South Africa manufacturing the destruction of SA manufacturing

We need an honest discussion about South Africa’s economic policy and the disaster that is taking place in much of our manufacturing industry.

Manufacturing production levels over the three months to July were lower than at the start of 2005.

After 16 years of the Industrial Policy Action Plan (Ipap) and as many versions, South African manufacturing has gone nowhere. In the second quarter the result was that fewer people were employed in the formal manufacturing industry than in 1969.

Yip, 52 years ago more people were employed making things in South Africa.

Some would say that SA is just feeling the impact of China and we must get used to it.

But many other economies have more people employed in manufacturing than two decades ago, many of which are African.

We cannot ‘get used to it’.

I think we are feeling the impact of high costs of power, labour, water, and regulations such as black economic empowerment (BEE).

We are also impacted by people who should not intervene in the economy but do so due to the power given to them at so many levels, from municipal to national government level.

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Officialdom and incompetence have resulted in trains that do not bring workers close to the factories in Wadeville, and in water not flowing in Standerton. Corruption has resulted in higher power prices and inconsistent supply, while the thieves are rich and free.

Moreover, the fast-growing manufacturing countries no longer just include China.

Outside of China, Ireland, Nigeria and Georgia are the top three fastest-growing manufacturing countries in the 10 years to mid-2021.

National shame

South Africa is one of 13 economies producing less now than a decade ago, along with Russia and Brazil: SA 3.3% less, Brazil 17.4% and Russia 5.6%.

Among 59 countries with a decade-long manufacturing history the median increase over the past decade was 15.5%.

South Africa is deindustrialising in both absolute and relative terms.

Our share of world manufacturing value added has been in decline since the 1980s.

At present SA is faring worse than very big advanced economies, which should not be the case: they have large manufacturing sectors, but their costs are higher and they have more regulations than most countries.

Employment in manufacturing

Since 1990 employment in South African manufacturing has declined by 40%. Yes, you read that right.

Since 2019, when the minimum-wage structure was implemented, employment in manufacturing has fallen 11.6%

These numbers are as at the second quarter of 2021. We don’t yet know what impact the riots and looting has had on employment.

Remember also that employment is something of a lagging indicator in that retrenchment decisions are not easy to take, nor is the process fast.

Covid-19 hurt everyone – but very few as badly as SA as far as I can surmise from recent data.

This feels like the great financial recession, where SA lost one in eight jobs and took longer than most to bounce back.

SA no longer the ‘most industrialised economy’ in Africa

Our manufacturing sector used to have the largest share of GDP on the continent, and people still refer to South Africa as the most industrialised economy on the continent – but this is no longer true: Egypt has a larger economy, and its manufacturing sector has a larger share of that larger economy.

Egypt, Ethiopia and Nigeria all employ more people in manufacturing now than South Africa does. Manufacturing employment as a share of the population has been larger than in South Africa in all three countries in the last few years.

When South Africa introduced Ipap in 2007 the stated objective was to grow manufacturing jobs by at least 350 000 by 2020. Instead, it had lost 218 000 manufacturing jobs by the end of 2020.

There is no shortage of ideas or plans as the Ipap was updated every year, but still we fell over 500 000 people short of the target.

Interestingly, we added quite a few jobs as a result of data revisions: most of those jobs were already around in 2007 but weren’t recorded then. Based on this, the actual shortfall would be closer to 700 000!

The reasons for the job destruction are plentiful

Firstly, South African manufacturing output peaked in early 2008 and since then has dropped by 15%.

Our output from manufacturing is lower in the three months to July 2021 than the three months to June 2004.

With the power outages, water shortfalls, and extreme price increases in the utility bills of businesses, it has become far more difficult to do business in South Africa – and government is seen doing nothing.

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As many have said: the more government says it will fix its utilities, the less is done.

The redistribution theme continues, with high taxes and ever-increasing labour expenses meaning that it is difficult for SA to compete. Strikes do take place more often here than in other countries and are often quite destructive, partly because workers are told how the owners just exploit them.

On top of that the ruling party and others still want to dilute ownership.

Then there’s the fact that South Africa is filled with rent-seeking go-betweens who add to input costs and add a percentage to selling prices to state-owned enterprises (SOEs), which then need to increase their prices to clients even more.

SOEs, which are often more exploitative in their pricing than almost all real private sector firms, often don’t deliver the services in full as promised.

Government attitude

But mostly it is the attitude of government that often threatens the private sector. It is never seen to be on the side of business.

During Covid it was mainly private sector funds that helped businesses as government thought it had to help the poor and jobless.

The Temporary Employer-Employee Relief Scheme (Ters) – though linked to workers’ and employers’ previous contributions to the Unemployment Insurance Fund (UIF) – came to the rescue of some employees, as did low interest rates.

But unlike almost all governments around the world, ours did not help fund business over the lockdowns.

If SA business did not have 19% of GDP in its bank accounts, there would not be an airline, hotel or even a wine farm left.

Government proved it does not understand the basic fact that it is easier to save something than try to build it again.

African diplomats have stated that South Africa is now seen as one of more corrupt African countries. Our rent seekers and government officials are seen as arrogant, corrupt and, in some cases, plain dumb.

‘Employment first’ needs to be the focus from now

The decline in employment in manufacturing is a fact.

Friends call the East Rand ‘the wasteland’ and think we can make good horror movies in the wrecked factory buildings.

In our industrial areas around the Witwatersrand there are so many factories and warehouses to let that it is hurting not just labour but property companies, local government revenues and of course other service providers such as taxi drivers.

While at present South Africa’s economy seems to be pumping and doing great, that is an illusion that massive increases in commodity prices have created.

If we do not address the manufacturing sector and remove the self-created chains like BEE, expensive rates and tariffs, and non-functioning trains, the high cost of labour will continue to affect our competitiveness – and impact our ability to survive.

This is the time to make use of the commodities windfall and build back manufacturing.

If we do not build real productive capacity in SA, we will have ever-increasing inequality. SA was one of the five or so countries where poverty had already been increasing before the pandemic.

Giving the poor social grants will never satisfy even their basic needs – particularly in a stagnating economy.

We need manufacturing enterprises and the employment they create.

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This article first appeared on Moneyweb and was republished with permission. Read the original article here.

By Mike Schüssler