Industrialisation, manufacturing and localisation: A new growth path for South Africa

By Tiro Mmokwa 

Over the years, South Africa has experienced significant de-industrialization. This contributed towards the decimation of the industrial base and to significant job losses. As a consequence, South Africa continues to rely heavily on imports. The value of imports into South Africa in 2019 amounted to about 25% of the gross domestic product. Excessive reliance on imports poses a threat to the country’s response to emergencies, pandemics and global disruptions.

Compared to major economies, our debt-to-GDP ratio reveals that our debt levels are nowhere near the impending crisis levels purported by those who insist we have a debt crisis; the accumulation of debt in South Africa has been driven primarily by persistently feeble economic growth, exacerbated by the poor performance of SOEs and Financial Mismanagement. In my view South Africa does not have a debt crisis; it has a GDP growth problem.

The debt management programme outlined in the February 2020 Budget Statement and the June 2020 Supplementary Budget Review outline the implementation of austerity measures which must be implemented to resolve increasing levels of government debt.

South Africa is a Developmental State which stresses the intervention role of government in correcting market failures in coordination and redistribution. The South African State practices state intervention in the economy to facilitate growth. The South African State has full Apprehension of “market-friendly approach” and the “market enhancing approach” which points to complementarities between government and private firms in economic activities and the role of government in coordination hence the promotion of Public Private Partnerships.

The combination of Macro and Micro-Economic Policies and Sets of Industrial Policies set South Africa in a new growth path to address our GDP growth challenges. What distinguishes industrial policies from macroeconomic policies in general is that macroeconomic policies are designed to affect aggregate demand. Macroeconomic policies are well-defined policies but the same is not true for industrial policies, Macroeconomic policies may have various indirect effects on various industries. Whereas Industrial policy is a set of policies designed for the development of selected industries to increase the welfare of the country and to achieve dynamic compar- ative advantages for these industries by use of state apparatus in resource allocation.

The macroeconomic strategy of South Africa must be underpinned by the coordination of fiscal and monetary policies to achieve macroeconomic stability Macroeconomic stability can be achieved if we ensure that our fiscal policy does not lead to the debt-to-GDP ratio rising above 60%. It also refers to the role of the SARB as the guarantor of a monetary policy that maintains the inflation target of around 4.5%, no matter the consequences for employment levels. If these two numbers are fixed and non-negotiable, then the cornerstones of macroeconomic policy are set. Microeconomic instruments need to be strengthened to address our mega-challenges of unemployment, poverty and inequality. In principle microeconomic interventions cannot work if the macroeconomic framework is not aligned with what is needed. South Africa needs decisive macroeconomic and microeco- nomic strategies with a clear vision on how to generate labour demand while stimulating productivity.

Mobilisation of other financial instruments for efficient allocation of resources to ensure that there is sufficient finance and financial sustainability to enhance social and economic development, economic growth, job creation, and redistribution of generated wealth. To utilise debt incurred for productive purposes to generate high growth which reduces the debt-to-GDP ratio, curbing the growth of public sector wage bill, reduce the budget deficit, improve conditions to facilitate `revenue collection’. To stimulate industrialisation through localisation to meet domestic demand, introduce import quotas to protect and promote local industries, to link the economy to Africa and global markets, to promote fair trade, the creation of jobs through infrastructure projects. Build a growing economy by rolling out South Africa energy transition leading to energy security and a maximised access to lower cost electricity.

Pre-1994, the then government identified industries whose development was deemed necessary for industrialization (e.g., steel, chemicals, machinery, oil refining, and ship building) this industries were nurtured by government. This is because these industries required large-scale investments. The government developed interventionist industrial development policies and we must go back to that economic trajectory in an inclusive manner.

Industrial policies are designed to nurture se- lected industries. The ANC-led government must select industries on the basis of their importance for future growth. Industries to be promoted must be determined by high income elasticities on the demand side and high productivity potential or prospects for technological advances on the supply side. The most important objective of industrial policies is achieving economic growth by way of industrialization and manufacturing, employment creation, national economic independence, export development, and technological development. Industrial policies encounter five points:

(i) Industrial policies are designed for selected industries,

(ii) Industrial policy is not a single policy but a combination of various policies

(iii) Industrial policy is concerned with government intervention,

(iv)Industrial policy targets resource allocation (most possibly due to market failures)

(v) Industrial policy aims to create dynamic comparative advantages for targeted industries.

There is a need for concise and legible planning for a 10 to 20-year trajectory, overseen and coordinated by the ministries. I propose that an Industrial Council is established nationally and in all provinces to oversee targeted sectors while putting state assets and instruments to optimal use. This council should incorporate government, labour federations and business to provide real-time solutions to constraints and bottlenecks. Effective instruments for industrial development and re-industrialisation such as competition policy, trade policy, tax and financial sector policies, sound labour market policies, technology policies, foreign investment policies must create conducive environment for industrial development and economic growth.

For South Africa to re-industrialise the relevant authorities and the industrial council to be launched must put concerted efforts to upgrade local firms by developing a sound supporting industry base for manufacturing cooperatives and companies, this includes a wide range of financial and technical assistance schemes:

1. Manufacturing Enterprise Technical Assistance Scheme (METAS)

2. Local Enterprise Finance Scheme (LEFS), which serves for the promotion of mechanization to increase productivity. There are also various other schemes established to assist in training, research and development, and automation

3. Productivity Methodology and Effective Labour Relations.

ENTERPRISE DEVELOPMENT INCENTIVES AND SUPPORT MEASURES TO IMPROVE SOUTH AFRICA’s INDUSTRIAL PRODUCTIVITY AND INFRASTRUCTURE SUPPORT

  • Manufacturing Investment Grant (MIG) – The MIG (2008–2014) offered a grant of 15–30% of the value of machinery, equipment, land, buildings and commercial vehicle costs.
  • Critical Infrastructure Programme (CIP)

The CIP is a cash grant covering up to 30% of the costs of qualifying infrastructure to attract investment in manufacturing

  • Foreign Investment Grant (FIG)

The FIG covers up to 15% of the value or to a maximum of R10 million of the cost of importing machinery and equipment.

  • Motor Industry Development Programme

The most popular incentive in recent years to improve competitiveness and productivity of local vehicle manufacturing to promote vehicle exports and encourage investment inflows

  • Automotive and Production Development Programme

Local manufacturers who produce more than 50 000 vehicles can import vehicle components duty-free. This allowance falls under the Automotive Investment Scheme (AIS). These manufacturers also receive a cash grant of between 20-25% of the value of in- vestments in productive assets.

  • Enterprise Incubation Programme

The DTIC increased its allocation for enterprise development support incentives from R3.3 billion in 2012 to R7 billion in 2015.

National Industrial Participation Programme Production incentives range between 7–15%, with local market value added (MVA) offering higher ranges at 10–25% in industrial financing loan facilities for targeted industries. Firms can access up to R50 million subject to MVA limits and there are production incentives for green technology.

  • Manufacturing Competitiveness Enhancement Programme (MCEP)

About R20 billion was allocated towards manufacturing-related tax incentives between 2012 and 2020. As of December 2019, existing businesses can apply for production incentives to further capital investment; green technology, improve competitiveness, undertake feasibility studies and cluster competitiveness.

Industrial development zones

These have been established in special designated areas across the country targeting economic activities with laws and systems different to the rest of the country. These incentives include: Preferential 15% corporate tax. Building allowance eligible with tax relief, em- ployment tax incentive, income tax allowance supporting greenfield investment utilising new and unused manufacturing assets, tax relief in line with various tax prescripts.

SOUTH AFRICAN INDUSTRIALISATION PATH

The ANC identified the following sector as industrial sectors as the Industrial Path for South Africa

  • Health-Care value-chain: pharmaceuticals, personal protective equipment and medical equipment,
  • Basic Consumer Goods: clothing and footwear, home textiles, consumer
  • Electronic products and appliances (including televisions, mobile phones, and
  • White goods like fridges, stoves and washing machines, household hardware products, packaging material, furniture
  • Capital Goods: equipment and industrial inputs particularly used in infrastructure projects, mining, agriculture, renewable energy, the green economy and digital economy.
  • Infrastructure construction-driven value chains, such as cement, steel, piping (plastic and steel), engineered products and earth moving equipment
  • Transport rolling stock: automobile and rail assembly and component Production.

Tiro Mmokwa is the Secretary-General of the African Manufacturing and Industrial Association