MechChem Africa

Delivering the keynote address at the opening session of the Manufacturing Indaba, Nampak CEO and Manufacturing Circle chairperson, André de Ruyter, talked about kick-starting industrialisation in South Africa.

Peter pic latestHe opened by highlighting the dire situation we are in: Manufacturing’s contribution to GDP has fallen from 24% in the early 1980s to less than 13% by 2015. South Africa, De Ruyter says, is experiencing “premature deindustrialisation”.

“For our stage of development, manufacturing’s GDP contribution should be at double current rates and is lagging behind other emerging markets,” he points out. The reasons? Increased competition from imports; increased labour costs; high energy costs; poor infrastructure; policy and regulatory uncertainty and asymmetrical compliance with World Trade Organisation rules.

Since 1989, De Ruyter reports, as the share of GDP has shrunk, South African manufacturing has shed 500 000 jobs. At 27.7%, current unemployment is the highest it has been for the past 14 years – and manufacturing contracted a further 3.4% in the first quarter of 2017.

“If manufacturing were to have an appropriate share of GDP (28 to 32%) for South Africa’s developmental stage, 800 000 to 1.1-million jobs could be created,” De Ruyter points out.

In addition, “manufacturing has the highest job multiplier of any sector”, so manufacturing job losses have a bigger negative impact. And, compared to mining, “manufacturing generates 3.4-times higher social returns for the same private returns,” 29.6% compared to 8.8% for every 10% of private income generated.

The case for a radical transformation of this sector is surely made?

Quoting Jerry Jasinowski, De Ruyter says that the economy of developed nations has tended to pass through industrialisation and into a services economy. “History teaches that a strong economy begins with a viable manufacturing base.” Africa, he says, is seeking “a viable path to prosperity without passing through an industrialisation phase. This is not likely to happen. It is by no means clear that it is even possible.”

Showing consecutive diagrams of the ‘The vicious cycle of deindustrialisation’ followed by the ‘virtuous cycle that promotes economic growth’, De Ruyter says that the departure point is demand. When people have less disposable income and consumer confidence is low, then demand falls, which causes lower capacity utilisation. Returns therefore fall, causing future investments to be deferred or cancelled. From a job’s perspective, fewer shifts precede retrenchments and skills training falls away, all of which cause demand to fall further.

“Without a virtuous cycle of investor and consumer confidence, supported by stable policies, South Africa will continue to deindustrialise, without the capacity to move to a services economy,” he notes.

The solution? “To stimulate demand for local goods, via preferential procurement, protecting local industries through more assertive trade policies and support for localisation initiatives such as Proudly SA.” Simply put, this leads to greater investor confidence, more jobs and training, higher levels of disposable income and increased demand.

But investment will not take place “if demand side policies do not dovetail with supply side policies ... and current demand from local consumers will not create impetus for growth.” South Africa, De Ruyter believes, “needs a macroeconomic environment that facilitates more capital investment in local manufacturing.”

Showing a matrix of possible initiatives, organised under the headings: Government incentives and support; Regulatory and policy interventions; and Private sector counter-performance requirements, he says that, while the goal is to persuade the private sector to invest in new capacity, this comes with responsibilities: job creation; a commitment to remain invested; and to support black industrialists at scale.

From the Regulatory column he lifts out a suggestion for government to ‘consider a super-ministry to drive industrialisation – SA’s Ministry of International Trade and Industry – which would offer a less fragmented approach to the endeavours of the ministries currently involved in this area: Trade and Industry (dti), Economic Development (EDD); Small Business Development; Finance and Public Enterprises.

Other policy suggestions include: proactive trade policies; using regulatory levers; private sector participation in SOCs; reconsidering proposed disincentivising taxes; and better support for black industrialists. And, most notably in the incentives and support column: a favourable tax rate of 15% for existing and new business in designated industrial areas.

Concluding, De Ruyter reveals that the Manufacturing Circle, in collaboration with a number of manufacturing industry associations, has launched an initiative to create a million new jobs by strengthening and growing the manufacturing sector in South Africa. “We are currently identifying: first, investments that could be made by manufacturing firms and; second, what needs to be resolved, unblocked or addressed in order for these investments to take place,” he says.

Following this exercise, a public sector engagement process will be conducted to align industry investment in job creation and economic growth with the key areas of focus identified.

A long overdue process that deserves all of our support.

BANNER 8

Contact MechChem Africa

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