By Iraj Abedian
Industrial localisation has undergone a substantial rethink the world over, gathering momentum in different regions based on sound socio-economic imperatives.
In the age of de-globalisation, precipitated to a large measure by the systemic ramifications of the Covid-19 pandemic, the drive for localisation is based on market forces and sustainable industry or sector-policies. These are developed by not just governments, but also with the heavy involvement of the private sector.
Gone are the days that localisation was driven by or equated with ideologically driven import substitution projects.
It is sometimes expedient to dismiss localisation using outdated and loaded concepts such as protectionism, infant industry, etc. However, this type of analysis takes attention away from where the real challenge is; namely the imperative of implementing appropriate industrial policies that support sustainable industrialisation of the economy.
Unlike many of its emerging market peers that have benefited from sound industrial policies coupled with favourable infrastructural and regulatory underpin, South Africa’s domestic sector has largely been left unsupported, if not neglected.
The exception in this case has mainly been the automotive industry, which is aided through the Automotive Production and Development Program (APDP).
Localisation requires emphasis on what the country can produce competitively, and the role of the government is to enable that process whilst the private sector drives it. As can be seen from the comparative trends in the graph below, South Africa has lost much ground globally.
Manufacturing has historically been credited for being a key driver of higher value job creation and an increase in living standards. Nonetheless, of South Africa’s total exports only 38% were manufactured in 2020. This indicates that the bulk of the country’s exports have not contained much value added, thus putting South Africa at a disadvantage, losing out on those opportunities that come with expanding industrial capacity, including higher gross domestic product (GDP) growth rates and better-paid employment opportunities.
Recent exceptional dynamics brought on by the Covid-19 pandemic aside, South Africa’s manufacturing sector as a share of the whole economy has declined significantly since its peak in the early 1980s.
Empirical evidence demonstrates that as countries develop, the gradual decline of manufacturing sector’s share of GDP is the norm. More often than not, this relative decline is due to the faster growth rates of the tertiary sector activities, and not due to the decline in the importance of manufacturing in absolute terms. However, the decline of the manufacturing sector in South Africa has been exceptionally accelerated, especially relative to its emerging market peers.
This deviation has entailed considerable job losses alongside material adverse effects on economic growth rates and social welfare.
Competitively, the South African manufacturing sector faces serious systemic headwinds and, hence, continues to lag those of its counterparts.
Globally, manufacturing sector exports make up 70% of total merchandise exports as per 2020 data by the World Bank. This value is even higher for key manufacturing economies such as China (94%) or Vietnam; and averages 74% for upper-middle income countries of which South Africa is part of.
This trend calls for urgent and intentional policy correction.
One of the proposals made by the National Development Plan 2030 regarding the stimulation of the country’s manufacturing sector is “leveraging public and private procurement to promote localisation and industrial diversification”.
South Africa is not alone in pursuing localisation and making use of government procurement to boost its manufacturing sector.
Globally, countries have adopted procurement policies that are aimed at enhancing national interests, including local procurement policies intended to promote local industry. For example, the economic stimulus package contained in US’s Recovery and Reinvestment Act (ARRA 2008) largely required that manufactured goods including steel and iron used in the construction of public works projects that were funded by the Act be made in the country.
In China, government procurement also favours goods and services from Chinese sources. Under China’s Government Procurement Law (GPL), government procurements are required to be derived from domestic sources, with prescribed exemptions. Worldwide, procurement by governments accounts for a significant share of economic activity, with public procurement amounting to 15% to 20% of GDP on average in developed countries.
Recently, the government has introduced a strategy for the South African manufacturing sector with focus on the development of competitive industries.
A welcome step change of the strategy has been the focus on Sector Master Plans for key industries, which are aimed at improving performance, job creation, competitiveness and efficiency, as well as economic inclusion. The accelerated evolution and implementation of these master plans are critical for South Africa’s re-industrialisation.
Localisation of industries and the intentional pursuit of re-industrialisation does not mean a departure from gainful engagements in global trade. It is rather more about changing the country’s terms of engagement in global markets to ensure the country can meaningfully and effectively exploit opportunities for sustainable growth ventures, job creation and growing social welfare.
The objective is to build the local industrial capacity for both the domestic market as well as for export markets - much like our automotive industries. A key by-product of a successful strategy in this regard is to reduce South Africa’s continued heavy reliance on exporting exhaustible raw materials.
When executed properly, localisation initiatives and policies have the potential to boost industries with considerable multiplier effect on the entire economy. By means of illustration, let’s take the aforementioned APDP as an example.
On the year it was implemented (1995), South Africa’s motor vehicle exports were negligible, but increased to more than 100 000 units annually by early 2000s, whilst in 2021 the industry exported 298 020 vehicles. Overall, the automotive industry makes up 17% of total manufacturing output, 18.1% of total exports (2021) and 6% on average towards South Africa’s GDP over the past five years.
Moreover, the industry remains one of the top recipients of foreign investment – a case in point, in 2020, seven original equipment manufacturers invested a record R9.2 billion, while the component sector invested R2.4bn.
In the post-Covid pandemic world, localisation has received renewed attention the world over. In part it is an expected response to the badly disrupted global logistics and the consequences of unavailability of key finished and intermediary goods.
In effect, simplistic assumptions of competitive production based solely on relative prices have been revised to also take into account the socio-economic costs in the form of lack of access (to medicine/PPE, computer chips, and many other critical equipment), rising unemployment, and general loss of social welfare. Furthermore, environmental concerns have become central to the overall cost-benefit analysis.
Against the backdrop of the evolving global manufacturing environment, current elevated risks as well as potential opportunities for the sector, it is of paramount importance that South Africa’s industrial localisation plays an important role in a wholesome support of manufacturing.
The recent study commissioned by Proudly SA quantifies manufacturing’s contribution to the wider economy by investigating the sector’s multiplier effects. The study’s results suggest investing in manufacturing generates considerable positive results for GDP growth, employment (especially for lower skilled), wages, household consumption, total investment and government revenue.
Specifically, amongst other positive findings, the study’s simulation results show a medium-term boost to GDP of 13%, unskilled employment creation of 8%, an overall boost to investment across the economy of 8.3% and an additional 9% increase in tax revenues, all resulting from a 10% investment rise into the manufacturing sector.
The structure of the South African economy, its national resource endowment, and its geographic location provide favourable technical support for a large scale re-industrialisation of the economy. However, as the above-mentioned study highlights, two critical prerequisites need sustained attention, namely:
⦁the intentional upgrade of key supportive infrastructure (for example, electricity, water, port and general transportation logistics, global connectivity); and,
⦁ the implementation of a set of well-structured industry master plans, suitably designed for appropriate value-chain participation and/or integration with their attendant fit-for-purpose institutional and skilled human resources.
Iraj Abedian, the founder and CEO of Pan-African Investment and Research Services and the firm’s senior economist and head of research, Nthabiseng Tsoanamatsie.
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