A defining feature of the sustainable economic development of virtually all developed countries has been a structural transformation from primary economic activities to high-productivity activities in manufacturing, which in turn leads to a mature, services-orientated economy.
A working paper by the United Nations University on the role of manufacturing in economic development cites such high-productivity manufacturing as the key driver in what it calls the “great take-off” of the American, British and European economies since the mid 18th century. And the authors of the paper contend that the same transition to manufacturing has been at the heart of China’s ability to follow suit in the 20th and 21st centuries.
The World Economic Forum agrees, but takes this opinion a step further by saying, in a 2012 report on manufacturing opportunities as drivers of economic growth, that manufacturing is also a key driver of higher-value job creation and a rising standards of living for the growing middle class in emerging nations.
This understanding of the vital role that manufacturing plays in shifting economies from “developing” to “developed” creates something of a conundrum for South Africa, sitting as it does at the foot of a continent that persists in focusing almost exclusively on its role as a provider of resources and raw materials to the rest of the world.
While South Africa has historically built up a fairly solid manufacturing base, this remains largely restricted to only a few sectors, most notably its automotive, agri-processing, metals, textiles and information communication technology industries. Importantly, the demonstrated resilience of even this relatively marginal manufacturing sector during the recent global economic crisis offers significant evidence of the economic value that stands to be unlocked for the country if it can make the shift from an economy driven mainly by resource extraction activities to one built on high-productivity manufacturing and beneficiation industries.
Of course, talking about shifting economic gear in this way is a lot easier than actually achieving such a transformation. Before South Africa can hope to begin tapping into the immense potential that could be presented by a greater focus on manufacturing, a number of significant changes in mindset first need to occur.
Much of the success of manufacturing as an economic transformer rests on the ability of our country to address its ongoing labour challenges. The reason why manufacturing in China has managed to catch up to, and in many areas surpass, that of Western nations lies largely in the ability of Chinese businesses to implement high-value labour models. Importantly, achieving such labour value on South Africa doesn’t require that we lower wages, but rather that we find ways for employers and employees to work together to optimise labour output in a way the reduces overall costs while delivering mutual benefits. And if such benefits can help to reduce the excessive amount of investment-limiting labour action that has come to characterise South African industry, so much the better.
Integral to achieving such sustainable labour value, and to a manufacturing-driven economy, will be a far greater focus on, and commitment to, developing the relevant skills. While resource industries may be able to get by on unskilled labour, manufacturers simply cannot – which means South Africa will need to take steps to comprehensively realign and reskill its workforce if it is to achieve the transition from one to the other. This, too, will require something of a leap of faith – both by existing businesses and their employees.
The first such paradigm shift is undoubtedly also the most difficult. We need to stop fixating on our country’s historic strength as a resource extractor and exporter and start seeing ourselves as having the real potential to compete in the global manufacturing arena. It’s a difficult leap of faith to make, but those who doubt that it is possible, need only look to a country like Mexico, which has succeeded in making the same transition and now finds itself in a dominant position in a number of key manufacturing sectors that are meeting growing US market demand.
To achieve the same success in South Africa is going to take a combination of a sincere belief by all stakeholders in the importance of a manufacturing transition and the determination by both the private and public sectors to support and drive such a transition.
Creating a thriving manufacturing-based economy requires massive infrastructural investment, which South Africa will only begin to attract when it first demonstrates the will and ability to follow such an economic path into the future.
The extent of the transformation required to turn South Africa into a manufacturing country isn’t really as daunting as might first appear to be the case.
After all, we already have the aforementioned production industries on which we can build. Not to mention the steady flow of raw materials, much of which we could divert into our own manufacturing plants instead of exporting it so that other countries can reap the massive benefits of being at the top end of the manufacturing value chain.
Rather than a complete re-engineering of our country’s entire infrastructure and workforce, we can achieve the incremental steps required simply through the application of a healthy dose of innovative and collaborative thinking.
Take our automotive industry, for example. Instead of exporting our raw materials so that we can then import vehicle components, we should be producing those components ourselves – and exporting any excess we produce. Platinum-based catalytic converters are a prime example. As are polymer-based car tyres and plastic components. And if some Middle Eastern countries can build their economies on tourism built around their affordable jewellery industries, is there any reason why gold-rich South Africa couldn’t do the same?
If the most recent bout of rand weakness has taught us anything it must be that South Africa can’t expect to develop its economy or get anywhere near achieving the lofty employment creation and poverty alleviation ambitions of its 2030 National Development Plan if it simply tries to maintain the status quo.
According to a 2012 report by the McKinsey Global Institute, manufacturing is on the cusp of a dynamic new phase as a new global consuming class emerges.
“By 2025, a new global consuming class will have emerged, and the majority of consumption will take place in developing economies and this will create rich new market opportunities,” the report reads.
The Goldman Sachs Global Economics Weekly of September 11 confirms that this belief is becoming increasingly widely held. It predicts that, in the next 10 or 20 years, consumer durables, especially high-end durables, are set to experience significant global demand pressures, similar to those experienced by commodities in recent years.
If South Africa is to have any hope of participating in these new opportunities, our economy needs to be realigned. To do that we need to make the decision to stop flogging the proverbial dead horse and commit to moving forward – not by merely trying to squeeze more out of the industries that have got us this far, but rather by realising the immense potential that exists to leverage our strength in those industries in order to establish new ones.
While our country will always rely on, and be thankful to, its miners for making it the African economic leader it has become, it’s clearly time we also evolved into a nation of manufacturers. Because that’s the only way we are going to reap the full economic, investment, and employment benefits of a growing African and global consumer base.
Mohammed Nalla is the head of strategic research at Nedbank Capital.