The deindustrialisation of SA

The story of SA’s deindustrialisation over the last 50 years is alarming, and reversing it should be a priority for our lawmakers.

The chart below shows manufacturing’s contribution to GDP has halved from a peak of 25% in the 1980s to under 13%.

Employment in manufacturing is also down – from 1.8 million in 2007 to less than 1.6 million in 2023. SA’s policy framers appear stuck in an apartheid-era protectionist mindset, with favoured industries such as automotive manufacturing held aloft by tariff barriers.

Other sectors struggle to compete internationally because of the unavoidable costs of doing business in SA, such as BEE and rapidly increasing energy and logistics costs.

Manufacturing as a percentage of GDP

This helps explain SA’s flaccid growth in the last decade.

“Countries that are good at manufacturing have tended to grow more quickly and for longer periods than countries that are not,” says a new report by the Centre for Development and Enterprise called Rethink growth, jobs and the DTIC (Department of Trade, Industry and Competition).

Only 20% of SA manufacturers export at all, and of these, more than half export less than 5% of their output.

The reason for this is low levels of entry into exporting and declining firm survival rates. In 2015, some 42 000 firms exported manufactured goods. In 2022, the figure was under 36 000.

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Another factor is manufacturing’s dependence for survival on the mining sector, which has itself been in decline since the 1980s. The quality of SA’s infrastructure has been another stake in the heart of manufacturing, with Eskom unable to meet energy demands, while Transnet’s diminished rail capacity is reckoned to have cost the economy R150 billion a year. That’s pushed freight onto roads and raised the logistics costs across the economy.

Then there’s a raft of ill-conceived empowerment policies that add both costs and uncertainties, and discourage investment.

All this bleeds into the manufacturing sector. The efforts of the DTIC to promote manufacturing have been more harmful than helpful, says the CDE report.

“This is due largely to policy choices that were overwhelmingly not premised on maximising export growth, but at replacing imports with local production, an approach that has led South Africa down an increasingly protectionist path.”

A key goal of the apartheid economic planners was to proof the country against international sanctions. That’s how we ended up with Sasol producing roughly a third our fuel needs, steel producer Iscor which later ended up being sold to ArcelorMittal.

Both were kickstarted with taxpayer money. To that list we should add Eskom, SAA and state-owned companies such as diamond miner Alexkor, and arms producers Denel and Armscor, to name a few.

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Protectionism

The policy of protectionism continued under the ANC-led government. The industry receiving most government support is motor vehicle manufacturing, which is sustained behind tariff barriers that keep the cost of vehicles higher in SA than would be the case if consumers could freely import them.

Automotive exports help SA’s current account, but the industry is not a massive employer though it does create high-productive jobs in a heavily unionised sector, and in parts of the country that need them. But this comes at a cost in the form of more pricey vehicles and higher transport costs across the economy.

Vehicles in SA are far more expensive than elsewhere in the world.

For example, a Mercedes C200 sells for R1.2 million in SA, which is 38% more expensive than a larger engine C300 sells for in Manhattan ($50 135). This premium is a consequence of the various tariffs behind which the automotive sector operates.

“Do the benefits of the support provided to the vehicle manufacturing industry outweigh the costs?” asks the CDE. “They certainly do for the protected firms, their suppliers, owners and employees. It is very doubtful, though, that the aggregate effects for the economy as a whole outweigh the costs.”

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Solar panel protection 

Another example of protectionist policy gone awry is the 10% tariff on solar panels at a time when the country was desperately trying to wean itself off Eskom’s erratic supply. This followed an application for tariff increases by a local solar panel manufacturer in April 2017, and came on top of an existing 25% local content requirement on solar panels in the Renewable Energy Independent Power Producer’s Programme.

This raised the cost of job creation in the local solar industry to R2.6 million per existing worker, in contradiction to the stated government policy of encouraging the adoption of alternative energy.

Such localisation policies have the perverse effect of raising the cost of public sector purchases of protected items. As former Eskom CEO André de Ruyter noted, local procurement rules meant Eskom paid two and a half times more for a kilometre of transmission line than does NamPower in Namibia.

These costs are funnelled through all sorts of intermediate goods, such as feed for poultry and other food products. That’s good for shareholders and company workers, but not for the country.

SA’s trade and industrial policies seem oblivious to the realities of modern global commerce and have in many instances shielded local companies from the rigours of international competition.

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Competition policy

The DTIC’s competition policy has tended to focus on employment and transformation than anti-competitive conduct. The result is that competition policy has become less predictable, and the costs, timing and benefit of mergers and acquisitions are likewise uncertain.

“As a result, firms involved in mergers and acquisitions go out of their way to satisfy what they think the minister wants. While these deals are not necessarily corrupt [since they need not be constructed with the intention of securing benefits for politically connected individuals], they introduce policy-driven discretion and uncertainty into what should be market transactions. This is a poor substitute for clear rules about what does and does not violate competition policy. Inevitably, this makes it harder to do business,” says the CDE report.

One easy fix for some of the contradictions in trade policy is to remove tariffs on any goods not made in SA.

The SA Revenue Service may be loathe to relinquish any revenue at all, but this must be done in the broader interests of the country.

Exports should become the goal of any industrial policy. That will help focus the minds of policymakers around issues of competitiveness, productivity and input costs. That opens a whole new debate around the type of skills the country needs, exchange control as a barrier to trade, trade finance and training.

CDE proposes a few other fixes:

• Any decision to amend or extent tariffs must consider the full impact on consumers and downstream users, not just the firm asking for protection;
• The impact of tariffs must be reviewed more regularly. Most tariffs have been in pace for decades, and while they are supposed to be reviewed periodically, this almost never happens. There should be sunset clauses for all tariffs.

This article was republished from Moneyweb. Read the original here.