Several elements have contributed to the deindustrialisation of the country over the past three decades, but none has been more devastating than the effects of load shedding.
‘It is essential that South Africa’s economic growth is grounded in manufacturing-led growth. Manufacturing is indeed less volatile and less vulnerable to economic downturns and will create real, sustainable and decent-paying jobs for our people. South Africa must also create an export-oriented economy. A dedicated focus on manufacturing growth will also lead to export growth.”
These are the words of Andrew Whitfield, the new Deputy Minister of Trade, Industry and Competition, who since taking office has been on a busy public relations crusade to drum up support for his vision of “a manufacturing renaissance” in South Africa.
His thinking as to how the South African economy can create much-needed employment and equitable growth is in line with similar sentiments coming from his political counterparts in the UK, Europe and the US who also see a re-industrialisation of their economies as the preferred route towards an elevation in global trade competitiveness.
Anyone with a basic understanding of Economics 101 will tell you that these theories can’t really be faulted for their soundness of reason, but given the context of what else is happening in the world, is a manufacturing renaissance in South Africa reasonably possible to achieve?
Why manufacturing?
What is so special about manufacturing that policymakers are now getting so excited about?
Physically making things is a powerful producer of productivity and holds more potential for innovation and sustainable margin generation, than say, the services sector. Manufacturing is also an enabler of skills development and the inclusion of more so-called blue-collar workers into the job market.
Manufactured goods can be successfully exported (should the demand for these products and brands exist), delivering a much-needed trade surplus benefit to the country. Enabling the making of finished things at a sizeable profit margin that the world wants to buy and collectively benefiting from this focus seems so obvious as a government policy for a country with a sizeable unemployment problem like ours.
Making new things by combining capital and resources consistently and successfully creates a positive multiplier effect that draws in more capital and generates more productivity as a result.
So what’s the problem then?
The obvious villains holding the sector back are the well-publicised ones: restrictive labour regulations, ageing public infrastructure, the high cost of capital made worse by a pervasive climate of government corruption and policy indecision – all of which are still very much in play as significant blockages to Whitfield’s dream.
These elements have contributed to the deindustrialisation of the country over the past three decades, but none have been more devastating than the effects of load shedding.
The power crisis ensured that any manufacturer carrying legacy weakness was very quickly killed off once the issue started to infect the economy. With decreasing levels of competition in the sector, the remaining manufacturers didn’t innovate, didn’t reinvest in their machinery, didn’t spend money on marketing and over the past 16 years, demand for locally made goods has plummeted.
Manufacturing has been declining in South Africa since 2008
Since the mid to late-2000s, manufacturing’s contribution to the nation’s GDP has declined substantially. What remains today is a concentration of the sector down to a handful of historically strong categories like mining and agriculture, dominated by a small number of companies exporting mainly commodities.
Today, South Africa has a services-based economy (about 62% of the economy is now classified as services-led) with very little manufacturing entrepreneurial appetite to go up against organised labour or put assets up as collateral to secure capital from overcautious investors.
Even though the lack of load shedding is an important indicator that a critical barrier to this renaissance has weakened; and there are some good signs that the government and the private sector are committed to a partnership to resolve critical infrastructure problems that the country faces – this doesn’t miraculously enable a path towards a renewed manufacturing era.
Unpalatable local manufacturing is a part of a global trend
As is to be expected, many developed economies have transitioned into becoming services-led economies, a trend that has significantly accelerated since the 2008 financial crisis.
This financialisation of advanced economies has meant that these markets are now at the mercy of marginal yield hunters who impatiently invest funds conservatively, rather than “gambling” on new businesses with a longer-term time horizon of return. People who deploy capital are looking for a sure thing, even if the returns are relatively low. Innovation – a practice of new value creation relied on by manufacturing – is seen as way too risky and actively avoided.
What can South Africa do to enable a manufacturing renaissance?
The concern is that the government’s new love affair with manufacturing is tainted by an attraction to reviving the past. If Deputy Minister Whitfield is hoping to somehow rekindle the glory days of the dwindling number of industries that have historically comprised the sector, then we are in for an expensive mistake.
Armed with a deeper understanding of the headwinds that we face, it would be preferable for South Africa to first clarify where future-orientated global opportunities lie that align with our strengths as a regional node of value creation. Explicitly aligning our efforts with the audacious goals of the African Continental Free Trade Area would be an example of one such approach.
Then it might be worthwhile to make clear exactly what it is that we would like this renaissance to produce; the holistic outcome that’s actually wanted.
We would want a policy approach that enables a new system to deliver things like local and international demand, sustainable margins, productivity and a favourable return on invested capital as well as decent wages, skills development, community wellbeing and a significant diversification of the sector, while reducing harm to the natural environment.
Rather than creating the need for the supply of mundane labour to mines and huge factories, what if policy had to support thousands of artisanal manufacturing entrepreneurs who can set up shop in vacant inner-city spaces – revitalising our high streets and encouraging diversification?
What if policy supported the proper packaging and exporting of products and brands under a powerful institutional banner, proactively hosting huge trade expos and flying in brand reseller agents from around the world to build a commercially viable system of marketing?
What if the minister created a dedicated manufacturing strategic foresight think tank that proactively identified plausible medium to long-term opportunities for the local industry to act on?
All of these outcomes need to be as a result of deliberate design.
Put simply – the elephant in the room is that the policy proponents appear to be very much focused on easing supply-side constraints while viewing the system from a dated perspective and conveniently overlooking the fact that demand for goods manufactured in South Africa isn’t there any more. You can’t sell what people don’t want to buy.
For a manufacturing renaissance to emerge, there would need to be a workable theory that incorporates components of modern marketing and innovation practices as a part of the design, in addition to better supply-side enablers.
Politicians ought to think of themselves as designers rather than as problem solvers – architects rather than mechanics. DM