Reviving factories and SA's industrialisation; will IPAP do it? Picture: THINKSTOCK
Reviving factories and SA's industrialisation; will IPAP do it? Picture: THINKSTOCK

The overall performance of SA’s industrial output has to be viewed as dismal by global standards, especially since 2008.

The most striking and extremely concerning component of this under-performance is the rapid decline in the country’s manufacturing capital stock since 2008 — which effectively means a decline the country’s capacity to produce manufactured goods.

According to the South African Reserve Bank, the value of capital stock, mostly machinery and equipment as well as buildings, within the manufacturing sector grew by a total of more than 26% in real terms between 1994 and 2008, peaking at a value of R677bn in 2008, in 2010 prices.

However, since 2008, the capital stock of the manufacturing sector has fallen by almost 17%, which is effectively an annual average decline of 2%, shrinking in each of the past nine years taking the capacity of the manufacturing sector back to the level that prevailed in 1995!

Under these circumstances it is extremely difficult to have a successful manufacturing development programme, contemplate a broader based increase in South African manufactured exports, or envisage an expansion of manufacturing employment.

Manufacturing production now represents 13% of SA’s GDP, having been more than 20% in the mid-1990s. De-industrialisation is a reality SA probably cannot avoid, but there is no upside to hastening the process through poor politics and policy.

It is true that as countries develop and move from low-income into middle-and high-income economies they tend to experience an extended phase of de-industrialisation.

However, this is not a viable explanation as to what has occurred in South African manufacturing over the past nine years. It is also clear that the answer to this decline in manufacturing capacity is not simply a weaker rand. Instead, there has to emerge a concerted effort to resolve the policy and related issues outlined above.

The Department of Trade and Industry recently launched the 10th iteration of its Industrial Policy Action Plan (IPAP), which is essentially the country’s policy on industrial development. The first version of IPAP was initiated in 2008.

IPAP has many components, including targeted incentives, focusing on the development of a fairly wide range of South African industry, including the automotive sector and agro-processing. There has clearly been some successes, especially within the motor industry, and some of the department’s programmes are considered dynamic and innovative by industry participants, while senior staff within the department engage with industry participants on a fairly regular basis.

There are obviously many reasons for the decline in SA’s manufacturing capacity. The department recently highlighted a few of the reasons, arguing "there is lack of policy certainty, programme alignment and integrated support across government".

This, according to the department, "has a severe negative impact on the effective use of critical industrial policy levers". Furthermore, it argues that the "lack of proper alignment has not just been a matter of poor co-ordination; it has often been both caused and compounded by corruption, collusion and rent-seeking".

According to the department, a few examples include "the stalling of the highly successful renewable energy programme; ongoing uncertainties around proposed amendments to the Mining Charter; and the failure, so far, to establish a viable framework for gas-based industrialisation".

It also seems fair to argue that, apart from the reasons outlined above, other factors have hurt the development of SA’s manufacturing capacity in recent years, including regular electricity outages; concerns about water supply; periodic strike activity that has, in many instances, turned into prolonged strikes; a lack of research and development and product innovation within the broader manufacturing sector; a shortage of critical skills; and inadequate infrastructure.

All of this leads to poor productivity and a lack of new investment, thereby compounding the stagnation of the sector.

Lings is Stanlib’s chief economist.