You can’t turn a shirt factory into one that makes engines
But you can boost SA's manufacturing by switching to making byproducts of the stuff we produce already
SA has been stuck in a long-running low economic growth graph for way too long. While China’s average annual GDP growth since 2000 has been around 9%, India has enjoyed 5%, South Korea 4%, Indonesia and Malaysia around 3.5% each, Turkey 3%, the Philippines 2.5%, and Brazil just over 1%. SA’s has been less than 1% for three decades.
Yet the country can escape from its low-growth trap by concentrating on what it is good at in the manufacturing sector, rather than slavishly attempting to achieve consumer-led economic growth.
Low economic growth is usually accompanied by high unemployment, and SA has the highest persistent rate of unemployment in the world. On a narrow measure it is around 27% and on a broader measure, which includes disillusioned people who have given up job-seeking, it is closer to 40%.
Unemployment can be reduced significantly. To draw comfort one need only look at the recent example of Spain, where the unemployment rate has fallen from around 25% in 2013 to the current 15%. However, while Spain is participating in the global economic growth upswing, SA has effectively decoupled from that process. In addition Spain’s economy is more susceptible to being stimulated by traditional levers such as monetary and fiscal policy.
SA cannot rely purely on a consumer-led economic revival. The reliable tools of tax cuts and interest rate reductions are not available as the cash-strapped government needs all the tax revenue it can muster, while interest rates are in a hiking cycle. Structural economic reform, which requires fundamentally changing the way economic growth is achieved, is required if SA is ever going to reduce the scourge of unemployment.
One fundamental truism of the global economy is that no developing country has ever evolved into a developed one without first having established a large and pervasive manufacturing base. Taiwan and South Korea had similar GDP per capita to SA in the 1960s but both have transformed in markedly different ways to us.
While Taiwan and South Korea placed manufacturing firmly at the forefront of their industrial policy, SA has experienced a gradual decline in its manufacturing base. Financial services and the wholesale and retail trades have been pivotal in whatever growth SA has experienced.
Both developed and developing countries have been hugely challenged in holding on to or claiming their share of global manufacturing by the emergence of China. For several decades it has attracted so much of the world’s manufacturing capability due to relatively low wage rates, a vast pool of labour, and an unrivalled commitment to capital formation in the manufacturing industry.
Established and late adopters in the global manufacturing space now find it very difficult to extract a similar degree of employment benefits from manufacturing that they enjoyed before China’s rise.
One elegant solution to SA’s pernicious unemployment rate has been espoused by UCT professor Haroon Bhorat. In a recent presentation to the Absa Consumer Conference he explained that by shifting from existing industries to related ones that require similar capabilities it is possible to find niche products to manufacture and satisfy export demand. Basically put, it is easier to move manufacturing production from shirts to blouses, than from shirts to jet engines.
Citing the oft-quoted example of petroleum jelly or Vaseline as a byproduct of the petroleum industry, he showed how important byproducts became in the late 19th century in the US and beyond. The skills base for producing both materials is not fundamentally different and neither is the type of capital required.
There is a surprisingly long and varied list of “frontier” products that SA could produce by utilising primary manufacturing skills it already possesses – such as for motor vehicle components, mineral wool, engine parts, traffic signals, harvesting machinery, large construction vehicles, fire extinguishers and refractory cements. In such a process, economic complexity is increased, GDP per capita rises and unemployment falls.