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Aug 03, 2012

Reindustrialisation Recipe?

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Thirdly|Education|Europe|China|South Africa|Manufacturing|Rob Davies
thirdly|education-company|europe|china|south-africa|manufacturing|rob-davies
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Few would disagree with Trade and Industry Minister Dr Rob Davies when he expresses the view that no developed economy has achieved its status without first going through a process of industrialisation. “We have taken a view that manufacturing is fundamental and integral to our economic growth. We have no doubt that we need to industrialise our country and immediately address the potential threat of deindus-trialisation,” he reminded an audience of businesspeople last week.

Even fewer would disagree, including Davies, that words and good intentions alone are entirely insufficient to kick-start South Africa’s much-needed reindustrialisation process.

Sadly, though, the country appears to be in a position currently whereby the more it speaks about building manufacturing, the less it achieves in terms of actual visible progress.

Without question, many of the problems relate to external factors outside South Africa’s direct control – not least the current crisis in the eurozone.

A graphic published in the World Bank’s recently released ‘South Africa Economic Update’ indicates just how toxic the crisis is likely to be for South African manufacturers. The graph shows a remarkably close correlation between growth in the eurozone and industrial production in South Africa. Besides a few short periods of decoupling, the lines on the graph track each other much as a heat-seeking missile would its target.

Despite its woes and the rise of China, Europe remains the largest importer of South Africa’s manufactured products and the brunt of the prevailing crisis is, thus, likely to be borne disproportionately by our factories. It should not be forgotten that, during the earlier stages of the crisis, a disproportionate number of the one-million jobs lost during the 2009 recession arose from within the manufacturing sector.

The correlation is equally worrying for the economy as a whole: for every one percentage point change in the eurozone’s gross domestic product (GDP), South Africa’s GDP adjusts by 0.8 of a percentage point.

But there are also internal factors holding back the process of rebuilding industry. The first is the protracted nature of the deindustrialisation process, which is arguably still under way. This long period of decline makes the current reindustrialisaiton aspiration much like turning the proverbial oil tanker on a tickey.

Ironically, the sensible macroeconomic choices made by South Africa over the past decade-and-a-half will also make for a difficult transition. Reindustrialisation cries out for a weaker exchange rate. But to effect such without damaging the country’s economic balances (which rely currently on portfolio flows to close the savings gap) is easier said than done. Indeed, the transition to a weaker rand would probably be very disorientating and disruptive.

Thirdly, South Africa’s poor basic education performance is not equipping the next generation of entrepreneurs with the skills needed to become the next generation of industrialists. Without a massive push to turn the tide on the country’s dismal maths and science outcomes, the raw material needed for industrialisation will simply be absent.

Lastly, the country’s current macro- and microeconomic policies are somewhat half-hearted. Either we have to make the sacrifices needed to facilitate the reindustrialisation dream, through a competitive currency and large-scale incentives for industry, or we will continue to limp down a path that is sure to result in even more deindustrialisation.

The problem is that to make such a dramatic change, we need to be certain the raw material – the entrepreneurs, the skills, policy, incentives and good governance – is truly in place. If it is not, such a policy course could do more harm than good. At present, it appears we are extremely weak in all those critical areas.

Edited by: Terence Creamer
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