeconomic policies and microeconomic reforms – industrial and trade programmes – should, undoubtedly, reignite strong economic performance. 

Over the past 25 years, the country has undergone a process of de-industrialisation largely due to aggressive, and premature, trade liberalisation – the tariff book is dominated by tariff-free merchandise items. 

Additionally, uncoordinated industrial and trade policies, rising administrative costs, infrastructure bottlenecks, innovation deficiencies, and import dumping have contributed to hardships in the manufacturing sector. 

The sector contributes 13% to GDP, down from about 20% in the 1990s, and accounts for 57% of total exports. 

Non-beneficiated mining and mineral products make up 36% of total exports. 

The beneficiation programme has not gained traction and is one of the impediments to re-industrialisation. 

Beneficiation is the process of turning minerals into higher-value products, which can be sold to either foreign or domestic markets. 

Beneficiation has multiple spin-offs that could accelerate the industrialisation programme. 

These, among others, include the development of capital-intensive industries such as refining and smelting. 

The industrial development curve calls for the establishment of both capital and labour-intensive industries going forward. 

It is premature, albeit unavoidable, to intensely promote the Fourth Industrial Revolution (4IR) before developing labour-absorptive industries. 

In fact, there’s a high probability that 4IR will fail to accommodate the large pool of job seekers. 

The government has made impressive strides in the automotive sector’s industrial and trade strategy, demonstrating that well-crafted policies could augment an industry’s development, increase export earnings, attract foreign direct investments, and support technology and skills transfer. 

The Automotive Production and Development Programme (APDP) – preceded by the Motor Industry Development Programme – has strongly supported exports of domestically produced vehicles which account for 11.4% of total exports. 

That said, there’s discontent in some quarters with respect to the corresponding increase in imports as a result of import credits that are granted to original equipment manufacturers (OEMs). 

The apt response is that the auto industry requires years of engineering experience and access to global supplier networks. 

It is important to note that foreign inputs, such as capital, machinery and equipment, have contributed immensely to the export-led auto sector. 

That said, the Automotive Masterplan 2020 has aims for the local content in manufactured vehicles to increase from 38% to 60% in the long run. 

The global vehicle production market is fiercely competitive and government should continue to offer OEMs production incentives. 

The collaboration between OEMs and the department of trade and industry has, unsurprisingly, led to local automotive production zones and increased vehicle exports to Europe, in particular. 

The government should support the role of public procurement in the localisation and industrialisation programme. 

The government and state-owned entities’ (SOEs) massive procurement budget – north of R850bn a year – should be used to develop local industries and, eventually, shipments to world markets. 

Unfortunately, the culture of corruption and rent seeking has limited the localisation drive in SOEs, specifically. 

Rent seekers are evidently not passionate about building the local industrial capacity. 

The improvement in tender processes, accentuated by the demand for local content, is a low-hanging fruit. 

This, to a large degree, could also be used as the policy tool to ease market concentration – big corporates dominate markets across the supply value chain; vertical integration is ubiquitous. 

This certainly results in high barriers to entry for small and medium enterprises. 

The competitive landscape is tough for emerging industrialists and a comprehensive legislative framework is required to deepen industrialisation and open domestic markets. 

Notably, the government has done well in promoting industrial development zones. 

There’s been a discernible increase in foreign direct investment, vertical integration, supply chain industry development, and job creation. 

On the imports side, domestic producers – cement, poultry and steel – have called for hikes in tariffs due to import dumping. 

Protectionist measures are generally a drag on economic growth because tariffs are paid by consumers and businesses. 

The supply glut in foreign markets has resulted in low worldwide prices, causing domestic companies to suffer. Economic policies should always be dynamic and respond to the needs of local industries. 

The probable decimation of domestic companies, adverse supply chain effects, and subsequent increase in unemployment should be avoided. 

It is encouraging to witness the recently released Poultry Industry Masterplan, the primary objective of which is to ease the import dumping pressure on local producers. 

Thobelani Maphumulo is an investment analyst and author of Invest Your Way to Wealth

This article originally appeared in the 16 January edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.

trade  |  economy  |  industrial policies
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