Reversing the secular decline in the manufacturing sector’s relative contribution to South Africa’s gross domestic product (GDP) would offer material employment, growth and tax revenue benefits, a new report commissioned by an industry lobby group asserts.

But it also argues that any large-scale reindustrialisation of Africa’s largest economy would have to be premised on a “meaningful accord” between business, government and labour and be supported by macroeconomic and foreign exchange policies that improve conditions for industrial competitiveness. A revival will also depend heavily on initiatives and incentives to deal with the country’s current infrastructure and skills backlogs, as well as to moderate the rate at which administered prices are being allowed to increase.

The sector’s relative GDP contribution peaked at nearly 22% in 1981, but it has been in steady retreat since that date and currently only contributes about 14% to GDP. In addition, employment in the sector has fallen sharply to around 1.73-million.

Entitled ‘Assessing the Manufacturing Sector and its Multiplier Effects on the South African Economy’, the report has been prepared for the Manufacturing Circle – a multisector body currently comprising 48 large and small manufacturing enterprises operating in areas as diverse as food and beverages, to pharmaceuticals and capital equipment. Economists from Pan-African Investment & Research Services (PAIRS), which also produce the Manufacturing Circle’s quarterly ‘Manufacturing Bulletin’, authored the document.

The report comes at a time when South Africa’s policymakers are also emphasising the importance of the manufacturing sector as part of plans to improve the resilience of the South Africa economy to economic cycles and to creating and sustaining growth and employment. This policy emphasis has been highlighting in the New Growth Path (NGP), which views manufacturing’s recovery as central to the overall aim of facilitating the creation of five-million new jobs by 2020. Reindustrialisaiton is also the core objective of the second industrial policy action plan, or Ipap2.

The thrust has received further practical support from the recent changes introduced to the regulations associated with the Preferential Procurement Policy Framework Act, of the PPPFA, which empowers the Department of Trade and Industry (DTI) to designate sectors and products that government departments and State-owned companies should procure from local producers.

The initial DTI designations, which became effective on December 7, cover power pylons, railways rolling stock, buses, canned vegetables, clothing, textiles, footwear and leather products and set-top boxes. Further designations will be made in 2012.

The reindustrialisation ambition implied by the PPPFA changes, together with the NGP and Ipap2, has also been integrated into various social compacts that have been concluded between government, business and labour over the past few months, including a ‘Local Procurement Accord’, which sets an aspirational target for government and large firms to buy 75% of the goods and services they use from local industry.

But PAIRS CEO Dr Iraj Abedian argues that these interventions need to be coupled with a larger macroeconomic package that is explicitly designed to bolster the role of the manufacturing sector in the economy. Such a package should give particular attention to the debilitating effects of surging administered prices, as well as the volatility and overvaluation of the rand.

A peer group assessment of South Africa’s administered-price trends against those in the other ‘Brics’ economies of Brazil, Russia, India and China, shows that local manufacturing competitiveness has been seriously depleted by the country’s relatively high administered price increases. The rapid electricity price increases are of particular concern.

“To put it into perspective, over the ten-yer period between 2000 and 2010, the growth in administered prices (mainly electricity) amongst all of South Africa’s [Brics] peer emerging economies has fallen. In contrast, over the same period South Africa has recorded a massive increase . . . of over 170%,” PAIRS says in its report.

The relative volatility and strength of the rand is also unfavourable to creating conditions supportive of manufacturing competitiveness and PAIRS, thus, calls for a review of South Africa’s foreign exchange policies.

The report emphasises the positive employment, growth, tax and export-earnings multipliers of manufacturing and includes a model of the relative value of yearly manufacturing growth of 10%, relative to the current anticipated level of 3.4%.

Should a growth rate of 10% be sustained over ten years, the cumulative output would be R537-billion, in contrast to R184-billion at 3.4%. The employment gain would be 454 000 jobs, as against 158 000, investment would be R339-billion (R116-billion) and the real wage increase would be R177-billion relative to the R61-billion that could be achieved at a 3.4% rate of expansion.

The report argues that, besides moving to foster a favourable exchange rate policy, South Africa should also consider differential electricity pricing for key sectors, extending government incentives to bolster key industry sectors, accelerating beneficiation plans, encouraging skills development and moves to fast-track efforts to deal with the infrastructural backlogs.

“We need to, as a nation, deal with what it takes to reindustrialize. It is not one policy – it’s a package of policies,” Abedian asserts.

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