The Secular Decline of the South African Manufacturing Sector

Policy Interventions, Missing Links and Gaps in Discussions

Nombulelo Gumata, Eliphas Ndou

• Publisher: Palgrave Macmillan
• Year: 2020
• ISBN:
  9783030551483
• Topic: Business
• Subtopic: International Business
• Index: Business

This book examines the global and domestic factors that have influenced the decline of South African manufacturing. Quantitative and econometric techniques are used to analyse the macroeconomic conditions that derive improved performance within the manufacturing sector. Empirical evidence is used to set out policy recommendations that would allow the South African National Development Plan to meet its objectives.

This books aims to bring together analysis of industrial policy, competition policy, and merger remedies to produce a framework on how to preserve a competitive environment and support output, investment, and employment growth. It is relevant to those interested in African, development, and labour economics.

© The Author(s) 2020

N. Gumata, E. NdouThe Secular Decline of the South African Manufacturing Sectorhttps://doi.org/10.1007/978-3-030-55148-3_1

Begin Abstract

1. Introduction

Nombulelo Gumata¹ and Eliphas Ndou¹

(1)

South African Reserve Bank, Pretoria, South Africa

End Abstract

What explains the secular decline in the South African manufacturing sector? How would the policy interventions, missing links and gaps in academic and policy discussions explored in this book have changed the performance of the manufacturing sector? This book explores these questions from various perspectives including the interaction between foreign and domestic factors, various policies such as monetary policy, fiscal policy, trade policy, labour market policies, industrial policy, mergers and acquisitions, financial regulation and macro-prudential policies. The analysis in the book highlights that policy lessons can be learned by understanding the macro-economic conditions that existed between 2005Q1 and 2008Q3. This is the period during which the manufacturing sector employment growth recorded a recent high average level of 1.44 million jobs. The labour participation and absorption rates averaged 57.79 per cent and 44.53 per cent, respectively during the same period. This is meant to draw lessons and policy recommendations so as to achieve the set objectives in the South African National Development Plan (NDP). Under various scenarios, the NDP projects that policy intervention will increase the manufacturing sector employment levels to range between 1.880 million and 2.289 million by 2030.¹ In addition, the NDP targets to increase the labour participation rate to 65 per cent by 2030. We use several statistical and quantitative techniques to assess the robustness of our findings to derive policy implications and recommendations thereof.

1.1 Organisation of the Book

Each chapter in the book highlights the research questions and sub-hypothesis examined in the beginning of each chapter. These chapters are organised in six parts. The first part deals with the contrasting effects of globalisation, trade-openness and import penetration on inflation, the output-gap, activity in the manufacturing sector and income inequality. Part two, explores the effects of commodity price booms, capital flows episodes, exchange rate volatility, global trade uncertainty and economic policy uncertainty on the manufacturing sector. Part three, assesses the impact of investment growth shocks, credit booms, financial and credit cycles, business and consumer confidence on the manufacturing sector. Part four, looks at the role of financial regulatory and macro-prudential tools in supporting the housing market, residential investment and the spill-over effects to the activity in the manufacturing sector. Part five, explores the impact of electricity price inflation shocks, manufacturing sub-sector output growth and employment growth on the labour absorption and participation rates. Part six analyses the transmission channels of the minimum wage shocks, market concentration, mergers and acquisitions on the manufacturing sector.

1.2 Why Have We Written This Book?

The manufacturing sector is important and is a major driver of aggregate growth. Figure 1.1 shows that on a bilateral basis, the manufacturing sector explains 71 per cent of the variation in GDP growth and 41 per cent of the variation in private sector employment growth. Furthermore, between 2005Q1 and 2008Q3 which is the shaded grey area in Fig. 1.1 (a and c), the manufacturing sector employment growth recorded a recent high average level of 1.44 million jobs. During this period, aggregate GDP growth averaged 5 per cent and the manufacturing sector output growth averaged 5.5 per cent.

Fig. 1.1

GDP and manufacturing sector output growth. (Note: The shaded area between 2005Q1 and 2008Q3 in (b) denotes the period during which the manufacturing sector employment growth recorded a recent high average level of 1.44 million jobs. Source: South African Reserve Bank and authors’ calculations)

In addition, the trends in Fig. 1.2 (a) show that between 2005Q1 and 2008Q3, the labour participation rate averaged 57.79 per cent, whereas the labour absorption rate averaged 44.53 per cent. During this period, Fig. 1.2 shows that employment levels in the manufacturing sector averaged 1.44 million jobs. This contributed to the decline in the unemployment rate to a recent low average of 22.91 per cent. However, the data trends show that the trends in Fig. 1.2 (b and c) have worsened post 2009. Post-recession in 2009, the manufacturing sector employment level declined from 1.43 million to 1.22 million which is equivalent to a 17.2 per cent decline and the unemployment rate averaged 25.69 per cent in Fig. 1.2 (c).

Fig. 1.2

Manufacturing sector employment, unemployment rate, labour participation and absorption rates. (Note: The shaded area between 2005Q1 and 2008Q3 in (b) denotes the period during which the manufacturing sector employment growth recorded a recent high average level of 1.44 million jobs. Source: South African Reserve Bank)

The trends in Figs. 1.1 and 1.2 show the importance of developments in the manufacturing sector for the achievement of the NDP goals. Against this background, the aims of the analysis contained in the book include the following:

• To focus and consolidate the discussions on policy interventions that can be implemented to reposition the manufacturing sector as a driver of economic growth, employment creation, economic development and reducing income inequality in South Africa.
• To extend and review the relevance of industrial policy through the lenses of the costs and benefits of globalisation. The contrasting effects of globalisation manifest through the low exchange rate passthrough which supports the price stability mandate versus the adverse effects of high imports penetration ratios, which take away from domestic output growth, crowd-out employment creation and contribute to high levels of income inequality. The adverse effects of globalisation go against the achievements of maximum employment and inclusive growth.
• To explore the effects of commodity price booms, capital flows episodes, global trade uncertainty, economic policy uncertainty and the exchange rate volatility on activity in the manufacturing sector.
• To assesses the impact of investment growth shocks, credit booms, financial and credit cycles, financial conditions, business and consumer confidence on activity in the manufacturing sector.
• To demonstrate the interaction and role of financial regulatory and macro-prudential tools spill-over effects into activity in the manufacturing sector.
• To explore the impact of electricity price inflation shocks, manufacturing sub-sector output and employment growth on the labour absorption and participation rates.
• To analyse the transmission channels of minimum wage, labour productivity growth, market concentration, mergers and acquisitions on the manufacturing sector.

1.3 The Book Aims to Facilitate Further Academic and Policy Discussions that Enable the Realisation of the NDP Objectives

The approach to the analysis of the manufacturing sector taken in the book is to place into focus the necessary policy interventions that will be catalysts to achieving the set objectives in the NDP. Based on various scenarios, the NDP projects that policy intervention will increase the manufacturing sector employment levels to range between 1.880 million and 2.289 million by 2030. In addition, the NDP targets to increase the labour participation rate to 65 per cent by 2030. At the core of an endeavour to achieve these targets or goals, is sustained or persistent policy co-ordination across sectors over the long-run.

1.4 The Analysis Contained in the Book Intends to Stimulate Academic and Policy Discussions on the Adjustments to the Adverse Effects of Globalisation

Literature and empirical evidence show that governments (countries) that achieved and surpassed their economic development and idustrialisation goals, coordinated policies across sectors over the long run. In this instance, it is a well-documented and proven fact that countries such as South Korea, Taiwan, and Singapore co-ordinated policies across sectors over the long run and became industrialised nations in just fifty years.² In addition, Autor et al. (2016) show that China’s unprecedented rise to the global stage provides evidence that international trade is transformative, has significant benefits, distributional costs and adjustment costs. Autor et al. (2013) and Pierce and Schott (2016) estimate that the China shock reduced the United States (US) manufacturing employment by around 1.5 million jobs between 1990–2007. As such, a better understanding of the circumstances when and where trade is costly. Furthermore, the analysis in the book intends to show how and why trade may be beneficial. This kind of analysis is necessary to help policymakers to develop effective tools for managing and mitigating the costs of trade adjustment. The understanding of the impact of positive shocks to trade openness, import penetration and the threshold effects thus becomes very important to guide policy designs to develop effective tools for managing and mitigating the costs of trade adjustment.

1.5 The Chinese Effect

The book also considers the effects of the China shock on the South African manufacturing sector. As stated earlier, Autor et al. (2016) show that China’s unprecedented rise to the global stage provides evidence that international trade is transformative, has significant benefits, distributional costs and adjustment costs. The China shock alongside various financial and trade liberalisation policies adopted in South Africa had a long-term effect on the performance of the South African manufacturing sector. We analyse how the Chinese output-gap shocks and the Chinese GDP growth shocks are transmitted into the South African economy. In addition, the analysis in the book estimates the threshold effects of trade-openness and the import penetration ratio on the domestic manufacturing sector. This kind of analysis helps us to better understand the circumstances when and where trade i...

Table of contents

• Cover
• Front Matter
• 1. Introduction
• Part I. The Contrasting Effects of Globalisation, Trade-Openness and Import Penetration on Inflation, the Output-Gap, Activity in the Manufacturing Sector and Income Inequality
• Part II. The Effects of Commodity Price Booms, Capital Flows Episodes, Exchange Rate Volatility, Global Trade Uncertainty and Economic Policy Uncertainty on the Manufacturing Sector
• Part III. The Impact of Investment Growth Shocks, Credit Booms, Financial and Credit Cycles, Business and Consumer Confidence on the Manufacturing Sector
• Part IV. What Is the Role of Financial Regulatory and Macro-prudential Tools in Supporting the Housing Market, Residential Investment and the Spill-Over Effects to Activity in the Manufacturing Sector?
• Part V. The Impact of Electricity Price Shocks, Manufacturing Sub-sector Output and Employment Growth on the Labour Absorption and Participation Rates
• Part VI. The Transmission Channels of Minimum Wage Shocks, Market Concentration, Mergers and Acquisitions on the Manufacturing Sector
• Back Matter