U n i v

U n i v
University of Pretoria etd – Moloto, P R (2005)
GROWTH TRENDS IN THE SOUTH AFRICAN MANUFACTURED EXPORT INDUSTRY
BY
PHINEAS RAMESHOVO MOLOTO
SUBMITTED TO THE
FACULTY OF MANAGEMENT
IN FULFILMENT OF THE REQUIREMENTS FOR THE DEGREE OF
MASTER OF ARTS
IN
ECONOMICS
AT THE UNIVERSITY OF PRETORIA
SUPERVISOR:
CO-SUPERVISOR:
PROFESSOR M. C. BREITENBACH
PROFESSOR T.I. FÉNYES
University of Pretoria etd – Moloto, P R (2005)
(i)
ACKNOWLEDGEMENTS
My sincere gratitude to my supervisor, Professor M.C. Breitenbach, for his patience and
encouragement during the course of this research. His accessibility and research expertise
contributed much to the research process. May his enthusiasm and expert guidance be
available to many students in future.
I am grateful to the following institutions for their support:
-
Vista University and Molde University College (Norway) for the tuition and financial
grants received over the years
-
The Economic Research Unit of the Department of Trade and Industry for trade data
provided, especially Fani Mogane, Statistics South Africa, for the economic data, and
library staff at the Industrial Development Corporation, University of South Africa
and Vista University
-
The National Research Fund for the research grant received
Most importantly, I would like to thank the Almighty God for the wisdom, strength and
guidance granted to me.
University of Pretoria etd – Moloto, P R (2005)
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DEDICATION
The seeds of education were sown in me by the encouragement and support received
from my grandmother (Tlakale Moloto), mother (Esther Hlakudi Moloto), my uncles
(Callies and Trott Moloto) and my brother, Diego Moloto. To the family of Philemon
Maimela, may the Lord bless you for the financial support you granted to me throughout
my studying years. To all relatives, and family and friends I say united we stand divided
we fall.
University of Pretoria etd – Moloto, P R (2005)
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DECLARATION
I declare that:
“Growth Trends in the South African Manufactured Export Industry”
is my own work, that all the sources used or quoted have been indicated and
acknowledged by means of a complete reference, and that this thesis was not previously
submitted by me for a degree at another university.
…………………………
P. R. MOLOTO
…………………
DATE
University of Pretoria etd – Moloto, P R (2005)
(iv)
SUMMARY
Title:
Growth Trends in the South African Manufactured Export Industry
By:
Phineas Rameshovo Moloto
Degree:
Master of Arts
Department:
Economics
Supervisor:
Co-Supervisor:
Professor M.C. Breitenbach
Professor T.I. Fényes
Through empirical research the researcher gained an in-depth knowledge regarding the
growth trends in the South African manufactured export industry as well as the factors
determining the patterns of growth and champion industries. Finally, recommendations
that may be used by relevant authorities and scholars were made. To researchers, a study
at disaggregated level into the growth trends of each manufactured export sub-sector
should be central to future research.
Selected key words: export orientation and import penetration, factor endowment,
industrialisation, manufactured export and trade liberalisation.
University of Pretoria etd – Moloto, P R (2005)
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ABBREVIATIONS
ANC
African National Congress
BLSN
Botswana, Lesotho, Namibia and Swaziland
BTI
Board on Trade and Industry
BTT
Board on Tariffs and Trade
DTI
Department of Trade and Industry
ECOWAS
Economic Community of West African States
ESKOM
Electricity Supply Commission
EU
European Union
EU-RSA-FTA
European
Union-Republic
of
South
Africa-Free
Agreement
FTA
Free Trade Agreement
GATT
General Agreement on Trade and Tariffs
GDP
Gross Domestic Product
GEAR
Growth, Employment and Redistribution
GEIS
General Export Incentive Scheme
GJMC
Greater Johannesburg Metropolitan Council
H-O
Hecksher-Ohlin
IDC
Industrial Development Corporation
IDZs
Industrial Development Zones
IMF
International Monetary Fund
IMS
Integrated Manufacturing Strategy
ISCOR
Iron and Steel Corporation
ITC
International Trade Center
JSE
Johannesburg Stock Exchange
LAC
Long-run Average Cost Curve
NAFTA
North Atlantic Free Trade Agreement
Trade
University of Pretoria etd – Moloto, P R (2005)
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NICs
Newly Industrialised Countries
NIEP
National Institute for Economic Policy
NPI
National Productivity Institute
NRF
National Research Fund
PWV
Pretoria-Witwatersrand-Vaal
RCA
Revealed Comparative Advantage
R&D
Research & Development
SACU
Southern African Custom Union
SADC
Southern African Development Community
SAPs
Structural Adjustment Programmes
SARB
South African Reserve Bank
SARS
South African Revenue Service
SDIs
Spatial Development Initiatives
SMEs
Small and Medium E nterprises
SIC
Standard Industry Classification
SSA
Statistics South Africa
TELKOM
Telecommunication Commission
TIPS
Trade and Industry Policy Secretariat
UK
United Kingdom
US
United States
USSR
Union of Socialist Soviet Republics
WTO
World Trade Organisation
University of Pretoria etd – Moloto, P R (2005)
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TABLE OF CONTENTS
PAGE
CHAPTER ONE: Introduction and research methodology
1.1 Introduction
1
1.2 Problem identification
1
1.3 The aim of the study
2
1.4 Importance of the study
3
1.5 Research procedure and methodology
4
1.6 Value of the research
5
1.7 The division of chapters
5
1.8 Summary and conclusions
7
CHAPTER TWO: The historical development of manufacturing
in South Africa
2.1 Introduction
8
2.2 The emergence and characteristics of the manufacturing sector in
South Africa
8
2.3 Changes in the structure of the manufacturing sector in South Africa
2.4 Concentration of industry in South Africa
13
19
2.5 Manufacturing productivity in South Africa
24
2.6 Employment performance of the manufacturing sector in South Africa
27
2.7 Summary and conclusions
32
CHAPTER THREE: Structural change and trade theories on
patterns of trade
3.1 Introduction
34
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3.2 The linear stages of development
34
3.3 Contextualising Rostow’s stages of growth to the South African
35
economy
3.4 Structural-change models
38
(i) Lewis two-sector theory
38
(ii) The industrial patterns growth theory
39
3.5 Transformation towards export dominance
40
3.6 Trade theories on patterns of trade
42
(i) Ricardo trade theory
43
(ii) Hecksher-Ohlin trade theory
43
(iii) Leontieff theory
44
(iv) Neo-technology trade theory
44
(v) Taste-differences trade theory
45
3.7 Determinants of sources of trade
45
(i) Research and Development
46
(ii) Economies of scale
46
(iii) Natural resource intensity
46
3.8 Possible underlying factors influencing export growth
47
(i) Currency fluctuations
47
(ii) Trade reforms
47
(iii) World economic demand
48
(iv) Firm level factors
48
(v) Monetary and fiscal policy instruments
49
3.9 Summary and conclusions
49
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CHAPTER FOUR: The impact of trade liberalisation on the manufactured
export industry
4.1 Introduction
51
4.2 The direction of South African trade
51
4.3 Trade liberalisation in South Africa
53
4.3.1 Trade liberalisation prior to the1990s
54
4.3.2 Trade liberalisation after 1990
55
4.3.4 South Africa’s trade liberalisation under the WTO
57
4.4 Implications of South Africa’s free trade agreements for the manufactured
export industry
4.4.1 South Africa’s trade with SADC
59
60
4.4.2 Implications of South Africa’s free agreement with EU on
manufactured export growth
64
4.5 Import penetration in the manufacturing sector
67
4.6 Export orientation of the manufacturing sector
70
4.7 Summary and conclusions
74
CHAPTER FIVE: Growth trends in the South African manufactured
export industry: Interpretation of results
5.1 Introduction
75
5.2 Growth trends of South Africa’s trade
75
5.3 Export growth by major economic sectors
77
5.4 Export performance by stage of production
81
5.5 Export growth trends by major regional markets
83
5.6 Geographical breakdown of manufactured exports
85
5.6.1 Growth trends of manufactured exports, 1990-2000
87
5.6.2 Growth trends of manufactured exports since 1990
89
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5.7 Growth factors influencing manufactured exports in South Africa
94
5.8 Summary and conclusions
98
CHAPTER SIX: Summary, conclusions and recommendations
6.1 Concluding remarks
101
6.2 General recommendations
109
BIBLIOGRAPHY
114
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LIST OF TABLES
CHAPTER TWO
2.1 Share of selected production sectors (%) of GDP
11
2.2 Value-added contribution of broad economic sectors to GDP (%), 1971-2001 15
2.3 value-added contribution of economic sectors to GDP (%), 1991-2001
16
2.4 Growth rates in real value-added for manufacturing groups (%), 1970s -1990s 18
2.5 Manufacturing production trends (%), 1998-2002
26
2.6 Employment contribution of sectors to formal non-agricultural employment
(%), 1950-2001
2.7 Manufacturing sector employment (%), 1995-2001
29
30
CHAPTER FOUR
4.1 South Africa’s main trading partners (%), 1995-2002
52
4.2 Tariff phase-down under the WTO
59
4.3 South Africa’s share of manufactured exports in SADC (%), 1990-2002
61
4.4 Reduction in tariffs of South Africa’s imports from the EU (%), 1999-2012
65
4.5 Growth of imports in the manufacturing sector (%), 1994-2002
68
4.6 Trade liberalisation by manufacturing industry in the 1990s
69
4.7 Manufacturing: ratio of exports to output (%), 1994 and 2001
72
CHAPTER FIVE
5.1 Growth trends of South Africa’s total trade (%), 1970-2000
76
5.2 Regional destination of South African manufactured exports as a
percentage of total manufactured exports, 1990-2002
5.3 A geographical breakdown of manufactured exports (%), 1990-2002
84
85-6
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5.4 Position and changes index in the manufactured export industry (%),
1997-2001
95
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LIST OF FIGURES
CHAPTER FOUR
4.1 South Africa’s trade of manufactures with SADC (Rm), 1990-2002
62
4.2 South Africa’s trade of manufactures with the EU (Rm), 1990-2002
66
CHAPTER FIVE
5.1 Export growth by major economic sectors as % of total exports,
1993-2002
80
5.2 Exports by stage of production as % of total exports ,
1992-2001
5.3 Growth trends of manufactured exports at 18-industry level (%),
82
88
1980-2000
5.4 Growth trends of major manufacturing industry groups (%),
1990-2002
90
5.5 Labour-intensive manufactured export trends (%), 1990-2002
91
5.6 Resource-intensive manufactured export trends (%), 1990-2002
91
5.7 Durable manufactured export trends (%), 1990-2002
92
University of Pretoria etd – Moloto, P R (2005)
GROWTH TRENDS IN THE SOUTH AFRICAN MANUFACTURED EXPORT INDUSTRY
CHAPTER ONE
Introduction and research methodology
1.1 Introduction
The importance of the manufactured export industry in South Africa relates to its pivotal role of
overcoming domestic structural constraints inhibiting the growth of the manufacturing sector
since 1980, with specific reference to the 1990s. The manufactured export industry holds growth
potential for the increasing contribution of the sector to economic growth and development in
South Africa. The thesis scrutinises the nature and patterns of growth trends in the South African
manufactured export industry influenced by the nature of industrial and trade policy
implemented in South Africa.
1.2 Problem identification
More than a decade ago the South African economy was by all measures an inward-oriented
economy characterised by resource-intensive exports, thus declining growth prospects over the
years. But since readmission into world markets South Africa has become a more open economy
with manufactured exports occupying a key role as the main source of economic performance
and growth (Roberts, 1988:5; Kahn & Black, 1998:9).
The dissertation will concentrate largely on growth trends in manufactured exports and factors
influencing these growth trends and its contribution to the economy. The nature of the
manufacturing sector and the growth patterns in exports are not well researched. This study is
therefore crucial in determining and analysing what factors are responsible for export growth
trends. Ascertaining the factors and identifying "export industry champions" would provide
business and policy-makers with valuable information regarding the comparative advantage of
the South African manufacturing sector.
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GROWTH TRENDS IN THE SOUTH AFRICAN MANUFACTURED EXPORT INDUSTRY
The fact that South Africa is a prominent member of Southern African Custom Union 1 (SACU)
provides for a rationale to study contributing factors to the growth of manufactured exports by
using trade data emanating in the custom union. Custom Unions are recognised by the General
Agreement on Trade and Tariffs (GATT) – now the World Trade Organisation (WTO), as long
as a custom union does not raise trade barriers against non-members but facilitate trade between
nations (Booysen, 1999:43). Over the past seven years, the Southern African Development
Community (SADC) intra-trade has growth significantly with South Africa dominant –
emphasising South Africa’s position as a bigger economy in the region (Roberts, 2000:614). Of
particular importance is the fact that SADC is a major destination of South Africa’s
manufactured exports (Laubscher, 1997:4; Tsikata, 2000:4; Valentine & Krasnik, 2000:266).
Furthermore, the significance of the availability of such trade data and tariff rates being levied
for SACU enables the researcher to utilise the relevant and appropriate figures for analysis of
impact of trade changes in exportable products in the custom union.
Analysing opportunities and challenges brought about by globalisation as South Africa seeks a
greater share of world markets are crucial when considering the re-integration of the South
African economy. In recent years trade continually enhanced economic efficiency in the South
African economy, thereby raising the country’s global competitiveness variables (Valodia,
1997:4; Jonsson & Subramanian, 2000:3).
1.3 The aim of the study
It is the purpose of this dissertation to investigate the direction of growth trends in the South
African manufactured export industry. Knowledge of the manufacturing sector is crucial in
analysing the role of the sector in the export industry, as an earner of foreign currency, creator of
employment and its effect on the growth and development of the South African economy in
general. The promotion of manufactured export growth is central to the growth and development
1
South Africa, Botswana, Lesotho, Namibia and Swaziland
2
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GROWTH TRENDS IN THE SOUTH AFRICAN MANUFACTURED EXPORT INDUSTRY
of the South African economy. This is in the light of the South African economy’s inability to
grow faster than the rate of population, which is resulting in ever-increasing social, political and
economic problems (Dias, 1998:1; Chandra, 2002:2).
The following secondary aims are set for the study:
??Investigating the development history of the South African manufacturing sector;
??Researching the co-existence of the South African manufacturing sector and its linkages
with other economic sectors;
??Researching the composition of South Africa’s manufacturing sector and its exportable
products;
??Highlighting
the
possible
prevalence
of
future
obstacles
which
could
hinder
the
competitiveness and growth of the manufactured export industry; and
??Where possible, making recommendations for a co-ordinated programme of action, which
can boost the export performance and direct actions of policy-makers with a view to attaining
growth and prosperity in the South African manufacturing sector.
1.4 Importance of the study
The need for the development of the manufactured export industry is imperative for a country's
ability to raise employment and the standard of living. This was recognised since Adam Smith's
analysis of the development process where the importance of export expansion as an engine of
economic growth was emphasised (Krueger, 1988: 89). Due to the prominence of the
manufacturing sector as a driver of economic growth in South Africa, it is important to research
the changing nature and growth patterns in the manufactured export industry. The impact of
these changes will be studied in relation to:
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GROWTH TRENDS IN THE SOUTH AFRICAN MANUFACTURED EXPORT INDUSTRY
??The manufactured exports by product and geographical dispersion;
??Overall contribution to economic growth and development; and
??The extent and nature of factors influencing growth trends of manufactured exports.
These will help deduce whether the opportunity cost forgone in utilising economic resources
justifies the industrial and export-led growth strategy adopted in the South Africa economy.
1.5 Research procedure and methodology
The knowledge of basic economic theory coupled with the ability to apply it is undoubtedly a
main tool used to gain insight into the numerous factors affecting the manufacturing industry.
Such knowledge is also crucial in forecasting what is likely to happen in the manufactured export
industry ni a given period of time. It is for this reason that a literature study will form the basis of
the background chapters. Sources of information will include annual reports, journals, articles
and textbooks. Gathering information is important in determining the status quo within the field
researched (Botha & Engelbrecht, 1992: 50). Furthermore, primary sources to collect data for
quantitative analysis include institutions such as Statistics South Africa (SSA), Department of
Trade and Industry (DTI), South African Reserve Bank (SARB) and Industrial Development
Corporation (IDC). According to Lindsay (1993:46), some data is more reliable than others. Due
to the uncertainty about the reliability of some data the researcher will utilise references which
are more reliable and will be acknowledged in full under the Bibliography.
A local search engine on the Internet, e.g. Sabinet, will be utilised due to its likelihood of
reducing agency and transaction costs when gathering information. A search engine can be
defined as a program that searches for documents using specified keywords and returns the list of
the documents when found. Basically, it enables searches for documents on the World Wide
Web. The results obtained through these methods of data collection will be analysed and
conclusions and recommendations pertaining to export growth patterns of the South African
manufacturing sector will then be made.
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GROWTH TRENDS IN THE SOUTH AFRICAN MANUFACTURED EXPORT INDUSTRY
The limitations (thus scope of the research) will determine the extent of study coverage of the
manufactured export industry. Since the manufacturing sector comprises of more than 21
industries, it would be difficult, if not impossible, to individually study growth patterns for each
industry type. The difficulty will arise mainly due to some logistical and time constraints.
Therefore, specific industries of the South African manufacturing sector will be researched for an
intensive analysis without compromising the general analysis of the overall growth trends of the
manufactured export industry in South Africa.
1.6 Value of the research
The aim of the research is to investigate export growth trends of South Africa's manufactured
goods. It is therefore important that the research outcomes are made available to the public and
relevant
funding
institutions,
government
stakeholders
and
other
interested
parties.
Consequently, there is a need to distribute copies of the research results to, inter alia, the
University of Pretoria, relevant directorates at the DTI and the IDC that are tasked with the duty
of promoting the establishment and expansion of manufacturing industries, Council for Scientific
and Industrial Research (CSIR) and the National Research Fund (NRF). The findings will be
useful in helping, inter alia, policy-makers in understanding trade conditions in the manufactured
export industry as well as other economic sectors with a view to pursue Research &
Development (R&D) for better industrial policy design and adjustment in accordance with the
prevailing conditions in the global manufactured exports industry.
1.7 Division of chapters
The dissertation is organised as follows:
Chapter 1 is an introduction to the dissertation. It outlines the problem statement, aim, research
procedure and methodology and the organisation of the dissertation.
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GROWTH TRENDS IN THE SOUTH AFRICAN MANUFACTURED EXPORT INDUSTRY
Chapter 2 deals with the historical development of the manufacturing industry in South Africa
over the years. This is important as it enables the researcher to establish the linkages between the
manufacturing industry and other industries such as mining and agriculture and influence on
current growth trends.
Chapter 3 explores the theory of structural change emphasising the significance of manufactures
as the stages of the structure of the economy evolve over the years on the one hand and trade
theories unravelling the theoretical rationale behind trade patterns on the other. There exists both
theoretical and empirical evidence that export-oriented industrialisation has led to superior
development performance in a number of countries, of which the East Asian Newly
Industrialised Countries are prime examples. They overcame the diseconomies of scale of being
small and realised dynamic efficiency in their mobilisation, allocation and utilisation of limited
resources.
Chapter 4 outlines the impact of South Africa's recent trade reforms in the manufactured export
industry, with specific reference to the 1990s. The diversion of demand for imported
manufactured goods to domestic producers by means of high levels of protection, that is to say,
import substitution, which was followed by many developed countries in early post-World War
II industrialisation efforts, has proven inefficient and ineffective in stimulating efficient and
competitive pressures on domestic firms. Consequently, countries shifted to reliance on an
export-led growth strategy, which experienced immediate and dramatic results in most
developing countries.
Chapter 5 investigates growth trends in South Africa’s manufactured export industry since the
1980s. The analysis of the growth trends is essential in identifying “export industry champions”
as well as the growing and growth potential markets and factors influencing the growth patterns.
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GROWTH TRENDS IN THE SOUTH AFRICAN MANUFACTURED EXPORT INDUSTRY
Chapter 6 provides a summary of all previous chapters in this thesis with a number of
concluding remarks and recommendations for relevant policy-makers and suggestions for future
studies of growth trends in the South African manufactured export industry.
1.8 Summary and conclusions
The need for the development of the manufactured export industry is imperative for a country's
ability to raise employment and the standard of living. Growth trends in the South African
manufactured export industry are not well researched. The aim of the research is to investigate
the growth trends in South Africa’s manufactured export industry since 1980, with specific
reference to the 1990s.
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GROWTH TRENDS IN THE SOUTH AFRICAN MANUFACTURED EXPORT INDUSTRY
CHAPTER TWO
The historical development of manufacturing in South Africa
2.1 Introduction
Many other middle-income and semi-peripheral countries share the broad issues central to the
analysis of development of the manufacturing sector in South Africa. These issues concern the
question of inward and outward development paths, and more generally, the role of the state in
the industrialisation process. The purpose of this chapter is to explain the historical development
of manufacturing in South Africa. The chapter starts with a descriptive evolution of the
manufacturing sector and explains the structural nature of the manufacturing sector in South
Africa and then highlights some growth trends over the years.
2.2 The emergence and characteristics of the manufacturing sector in South Africa
The industrial revolution in South Africa began with the discovery of minerals in the mid-1800s.
As the growth rates of the economy increased, the sectoral contribution to economic growth
changed significantly with the eventual dominance of the manufacturing sector. The potential to
shift production processes from a predominantly primary to a modern diversified economy was
the core of South Africa’s industrial development (Leftwich, 1974; Botha et al, 1988; Schrire,
1991 & Chandra, 1992).
Dowling & Salvatore (1977:69) argue that the main reasons behind industrialisation in
developing economies are that their manufactured imports clearly indicated the existence of a
domestic market, protection against foreign competition and to relieve balance of payments
pressure.
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GROWTH TRENDS IN THE SOUTH AFRICAN MANUFACTURED EXPORT INDUSTRY
Swanepoel et al. (1995:19) define economic growth as a process whereby the production
capacity of an economy increases over time so that there is an increase in the national income.
Empirical evidence shows that the level of economic development in industrialised nations is
attributable to an industrial growth path that was followed during their era as low-income
countries.
For South Africa, it was the discovery of precious minerals such as gold on the Witwatersrand in
1886 and diamonds in Kimberly in 1870 that gave a significant starting foundation for
manufacturing growth (Houghton, 1972:63). The early development of the manufacturing sector
in South Africa, as a result, has been attributed to mining fortunes. As Nattrass (1982:163) puts
it: “even today the links between the two sectors are strong”. The discovery and exploitation of
these minerals greatly transformed the South African economy by increasing the national income
and accelerating the tempo of economic growth (Davenport, 1991:494). The location and nature
as well as the extent of accessibility of the minerals created sufficient economic incentives for
the establishment and promotion of industries in areas endowed with mineral resources
(Coleman, 1993:195).
The growth of the mining industry was responsible for the establishment of a rail system, the
opening up of the coal-fields for the generation of electricity, and the establishment of urban
concentrations, commercial farming and most important, manufacturing development (Abedian
& Standish, 1992:1).
The most notable linkage exists between mining and manufacturing industries (Fedderke &
Pirouz, 2002:26). For instance, the mining industry has been a major source in the expansion of
manufacturing in South Africa (Houghton, 1972:109). The initial stages of manufacturing
development were strongly linked to the needs of the mines. It included manufacturing of
explosives and production of boots for miners.
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GROWTH TRENDS IN THE SOUTH AFRICAN MANUFACTURED EXPORT INDUSTRY
The mining industry has created a domestic market without which manufacturing consumer
goods would have been impossible (Houghton, 1972:109). In areas like Witwatersrand, for
instance, mining is attributed with the initiation of the great urban concentration of population
that has become the great urban market for industrial goods. Therefore, the existence of the
mining industry gave a great impetus to the South African manufacturing sector.
The subsequent development of the manufacturing sector depended heavily on the fortunes
accumulated by the mining sector. Using the vast revenues from mining source, diversification
into the manufacturing industry was made possible.
Financial resources from the mining
industry were not only used as start-up capital but also financed the manufacturing sector’s high
propensity to import capital goods and intermediate goods as well as input materials. Therefore,
to ensure its growth, the South African manufacturing sector relied on the foreign exchange
earned by the mining industry to meet the import bill (Joffe et al, 1995:151).
During its infancy stage, the South African manufacturing sector did not possess capable human
resource capacity to ensure growth. Lumby (1990:76) argues that for demand of productive
labour force, the manufacturing sector relied on a large skilled labour force with financial and
business know-how, that had developed in the mining industry. Poor skill levels and taskspecific production skill levels inhibited the growth of manufacturing (Joffe et al, 1995:187).
Where domestic supply of labour could not meet skills needed in the manufacturing sector, the
industry relied on the foreign links established by the mining industry. The foreign technical
input included managerial skills and supplies of essential skills capable of efficiently operating
imported technology. The South African manufacturing sector was characterised by numerous
structural constraints, mainly a direct consequence of patterns of economic development in the
country. Consequently, foreign technology became a prominent factor in the production
functions of large manufacturing firms in South Africa.
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GROWTH TRENDS IN THE SOUTH AFRICAN MANUFACTURED EXPORT INDUSTRY
Although import substitution policy managed to significantly reduce the import of consumer
goods; this was accomplished at a higher growth of import of input materials. When foreign
technology
increased,
investment
was
heavily
directed
to
the
more
capital-intensive
manufacturing industries. This feature is attributed to the industrial policy which was geared
towards substitution of imported consumer goods with locally produced goods. The size of the
market and skewed distribution of income led to the import substitution policy achieving suboptimal outcomes in the form of sub-optimal utilisation and restrictive expansion of the
manufacturing capacity. Table 2.1 shows the transformation of the economy of South Africa
from an agro-mining to a diversified manufacturing and service sector economy.
Table 2.1: Share of selected production sectors as % of GDP
Year
Sector
Agriculture
Mining
Manufacturing
1911
21
28
4
1920
22
18
7
1930
14
16
9
1940
13
13
12
1950
17
13
19
1960
12
13
19
1970
8
9
24
1980
5
21
23
1990
5
11
26
2000
6
7
29
Source: Series of SARB quarterly bulletins
By the time the Union of South Africa was formed in 1910 economic activities were
predominantly agriculture and mining (Table 2.1). During that period, agriculture and mining
contributed a combined figure of 49 percent, while the manufacturing sector contributed a mere
4 percent to GDP.
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GROWTH TRENDS IN THE SOUTH AFRICAN MANUFACTURED EXPORT INDUSTRY
In 1925, the South African manufacturing growth was boosted by the national deliberate policy
of import substitution and direct state involvement in the economy.
The manufacturing sector
began to grow much faster than the rest of the economy. While mining and agriculture
experienced relative declining growth, manufacturing recorded a 2.2 growth rate. Since its early
stages of development, the manufacturing sector has developed into the largest contributor to
GDP (SARB, 1999:107).
The Great Depression in 1929 brought contrasting performances for mining, agriculture and the
manufacturing sector of the South African economy (Abedian & Standish, 1992:1). The
agricultural sector experienced various endogenous and exogenous crises, and since then the
sector has been decreasing in terms of importance to the economy. Between 1920 and 1930 the
sector’s share in GDP declined by more than 10 percent. The downward growth trend is not
unique to South Africa; it is regarded as a common feature of most developing countries
(Abedian & Standish, 1992:3).
Various global political and economic events increased the growth of the mining industry until
late 1970s, notably the oil crisis of 1973 and 1979, which appreciated the value of gold. But the
sudden rise in the value of gold was not sustained since the early 1980s, leading to the meltdown
of the mining industry as the heartbeat of the South African economy (Abedian & Standish,
1992:3). These trends indicate two contrasting developments in the South African economy
during the period under review: first, the absolute contribution of agriculture and mining
continued to decline at a very alarming rate with serious socio-economic implications and
second, the manufacturing sector consistently increased its share of GDP (Barker, 1993:59).
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2.3 Changes in the structure of the manufacturing sector in South Africa
The term ‘manufacturing’ relates to activities that transform raw materials or combine with
intermediate goods into final goods with higher value (Nyilas, 1976:6). The development of the
manufacturing sector has certainly changed the structure of the South African economy.
Industries within the manufacturing sector can be categorised in terms of size of operation.
Large-scale operation industries refer to huge operations employing a large number of labourers.
According to Matthews (1983:124) large-scale operations require more capital techniques and
modern technology. It includes industries such as chemical and steel. On the other hand, smallscale industries refer to small firms hiring few workers, often not using sophisticated technology.
They are usually labour-intensive, producing traditional products such as clothes and shoes
(Dowling & Salvatore, 1997:74).
Manufacturing industries can also be classified as being light, heavy and high tech in the nature
of production techniques (Mazumdar & van Seventer, 2002:13). Heavy industries are generally
more capital-intensive, meaning that they tend to use a higher proportion of capital to labour
(Abedian & Standish, 1992:106). Light industries are those that use a higher proportion of labour
than capital in their production techniques (Chandra et al, 2001:56). According to Nyilas
(1976:280) light industries mostly produce consumer goods, whereas heavy industries produce
more capital goods. High-tech industries are those that use the highest volume and state-of-theart technology. They produce very high value goods such as electrical machinery, electronics,
professional and scientific equipment (Mazumdar & van Seventer, 2002:13). There are
manufacturing industries that utilise labour and capital in more equal proportion. These
industries are called intermediate and include rubber and motor vehicles (Abedian & Standish,
1992:106). Heavy industries and high tech, in particular, are growing at a higher rate than light
industries in South Africa. The manufacturing sector plays an important role and remains
dominant in the secondary sector of the South African economy (Matthews, 1983:123).
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The role of manufacturing relates to contribution to GDP, provision of employment opportunities
and expansion of trade of manufactured exports. Moreover, the importance attached to the
growth of the manufacturing sector is the need to improve the standard of living (Schrire,
1991:447). According to Elias (1992:118) manufacturing in South Africa grew much faster than
the rest of the economy, particularly in recent years as in most countries. Even though the
manufacturing sector in South Africa overtook the mining sector to become the largest
contributor to GDP, its growth has only been sustainable until the 1990s.
The manufacturing sector has plausible and dynamic multiplier effects expressed as forward and
backward linkages with other sectors. Linkages can be defined as the effect which the
establishment of one industry has on other industries either by expanding the market for
industries which produce its inputs or facilitating the supply of the input materials and other
industries. The former is a backward linkage and the latter is a forward linkage (Dowling &
Salvatore, 1977:40).
This feature is attributed to the influence of the external economies,
economies of scale and high degree of supply and demand for economic resources (Elias,
1992:118). External economies refer to cost reductions of a firm resulting from the expansion of
the entire industry, whereas economies of scale refers to the reduction in the LAC of a firm as it
expands its own output (Dowling & Salvatore, 1977:76).
The economy of South Africa has changed considerably over the past decade. Most notably is
the decline in the primary sector and the increase in the size of the tertiary sector. The primary
sector involves the extraction of basic materials from land, sea, or air. Mining and agriculture are
most noticeable examples. Growth in this sector gives employment and supplies raw materials to
the secondary sector. The secondary sector is the major feature of the modern economy, entailing
a vast range of manufactured goods. In South Africa, people are increasingly working in the
manufacturing industries – rather than primary industries – to produce the material goods that are
characteristic of the modern economy.
Since production does not cease until the final
consumption stage, the tertiary sector plays an important role in the modern economy to ensure
the goods reach the final consumer.
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Table 2.2: Value-added contribution of broad economic sectors to GDP (%), 1971-2000
Broad economic sectors
Average share
Average
share Average
1971-1980
(%)
(%)
1981-1991
1991-2000
Primary
16.1
13.3
11.4
Secondary
29.5
29.6
27.7
Tertiary
54.3
57.0
61
Total
100
100
100
share
Source: TIPS database (www.tips.org.za), 2002
From a macro perspective, there has been a noticeable structural change in the reasonably
diversified South African economy since the 1970s (table 2.2). The share of the primary sector
(largely agriculture and mining) in overall GDP has decreased over the past three decades,
although the secondary sector’ share (manufacturing, construction and electricity, gas and water)
of GDP has maintained a more or less constant level between 1970-2001. The most significant
growth trend, though, is that of the tertiary sector, which traditionally has had the largest GDP
share. It is increasingly growing, at the expense of the primary sector, which is in line with trends
towards less reliance on primary products and more on high value-added services such as
business services, transport and communication and wholesale and retail trade. Table 2.3 shows
the value-added contribution of South Africa’s economic sectors to GDP between 1991-2001,
measured in 1995 constant prices at broad 9-sector level. Table 2.3 reveals that for the
agricultural, mining and construction sectors there has been significant changes considering both
halves of the decade. The deterioration of the mining sector is linked to the decline in commodity
prices, notably gold mining, coal mining and iron ore.
Regarding the share in net output during the 1990s, it appears that the manufacturing sector and
community services are the most important contributors to value-added by 9-sector aggregation,
though its share in GDP has remained constant at around 20 percent.
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Table 2.3: Value-added contribution of sectors to GDP (%), 1991-2001
Sectors
Average share
Average share Average
1991-1996
1997-2001
annual Average
annual
change 1991-1996 change 1997-2001
(%)
(%)
Agriculture
4.8
4.5
-0.4
1.4
Mining
7.3
6.2
-0.1
-1.0
Manufacturing
21.2
20.3
1.6
1.5
Construction
3.3
3.1
-0.7
1.3
Electricity
3.5
3.7
4.5
-0.1
Transport and
8.5
10.5
5.2
5.6
Trade
14.0
13.5
2.2
1.8
Business Service
15.7
18.0
2.9
6.0
Community
21.9
20.3
1.6
0.1
100
100
2.0
2.3
Communication
service
All industries
Source: TIPS database (www.tips.org.za), 2003
Table 2.3 further indicates that business services (6 percent) and transport and communication
(5.6 percent) had the highest growth rate in value-added between1997-2001 measured in 1995
constant prices. By contrast, the lowest growth rate in value-added was recorded by mining and
electricity. The high performance of the transport and communications sector in the mid -1990s is
largely attrib uted to the rollout of the telecommunications services, both by mobile service
providers and the national fixed-line operator, TELKOM. On the negative note, manufacturing
sector’s growth performance has not improved significantly in both halves of the period under
study and more so its performance has been below the economy-wide average. By the same
length, fiscal policy introduced during the mid-1990s (GEAR Policy, 1996) has had a negative
effect on the performance of the community services sector.
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In the early stages of manufacturing in South Africa the output of the sector was greatly aligned
towards the production of goods for the domestic consumer market and the mining industry
(Nattrass, 1982:169 & Fedderke & Pirouz, 2002:26). Moreover, the development of
manufacturing in South Africa began with light industries as in most developing countries. Light
industries such as food, clothing and textiles accounted for a larger share of total manufacturing
in mid-1910. According to Coughlin et al. (2001:2) textiles were one of the earliest offshoots of
the peasant economy and served as an engine of early industrialisation.
Another feature of the manufacturing sector was the high need for unskilled and semi-skilled
labour to start light industries. Since most developing countries possess a comparative advantage
in this regard, it became ‘easy’ to establish these industries. Soderbom and Mazumdar & van
Seventer (2001: 49 & 2002:8) broadly classify labour in terms of the skill levels as follows:
??Highly skilled labour – relates to workers with at least two years of education and training –
usually formal - after completion of standard ten (matriculation);
??Skilled labour – comprises of workers in occupations for which at least a number of weeks or
months of training is required; and
??Semi-skilled labour – those for which the required expertise is acquired after short training.
The role of the government in the early years of industrial development in South Africa led to the
promotion and dominance of heavy industries through the establishment of strategic government
enterprises such as TELKOM, ESKOM and ISCOR.
The internal structure of manufacturing had changed significantly vis-à-vis firms, size as well as
composition of the manufacturing sector (Cassim & van Seventer, 1999:7-8). However, the
exhaustion of the import substitution strategy in most light industries and skewed income
distribution restricted demand for goods produced by the light industries.
The allocation of
production resources, consequently, shifted even more intensively towards heavy industrial
output because of the high-income elasticity associated with it.
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The Second World War also contributed to the growth of heavy industries in areas such as
chemicals and armaments (Houghton, 1972). Another feature of structural change in South
Africa’s manufacturing sector relates to growth in foreign trade. The export-oriented approach
was based on the premise that exploiting the export market will increase foreign exchange earned
necessary to pay for imports. As a result, the value of exports to the rest of the world increased
since the last half of 1980.
The structure of the manufacturing sector can also be analysed in terms of its factor contentintensity. This includes heavy, medium, and light industries. The table 2.4 indicates the growth
rates of the different broad categories of manufacturing industries. Until 1970s manufacturing
activities in South Africa were characterised by the dominance of light manufacturing subsectors. This is attributed to the policy of inward industrialisation in the early stages of industrial
revolution in South Africa. However, the growth rate was sustained until the second half of the
1990s. This is attributable to the re-integration of the South African economy into the world
economy (Calitz, 2002:248). By comparison, the heavy industries managed to shrug off the
effects of globalisation in the 1980s and first half of 1990s, although at a much slower rate than
in the 1970s (Mazumdar & van Seventer, 2002:13). But the growth of the heavy industries
became stagnant in the latter half of the 1990s. The high tech manufacturing industries, by
contrast, became the only manufacturing category that recorded increasing growing rates in the
1990s, thereby reversing the decline of the 1980s. More important though is the fact that in the
1990s, the high tech category registered growth rate of 2.2 percent.
Table 2.4: Growth rates in real value-added for manufacturing groups (%), 1970-1990s
Group
1970s
1980s
1990s-1st half
1990s-2n d half
Light industries
5.3
1.6
0.5
-0.5
Heavy industries
4.0
1.6
1.9
0.0
Hi-tech industries
4.5
0.1
0.5
2.2
Source: Development Policy Research Unit (www.uct.ac.za/dpru), 2000
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The increasing growth rate of capital-intensive industries in South Africa is primarily because of
the importance of these industries in general economic growth. Other factors include
technological advancement of the whole economy, defence industries and the promotion of
consumer durables (Nyilas, 1976:281). Put differently, the growth rate of capital-intensive
industries is as a result of changes in aggregate demand.
2.4 Concentration of industry in South Africa
When the South African economy began its diversification policy, the main question was where
will the economic activity locate for the development of the manufacturing sector (Houghton,
1972:130)? Within a free market economy, there may be various forces operating in the direction
of the spread of manufacturing production evenly across both the efficient and spatial
concentration of industrial production. However, not all sources of concentration are known and
knowable (Burgess, 1989:75).
Concentration measures the market structure, which includes the degree of product
differentiation and barriers of entry and exit (Ferguson & Ferguson, 1994:38). Some
determinants of concentration are natural, underlying the forces of structural operation such as
economies of scale while others are artificial, promoted by the strategic behaviour with a view to
eliminate competition. Naturally, firms will be in regions with good market accessibility. In other
words, manufacturing clusters are in pure pursuit for exploitation of economies of scale.
The degree of manufacturing concentration is determined by the relationship between cost and
production curves, affirming that the determinants of locational advantage are the ease of
interaction of demand and supply forces. Such market forces include consumers, suppliers and
various sources of information and technology, which are responsible for the rate of innovation
of new products into the market. Venables and Petersson (1999:45 & 2000:3) maintain that the
presence of positive externalities between firms can take many different forms.
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The beneficial externalities include, among the others, knowledge spillovers and human resource
pooling effects which encourage production to locate where they can benefit from the readily
available labour skills, as well as linkages between consumers and producers.
Assuming that
there is free movement of factors of production and/or firms, spatial clustering of production
activities become inevitable (Venables, 1999:14) In fact, concentration of manufacturing
production reduces transaction costs and facilitates the separation of production and consumer
activities. In brief, the agglomeration of manufacturing industries is a consequence of advantages
of industrial location.
The history of the South African manufacturing sector reflects high levels of concentration in
four major metropolitan areas (Nattrass, 1982:181). More than 70 percent of South Africa’s
output
is
generated
in
the
Town/Belville/Simonstown/Wynberg,
PWV
and
area,
Port
Durban/Pine
Elizabeth/Uitenhage
Town/Inanda,
(Dagut,
1991:39).
Cape
The
government influenced the location of the industry by establishing and promoting state
parastatals and the channeling of funds through the IDC (Lipton & Simkins, 1993:56).
Capital investments were made in urban areas at the expense of infrastructure development in
rural areas, thereby promoting industrial concentration in Gauteng, the Western Cape, Eastern
Cape and KwaZulu-Natal Provinces (SSA, 1996:1). According to Chandra (2001:52)
manufacturing activities are evenly distributed between the other provinces: Limpopo, Northern
Cape, North-West, Free State and Mpumalanga. The pattern of unequal distribution of industries
is further reinforced by the varying provincial economic performance vis-à-vis employment,
contribution to GDP and total manufacturing output.
Even in world terms manufacturing activities are unevenly distributed between developed and
developing countries (Hayter, 1997:49). Industrialised countries such as the United States,
United Kingdom, Japan, Italy, Germany, and France accounted for more than 62 percent of
world manufacturing output in 1990, with the other percentage shared by the remaining countries
including Canada and South Africa.
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The socio-economic complexities brought about by the relative concentration of manufacturing
firms were a major concern for development in South Africa. The negative externalities of
industrial development patterns included pollution and excessive pressure put on environmental
resources to provide for the growing urban population (Nattrass, 1982:182). Faced with the
increasing
urbanisation
difficulties,
the
government
introduced
Border
Area
policy
to
“redistribute” industries to the rural areas closer to the metropolitan areas. Consequent to this
policy was the establishment of manufacturing factories in Hammarsdale (Durban), Rosslyn,
Pelindaba (Pretoria) and Pietermaritzburg. Employment generated by the de-industrialisation
policy was 11600 jobs, which was inadequate to counter the continued urbanisation. The policy
of decentralisation was then followed with more conviction to redress economic polarisation and
to reduce the flow of people into the cities (Nattrass, 1982:260 & Swanepoel et al, 1997:112113). Some of the objectives of the decentralisation policy were:
??Creation of employment opportunities in rural areas;
??Counteracting urbanisation;
??Improvement of economic development in rural areas; and
??Encouragement of Black economic participation in the manufacturing industry.
However, there exists a widespread believe among economic policy observers in South Africa
that industrial decentralisation policy was a resounding failure (Dewar, 1996:33). Some of the
reasons highlighted are:
??Rural-urban migration rates continued to increase;
??Due to high opportunity cost, the programme resulted in net loss of jobs;
??The programme was motivated by political motives rather than issues of economic
efficiency;
??The programme was not self-sustaining;
??Large-scale corruption became rampant; and
??The multiplier effects of the programme were poorly anticipated.
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In order to offset locational disadvantages, manufacturing entrepreneurs establishing factories in
the designated Border Areas were offered special inducement packages in the form of capital
assistance for building and layout of industrial sites (Houghton, 1972:141). The unequal
distribution of the manufacturing industries is responsible for migration into the cities in search
of better living conditions. Welfare observers view industrialisation as a source of improving
living conditions in poor countries. But the fruits of industrialisation in South Africa were shared
based on racial lines, thereby alluding poor communities.
This is strongly attributed to the
effective measures introduced under the Apartheid government to restrict the mobility of African
labour and ownership of assets (property) mainly in the so-called White designated areas
(Nomvete, 1993:14).
Ownership of manufacturing groups was concentrated in six diversified conglomerates in 1992
(Joffe et al. 1995:149). The top six conglomerates – Anglo American Corporation, the
Rembrandt Group, Anglo Vaal, the Liberty Group, SA Mutual and Sanlam, have substantial
financial muscle as indicated by their market capitalisation of approximately 85 percent of the
JSE in 1992 (Joffe et al, 1995:149).
Furthermore, fourteen firms out of 270 largest corporations dominate the extent of ownership
and control in the corporate sector. These firms own manufacturing groups which accounted for
some two-thirds of employment, sales and total assets in the JSE (Henrekson & Jakobsson,
2000:16).
Although these conglomerates have the financial power, they could inhibit manufacturing growth
in the form of anti-competitive behaviour, establishment and growth of small manufacturing
enterprises, sub-optimal expansion and promotion of manufactured export, retarded technology,
development and capacity (Joffe et al, 1995:143).
In the Swedish manufacturing sector, new
industries have been decreasing since the 1950s, attributed to barriers of entry into the highly
concentrated ownership and control of few private-sector enterprises (Henrekson & Jakobsson,
2000:17 & Davis & Henrekson, 1997:7).
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At output level, concentration levels in the manufacturing sector relate also to the dominance of
certain manufacturing groups insofar as output distribution is ni dicated (SSA, 2002). Of the 27
manufacturing groups in South Africa, a large amount of output distribution is shared by food
division (14,4 percent), motor vehicles (11,2 percent), chemicals (10,7 percent), basic metal (9,7
percent), paper (5,1 percent) and petroleum products (4,8 percent). The other 21 manufacturing
groups share the remaining 44 percent.
A literature review on the recent industrial strategy in South Africa indicates the active
involvement of the government mainly via fiscal and monetary incentives and various initiatives.
Among these are the SDIs, IDZs and macroeconomic considerations such as Holiday Tax
Schemes are promotion of manufacturing by the SMEs (DTI, 1999:42-45).
These initiatives of stimulating manufacturing growth in South Africa are promulgated by the
GEAR policy (1996) and RDP (1994) and are in line with international successful experiences as
was the case in Taiwan (Hosking, 1999:1-3 & Sono, 1994:155). The establishment of the
Pietermariztburg/Msinduzi SDI with special attention to the manufacture of leather, timber,
wood and wood products is an example of such steps designed to develop export-oriented
manufacturing in South Africa (DTI, 1999:45). The SDIs and IDZs have so far played a key role
in the drive for higher levels of investment, export and international competitiveness in world
markets (SDI, 2000:1). In 2002, DTI adopted a new industrial development strategy - IMS –
based on two competing developments in South African manufacturing for the past five years:
the rise of the automotive industry and the decline of the textile and clothing industry. Mainly the
IMS strategy aims at promoting competitiveness and providing infrastructure and logistical
support to eight key manufacturing sectors. These are: clothing and textiles; agro-processing;
metals and minerals; tourism; automotive and transport; crafts; chemicals and biotechnology;
and knowledge-intensive industries. The sectors chosen highlight the different facets of the
South African economy, ranging from its strong agricultural and minerals base to its newer
information technology manufacturing industries.
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2.5 Manufacturing productivity in South Africa
The South African manufacturing sector is characterised by poor productivity performance (Joffe
et al. 1995:21). Productivity, defined as the relationship between real output and the quantity of
input used to produce that output, measures efficiency levels in the economy (Swanepoel et al,
1995:256; Meier, 1989:97 & Barker, 1992:89). Productivity can be measured in three ways:
??Labour productivity can be defined as the number of units of output obtained from a unit of
labour;
??Capital productivity shows the number of units of output per unit of capital input; and
??Multi-factor productivity indicates capital-labour ratio.
Most productivity studies tend to prefer a labour productivity index as a measure of productivity
in the economy (Barker, 1992:89). It is, however, cautioned that the focus on labour productivity
does not in any way suggest that labour is the only important factor contributing to productivity
but rather the opposite. McConell & Brue (1995:560) argue that it is because of the close
correlation between changes in productivity and the real wage rate.
Growth of productivity in
the economy and in particular labour productivity, is essential for the following reasons:
??Productivity is the basic source of improvement in real wages;
??Productivity growth leads to economic growth;
??A higher productivity level raises efficiency in the economy; and
??Increase in productivity is anti-inflationary.
South Africa’s productivity made a relatively low contribution to GDP (Barker, 1992:89). The
performance of the manufacturing sector has deteriorated considerably over the past three
decades (NPI, 1994:15). Between 1960 and 1970 real manufacturing output rose by 9,1 percent
per annum, only to decline by 5,3 percent between 1970-1980. By comparison, the United States
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had similar productivity trends though for South Africa’s stagnation, which became the feature
of the 1980s and 1990s, has had far-reaching effects on the socio-economic conditions in South
Africa.
Because of the economic importance attached to productivity growth, identifying and analysing
such trends in the manufacturing sector is important. The rise in productivity levels leads to
production efficiency, better use of existing resources by either bringing into employment of
some factors previously lying idle or reorganising the use of those already employed, thus
increasing their productivity.
However, productivity performance depends on the level of education and training, the health
and vitality and the age-gender composition (Kokko, 2002:36). The position with regard to
skilled and unskilled labour in South Africa is very similar to that in other developing countries – where there is a high shortage of skilled labour (Kibuuk, 1997:47).
In the light of the declining productivity growth levels, it becomes imperative that the nurturing
of skilled labour becomes a direction of human resources development design. The reallocation
of labour from less productive to more productive employment results in productivity gains (Mc
Connel et al, 1999:542). Production efficiency gains have been realised historically by the
transfer of labour from agriculture where the average productivity of labour is relatively low, to
the manufacturing sector where the average productivity of labour is higher (Todaro, 2000:84)
By the same length, capital widening and capital deepening can contribute to productivity
growth. The former means using the existing portion of capital more efficiently and the latter
relates to an increase in the amount of capital per worker, which then raises the worker’s
productivity (Dowling & Salvatore, 1977). An example of capital widening would be a case
where an operator may purchase an extra lorry identical to those he is already using, employ an
additional driver to increase delivery frequency.
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A major concern is the fact that productivity in South Africa also seems to increase at lower rate
than it does in South Africa’s major trading partners (Barker, 1992:93). This is a worrying factor
since the manufacturing sector is regarded as a main source of wealth and welfare improvement
in South Africa (Sono, 1994:44). The reasons for the poor performance in South Africa’s
manufacturing sector are complex. Du Toit & Falkena (1994:24) identified some of the main
factors adversely inhibiting productivity growth in South Africa as follows:
??Lack of capable human resources;
??Increasing outdated technology owing to conditions prior democracy;
??Inadequate awareness and knowledge regarding productivity standards;
??Political factors such labour unrest and violence; and
??Social factors such as poor infrastructure and cultural differences.
Capital-intensive industries seem to dominate the manufacturing sector, while labour-intensive
industries contributed only modestly to total output. In the 1990s, manufacturing became more
capital intensive mostly in historically capital-intensive industries, thereby elevating the rates of
employment losses in the manufacturing sector as a whole. But still capital productivity
remained low, largely because of capital flight, poor savings levels and political instability in the
1980s (Joffe et al, 1995:21).
Table 2.5: Manufacturing production (%), 1998-2002*
Variables
1998
1999
2000
2001
2002
Sales
91.7
92.0
100
105.1
113.7
Volumes of production
96.9
96.4
100
102.8
108.2
Capacity utilisation
80.1
78.9
100
79.8
80.8
Labour productivity
90.3
94.1
100
104.8
107.8
Source: SARB
*Base year = 2000
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The manufacturing sector has been in decline mainly because of the structural changes that took
place in the 1990s. This has brought about the contraction of uncompetitive industries such as
clothing and textiles. Low economic growth and a shortage of skilled labour have put a ceiling
on growth. Labour productivity has been increasing, though analysts argue that this has largely
been a result of job losses. But significant production capacity exists to meet higher demand.
Between 1998 and 2002, capacity utlilisation has stayed fairly constant at around 80 percent.
Table 2.5 indicates that with the exception of the 2002 financial year, manufacturing production
either grew at lower margins or declined, especially in 1999. The strength of the Rand has since
undermined the performance of the sector and as a result, production volumes dropped by 1.7
percent in the first half of 2003. Table 2.5 indicates a rise of 6.2 percent in production volumes
between 2001 and 2002, largely due to the depreciation of the external value of the Rand in
2001, which led to robust manufacturing growth, especially in exporting industries (Chandra,
2002:3).
Despite the rapid growth in labour productivity during 1998, the growth in nominal unit labour
cost still increased between 1997 and 1998 (SARB, 1999:9). Unit labour cost is derived as the
ratio of nominal compensation per worker to output per worker. When productivity rises at a
lower pace than nominal compensation per worker, the cost of the labour required to produce one
unit of output rises (SARB, 2002:21). In 1999, the real output of the manufacturing sector
showed signs of strength. The performance improved mainly as a result of growing external
demand for South Africa’s manufactured exports. It also emerged that since the 1990s
productivity rises have become a permanent feature of the South African economy (SARB,
1999:6).
2. 6 Employment performance of manufacturing in South Africa
The crisis in the employment creating capacity of the South African economy since the middle of
the 1990s is well-documented (Schoeman & Blignaut, 1998; Loots, 1998; Barker, 1999; Sellars,
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2000; Lewis, 2002; Chandra, 2002 & Fedderke, 2002). During this period, unemployment has
emerged as the most serious socio-economic problem facing the economy of South Africa. The
employment share of the secondary sector showed an increase from 16,6 percent in the postwar
period to 25,1 percent in 1996, but the sharpest increases were in the tertiary sector (Barker,
1999:88). Significant declines in employment were registered in the mining and agricultural
industry.
Employment growth in the formal non-agricultural sectors to total formal employment has been
declining in the 1990s (Mahadea, 2003:23). The reduction in employment in the formal economy
attributed for approximately 70 percent of the total employment in the economy in 1989 (SARB,
2000:20-21). But by 1999, the rate had declined to about 65 percent, meaning that 20 percent or
about 78 000 employment opportunities were lost over the past decade. Major losses were
recorded in the mining (45,percent), construction (43, 9 percent) and manufacturing industries
(18 percent) (SABR, 2000:21). The declining growth of employment in the formal sector of the
economy is mainly attributed to the low growth in GDP (Barker, 1999:183).
Table 2.6: Employment contribution of sectors to formal non-agricultural employment (%),
1950-2001
Sector
1970
1980
1990
1996
2001
Manufacturing
17,6
19,3
19,4
19,3
26,9
Electricity
0,7
1,0
1,1
1,0
0,8
Construction
5,2
5,3
5,8
4,8
4,6
Trade
11,9
12,5
12,5
12,1
19,2
Transport and communication
5,9
6,6
5,4
4,4
4,5
Finance and insurance
3,1
3,9
5,5
6,4
4,1
Source: SSA, 2001; SARB data series, cited in Barker F S, 1999
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Other factors responsible for the decline in employment and in manufacturing in particular,
include labour legislation, stiff competition faced by local producers in the increasingly
globalising world markets, capital intensity of production processes, and downsizing in the
public sector (SARB, 2000:202-21). Chandra et al. (2001:8) and Samson et al. (2001:11) reckon
that manufacturing firms in South Africa have responded anti-employment to regulations post1994. In many instances, manufacturing enterprises have responded by either hiring fewer
workers, becoming more capital intensive or hiring more temporary workers.
Furthermore, the dominance of the large manufacturing firms, which are more capital intensive
is a major factor constraining the absorptive capacity of the manufacturing sector in spite of
growth in value added (Chandra, 2001:53, 64). For instance, there are 1 911 larger
manufacturing firms as against 1 095 smaller firms in Gauteng, indicating the impact such
dominance would have on employment growth in the manufacturing sector. The large firms
employed 73 percent of full-time employees in 1998. The food industry registered 37 percent job
growth higher than sectoral job growth combined figures of capital intensive industries:
chemicals, electricity and iron (Chandra, 2002:6-9).
Mazumdar & van Seventer (2002:4) attribute the poor employment in the South Africa
manufacturing sector to a direct consequence of a sharp decline and negative growth rates of real
output in the 1980s and 1990s, respectively, and rise of labour unit costs. The growth rate of real
output at current prices has been at the expense of job creation thus “jobless growth” – economic
growth without job creation (Todaro, 2000:272). Sono (1994:46) indicates that while South
African manufacturing ranks lowest in labour productivity relative to Taiwan, United Kingdom,
and United States, it worryingly ranked the highest in unit labour cost in the period 1970-1991.
Although output growth in manufacturing was no where the level of East Asia, it would appear
that South Africa shared the fruits of economic growth equally between wages and employment
increases (Mazumdar & van Seventer, 2001:6).
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According to Gibson (2000:146) increases in labour earnings above productivity may lead to
increased growth of the economy. However, this will depend on various considerations such as
income elasticity of manufactured goods, the accelerator mechanism of investment, consumer
and producer price indices, the impact on export competitiveness and labour market responses.
Growth in unit labour cost above productivity increases the propensity to employ more capital
than labour, but employment growth will respond through an inverse functional relationship
dependent on firm-level factors and the associated production function (Teal, 2001:2 &
Soderbom, 2000:1)). In South Africa, it is estimated that a 10 percent increase in wages will
often lead to a 70 percent decline in employment (Barker, 1999:150).
Table 2.7: Manufacturing sector employment (%), 1995-2001
Industry
1995
1997
1999
2001
Food
12.8
12.7
12.9
12.3
Beverages
2.3
2.2
2.3
2.1
Tobacco
0.2
0.2
0.2
0.2
Textiles
4.6
5.3
4.1
4.2
Footwear
1.9
1.7
1.4
1.0
Printing, publishing and recording equipment
3.7
3.6
3.3
3.3
Basic chemicals
2.1
2.0
2.4
2.2
Plastic products
3.4
3.2
4.0
4.5
Rubber products
1.2
1.2
1.1
1.0
Non-metallic minerals
4.5
4.5
2.4
2.2
Basic iron and steel
4.2
4.1
3.2
3.1
Machinery and equipment
5.1
5.3
5.4
5.4
Electrical machinery
6.6
6.0
6.3
6.3
communication 1.0
1.1
1.3
1.1
5.6
5.8
6.2
Television,
radio
and
equipment
Motor vehicles, parts and accessories
5.6
Source: Calculated from Economic Research Unit database (DTI), 2003
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Another factor retarding employment growth in the South African manufacturing sector has been
the low rate of investment and the character of industrial investment made (Joffe et al, 1995:6 &
Nattrass & Brown, 1977:7). Heavy and low labour-intensive industries tend to be overdeveloped
at the expense of more labour-intensive industries. Manufacturing groups with a high
employment elasticity of growth include clothing, textiles and footwear. Textiles accounted for
16 percent of sectoral jobs in 1998, higher than metals (9 percent) and vehicles (4 percent)
(Chandra et al, 2001:64). Yet the more capital-intensive industries experienced higher
investment rates as compared to the labour-intensive industries.
Since the manufacturing sector employs mostly semi- and unskilled labour, which South Africa
has in abundance, raising investment levels evenly is crucial for generating employment
opportunities. Unemployment data obtained from SSA (2003) showed that the economy of South
Africa failed to create job opportunities for new entrants into the labour market, thus requiring an
annual growth rate of 5,4 percent in order just to employ the new entrants in the labour market –
let alone the backlog. The unsatisfactory employment performance of the South African
manufacturing sector has undermined its “engine of growth” status, with falling socio-economic
indicators (van Dijk, 2003:119).
The period 1995-1997 was characterised by low or stable employment growth rates. The labourintensive industries dominated employment, led by food, clothing and textiles.
For natural-
intensive industries a stable or moderate decline in job creation was prevalent, with marginal
increases in employment recorded by metal products excluding machinery, machinery and
equipment. For durable goods less job creation was more eminent in electrical machinery,
declining from 6.6 percent in 1995 to register 6.3 percent in 1997. In the final analysis, it appears
that while the structure of the South African economy has adopted the global trends with a move
in the direction of a “New Economy” and has seen a shift in production towards tertiary
activities, it now becomes clear that this alone is not able to address the employment crisis.
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2.7 Summary and conclusions
It was the discovery and exploitation of diamonds and soon afterwards, of gold which were
responsible for developing modern industry in South Africa. South Africa's early stages of
manufacturing development were dominated by heavy industries; unlike in most developing
countries were textiles and clothing led the industrial process longer. The deliberate involvement
of government through provision of infrastructure and promotion of import substitution
strategies had been the driving force behind development of industry in South Africa. Industrial
development in South Africa has not been without its difficulties.
Significant growth of manufacturing in South Africa was hampered by various structural
constraints such as high levels of import-intensity, bias against export of manufactures, the small
size of the domestic market and skewed income distribution and the industrial strategy of import
substitution. In an attempt to curb the wide divergence of economic opportunities around South
Africa, an industrial policy shift towards decentralisation around major cities was deemed
necessary. The economic structure of South Africa is divided into three broad sectors, primary,
secondary, and tertiary. The manufacturing sector dominates the secondary sector and occupies a
very important role in the economy. The South African manufacturing sector is characterised by
high levels of concentration with regard to geography, total distribution of output, employment,
sales and ownership and control.
Through special programmes such as SDI and IDZs the post-1994 South African government
hopes to stimulate the growth of the manufacturing sector by increasing competitiveness, levels
of investment and sustainable foreign trade balance to create “a better life” for all South
Africans. To expedite and facilitate manufacturing growth the government has adopted a new
industrial development strategy - IMS – based on two competing developments in the
manufacturing sector evidenced for the past five years. Mainly, the IMS strategy aims at
promoting competitiveness and providing infrastructure and logistical support to eight key
manufacturing sectors.
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In the light of the growing employment deterioration and the subsequent increasing poverty
levels in South Africa, the growth of manufacturing is imperative. This requires a clear
identification of sources of growth to ensure that manufacturing will begin growing towards a
situation where it is self-supporting. Evidently, while the structure of the South African economy
has adopted the global trends with a move in the direction of a “New Economy” and continues to
experience a shift in production towards tertiary activities, it has become clear that this alone is
not able to address the unemployment crisis.
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CHAPTER THREE
Structural change and trade theories on patterns of trade
3.1 Introduction
As the structure of the economy changes from being predominantly agricultural to industrial so
does the kind and composition of its exports to the rest of the world. Although controversial in
its application, the process of an economic shift based on the experiences of the now developed
nations of Western Europe and North America still remains the thrust of policy advice from
global institutions to the developing economies of Africa, Asia and Latin America. What is not
disputed, though, is the diversification brought about by the shift in economic production from
the agricultural predominance such that manufacturing occupies the central role as the driver
and/or facilitator of economic growth.
Consequently, the developing economies in Africa, Asia and Latin America reformed their
development strategies by adopting export-orientated strategies in search of wider export market
access. But still the extent of successes and failures has been a matter of debate when
considering the comparative experiences of economic development in the regions of the
developing economies. Chapter three focuses on the overview of theories of growth that
encourage structural shifts in the production activities such that the secondary sector,
manufacturing in particular, dominates the secondary sector. It also discusses trade theories on
patterns of trade.
3.2 The linear-stages of development
Originating in the 1950s and 1960s, it views the process of the changes in economic structure as
a simple way of succession of a number of stages based on the path that the now developed
nations had adopted in transforming from poor agricultural to modern industrial economies.
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Primary lessons are acquiring a right quantity and mixture of savings, investment and foreign aid
to proceed along the path towards prosperity as followed by the now developed economies.
Rostow’s stages of growth, which propagates the mobilisation of domestic and international
savings in order to generate sufficient - not necessary – investment to accelerate the dominance
of the manufacturing sector, is quintessential of the linear stages of development. Presenting the
descriptive yet logical and practical possibilities through which a country must pass during the
course of development, Rostow’s stages of growth are sequentially partitioned as follows:
??The traditional society stage;
??Pre-condition for take-off;
??Take-off into self-sustaining growth;
??The drive to maturity; and
??The age of high-mass consumption.
The linear-stages growth theory is logical in identifying a country’s level of development even
though its critics point to the theory’s shortcomings. These include the failure to consider the
constraint of relatively low levels of capital formation in developing countries; the higher saving
and investment rates are considered a sufficient – not necessary – condition for change in
economic structure and confusing economic growth to mean development (Todaro, 2000).
3.3 Contextualising Rostow’s stages of growth to the South Africa economy
Prior to the beginning of industrialisation, South Africa was an agricultural and pastoral
economy with low levels of living and less involvement in trade (Leftwich, 1974:30). The first
stage of development occurred before the late 1800s when subsistence agriculture dominated the
economic activity. This was primarily because of limited scope for exports and input materials.
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Another constraint was the small and scattered domestic market which apart from the isolated
natives was made up of Dutch and British settlers and French colonisers in the late 1600s
(Beaumont, 1995:11).
The second stage began around 1860 until early 1920 with agriculture and mining dominating
the economic activities. Agriculture was second to mining with a contribution of 21.5 and 27.3
percent to GPD in 1911, respectively. In the same period, manufacturing was dominated by light
industries (Lumby, 1990:6). The sector contributed about R17 million and R80 million in 1911
and 1921 to GDP, respectively (De Kock, 1924:45).
The mining industry’s dominance was
spurred by the mineral discoveries in the first stage with further substantial discoveries of
diamonds and gold into the second stage (Beaumont, 1995:14).
The pre-condition stage in South Africa was cemented further by laying conditions for the takeoff stage. According to Konczacki et al. (1991:82) railway lines were constructed between
Johannesburg and Kimberly as two sources of wealth and magnets attracting the labour force
into these areas. Construction of railway lines facilitated efficient international trade that was
vital for importation of consumer and producer goods to meet increasing domestic demand,
which was financed by export of gold and diamonds.
Social infrastructure in the form of hospitals and schools was built to improve the health
conditions and literacy levels of the people. Banks, harbours and ports were improved to kickstart trade with merchants in items such as wine and animal skin. Infrastructure played a very
important role of attracting investment necessary for economic development (Mody & Yilmaz,
1994:4). During this stage, agriculture turned into a commercial activity with wool pioneering as
a large consignment into foreign markets.
Agriculture played a minimal role relative to mining, gold in particular, as the engine that
propelled the shift of production process in the South African economy, as S.H. Frakel reverted:
"Gentlemen, this (gold) is the rock upon which the future success of South Africa will be built? .
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Indeed it was the need for explosives in the gold-mining industry, which directly stimulated and
accelerated manufacturing. Reinforced by the adoption of protection policy in mid-1920s, the
import substitution process during the WWI further oiled the growth machine of manufacturing,
which was later hampered by the Great Depression of 1929-32.
Although industrial possibilities of South Africa became evident as early as 1914, it was not until
the 1920s that the real foundation giving impetus to industrial expansion was laid. This led to the
third stage of economic development in South Africa. The devaluation of the South African
currency and establishment of ISCOR gave a new impetus to South African economic
development. The literature review reveals that whilst the service sector accounted for a large
contribution to GDP, the natural resource-intensive industries played a declining yet important
role in the growth of the economy. As the economy grew, manufacturing and the service sector
became dominant and today the trend is still that reminiscent of the 1920s.
Manufacturing grew in both size and number of establishments in the variety of products
produced. This, according to van Zyl (1998:207), can be attributed to the efficient organisation
of agricultural marketing, discriminatory labour market policies and the protection of domestic
industry through tariffs to promote import substitution in 1925, which also served as source of
revenue. This stage ended in 1933.
The maturity stage was driven by various demand-led factors highlighted by Lumby (1990:8) as
follows:
??Import substitution industrial policy;
??The drive to expand exports of manufactured goods;
??Gold standard was abandoned and currency devalued;
??The international minerals boom of the 1960s; and
??Gold became a safe haven as a result of the1973 and 1979 oil price shocks.
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These factors laid the foundation for economic progress in South Africa between 1933-1974.
Diversification and sophistication of manufacturing was the mainstay of the drive to maturity the
stage of economic development in South Africa. The development of textile, metals and
engineering, and the growth of liquid fuel and chemical industries, the strengthening of the goldmining industry and improvement in the quality of farming sailed South Africa into the stage of
high-mass consumption (Lumby, 1990:78).
The main feature of the South African economy is the pervasive unequal distribution of income
between population groups and provinces thus the prevalence of widespread poverty. This nearly
served as a major deterrent for South Africa’s final stage of high mass consumption. Despite this
factor South Africa arrived at her final stage of high mass consumption in 1975 (HartlandThunberg, 1978:7).
Since this period the South African economy has been constantly constrained by declines in real
output levels in various sectors of the economy, particularly manufacturing in the 1980s. A
negative mood in the international community manifested in the form of political and economic
sanctions. Despite these negative developments, the contribution of both manufacturing and
services are higher than that of agriculture in relative terms. But still, the manufacturing
performance has contracted in the 1990s.
3.4 Structural-change models
The mechanism of this theory involves primarily shifting domestic production structures from
heavy reliance on traditional subsistence agriculture to a more modern, urbanised and more
industrially diverse manufacturing and service economy.
(i)
Lewis two-sector theory
Under this theory, the underdeveloped economy consists of two interdependent sectors, namely:
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??A traditional, overpopulated rural subsistence sector which is characterised by zero marginal
productivity of labour. Labour is regarded as being in surplus due to the assumption that it
can be withdrawn from the agricultural sector without any loss in output; and
??A high-productivity modern urban industrial sector into which labour from the former sector
is gradually transferred.
The Lewis theory is relevant to the dualistic economic system of South Africa with a developed
and prosperous core co-existing with a large underdeveloped and relatively poor periphery.
Although the Lewis two-sector model is both simple and roughly in line with the historical
experience of economic growth in the developing nations, three of its main assumptions do not
fit the institutional and economic realities of most contemporary Third World countries (Todaro,
2000).
Firstly, the tendency of capital flight and labour-saving technology resulting in jobless growth
contradicts the assumption of proportional labour transfer rate, employment creation and modern
sector capital accumulation. Secondly, contrary to the assumption that labour surplus exists in
rural areas while there is full employment in urban areas, the reverse is true in most developing
countries where empirical evidence indicates that the assumption is more evident in urban
economies than in rural areas. Lastly, the assumption of existence of constant urban real wages
until the supply of rural labour is exhausted contradicts with the rising urban real wages in spite
of the growing pool of the unemployed in developing countries.
(ii)
The industrial patterns of growth theory
It defines the structural transformation of a developing economy as a set of changes in the
composition of demand and supply as per capita income increases. The transition of economic
activity allows new industries to replace traditional agriculture as the driving force behind
economic growth.
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In contrast to the linear-stages of growth, this model recognises the fact that developing nations
are part of a web of the international system that can either promote or hinder their process of
shift from exporting mainly agricultural commodities to growth of manufactures.
3.5 Transformation towards export dominance
Within the development stages one can identify the economic structure and transition of a
country such that the decline of one economic sector tends to give way to the emergence of
another. In the early stages of development, agriculture tends to dominate. The position of the
manufacturing and service sectors will surpass agriculture along the course of development.
Subsequently, the contribution and composition of a country’s exports begin to manifest the
changing production landscapes (Jalilian et al, 2000:7).
Even though the economy will be predominated by subsistence agriculture with most of its
resources being allocated to provide basic needs of life, the pre-manufacturing phase will be
dominated by the processing of exportable raw materials. Characterising this stage will be
manufactures such as handicraft, food and shelter-construction materials (Nyilas, 1976:274). In
South Africa, the dominance of subsistence agriculture was primarily dictated by the small size
of the domestic market as well as the limited scope for exports and input materials (Leftwich,
1974:30).
As the intensity of production modernisation, induced by foreign role-players, creeps into the
economy, stumbling blocs to accumulate the necessary modern production facilities impinge on
the transition towards a diversified economy (Beaumont, 1995:45; Mody & Yilmaz, 1994:4).
While the economy continues producing traditional consumer goods, technological improvement
becomes central to new production functions in both agriculture and manufacturing industries.
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With output levels surpassing the subsistence level, labour is freed to engage in other duties,
which include employment in manufacturing, thereby greasing the wheels of manufacturing
development (Browett, 1990:4). The weakening of rudimentary traditional economic system has
thus given way to the establishment of enterprises, the spread of education, the widening of trade
and commerce and the development of infrastructure crucial to the industrial growth and nature
of output produced. However, these sources of industrial growth are insufficient to trigger the
economy to engage in manufacturing of capital goods. The transition is curtailed by the lack of
capital formation institutions necessary for the development of manufacturing base (Thoburn,
2000:14 & Meier, 1995:363).
To acquire such necessary capital, exportation of natural resources and/or inflow of foreign aid
become essential for the production of quality manufactured capital goods and its subsequent
exportation. For the consolidation of this stage of transition, rising levels of investment,
expansion of industrial sectors with external economies of scale and internal structural
adjustments are paramount to self-sustaining growth. As new industries expand and the wave of
technology is adopted and adapted across the economy, the transition from light to mediumheavy manufacturing industries is curtailed by the lack of skilled labour in the domestic market.
However, the facilitation of manufactured exports should not be in isolation from the stimulation
of the agricultural sector lest it poses deleterious implications on the manufactured export growth
path through the importation of consumer goods and other raw materials for agro-processing
industries. It is important that during this phase, goods formerly imported are produced locally
and new import requirements developed, as should the production of new commodities for
foreign markets. For South Africa it was the economic linkages between the agricultural, mining
and manufacturing sectors that drove the transition period towards a competitive export-oriented
economic system with the latter’s industries dominant.
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The increasing level of total income generated from the high value-added manufactured exports
partly financed by foreign technology is a reflection of the changing structure of the
manufacturing sector, whereby light industries give way to heavy and hi-tech industries. The
latter industries are stimulated by the increasing demand for manufactured goods for
consumption and exportation.
As the economy experiences increasing diversification with rising
levels of per capita incomes, investment and continued improvements in manufactured exports,
the service sectors are growing in significance, driving the capacity of the economy to
experiment with the hi-tech manufacturing industries. As a result, the volume of output traded
locally diminishes while the earnings from exports of manufactures increase significantly.
Eventually, the manufacturing sector grow in both size and number of establishments in a variety
of products produced.
3.6 Trade theories on patterns of trade
In pursuit of economic growth capable of driving development, developing economies have
adopted varying trade reform initiatives in an attempt to overcome domestic market constraints.
Since trade is used as a proxy for participation in international trade, it could thus be used as an
indicator of openness of a country’s trade regime. Central to adopting a more liberalised trade
policy is the notion that it allows importation of capital goods essential for capital formation and
higher investment on the one hand and technology transfer, higher productivity and economywide prosperity on the other.
While extensive literature exists vis-à-vis the varying tendencies of trade levels between
countries, common sense informs that bigger economies, measured in GDP terms, (United
States) are likely to generate more trade than smaller nations (South Africa). However, there is
no simple theory of trade as, in reality, stimulants of trade differ from one country, region and
continent to another. Nevertheless, principles guiding the rationale behind trade exist, explaining
basic variables influencing patterns of trade.
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Such is the several different ways in which trade can be analysed as distinguished by Stopford
(1995:266):
??Trade by country indicating why they trade and how trade fits in with the growth of their
economies;
??From a geographical viewpoint and research the regional distribution of trade and trade flows
between the trading regions of the world; and
??View trade as a collection of commodities and study the economic characteristics of each
commodity.
From the distinction listed above, a researcher can choose the approach suitable to the research
interest. Literature on international trade (Ellworth, 1964; Gouwland, 1984:17; Stopford, 1995 &
Abdi & Edwards, 2002) broadly distinguishes different strands of thoughts on trade as follows:
(i) Ricardo’s trade theory
Ricardo’s trade theory focuses on labour as a relative factor of production and suggests that
differences in labour productivity exist across commodities where each commodity has a unique
method of production. In other words, it is the localisation of production between different
countries following the principle of comparative cost. The differences in production techniques
across countries would give rise to differences in relative prices of commodities, thereby creating
a platform for trade. For instance, South Africa imports footwear from Zimbabwe where wages
are lower, which accords with the traditional trade assumption.
(ii) Hecksher-Ohlin trade theory
The H-O theory argues that one of the most important causes of trade is the fact that different
countries are endowed with different natural resources. It considers both capital and labour as
major basis of trade.
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The theory proposes that same techniques of production for all commodities are available in all
countries, but the relative differences in factor possessions between countries form a basis for
trade. However, it is the relative abundance or scarcity of a resource that will determine lower or
higher factor costs, thereby implying varying prices for the products. The main assertion of the
theory is that a country should export the commodity that uses relatively intensively the
relatively abundant factor of production and import the commodity which uses relatively
intensively the relatively scarce resource. The H-O theory is somewhat more sophisticated than
the Ricardian theory in acknowledging that there exist at least some commodities that can be
produced with various production techniques. Basically, this assertion implies that it is not only
the relative abundance of a resource that will be important in determining the comparative
advantage of a country, but also the intensity of the use of resources in producing the
commodities across different countries that will determine the pattern of trade.
(iii) Leontieff theory
The Leontieff theory uses an input-output matrix to determine factor-intensiveness of exports
and imports. It modifies the factor-content assumption even more sophisticatedly, but it still
revolves around the factor endowment theory. It includes the composition of factors of
production (mainly labour), not just capital and labour, in explaining varying patterns of trade.
For instance, differences in the composition of the labour force are regarded as an important
determinant of comparative (dis)advantage. Broadly speaking, labour can be divided into
unskilled, semi- and skilled labour. In this case, labour is treated as a he terogeneous factor,
unlike the classical economists.
(iv) Neo-technology trade theory
This is the most radical departure from the endowment assumption by dropping the common
production function assumption and to argue that technology is integral for trade to occur.
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The neo-technology school of thought features the technical know-how and the ability to
innovate in a country as a major factor influencing trade patterns. The theory acknowledges the
influence of technology on methods of production and the role that this variable has on the
capacity of a country to innovate a new structure of exportable products. Manufactured goods
often require specialist investment and expertise. As a result, countries can develop a competitive
advantage based on technical innovation that can act as a barrier to other countries due to the
high cost of entry.
(v) Taste-differences trade theory
The premise of this trade theory is the assertion that tastes - rather than factor endowments influence pattern of trade. It is based on demand differentials for certain goods to be imported to
either supplement or replace domestically produced goods. This stems from inter-industry trade
where countries import and export the same goods. For example, if most Americans prefer to
drive larger cars, while South Africans prefer smaller cars, then trade can take place to meet
demands for the respective markets. The minority of the consumers in America who wish to
purchase
smaller
cars
can
import
them
from
South
Africa
and
vice
versa.
In a world economy where demand is constantly changing, an important source of trade is the
temporary local shortage of goods or commodities, which would normally be obtained locally at
a competitive price. The temporary shortages that may arise from business cycles include factors
such as demand, mechanical failure, disaster, poor planning or sudden bursts of commodity
inflation which could encourage manufacturers to build stocks of raw materials.
3.7 Determinants of sources of trade
Since the manufacturing sector has linkages with other economic sectors, both the direct and
indirect capital and labor impact on manufacturing’s ability to export are deemed crucial for the
success of export growth.
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Dias (1998:6-8) identified five variables as major sources of trade: (i) Research and
Development (ii) economies of scale (iii) natural resource intensity, and (iv) multi-factor
productivity. Some of these variables are briefly explained below.
(i) Research and Development
R&D measures the propensity to innovate in the manufacturing industry. It represents actual
expenditures on R&D, which will affect the growth of exportable manufactures. R&D should be
treated with caution since a significant amount of technology in developing countries is imported
from industrialised countries. R&D could be less reliable when measuring the ability of an
industry in a country to innovate. It can be used as an indicator of R&D activity (rather than
innovation) and regard locally produced technology as the measure of innovative capacity of the
manufacturing sector.
(ii) Economies of scale
The economies of scale is measured by the ratio of the output in industry valued in monetary
terms per annum and the total output of manufacturing per annum. The scale variable is not
meant to establish a relationship between the location of the long run average cost curve and its
level of exports and imports, but rather to propose that an industry with a larger share of output
and consumption is more likely to experience economies of scale essential for higher export
performance.
(iii) Natural resource intensity
The pattern of trade in manufactures is greatly influenced by the (non-) availability of natural
resources such as gold and diamonds as it was the case in South Africa.
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According to this variable, those industries associated with a high intensity of natural resourcesuse include Ricardian sectors, food, beverages, tobacco, paper and related products, wood and
wood products, leather as well the non-metallic mineral industry and the basic iron an steel and
non-ferrous mineral sectors.
3.8 Possible underlying factors influencing export growth
There are several factors considered as determinants of export growth in several countries. Due
to the multiplicity of these factors and different country-patterns of trade, the following factors
will be highlighted below and discussed thoroughly when they emerge as dominant factors when
analysing export growth trends in the South African manufactured export industry in the
remaining chapters.
(i) Currency fluctuations
In the light of many countries’? practice of determining or fixing nominal exchange rate, the real
exchange rate is seen as a crucial determinant of exports. It stems from the fact that exporters
tend to be willing to export more if their domestic cost ratio is less than the real exchange rate.
Most firms in most African countries remain loyal to the domestic market and in this context are
likely to find trade liberalisation and real exchange devaluation problematic. Overvaluation of
exchange rates is considered as a common factor that contributed to the dramatic decline in
export volumes during the 1970s and early 1980s in most developing countries (Kuma, 1985:8).
(ii) Trade reforms
Trade liberalisation will be beneficial for a country’s exports as it will benefit the input used
most intensively in its production. A country’s access to imports at world markets is an important
determinant of export.
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In more recent times the effects of imperfect competition, economies of scale and distribution of
trade patterns have been analysed, mainly as part of endogenous growth theory and strategic
trade policy. The gist of this literature is that a country’s? successful integration into the world
economy and its share of exports in world trade is a significant determinant.
As a vent of surplus, trade could benefit the economy by utilising those economic resources that
are idling, thereby optimising the capacity of the sectors of the economy (Thirlwall, 1999:337 &
Giersch, 1987:45). Moreover, in periods of recession, which are characterised by slackening
domestic demand, local producers may try to export more abroad to reduce idle capacity in an
effort to compensate for the declining domestic demand. Thus the rate of capacity utilisation and
the efficient use of available factors of production are important determinants of manufactured
export behaviour.
(iii) World economic demand
The impact of business cycles in global markets (especially in major industrialised economies),
which depends on the share of a country’s export and structure of its exports in the world
markets, a nation’s export destination and commodity composition are major factors determining
its export growth. If export ratios to emerging economies are higher than to developed markets,
export performance will decline with negative performance for such industrialised economies.
(iv) Firm-level factors
Recent literature on determinants of exports shows that firm-level specifics constitute heavily on
the ability of a firm to either enter export markets or remain focused on domestic markets. Firmlevel factors emphasise the importance of production and cost functions for a firm to participate
in exporting.
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Entry into exporting is associated with fixed costs, predicting that only relatively productive
firms with relatively high returns from exporting will choose to enter the world export market.
Since the emergence of this line of thought, many countries have set aside funds for research and
development to investigate any relevance of firm-level theory and traditional trade theory. If
anything, these developments suggest that in order to better understand the nature and
determinants of a country’s export potential, there is a need to explore beyond traditional factors
(Rankin, 2003:4).
(v) Monetary and fiscal policy instruments
Whilst trade reforms have higher prospects of increasing manufactured exports, the role of stable
monetary and fiscal policy should not be overlooked. Policy measures introduced to enhance the
exports promotion strategy are important in facilitating export-entry and may become
particularly rewarding in terms of improving export performance of a country (Teal &
Soderbom, 2000:9).
3.9 Summary and conclusions
Diversification of developing countries’ economies requires a well thought of establishment of
manufacturing industries, which could make in-roads into foreign markets. This emphasises the
promotion of international trade, in manufactures in particular, as an integral part of the
development strategy for developing countries. Trade can be broadly analysed by studying trade
by country, geographical area and commodity.
In pursuit of the reasons why trade takes place, different theories of trade emerged to explain
forces behind international trade. The most notable ones include Ricardo? s and the H-O trade
theories, which are based on comparative advantage. Both theories attribute trade to different
factor endowments, although the H-O theory is regarded as the more sophisticated.
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Trade can also be explained through theories such as the Leontieff, technology, taste differences
and cyclical conditions in the economy. Many economists consider R&D, economies of scale
and natural resources among the possible determinants of the sources of trade. There are various
possible factors underlying the growth of export, which range from individual firm-level factors
to macroeconomic policies.
Foreign trade in South Africa has been characterised by restrictions, incentives, exhortations and
other forms tinkering with the economy. But since the 1990s, the key features of South Africa’s
patterns of trade changed significantly. Today, the composition of the South African exports is
diversified with manufacturing contributing a sizeable exporting value to the total GDP.
However, export growth trends indicate that South Africa’s exports are mainly derived from the
skill-intensive and mineral-intensive industries. The structure and pattern of export growth by
factor intensity in South Africa explain partly why the manufacturing sector has not seen any
major job creation despite rapid export growth in the 1990s. Reducing the import bill in the
manufacturing sector could be achieved with a concerted effort to encourage R&D, thereby
increasing the innovation capacity of the manufacturing sector and the economy in general.
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CHAPTER FOUR
The impact of trade liberalisation on the manufactured export industry
4.1 Introduction
In the chapter trade patterns in the South African economy are analysed with a particular
reference to the 1990s. The chapter provides a background analysis of South Africa’s main
trading partners in the 1990s and most important, the degree of the structural changes of South
Africa’s trade policy orientation and the extent of its effect on the manufacturing sectors’ trade
behaviour.
The analysis will be made based on export orientation and import penetration subsequent to
South Africa’s simplified tariff phased-down programme under WTO for periods of which data
is available and less complicated. Thus the chapter concentrates on the effects of the new trade
policy reforms on the capacity of South Africa’s manufactured export industry to penetrate world
markets.
4.2 The direction of South African trade
The last few decades have witnessed an increased global integration as well as the opportunities
and challenges it presents to the economies of the world, producing “winners” and “losers” in the
same country, region and the rest of the world. The period of globalisation has led to a dramatic
expansion of world production and trade. Encouraging is the growing participation of developing
countries in world trade, but still these groups of economies should vigorously formulate fruitful
policies for diversification of production activity. In comparison to other larger emerging
economies, South Africa still appears to be a moderate globaliser (McCarthy, 1998: 436, Calitz,
2002: 566 & Loots, 2002: 265-267).
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South Africa’s diversification of its economic activity and growth of manufactured exports, in
particular, was halted (and even reversed) by the imposition of trade and financial sanctions by
several major United States banks, some members of Commonwealth Nations and the Nordic
countries (Jonsson, 2000:3). In an effort to maintain a positive balance of trade, South Africa
(against its will) became more focused on developing industries for foreign markets.
The nature of South Africa’s direction of trade has changed significantly since the 1990s,
subsequent to improved political and economic relations with the rest of the world. The new
democratic dispensation has since stimulated trade growth and inflow of investment (Calitz,
2002:248). Consequently, some of the traditional trading partners recorded strong increases in
trade flows and others have registered declining growth rates while new market opportunities
were identified.
Table 4.1: South Africa’s main trading partners (%), 1995-2002
Country
EXPORTS
United Kingdom
United States
Germany
Japan
Netherlands
Zimbabwe
Italy
1995
1996
1997
1998
1999
2000
2001
2002
14
8
8
9
5
8
4
11
10
8
11
5
8
4
1
11
8
10
6
7
4
17
15
12
11
9
8
6
18
15
15
9
8
6
5
15
18
13
9
7
5
6
17
16
14
9
8
4
5
16
15
12
9
7
4
6
19
14
13
12
5
5
6
18
15
14
10
4
5
4
17
15
14
9
4
5
3
20
19
14
11
6
6
4
21
19
14
11
6
5
5
22
20
14
13
7
6
4
20
16
11
9
5
5
6
20
15
12
9
5
5
7
IMPORTS
Germany
United States
United Kingdom
Japan
France
Italy
Rep.of China
Source: Customs & Excise database (www.sars.gov.za), 2003
Evidently, since the mid-1990s the distribution of South African trade has shifted somewhat
from traditional markets in Europe to Asia and America (Budget Review, 2000:19).
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Notably, trade by income level indicates that South Africa trades more with high-income
economies (Western Europe, North America, East Asia and Pacific). However, South Africa’s
trade is not limited to the high-income countries as it also does trade with middle-and lowincome countries. The former category includes Sub-Saharan and South Asian economies; and
the remaining trading partners make up the middle-income group (Alleyne & Subramanian,
2001:14).
Germany, the United Kingdom (UK), the United States (US) and Japan have consistently
affirmed their position as South Africa’s major trading partners, consistently accounting for more
than 70 percent of trade between 1990-2002. This emerging trend can be attributed to various
structural changes, particularly the shift in trade policy paradigm, which has been taking place in
the South African economy. Conversely, France, Italy and the Netherlands compensated for the
relatively declining import shares of the major consumers of South Africa’s exports – Germany,
US, UK, and Japan – beginning in the latter part of the 1990s.
4.3 Trade liberalisation in South Africa
Historically, South Africa had pursued a development policy based on import substitution. But
by late 1960s, policy changes became inevitable and a commitment towards export-led growth
designed to encourage diversification into global markets became dominant. In an effort to raise
exports of manufactures amid the declining export share of the primary exports, South Africa
embraced re-integration into global markets in the early 1990s through economic reforms.
Theoretical arguments in recent development literature indicates that countries that followed
outward-oriented trade policies generally perform better economically than those that pursued
protectionist trade policies (Valodia, 1997:2). For a country to become fully committed to export
growth, dismantling of tariff barriers is essential for the following reasons:
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??Inflating tendency of tariff barriers on costs of input materials;
??Foreign competition fosters efficient allocation of resources by domestic firms;
??Trade is a reciprocal business in which protectionism provokes protection in response; and
??Tariff barriers create an artificially profitable home market as businesses have no incentive to
compete in foreign markets.
In pursuit of the fruits associated with outward-oriented trade policy, South Africa underwent
different episodes of trade liberalisation. Notwithstanding effects on other economic sectors,
South Africa’s trade regime was viewed as a main constraint for the growth of the manufactured
export industry.
4.3.1 Trade liberalisation prior to the 1990s
The first liberalisation episode was heralded by the 1972 report of the Reynders Commission of
Inquiry into South Africa’s export trade. The report was an outcome of a commission of enquiry
that was appointed by government in 1971, headed by Dr H.J.J. Reynders, to investigate the
export trade of South Africa (Struthers, 1990:15). The report was instrumental in reforming the
trade regime of South Africa and stimulated measures necessary for the liberalisation of trade as
early as the 1970s (Jonsson & Subramanian, 2000:3).
The main recommendations of the Reynders Commission were:
??The promotion of exports in the manufacturing sector;
??The introduction of export incentives to countervail the effects of distance from major
markets and the influx of subsidised exports from other countries; and
??The need for South Africa to earn more foreign currency by diversifying away from gold
exports into manufactured exports.
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However, the real appreciation of the Rand owing to a gold-led export growth reduced the
competitiveness of South Africa’s manufactures, resulting in increased calls for protection. The
start of 1980s signaled the process of intensification of trade liberalisation. The eventual strategy
was thus on export promotion rather than on liberalisation of the import regime. It was only in
1983, when about 77 percent of imports were subject to direct import controls that the first
systematic attempt was made to dismantle the controls. In 1985, South Africa switched from a
positive list of permitted imports to a negative list of prohibited imports covering about 23
percent of imports (Kusi, 2002:2).
Towards the end of the 1980s, South Africa’s commitment to trade liberalisation became even
more evident, especially with the BTT, which had succeeded the BTI, hardening its stance
towards private sector requests for protection. Export promotion was further enhanced by the
introduction in 1989 of sectoral “Structural Adjustment Programmes” for certain industries,
notably for the motor vehicles and textile-clothing industries. These selective sectoral
programmes had been at the heart of the BTI’s 1988 policy document entitled “A Policy and
Strategy for the Development of Structural Adjustment of Industry”.
4.3.2 Trade liberalisation after 1990
The 1990s experienced the birth of a massively significant period of economic, political, and
social change in South Africa. After years of political struggle, the first democratic elections in
1994 marked the end of Apartheid government and thus the birth of new economic and
development challenges for the new government – led by the ANC. The ANC policy framework
(1994) on the economy is clear: The expansion of production for internal market is essential for
redistribution, increasing manufactured export competitiveness to achieve a high productivity
and diversification away from primary exports towards reliance on exports of manufactures. A
major turnaround of trade liberalisation in South Africa was motivated by a publication of IDC
entitled The Modification of the Application of Protection Policy (Lipton & Simkins, 1993:213).
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The report argued for export orientation to replace the import substitution strategy. In contrast to
the BTI’s recommendation, IDC recommended for a much more uniform and lower tariff
structure to reduce the dispersed and complex relatively high protective structure and encouraged
anti-dumping measures and gradual downward adjustment of tariffs to predetermined levels.
Against traditional observation, Naude (2000:246) states that South Africa has been forced to
shift to an outward orientation strategy primarily because of the need for accelerated export
growth to overcome the balance-of-payments constraint and not because of other benefits
attributed to trade liberalisation. Globally, growth rates of export of the trade liberalising group
of countries are much greater than among the non-liberalisers. However, a comparative study on
trade policy changes in a sample of developing countries by Holden (2000:295) shows that the
majority of these countries suffered terms of trade deterioration upon reform of protective
structures. By contrast, enhanced trade conditions in South Africa have in recent years improved
efficiency reasonably, even though chronic unemployment and poverty levels remain major a
concern (Jonsson & Subramanian, 2000:3).
In order to solve the problems of declining average economic growth, rising unemployment and
absolute poverty the new government formulated the GEAR strategy in 1996. Mostly the
strategy aims to stimulate economic growth by liberalising the economy with special reference to
encouraging manufactured export growth (Edwards, 2001:57; Naude, 2000:246; Dias, 2002:1).
From a macro perspective, it is very important that South Africa stimulate its non-traditional
exports. It is generally accepted that export-led growth is the way for increasing global
competitiveness and growing the economy. This will, in turn, increase the wealth and living
standard of South Africa.
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Without any doubt, the impetus for trade liberalisation in South Africa started gaining
momentum in the early 1990s, reflected in a consultative process under the auspices of the
Tripartite National Economic Forum involving government, labour and organised business
(Holden & Gouws, 1997; Tsikata, 1999; Jonsson & Subramanian, 2000; Onyango & van
Seventer, 2001). To reduce supply-side impediments in the manufactured export industry, the
DTI introduced an incentive package in the form of the GEIS, which was later eliminated in
1997 for it contravened WTO rules. With certain exceptions, all exports qualified automatically
for assistance in terms of a formula that made the rate of subsidisation an increasing function of
the stage of production and local content. A local content rule simply requires that certain
amounts of local input material must be combined with foreign input material for manufacturing.
For example, manufactures with high value-added and local content qualified for a nominal
subsidy of 19.5 percent of export turnover; while those firms with low value-added and low
domestic content qualified for a meagre 2 percent.
4.3.4 South Africa’s trade liberalisation under the WTO
Although agreed to under GATT in 1994, South Africa engaged in a far-reaching trade
liberalisation programme implemented under the WTO. In addition to tariffs being simplified
and reduced for almost all South Africa’s imports, non-tariff barriers such as local content
requirements and export subsidies were abolished for they contravened WTO trading rules. The
acceleration of the tariff phase-out was further boosted by the commitment of South Africa to
bilateral free trade agreements such as the EU-RSA FTA and unilateral trade liberalisation
programme.
The main reasons for the recent structural reforms, trade policy in particular, were deteriorating
economic performance, socio-political factors and the inappropriateness of the Apartheidinherited economic system (Calitz, 2002:248 & Roberts, 2000:607).
In a declaration to the
unilateral tariff reduction programme that exempted the agriculture and mining sectors, which
were granted a longer phase-out period, South Africa aimed to:
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??Reduce the number of tariff lines (from over 13, 000) at the six-digit level by 15 percent in
the first year and by 30 percent or higher by 1999;
??Convert all quantitative restrictions (QRs) on agricultural imports to bound ad valorem rates;
lower all bound agricultural tariffs; and reduce the number of tariff rates to six – 0 percent, 5
percent, 10 percent, 15 percent, 20 percent, and 30 percent – with the exception of the
“sensitive” industries (textiles, clothing and motor vehicles);
??Liberalise the sensitive industries over an eight-year period; and
??Phase out the GEIS by 1997.
Table 4.2 shows a declining trend of tariff relaxation across South Africa’s economic industries,
notably manufacturing industries. The only exceptions to the five-year tariff liberalisation
process were the clothing and textiles and automotive sectors, which were granted eight years to
attain the levels made in the WTO offer (Cassim & Onyango, 2001:2; Jonsson & Subramanian,
2000:8; Black, 1998:2 & Roberts, 1988: 13). Notably, the South African economy appears to be
heading for a relatively full-scale tariff liberalisation with certain “sensitive” industries enjoying
a gradual liberalisation progress (table 4.5).
Cassim & Onyango (2001) point to the fact that South Africa’s average weighted import duties
were also to be reduced from 34 percent to 17 percent for consumption goods, 8 percent to 4
percent for intermediate goods, and 11 percent to 5 percent for capital goods. With the WTO
bindings for these categories being 26 percent, 4 percent and 15 percent, respectively, South
Africa’s commitment to import liberalisation to allow foreign competition to the sectors is more
than generous by WTO benchmarks.
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Table 4.2: Tariff phase-down under the WTO
New
ISIC
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
82
Total
Description
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Textiles
Clothing, excl., footwear
Leather, leather products
Footwear
Wood, wood products
Paper, paper products
Printing , publishing
Petroleum, and
petroleum products
Industrial products
Other chemical products
Rubber products
Plastic products
Glass, glass products
Non-metallic and
mineral products
Basic iron, steel products
Non-ferrous metal products
Metal products, exclu.,
Machinery
Non-electrical machinery
Electrical machinery
Radio, television and
Communication apparatus
Professional equipment etc
Motor vehicles, parts,
accessories
Other transport equipment
Furniture
Other manufacturing
Mining
30.1
73.7
14.9
37.5
13.9
9.6
8.1
1.6
33.8
73.7
14.8
41.6
3.6
9.3
1.3
-
31.8
68.2
14.1
39.1
3.4
9.1
1.2
-
24.9
54.6
16.5
36.8
3.5
8.8
8.1
-
23.4
50.5
15.7
34.2
3.3
8.7
1.0
-
21.9
46.4
14.8
29.1
3.1
8.5
1.0
-
20.3
42.4
14.8
29.1
3.1
7.9
1.0
-
18.7
37.7
14.8
29.
3.1
7.3
1.0
-
17.3
33.2
14.8
29.1
3.1
1.0
-
17.3
33.2
14.8
29.1
3.1
1.0
-
17.3
33.2
14.8
29.1
3.1
1.0
-
9..3
9
30.5
19.8
11.8
10.6
7.5
3.8
14.5
14.7
9.5
8.7
7.5
3.7
14.1
13.7
9
8.1
1.7
2.7
15.8
13.2
8.3
8.4
1.7
2.6
15.4
12.6
7.9
8
1.6
2.5
14.6
12
7.6
7.7
1.6
2.4
14.4
12
7.6
7.7
1.6
2.5
14.4
12
7.6
7.7
1.6
2.5
14
12
7.6
7.7
1.6
2.5
14
12
7.6
7.7
1.6
2.5
14
12
7.6
7.7
7.6
2..3
13.1
4.4
2.3
8.2
4.2
2.3
7.8
4.2
2.3
7.8
4.1
2.2
7.6
3.9
2.0
7.4
3.9
2.0
7.4
3.9
2
7.4
3.9
1.9
7.4
3.9
1.7
7.4
3.9
1.7
7.4
6.5
11
12.1
1.4
6.1
5.1
1.3
6
3.7
1.4
5.8
2.4
1.3
5.8
2.3
1.3
5.7
2.3
1.3
5.7
2.3
1.3
5.7
2.3
1.3
5.7
2.3
1.3
5.7
2.3
1.3
5.7
2.3
7.2
55.4
0.2
33.5
0.2
31.7
0.3
29.3
0.3
27.9
0.3
24.8
0.3
23.2
0.3
22.1
0.3
22.1
0.3
22.1
0.3
22.1
1.4
28.1
2.9
2.7
11.7
0.4
21.4
1
0.6
7.2
0.4
20.8
1
0.6
6.8
0.3
20.2
5.2
0.5
6.1
0.3
19.6
5.1
0.4
5.8
0.2
18.9
4.9
0.4
5.3
0.2
18.9
4.9
0.4
5.1
0.2
18.9
0.2
18.9
4.9
0.4
4.9
0.2
18.9
4.9
0.4
4.9
0.2
18.9
4.9
0.4
4.9
0.4
4.9
Source: Customs & Excise (www.sars.gov.za), 2003 & TIPS, 2003 (www.tips.org.za) databases
From a cross-sectional empirical analysis on trade liberalisation it is evident that not all countries
and regions benefited to the same extent (Meier, 1995:33-66). It is therefore essential to establish
the impact of trade liberalisation on the manufactured export industry in South Africa to
ascertain whether this phenomenon stimulated growth in manufactured exports.
4.4 Implications of South Africa’s free trade agreements for the manufactured export industry
Many developing countries have been reluctant participants in multi-lateral trade liberalisation
agreements. South Africa is not one of these.
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Following the lifting of sanctions, South Africa succesfully participated in the Uruguay Round of
negotiations of the then GATT and has concluded a development and cooperation trade pact
(based more on trade) with the EU and SADC and has made significant progress towards
strengthening bilateral ties with main trading partners. This has taken mainly a form of free trade
agreements to gain greater market access in these regions (van Seventer & Mlangeni, 2001:1;
Masters, 2001:1 & Black, 2001:14).
4.4.1 South Africa’s trade with SADC
Historically, southern African economies were characterised by a highly interventionist and
protectionist trade regime (Kalenga, 2000:6). Since the mid-1980s, there has been a fundamental
shift in the domestic policy and outward-orientation of SADC economies (Sandberg & Martin,
2001:412; Visser, 2001:2 & Evans, 2000:674). The region has made substantial reforms of its
foreign trade regimes either as a part of IMF/World Bank SAPs or unilateral and multi-lateral
reforms.
By world standards, SADC has considerably high tariff schedules (van Seventer, 2001:6).
However, in recent years Kalenga (2000:7) & van Seventer (2001:6) have noticed a considerable
lowering of tariff barriers even though significant non-tariff barriers still exist. Zambia is
regarded as having the most liberal trade regime in SADC, while Tanzania, Mauritius (the most
export oriented economy in SADC) and Zimbabwe have the highest tariff peaks (Tsikata,
2000:14). In addition, there are several bilateral preferential trade agreements amongst the SADC
economies. These include South Africa and Zimbabwe (largely confined to textiles and
clothing), South Africa and Mozambique, South Africa and Malawi, Malawi and Zimbabwe,
Namibia and Zimbabwe as well as Botswana and Zimbabwe.
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A survey conducted by the IDC (1998) among South Africa’s importers of food and beverages
from the SADC region confirmed that the low levels of imports were, to a large extent, related to
the existing business culture and lack of information rather than the restrictive trade rules and the
absence of competitive supply forces in the region. Moreover, lack of trade finances, high freight
costs and unfavourable macroeconomic policies continue to exert an inhibiting pressure on
regional trade expansion.
Exports from South Africa to the rest of the non-SACU SADC countries have seen a significant
growth since the early 1990s, in particular (Valentine & Kransnik, 2000:273 & Table 4.3). Since
the 1990s countries that traditionally had less trade with South Africa (Angola and Mozambique)
recorded high growth of imports (although from a low base) from South Africa and the more
traditional trading partners (Zimbabwe, Zambia and Mauritius) had their imports from South
Africa growing at lower rates. Overall, SADC-SACU trade data indicate that South Africa export
share to the rest of SADC has increased although at a lower rate (13 percent), mainly because of
poor economic growth in Zimbabwe (Elyea & Mlangeni, 1999:14).
Table 4.3: South Africa’s share of manufactured exports in SADC (%), 1990-2002
Year
1990
1992
1994
1996
1997
1998
1999
2000
2001
2002
Angola
1.1
7.7
4.0
5.0
5.7
7.6
7.9
6.5
11.1
12.6
DRC
12.2
5.3
4.2
7.9
5.7
5.6
4.9
4.4
4.0
4.9
Malawi
14.0
14.5
9.1
7.3
7.7
8.7
8.8
8.3
7.6
8.4
Mauritius
8.4
7.1
9.8
7.4
8.2
7.3
7.4
10.0
9.00
8.7
Seychelles
1.2
1.1
1.3
1.4
1.4
1.4
1.3
1.1
1.0
1.3
Zambia
15.3
18.9
13.1
13.7
14.9
14.4
14.5
22.4
20.5
18.7
Zimbabwe
34.6
31.9
34.0
38.8
37.0
35.4
30.3
23.9
22.9
24.1
Mozambique
13.1
14.0
24.5
18.6
19.5
20.0
24.6
23.6
23.9
21.3
Source: Calculated from Economic Research Unit database (DTI), 2003
Table 4.3 indicates that Mozambique is fast becoming South Africa’s largest trading partner in
Africa, overtaking Zimbabwe, which has been declining following its political instability and
economic slump since 2000.
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Manufactured exports to Mauritius and Zambia are steadily growing while trade with Malawi is
declining despite its bilateral trade agreement with South Africa.
The African market, SADC in particular, is important for South African export opportunities
(Ginsberg, 1998:8 & Matlanyane & Harmse, 2002:442-23). The favourable trading conditions
with the African economies, particularly the SADC market, have been a very notable feature of
the 1990s. The composition of South Africa’ s exports of manufactures to the region is of great
significance and is mainly made up of machinery and appliances, motor vehicles, chemical
products, plastic and rubber products foodstuffs and beverages and textiles and clothing. Given
the high income-import elasticity of demand in developed markets, South Africa should focus on
the large developed markets of the world if the country wishes to effect a quantum on its growth
performance in spite of the higher current manufactured export earnings in the SADC market.
Figure 4. 1: South Africa’s trade of manufactured exports with SADC (Rm), 1990-2002
30000000
25000000
20000000
m
z
15000000
10000000
5000000
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
0
Source: Economic Research Unit (DTI), 2003
62
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Figure 4.1 shows growth trends in South Africa’s manufactured exports (Z) and imports (M) in
the SADC region for the period 1990-2002. Since post-1994 there has been increased trade in
manufactures, with manufactured exports dominating imports, resulting in a positive balance for
South Africa’s manufactured export industry.
Figure 4.1 clearly shows South Africa’s large
trade surplus with the SADC market and this performance raises questions of export growth
sustainability. Sub-Saharan Africa cannot be seen as the market that will provide South Africa
with sufficient export-oriented growth opportunities to overcome its lethargic growth.
On the other hand, South Africa’s large trade surplus with most of SADC economies is a major
concern for manufacturing growth and development in the region. Researchers argue that the
situation offers South African exporters a more competitive edge over SADC exporters in the
region and South African market. Furthermore, a literature review has shown that there are
competitive exporters of certain manufactured products (food, beverages, tobacco, furniture,
cotton, leather, refined copper and copper wire) in the SADC economies but South Africa
continues to import such products from the rest of the world. Even though South Africa has
begun importing small quantities of these products, evidence exists that there is potential for
SADC export expansion into the South African market.
However, trade policy changes alone cannot explain the increasingly growing manufactured
exports into SADC market. Factors such as the high growth in the SADC member states’ real
GDP and special agricultural, mining and industrial projects (e.g. the construction of the Mozal
Aluminium Smelter in Mozambique) have been instrumental in the performance of the
manufactured export industry in South Africa.
The growth in exports of manufactures to the SADC market has been achieved in spite of the
historically high levels of barriers to trade in the region. In contrast to exports of South Africa to
the other regions of the world, the SADC market is the only region to which the country’s major
exports are manufactured goods.
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It is expected that the Trade Protocol adopted by SADC in 1996 will lead to more export
opportunities for the South African manufacturing firms (Kalengu, 2000:19; Evans, 2000:663).
4.4.2 Implications of South Africa’s free agreement with EU on manufactured export growth?
The RSA-EU FTA has strengthened South Africa’s position in the global economy. The
European Union (formerly know as European Economic Union or European Community) was
formed in November 1993 and now consists of 25 member states 2 . It was formed to enhance
political, economic and social co-operation among member states. The signing of the EU-RSA
FTA deal on 11 October 1999 marked the conclusion of four years of rigorous negotiations.
The agreement covers a wide range of areas including trade, economic relations, finance and
technical change. A free trade agreement with the EU is indicative of the wider strides South
Africa has taken since re-integration into global markets. The trade aspects of the agreement
cover all industry sectors and many agricultural goods as well as services.
Table 4.4 shows that at the end of a 10-year transition period, 95 percent of South African
exports will enter the EU market free of duty and, after 12 year, 86 of the EU exports will enter
the South African market duty free. The free trade deal with the EU is a landmark bilateral
achievement because it is the only such agreement South Africa has with a developed regional
economy.
2
Austria, Belgium, De nmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Nederland, Portugal,
Spain, Sweden, United Kingdom (1 May 2004 new member states – Cyprus, Czech Republic, Estonia, Hungary,
Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia).
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Table 4.4: Reduction in tariffs of South Africa’s imports from the EU (%), 1999-2012
Sector
As % of 1999 2000
2003 2006
2009 2012
RSA
imports
from
the EU
Food, beverages & tobacco
2,1
15,6
15,4
14,1
10,5
7,4
4,3
Chemicals
12,6
2,9
2,8
2,7
2,0
1,3
0,7
Plastics
4,6
10,2
10,1
9,8
7,4
4,5
1,8
Leather
0,3
10,9
10,9
10,1
8,3
6,2
4,9
Wood
0,4
7,7
7,7
7,3
5,1
3,1
1,1
Paper
3,2
6,7
6,7
5,5
2,6
1,4
0,2
Textiles
2,1
-
20,9
16,1
10,1
10,6
10,4
Footwear
0,3
22,2
22,6
21,2
17,2
11,6
7,4
Machinery
46,4
4,4
4,0
3,6
2,3
1,4
0,5
Vehicles
5,5
10,8
9,9
8,5
7,0
5,5
4,3
Optical & photographic equipment
3,9
0,3
0,3
0,3
0,3
0,2
0,1
Other manufactured goods
1,1
9,4
9,4
9,2
7,3
4,7
2,2
Source: National Treasury, 2000
The EU accounts for more than 42 percent of South Africa’s total merchandise trade and two of
its members – Germany and United Kingdom – are consistently among South Africa’s top four
trading partners. The beginning of 1994 signaled the end of all sanctions against South Africa
thus paving way for increased trade between the EU and South Africa. The dominance of
primary exports to the EU market is a major concern (Akinbugbe, 2000:645-46).
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GROWTH TRENDS IN THE SOUTH AFRICAN MANUFACTURED EXPORT INDUSTRY
120000000
100000000
80000000
60000000
40000000
20000000
0
m
20
02
20
00
19
98
19
96
19
94
z
19
92
19
90
rands
Figure 4.2: South Africa’s trade of manufactured exports with the EU (Rm), 1990-2002
year
Source: Economic Research Unit database (DTI), 2003
Manufactured exports accounted for about 30 percent of South African exports to the EU
economy. The composition of South African imports from the EU indicates a heavy
concentration on manufactured and capital goods – a common characteristic of a typical
developing economy. These include machinery, chemicals, fuels, scientific instruments and
special metals (Pallango, 2000:72). Figure 4.2 clearly shows that growth in manufactured exports
(M) is associated with growth of manufactured imports (Z), creating a perpetual trade deficit for
South Africa’s manufactured export industry. Boosting exports, particularly of manufactures, is
now regarded as one of the best ways of overcoming the domestic market constraint by
stimulating sustainable economic growth and development in South Africa.
At regional level, the implementation of the EU-RSA FTA, which is based on the free trade
approach, is likely to further complicate SADC trade relations (Lewis et al, 2002:1). By
implication, the free trade deal considers Botswana, Lesotho, Namibia and Swaziland as party to
the trade pact.
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Moreover, the SACU and non-SACU/SADC countries are likely to have no options in terms of
their relationship with the EU other than those defined within the context of the EU-RSA trade
pact (Kalenga, 2000:10).
4.5 Import penetration in the manufacturing sector
In South Africa, growth in production is strongly correlated to imports of intermediate and
capital goods that consistently exceeded 73 percent of total imports prior to 1988. The higher
intermediate and capital goods composition of imports implies that import growth is closely
related to output growth (Edwards, 2001:4). Using trade data from 1980-1998, Abdi & Edwards
(2001) conducted a study into the export and import behaviour of South Africa’s manufacturing
sector. For import penetration analysis, they spread the time periods between the 1980s and
1990s to indicate the impact of the changes in trade regimes over these periods. Their finding
overwhelmingly showed that across the economy, relatively high import penetration levels are
most prevalent in the manufacturing sector.
The manufactured import data by SIC was valued at current prices between 1994-2002. By
referring to table 4.2 (Tariff phase-down under WTO) and table 4.5 (Growth of imports in the
manufacturing sector) an observable trend for so-called sensitive industries is that while tariff
liberalisation increased momentum (tariff dropped by more than twice the original rate) during
the period 1994-2002, import growth has more than doubled for clothing and textiles and four
times for motor vehicles. It appears that while South Africa’s manufacturing sector is
consistently and continuously liberalising its industries, it has resulted in an upward growth of
import penetration. Accordingly, the researcher attributes (as did Abdi and Edwards, 2002) the
increasing import penetration momentum to the trade liberalisation of the South African
economy, manufacturing in particular, notwithstanding other factors. It could also imply that the
process of liberalisation was introduced too fast for the South African manufacturing sector.
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Table 4.5: Growth of imports in the manufacturing sector (%), 1994-2002
Industry
1994 1995 1996
1997
1998 1999 2000 2001 2002
Food
6.7
8.3
9.2
11.2
11.0
10.6 12.0
14.2
16.9
Beverages
5.9
7.0
9.7
11.6
13.4
13.1 10.8
12.3
16.1
Tobacco
10.2
9.1
10.5
8.7
16.1
13.3
8.7
10.6
12.8
Textiles
7.7
8.9
8.9
10.2
11.1
10.8
12.2 13.2
17.1
Wearing apparel
5.7
5.7
7.3
9.3
11.0
12.0
15.1 16.5
17.4
Leather & leather products
8.0
8.9
10.0
11.2
11.5
11.9
14.6 15.2
8.7
Footwear
4.7
6.6
8.3
9.2
9.5
107
14.2 16.8
20.1
Wood & wood products
6.8
8.0
9.0
10.2
9.7
9.8
13.2 14.1
19.2
Paper & paper products
7.6
10.2
10.2
10.4
11.6
12.0
12.9 14.0
11.2
Printing & publishing
7.2
8.4
11.8
9.7
11.7
10.9
11.7 12.9
16.2
Coke & refined petroleum
3.5
4.4
9.5
7.6
12.0
12.0
14.4
25.7 11.0
Basic chemicals
6.4
8.5
8.7
9.4
10.2
10.5
12.8
14.3 19.3
Other chemicals
5.4
6.3
8.1
8.9
10.4
11.6
13.4
15.7 20.2
Rubber & rubber products
5.6
7.3
7.9
9.3
11.1
11.7
14.0
15.3 17.8
Plastic & plastic products
5.4
6.9
7.8
8.9
10.1
11.1
13.1
15.6 21.0
Glass & glass products
6.7
8.2
9.8
10.0
12.0
11.0
12.3
13.1 16.8
Non-metallic minerals
4.7
6.3
7.9
8.4
10.0
11.7
14.5
16.5
20.2
Basic iron & steel
6.2
8.2
9.6
8.8
11.0
10.1
12.2
14.5
18.9
Non-ferrous metals
3.3
6.5
7.4
9.2
11.1
11.6
22.1
12.1
16.8
Metal products
5.6
7.4
8.7
9.3
11.4
11.4
11.9
14.6
19.4
Machinery & equipment
6.6
8.0
9.8
10.2
11.7
10.5
11.6
13.9
17.8
Electrical machinery
7.1
9.6
8.3
8.8
11.1
10.8
12.5
14.2
17.7
TV, radio & communications
4.2
5.1
6.3
8.9
15.1
11.9
15.1
15.5
17.9
Professional & science equipment
6.0
7.0
8.5
9.0
10.7
10.9
12.8
15.5
19.6
Motor vehicles, parts & accessories
5.5
7.4
8.0
7 .3
8.1
9.7
13.7
17.3
23.0
Other transport
4.2
5.4
4.5
8.1
9.8
12.3
14.6
19.5
21.8
Furniture
3.3
4.4
6.7
6.9
8.4
12.2
14.0
18.6
25.5
Other industries
6.7
6.0
7.8
10.1
12.7
11.8
11.9
13.9
17.3
Source: DTI and Customs & Excise databases, 2003
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The overall findings of Fedderke & Vaze (2001), Abdi & Edwards (2002) and the researcher
show that in some industries there has been a very strong growth in import penetration emerging
mainly in the 1990s, with some experiencing no significant change in protection and others
experiencing increased protection. These findings therefore seem to suggest that it is difficult to
only ascribe the pattern of increased import penetration in 1990s to the on-going trade
liberalisation.
An analysis of “protected” (column 1) and “liberalised” (column 3) manufacturing industries in
table 4.6 shows the sectors that have become more protected have experienced an average
growth in import penetration (0.93) closer to that of liberalised sectors (1.10) during the 1990s.
Table 4.6: Trade liberalisation by manufacturing industry in the 1990s
More protected
Little or no change
Liberalised
Food
Machinery and equipment
Basic iron and steel
Textiles
Beverages
Motor vehicles, parts
Tobacco
Non-metallic minerals
& accessories
Leather and leather products
Coke
&
refined
petroleum
Paper and paper products
products
Basic chemicals
Printing, publishing & recorded
Basic non-ferrous metals
media
Electrical machinery
Wood and wood products
Wearing apparel
Rubber products
Plastic products
Metal products, excl. machinery
Furniture
Other transport equipment
Glass and glass products
Footwear
Professional & scientific
equipment
Other industries
Source: Fedderke and Vaze (2001)
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This finding may imply that trade liberalisation does necessarily appear to have been associated
with a higher growth rate of import penetration and that the effective rate of protection does not
serve to prevent growth in import penetration. The 1990s experienced a high average import
penetration relative to the 1980s partly because of the “catch-up” syndrome as foreign products
made up for the lost time in the 1980s. The analysis shows that it is difficult to ascribe the pattern
of increased import penetration in the 1990s to one factor.
It also appears that import penetration increased in sectors that did not experience a lowering of
effective protection. Even though some sectors (textiles) experienced relative rising effective
protection rates, they also experienced a moderate to high import penetration. Plausible reasons
for increases in import penetration amidst increasing effective protection rates include:
??Inefficiency within the domestic industry;
??Increase in productivity and efficiency ; and
??Already liberalised industry.
In theory, sectors that have been liberalised are expected to experience increased import
penetration and vice versa. But this is far from theory in the South African manufacturing
industries. Of the liberalised sectors, increased import penetration has been observed in footwear,
furniture plastic products and television, radio and communication equipment (in that order).
While these outcomes are expected, by contrast, basic iron and steel, basic non-ferrous products
and paper and paper products have experienced a decreasing growth in import penetration
despite undergoing liberalisation.
4.6 Export orientation of the manufacturing sector
Since at least 1994 there has been a number of major structural changes in the South African
manufacturing sector.
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GROWTH TRENDS IN THE SOUTH AFRICAN MANUFACTURED EXPORT INDUSTRY
One of the major significant changes is the sectoral composition of output and exports and a
growing export orientation (Onyango, 2003). There has been a steady increase in the share of
exports in manufacturing output. Whereas in 1994 exports contributed 14 percent of
manufactured output, this had doubled to 28 percent in 2001 - consistent with the world trend
(DTI, 2002:14). Manufacturing’s share of exports rose from 35 percent to over 50 percent at the
end of the 1990s.
Total trade as a percentage of GDP was almost 65 percent in 1997, up from 45 percent in 1990.
Food and food products (6.6 percent) and basic iron and steel products (13.3 percent) registered
the highest contribution to total exports in 2001. Although the overall performance of individual
manufacturing industries was satisfactory between 1994 and 2001, the percentage of total
exports in 2001 remained low as shown on table 4.7.
Table 4.7 shows the following trends in export orientation:
??All sectors have increased export orientation – but at widely differing rates;
??A number of wage goods (such as food, leather, footwear and textiles) have experienced only
slow rates of increase in export orientation;
??A number of “traditionally” more export oriented manufacturing sectors – notably the four
sectors3 that were the most export oriented sectors in 1994, have had low rates of increase in
export orientation; and
??A number of technology sectors are increasingly becoming export oriented.
3
Basic iron and steel, precious and non-ferrous metals, basic chemicals and leather.
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GROWTH TRENDS IN THE SOUTH AFRICAN MANUFACTURED EXPORT INDUSTRY
Table. 4.7: Manufacturing: ratio of exports to output (%), 1994 and 2001
Exports as a percentage of manufactured output, 1994 and 2001.
Sector
1994
2001
(%)
(%)
% of total exports in 2001
Food and food products
8,5
13,6
6,6
Beverages
5,8
14,3
2,5
Wearing apparel
6,0
18,7
1,5
12,1
20,1
1,6
3,5
5,5
0,1
Wood and wood product
14,1
27,8
1,5
Furniture
18,0
51,4
2,3
Paper and paper products
20,5
26,0
4,7
Publishing & printing
2,0
3,4
0,1
Other chemical products
8,8
18,9
4,0
Rubber products
7,3
23,4
0,9
Plastic products
3,3
8,5
0,8
Glass and glass products
8,8
18,3
0,4
Other non-metallic minerals
5,8
11,2
0,9
Electrical machinery
7,5
19,2
1,9
48,8
52,4
13,3
8,2
59,3
1,8
44,4
50,8
6,5
Motor vehicles and trailers
8,9
28,4
13,3
Other transport equipment
33,9
86,3
2,0
General and special purpose
16,8
80,0
12,5
0,8
4,2
0,5
14,3
27,7
Textiles
Footwear
Basic iron and steel products
Radio, television ad communication
Basic precious and non-ferrous metals
Other manufacturing industries
Total manufacturing
Source: DTI Annual Report, 2001-2002
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It is essential for South Africa to sustain its export growth as nations that wish to import must do
so by exporting to the rest of the world (McCarthy, 1998:448 & Brown 1979:122). Increased
export revenues provide countries with the foreign exchange needed to import intermediate and
capital equipment necessary to sustain output growth. Thus, growth in export orientation
becomes essential for an improved growth performance, either as engine that drives the
economy, or the facilitator of growth in avoiding balance-of-payments constraint.
Export orientation of the manufacturing industries in South Africa and anywhere else in the
world
is
of
paramount
importance
as
it
stimulates
export
diversification.
Substantial
diversification has been taking place as new export sectors and markets emerge and there has
been encouraging signs of fundamental reorientation of South African manufacturing firms
towards foreign markets (Black & Kahn, 1998:9).
The growth in export performance of the South African manufacturing sector has been due to a
few exporting industries led by non-ferrous metals, petroleum and coal products – all of which
are large-scale capital-intensive in their nature of production. The strong export performance of
transport equipment, machinery and electrical machinery appears to substantiate export-led
growth through trade liberalisation.
This trend is expected to be sustained given the increased market access in developed
economies, notably the EU and the US and the growing prospects of a free trade regime in the
SADC region in 2008. As a result of the shift in trade policy paradigm leading to the noticeable
outward orientation in the manufactured export industry in the 1990s, the manufacturing sector
in South Africa continued to achieve significant trade performance, although at differing rates. It
is therefore plausible to suggest that trade liberalisation in South Africa has had a major effect on
improved export orientation and performance in the manufactured export industry.
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4.7 Summary and conclusions
Since the 1980s, there has been unprecedented global integration. Societies and economies
around the world are being more integrated. The spread of globalisation is a direct consequence
of reduced costs of transport, lower trade barriers, faster communication of ideas and increasing
capital flows. In South Africa, the process of globalisation is largely credited with the pace of
trade liberalisation. However, compared to other larger emerging economies, South Africa
remains a moderate globaliser.
Although the first step of trade liberalisation was heralded by the recommendations of the
Reynders Commission, the beginning of the 1980s signaled the process of intensification of a
strategy of trade liberalisation. Towards the end of the 1980s, South Africa’s commitment to
trade liberalisation became more evident with the BTI hardening its stance towards private
sector’s requests for protection and instead opted for the introduction of “Selective Sectoral
Programmes”. For the manufactured export industry, the South African economy appears to be
heading for a relatively full-scale tariff liberalisation with certain “sensitive” industries under
gradual liberalisation progress. The 1990s saw the birth of a massively significant period of
economic, political and social changes following the first democratic elections. Consequently,
South Africa undertook a massive trade reform programme.
But most important was market access initiatives that resulted in various bilateral and
multilateral agreements. These market access initiatives significantly altered the composition,
structure and the destination of the South Africa’s manufactured exports.
The fact that the
1990’s saw a change in the orientation of trade policy and that such changes had a significant
impact on trade performance of the manufactured export industry is a plausible one. It therefore
appears that trade liberalisation in South Africa has had a major effect on improved export
orientation in the South African manufactured export industry.
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CHAPTER FIVE
Growth trends in South Africa’s manufactured export industry: Interpretation of results
5.1 Introduction
South Africa’s economy is reasonably diversified, with manufacturing and services contributing
a sizeable share to total GDP. As a percentage of world exports, South Africa showed a declining
trend throughout the 1980s and 1990s. This is attributable, among others, to the dominance of
gold (its value declined) as South Africa’s major export commodity and the declining price of
primary commodities. Since re-integration into global markets, South Africa has initiated a
rigorous export policy aimed at reducing dependence on mineral export revenues and boosting
the manufactured export sector. Consequently, a remarkable feature of the South African
economy has been the sharp rise in manufacturing exports in the 1980s and its predominance in
the 1990s. This is in accordance with South Africa’s industrial and trade policy thrust: to
significantly increase the growth of “non-traditional” exports in the wake of the declining
importance of gold and question marks over the growth of certain “other” traditional commodity
exports.
This chapter is crucial in determining and analysing what factors are responsible for export
performance and growth in the manufactured export sector. But most important is the
identification of “manufacturing export industry champions” generating export revenue greatly
essential for economic growth and development in South Africa.
5.2 Growth trends of South Africa’s trade
Superficially, conditions for growth of exports were very favourable in the 1970s as a whole.
The main influential factor was the commodity boom of the 1970s. The effect on foreign
currency value of South Africa’s goods was dramatic.
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Table 5.1: Growth trends of South Africa’s total trade (%), 1970-2000
Year
Merchandise exports
1970-1975
9.4
Net gold exports
Total exports
Merchandise imports
13.1
10.8
9.6
1975-1980
9.6
19.8
14.0
5.5
1980-1985
-8.9
-14.2
-11.4
-13.1
1985-1990
10.4
-2.1
5.8
7.5
1990-1995
5.2
-2.8
2.9
8.1
1995-2000
1.7
-9.9
-0.3
-1.3
Source: NEIP, 2001
Table 5.1 shows growth trends of South Africa’s total exports and imports for the period 19702000. It emerges that South Africa’s overall export performance was superior in the period 19701980. This period recorded the best average annual rates of growth of total exports than any
other of the decades. Table 5.1 further shows that the contribution of net gold exports to total
exports has been declining in real terms. Starting from 19.8 percent beginning 1980, it recorded
9.9 percent by end of 2000. With the exception of merchandise exports, which registered a
growth percentage of 10.4 percent in the period ending 1980, South Africa’s exports declined
during the period under scrutiny, albeit at varying rates. A noticeable feature of the above table is
the accompanying rise in merchandise imports as merchandise exports grow.
It must be emphasised though that since 1985 the percentage of merchandise exports
continuously has exceeded the contribution of net gold exports and the growth rates of total
exports. It therefore seems clear that total export performance has been significantly affected by
the decline in gold exports, mainly as a result of a weaker gold price and falling production since
1980. It was however, offset by a strong increase in non-gold merchandise and service exports,
especially since the early 1990s.
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Kusi (2002:9) noted that the volume of gold produced and exported fell dramatically from the
1970s and the drop in output was halted as a number of new shafts and some dump processing
schemes came on stream. Poor industrial relations led to many strikes that evidently later
contributed to the decline in output in the mid-1980s. Consequently, gold and “other mining”
exports as a share of total export earnings show a downward trend, as shown in table 5.1.
5.3 Export growth by major economic sectors
During its emergence as the key exporting sector, South Africa’s manufactured export sector
experienced various inhibiting factors, with the most prominent in the 1980s. At the centre of
negative factors constraining growth was the decline in the foreign value of South Africa’s
overall export earnings. Between 1970 and 1980, at sectoral level, the performance of the mining
sector as a percentage of total export was the greatest, followed by manufacturing. Starting at
44.6 percent in 1970, the mining sector makes up 54.1 percent of total exports in 1980. For
manufacturing, exports make up 43.5 and 37.5 percent, respectively, during the same period
(Lipton & Simkins, 1993:91).
Measured in current US dollars, South Africa’s total exports rose at an average annual rate of
22.2 percent in the 1970s, but fell sharply by 8.8 percent per annum in the1980-1990 period. The
export performance of all three major exporting sectors (agriculture, mining and manufacturing)
registered a dismal growth trend. Agriculture was the most affected, whilst mining and
manufacturing experienced moderately lower rates of export growth.
The structural change in the composition of South Africa’s export basket set in motion the
emergence of the manufacturing sector as a major contributor to export growth. A major concern
was, however, the continued deterioration of the export performance of the mining sector as a
share of South Africa’s total export sector. The mining sector had (still has) a principal role as
major generator of foreign revenue essential to finance the import deficit bill of the
manufacturing sector. It must be noted that for a technology-scarce economy of South Africa’s
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nature it is not surprising that the requirements for intermediate and capital inputs have led to a
deficit as a permanent feature of South Africa’s manufacturing sector.
In the absence of a significant reversal of capital outflow and the declining mining export
earnings, the need for a significant increase in the rate of “non-traditional” exports, manufactures
in particular became inevitable. By comparison, recent growth trends exhibited by the DTI trade
data (2003) indicated that the relative contribution of the agricultural sector to total exports has
never exceeded seven percent during the 1990s. In 1990, the share of the manufacturing sector to
total exports overtook the mining sector’s share to record 47.8 percent against 42.4 percent of
mining sector. This trend has since become a permanent feature of South Africa’s sectoral share
by kind of economic activity to total export. Despite the continued decline in the share of
primary clusters to total manufactured exports, it appears that the RCA of South Africa still
remains in primary commodities (basic iron and steel, non-ferrous metals and, to a lesser extent,
paper). The emergence of durable exports such as motor vehicles, accessories and parts
(subsequent to the introduction of Motor Industry Development Programme) indicates that with a
concerted effort by relevant government institutions it is possible to break the traditional pattern
of RCA of South African trade.
Recent trends in South Africa’s GDP, compared to other emerging economies (Thailand, Korea
Republic, Indonesia, Malaysia and Mauritius), show that exports of manufactures and
manufacturing production experienced a lesser contribution to the growth rate. The trend in
South Africa’s GDP growth rate has been, since 1994, less than 1 percent, even though real
exports have increased by about 5 percent (Onyango & van Seventer, 2001:11). Although this is
poor in comparison with the other emerging countries, it is at least an improvement. It must be
noted that it is the manufacturing rather than the primary export sector that has a significant
positive impact on GDP growth rates in less developed economies.
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In recent years, South Africa’s economic policy has been driven by the need to refocus
industrial and trade policy to increase the contribution of industrial products to total exports.
Moreover, a closer analysis of the manufacturing sector in South Africa in the 1990s indicates
the lowest ratio of the manufactured exports to merchandise exports of all the countries
considered. This was about 57 percent of the ratio for Malaysia, Mauritius and Thailand, but only
fractionally smaller than Indonesia. The mean value of South Africa manufactured exports for
this period was smaller than all the East Asian economies. However, in per capita terms,
Mauritius produced more than three times the value of South Africa’s manufactured exports
(Rankin, 2003:5).
But the ratio of merchandise export to GDP, as noted by Rankin (2003:1), has increased since
1990. Moreover, manufacturing exports as a share of total exports have increased significantly
from 17 percent in 1988 to 54 percent in 1998. Since 1991 the ratio of manufactured exports to
GDP has increased by more than three times from 3.1 to 9.6 percent. This suggests that
manufacturing exports are increasingly becoming an integral part of GDP. The growth of
manufactured exports as part of GDP is essential as it generates foreign exchange, allows firms
to benefit from economies of scale, provides a mechanism for the transfer of know-how and
technology and encourages efficiency and job opportunities. South African trade by major
economic sectors - division of traded good in the manufacturing, mining and agricultural sectors
- shows an important structural change. Over the last decade, the proportion of manufactured
goods in total exports has increased significantly as more of South Africa’s raw materials are
processed before being exported and the proportion of manufactured imports has fluctuated
considerably. Figure 5.1 shows the structure of South Africa’s trade by kind of economic activity
between 1993-2002. The agricultural sector is second from the last after “other trade” with 5.2
percent as the highest contribution to total exports since 1995. The share of mining exports
declined considerably since 1994, recording 36.9 percent in 2002 down from 58.3 percent in
1996. Noteworthy is the significant growing share of manufacturing export since 1992.
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As expected, 1998 was characterised by declining growth of exports mainly due to depressed
markets in the Eastern Asia markets following the 1997/8 Asian financial crisis. It is evident that
the manufactured export industry has become the engine of trade growth in South Africa as it
continues to account for the lion’s share of total exports. By contrast, the growth trend of South
Africa’s imports by kind of economic activity shows a different performance.
Figure 5.1: Export growth by major economic sectors as % of total exports, 1993-2002
Agriculture
Mining
Manufacturing
Other trade
60
40
2002
2001
2000
1999
1998
1997
1996
1995
1994
0
1993
20
Source: Economic Research Unit database (DTI), 2003
Imports by agricultural and mining sectors indicate the well-documented self-reliance of the
South African economy vis-à-vis these sectors. But even so, imports by the mining sector have
been steadily rising while a downward trend is identified for the agricultural sector. The growth
in imports by the mining sector can be traced to the recent surge in “high-tech” mining to
increase the competitiveness of the South African mining sector in global markets. On the other
hand, deficit has become a permanent feature of the South African manufacturing sector.
This is a worrying phenomenon for economic policy-makers since the manufactured export
industry is highly regarded as the engine of economic growth and the lack of “self-reliance” by
the industry could serve as a constraint to growth in the long run.
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For instance, South Africa’s manufactured exports in 1993 amounted to R15.7 billion, whereas
manufactures imports were R45.1 billion. By 1998 their values were R42.4 billion for exports
(+170 percent) and R106 billion for imports (+135 percent). Therefore, South Africa has a
marked trade deficit in manufactured goods, although the relative (not absolute) increase in
exports was rather higher than for imports for the periods examined.
Overall
export performance by 9-sector aggregation (Business services, Manufacturing,
Community services, Transport, Agriculture, Trade, Electricity, Mining and Construction) in
South Africa provided a broader analysis of export growth between 1991-2001. TIPS trade data
(2002) showed that the highest growth rate in exports between 1997-2001 came from of business
services (7.3 percent), manufacturing (6.9 percent) and community services (6.9 percent). The
moderate growth performers included transport, agriculture and trade, whereas amongst the
negative achievers mining stand out – a major policy concern considering its importance to
employment creation and foreign currency generation.
5.4 Export performance by stage of production
Rapid growth in exports of manufactures has been a central feature of the successful
development of the high growth economies in East and South-East Asia during the past four
decades. The success of the larger developing economies (China, Thailand, Malaysia, and
Indonesia) that achieved high growth rates of manufactures exports in the 1980s has prompted
policy-makers in similar countries to adopt growth strategies relevant to manufactures as a policy
central for the development of their economies (Martin, 1993:1). South Africa has since adopted
the strategy and is reaping rewards for diverting more of its resources from extraction to
processing of natural resources destined for world markets. The shift in the structural
composition of the South African economy has thus, to an increasing degree, rubbed off in the
changing composition of the export basket in the 1990s. Following the reintegration of South
Africa into the global economy in the early 1990s, there has been improved export orientation
towards world markets.
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It has contributed towards the diversification of South African exports away from mining
towards manufactures. The rising economic significance of manufactured exports bears
testimony to the outward orientation of South Africa’s production, and a shift from just
extraction of natural resources to the beneficiation process.
Figure 5.2: Exports by stage of production as % of total exports, 1992-2000
Manufactured goods
Raw goods
Semi-manufactured goods
80
60
40
20
0
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Source: Economic Research Unit database (DTI), 2003
Exports by stage of production in the early years of 1990 show a slender dominance of raw
products. But the dawn of 1994 has since changed the production landscapes. This period has
seen a higher real growth of export of manufactured goods and an increase in the percentage
share of semi-manufactured exports, whereas exports of raw materials continue to decline.
Figure 5.2 shows that the contribution of raw products (22.3 percent) to total exports was the
greatest, followed by manufactured goods (47.2 percent) and semi-manufactured products (27.2
percent). Manufactured exports recorded 45.5 percent to the share of total exports, with raw
products and semi-manufactured goods accounting for 27.6 percent and 36.9 percent,
respectively.
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Clearly figure 5.2 shows a shift in commitment of resources away from the primary sector to the
secondary, which is consistent with industrial and trade policy prescription in South Africa.
However, the position of the trade balance by stage of production paints a typical characteristic
of a developing economy. Growth in output of the South African manufacturing industry is
regrettably associated with an increase in imports of intermediate and capital goods – a trend that
dates back to the primitive years of industrialisation in South Africa (Parr, 2000:299). Therefore,
it is not surprising that the manufactured export sector have the greatest deficit counter-balanced
(as expected) by the greatest surplus generated by the raw products. Semi-manufactured goods
faired better than manufactured goods, only registering deficits in 1996 and 1998, and then
gaining strength in the remainder of the 1990s and beginning of 2000s.
5.5 Export growth trends by major regional markets
The trade reforms adopted by the South African economy post-1994 gave impetus to
manufactured exports destined for the key international markets, following the lifting of trade
sanction against South Africa by the international community. In terms of percentage growth
rates year-on-year change of the total manufactured export value, there have been a dramatic
acceleration to the SADC and North Atlantic countries in the first half of the 1990s. By contrast,
EU’s growth rates steadily accelerated in the last half of the period under review. A fairly steady
growth of manufactured exports is experienced for the East Asian market. From 7.5 percent in
1990 SADC grew by more than 5 percent in 1995, only to decline by 2.1 percent in 2002.
Although from 6.7 percent in 1995, NAFTA recorded the highest growth rate of 11.6 percent in
2002 from 3.9 percent in 1990. Following the 1997/8 East Asian crisis the region’s absorptive
capacity of South Africa’s manufactured exports was severely dampened, dropping by more than
2 percent between 1996 and 1999. Measured at average annual growth percentages (not shown in
table 5.2), the EU (21.4 percent), followed by East Asia (11.8 percent), SADC (11.7 percent)
were star performers with NAFTA (7.8 percent) a moderate performer.
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The other regions failed to grow at more than 2 percent. The research outcome of manufactured
export growth by major regions indicates that with the exception SADC, South Africa’s
manufactured exports are mainly destined for developed markets in the EU and North America.
Table 5.2: Regional destination of South African manufactured exports as a percentage of total
manufactured exports, 1990-2002
Regions
1990
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Eastern Africa
0.5
0.5
0.8
0.8
1.3
1.7
1.7
1.9
2.0
1.7
1.4
1.7
1.7
SADC
7.5
8.5 10.0
10.2
11.5
13.4
13.7
13.7
12.7
13.1
12.9
12.8
11.5
NAFTA
3.9
3.7
6.0
6.0
7.3
6.7
7.8
7.7
9.2
9.2
11.0
10.8
11.6
11.1 11.4
9.9
10.2
12.4
13.9
13.6
11.1
12.2
13.0
11.0
12.5
Eastern Asia
10.5
S. Eastern Asia
1.2
European Union
18.3
1.7
1.8
4.6
3.9
4.2
4.4
2.1
2.8
3.0
3.1
3.0
16.3 19.3
1.1
17.0
17.9
21.7
18.7
18.9
24.7
26.8
25.8
26.6
26.2
Source: Economic Research Unit database (DTI), 2003
Table 5.2 provides the top regional destination of South Africa’s manufactured exports between
1990-2002. The table shows that there has been a fairly consistent pattern of the top five trading
regions over the period examined. As always the top three major markets were EU, SADC and
Eastern Asia. These results are hardly surprising given South Africa’s top trading partners
analysed in chapter 4. East Asia includes notables like Japan, South Korea and Taiwan;
NAFTA’s totals are primarily attributed to the US, with Canada a distant second. Zimbabwe,
Mozambique, Malawi, Mauritius, and Zambia dominate the SADC market. For North America
and Asia one could argue that South African manufactured export growth was more or less in
line with global trends (van Seventer, 2001). Average annual growth of the manufacturing
industry was 6.5 percent (SADC), 19.3 percent (the Rest of Africa), and 3.8 percent (North
America) while Europe and Asia recorded -4.9 percent and -8.3 percent, respectively, during the
period under review.
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5.6 Geographical breakdown of manufactured exports
The geographical breakdown of South Africa’s manufactured exports (percentage) indicates that
the SADC region is the major market for more than half of the export manufacturing firms. Food
processing and beverages industries are prime examples. Table 5.3 indicates that since 1990, the
geographical destination of manufactures remained relatively constant, with food, chemicals,
basic iron and steel and non-ferrous metals prominent in almost all the regional markets.
Television, radio and communication equipment (1998), machinery and equipment, and motor
vehicles, parts and components (2002) had considerable growth rates.
The rest of Africa market is the second most important export destination for a large number of
the South African manufacturing firms. The electronic sector is dominant in this market. The rest
of the Americas and Central and Eastern Europe are also important major market for firms in
South Africa. Asia emerged as a major market for a number of iron and steel manufacturing
firms whilst North America is an important major market for firms in the metal products and
machinery industry.
Table 5.3: A geographical breakdown of manufactured exports at industry level (% of total
manufactured exports), 1990-2002
Clusters : 1990
SADC
NAFTA
EA
EU
_________________________________________________________________________________________________
Food
Beverages/tobacco
10.8
14.8
13.4
0.1
0.3
0.7
3.1
1.0
4.9
3.1
Chemicals
15.1
11.3
7.3
7.6
Basic steel/ iron
10.5
29.1
42.6
14.2
9.7
14.6
13.5
17.2
Textiles/clothing
Non-ferrous/metal products
Machinery/equipment
2.9
1.1
13.5
6.9
0.9
5.4
Electrical machinery
4.1
0.5
0.2
0.9
TV, radio/comm..equipment
0.5
0.5
0.1
0.9
Motor vehicles
7.5
8.8
1.2
Continue on next page
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Continued from last page
Clusters : 1994
_________________________________________________________________________________________________
Food
9.4
4.9
8.5
13.0
Beverages/tobacco
4.0
0.1
0.1
0.1
Textiles/clothing
3.2
5.1
5.1
4.5
15.7
21.3
10.9
10.6
Basic steel/ iron
7.5
31.7
34.8
14.1
Non-ferrous/metal products
5.7
7.9
14.1
8.7
Chemicals
Machinery/equipment
Electrical machinery
TV, radio/comm..equipment
Motor vehicles
Clusters : 1998
12.1
4.2
1.0
4.9
2.6
0.4
0.5
1.9
0.5
0.2
9.1
SADC
4.1
NAFTA
0.1
4.4
EA
0.4
9.2
EU
_________________________________________________________________________________________________
Food
Beverages/Tobacco
11.5
4.7
3.7
1.1
8.7
6.8
0.6
3.5
Textiles/clothing
2.2
4.9
1.4
Chemicals
17.0
16.7
10.4
Basic steel/ iron
14.1
6.7
1.4
Non-ferrous/metal products
4.5
7.8
8.4
19.0
8.1
9.9
14.3
Machinery/equip
2.8
0.6
0.6
2.5
Electrical machinery
1.9
0.4
0.1
0.7
TV, radio/comm.equip
Motor vehicles
Clusters : 2002
8.7
6.2
5.8
SADC
6.3
NAFTA
3.5
23.8
E.A
16.9
5.5
EU
_________________________________________________________________________________________________
Food
11.9
3.6
5.6
Beverages/tobacco
4.2
1.8
0.4
4.6
Textiles/clothing
3.2
8.2
1.5
3.0
18.7
17.7
6.5
8.2
Basic steel/ iron
6.9
16.8
26.9
12.4
Non-ferrous/metal products
7.4
7.0
24.1
Chemicals
5.9
4.2
Machinery/equipment
13.2
10.1
2.0
17.5
Electrical machinery
4.0
0.7
0.6
2.2
TV, radio/comm.equipment
1.9
0.2
0.3
1.1
Motor vehicles
10.8
20.5
14.5
16.5
Source: Calculated from Economic Research Unit database ( DTI), 2003
Table 5.3 shows that mechanical goods and parts; electrical machinery, equipment; furniture;
iron and steel; motor vehicles and parts; paper and paper products have been dominant.
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The North America market was dominated by primary exports in the early 1990s, with a
dramatic acceleration of manufactured exports since mid -1990.
Whilst electrical machinery and equipment and motor vehicles and parts exports have featured
prominently in recent years, agricultural and minerals goods still contributed a sizeable share of
total manufactured exports. The SADC market exhibits a sectoral dispersion of manufactured
exports different from the other major markets analysed. Equally important are both the primary
and manufactured exports although the manufactured export industry is the only industry
wherein South Africa consistently registers a trade surplus.
5.6.1 Growth trends of manufactured exports, 1990-2000
The changing structure of South African manufacturing sector shows that export orientation has
become an integral part in the mid-1980s. As a result, manufactured exports have since become a
main component of foreign demand in the South Africa economy. Figure 5.3 shows average
annual rates (five-year time scale) of growth trends of South Africa’s 18 manufactured export
industries between 1980-2000, based on constant 1995 US Dollars. During 1980-1985 period,
only paper and paper products (4.1 percent), non-ferrous basic metals (5.4 percent) and leather
and leather products (1.8 percent) were star performers.
Negative rates of growth were recorded by footwear (-11.8 percent), electrical machinery (- 11.4
percent), furniture (-10.4 percent) and wood and wood products (-7.8 percent – dropped from
38.1 percent in 1970-1975 period). As a result, manufactured export growth for this period was
the worst ever in the South African manufacturing sector.
Though at varying rates, the period
1985-1990 saw all 18 manufacturing exporting industries registering positive growth rates.
Furniture (35.7 percent) and fabricated metal products (30.8 percent) were champion exporting
industries, with motor vehicles, accessories and parts (23.7 percent), television, radio and
communication equipment (21.0 percent) and professional equipment (19.6 percent) completing
the list of moderate performers.
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Figure 5.3: Growth trends of manufactured exports at 18-industry level (%), 1980-2000
40
30
20
10
pr
of.
sc
ien
tifi
ce
oth
qu
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an
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rin
g
ctu
red
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rts
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ng
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m
.eq
uip
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ea
r
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ur
e
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od
s
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du
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t
s
&
lea
the
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ro
du
cts
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r
wo
od
&
-10
mo
tor
ve
hic
les
ch
em
ica
ls
no
niro
fer
n
&
ro
us
ste
ba
el
sic
m
pa
eta
pe
ls
r7
pa
pe
rp
fab
rod
rica
uc
ted
ts
m
eta
lrp
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uc
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ts
ch
ine
ry
&
eq
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me
nt
ele
ctr
ica
lm
ac
hin
oth
er
er
y
tra
ns
po
rt e
qu
ip
0
-20
1980-85
1985-90
1990-95
1995-00
Source: Economic Research Unit database (DTI), 2003 and NEIP, 2001
With the exception of leather and leather products and non-ferrous metals, the remaining 16
industries experienced double-digit growth rates. In fact, during this phenomenal manufactured
export growth period only non-ferrous metals fell by 1.5 percent but still retained a positive
growth trend. Although the impressive growth trend of the 1985-1990 period fed into 1990-1995
period, the latter period experienced a downward growth trend. Only chemicals and leather and
leather products managed to achieve positive growth rates, all other industries experienced a
decline in real growth rates and yet retained positive growth rates. Fabricated metal products,
electrical machinery, other transport equipment and professional and scientific equipment were
the worst performers. The growth trends of 1995-2000 were similar to those of 1980-1985,
characterised by the reversal of the growth period of 1985-1990. The only relative star performer
was non-ferrous basic metals, registering 10.5 percent between the periods in comparison. All
other industries continued with a downward growth trend either retaining a positive or negative
growth rate.
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5.5.2 Growth trends of manufactured exports since 1990
The beginning of the 1990s brought with it remarkable changes in the history of manufactured
export industry. Following the democratisation of the South Africa economy in 1994, the
manufacturing sector’s trade was boosted with improved access to key international markets.
Economic democratisation in South Africa presented the manufacturing sector with increased
challenges from seasoned competitors and also brought with it vent-of-surplus opportunity.
Having analysed manufactured export performance for the period 1980-2000 on a five-year
basis, the 1990s shows an interesting analysis into the growth trends of South Africa’s
manufactured export sector. In recent years, the South African economy experienced a continued
decline in the role of commodities as main components of the total export basket. This is
informed by the rising export performance of the manufacturing sector relative to other sectors
such as mining. The growth of South Africa’s manufactured export by sector and industry as a
percentage of total manufactured export between 1990-2002 shows growth in every industry.
Albeit at varying rates, major industry groups (natural resources-based, durable and labourintensive) have shown significant growth rates.
Despite South Africa’s large endowment in raw materials, primary exports make up a smaller
share of total exports in the 1990s. The early years of the 1990s shows a dominance of durable
manufactured exports, with labour and resource-intensive exports following from a distance. The
annual rates of growth for the durable manufactured exports grew dramatically by 3.8 percent in
1993-94 period.
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Figure 5.4: Growth trends of major manufacturing industry groups (%), 1990-2002
18
16
14
percentage
12
10
8
6
4
2
0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
year
resource-intensive
durable
labour-intensive
Source: Economic Research Unit database (DTI), 2003
During the same period, resource-intensive manufactured exports overtook labour-intensive
manufactured exports, recording higher annual growth after durable goods. Although labourintensive manufactured exports grew, it was lower than the rest. By the dawn of the mid-1990s,
the growth trends at broad manufactured export level changed significantly. Although
manufactured export growth trends still appeared in favour of resource-intensive and labourintensive, the figure indicates the growing share of durable exports – a trend that has become a
permanent feature of South Africa’s manufactured export industry. The implication is that the
increasing shift of the manufactured export industry towards high-value export has changed the
structure and composition of manufactured exports destined for world markets. It appears that
year-on-year growth analysis between 1990-2002 at current prices shows that high growth rates
were more prevalent for the durable goods, distantly followed by labour-intensive manufactured
exports. The trend emerging is that of a declining role of primary commodities as main
component of the total manufactured export industry in South Africa.
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Figure 5.5: Labour-intensive manufactured export trends (%), 1990-2002
25
percentage
20
15
10
5
0
1 9 9 0
1991
1992
food
1 9 9 3
1994
beverages
textiles
1995
1996
1 9 9 7
y e a r
leather & leather products
1998
1999
furniture
2 0 0 0
footwear
2001
2002
clothing
Source: Economic Research Unit database (DTI), 2003
Figure 5.5 shows that beverages, furniture and clothing were star performers for the labourintensive category between 1990-2002. All but furniture experienced almost double annual rates
of growth between 1990-2002. The industries that performed well (food, textiles, leather
products and footwear) in 1994 captured relative deteriorating export performances.
Figure 5.6: Resource-intensive manufactured export trends (%), 1990-2002
25
20
percentage
15
10
5
0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
year
basic chemicals
iron & steel
paper & paper products
non-ferrous basic metals
Source: Economic Research Unit database (DTI), 2003
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Although the total resources-based exports (basic chemicals, paper and paper products, nonferrous basic metals and other chemicals) have experienced steady growth rates, most of the
industries show a decreasing share in the total manufactured exports relative to other industries
in the 1990s.
Owing to beneficiation of natural resources, annual rates of growth of durable manufactured
export performance have been impressive during the period 1990-2002. Figure 5.7 shows the
performance of the durable manufacturing industry group.
Figure 5.7: Durable manufactured export trends (%), 1990-2002
30
25
percentage
20
15
10
5
0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
year
TV, radio & comm.equip
motor vehicles
fabricated metal products
other transport equipment
machinery & equipment
electrical machinery
Source: Economic Research Unit database (DTI), 2003
Star performers include motor vehicles, television, radio and communication equipment and
machinery and equipment. Whilst motor vehicles and machinery and equipment grew by 1.3
percent and 0.9 percent between 1990-94, these industries registered 6.6 and 7.3 percent in 1998
to remarkable growth rates of 26.4 and 23.0 percent in 2002, respectively.
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Summary of manufactured export growth trends: 1980-2002
The following growth trends highlight some of the key findings of the research.
??Whilst the early 1980s experienced negative growth rates, significantly higher growth trends
were prevalent in the last half of the 1980s. By great contrast, the rest of the 1990s were
characterised by a positive yet relatively downward trend in South Africa’s manufactured
export industry.
?? Although the manufactured export industry experienced significant positive growth rates
between 1990-2002, it was not enough to surpass the annual average rates of growth
achieved since mid-1980s and early 1990s.
??South Africa’s manufactured exports by sector and industry as a percentage of total
manufactured exports between 1990-2002 showed a significant growth trends for all major
manufacturing industry groups (natural resources-based, durable and labour-intensive). A
star performer during the period under review was the durable industry – a trend that has
become a permanent feature of South Africa’s manufactured export industry – implying an
increasing shift towards high-value manufactured exports destined for world markets.
??A remarkable feature of the South African economy in the 1980s has been the sharp rise in
manufactured exports and its predominance in the 1990s. This was spurred by the industrial
and trade reforms with a view to improve the contribution of high-value exports amid the
declining importance of commodity exports.
??Average annual rates of growth at 18-sector analysis between 1980-1985 showed that paper
and paper products, non-ferrous basic metals and leather and leather products were star
performers.
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??The period 1985-90 recorded phenomenal growth trends spurred by furniture and fabricated
metal products as champion industries with motor vehicles, accessories and parts, television,
radio and communication equipment completing the list of moderate performers.
??A downward trend was evident during the period 1990-1995, with only chemicals and leather
and leather products performing well. Fabricated metal products, electrical machinery, other
transport equipment and professional and scientific equipment were the worst performers.
??The growth trends of the 1995-2000 period were a replica of the 1980-1985, reversing the
growth period of the 1985-1990. As the other manufactured export industries retained either
a declining positive or negative growth rate, the only relative star performer was non-ferrous
basic metals.
??Manufactured exports growth trends by regional markets showed that South Africa’s
manufactured exports were mainly destined for developed markets (EU and NAFTA).
SADC, the regional economic bloc of developing countries in Southern Africa, is the only
market in which the manufactured export industry continues to record a trade surplus.
5.7 Growth factors influencing manufactured exports in South Africa
In recent years, South Africa’s manufactured export industry underwent a fierce structural
adjustment process prompted by the new industrial and trade policy reforms. As a result,
considerable
changes
of
competitiveness were deliberately manipulated, leading to the
fluctuations of the performance of South Africa’s capacity to trade in manufactured goods.
Levels of competitiveness, geographical and product specialization and elasticity to changes in
world demand were consequently influenced by these structural changes (Golub, 2000:15).
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Table 5.4: Position and changes index in the manufactured export industry, 1997-2001
Industry
Position index
Changes index
Clothing
58
51
Mis. Manufacturing
41
58
Leather products
39.9
39
Non-electrical machinery
37.5
60.5
Textiles
31
18.5
Consumer electronics
31
39.5
Electronic component
28.7
41
Transport equipment
18.5
62
Chemicals
17.8
38.5
Processed food
10
99.5
Minerals
8.5
62
Wood products
5
37
Basic manufacturing
9.5
98.5
Fresh food
7.6
20.5
Adapted: TIPS (www.tips.org.za), 2003
The position and change indices are ranked in an ascending order such that a lower composite
index shows dominance of that particular variable in a certain sector. Table 5.4 indicates the
dominance of traditional sectors composing of basic manufacturing (9.5 percent), wood products
(5 percent) and food (10 percent) at static trade performance level. Although these sectors fared
well under the static trade measurement, they performed poorly when measured by the dynamic
trade performance, which is greatly influenced by competitiveness, adaptability and geographical
specialisation level. A change towards a negative level of these influential factors of dynamic
trade performance will lead to a declining growth trend for that particular sector. Table 5.4
reveals that leather products, textiles and clothing and consumer electronics showed higher
dynamic trade performances over the period examined.
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The ability to adjust to the changes of trade conditions in the markets of these sectors was pivotal
to the export growth experienced during the period under study. As for the adaptability level, i.e.
the ability to adjust to fluctuations in world demand, only non-electrical machinery and clothing
(mainly due to the competitiveness effect) emerged as star performers.
The 1997-2001 period showed that poor export growth performance were recorded by basic
manufacturing, chemicals and food, while some improvement was registered by exporting
manufacturing industries such as non-electrical machinery, textiles and information technology
and consumer electronics. However, the combination of competitiveness and geographical
specialisation effect indicates that the South African manufactured exports industries were
relatively low (in the exception of leather and transport equipment exports), suggesting that the
export of manufactures specialised in relatively poor export growth performance markets and
lacked competitiveness. The outcomes of the survey showed that South African manufactured
exports have access to all global markets but still grew either in declining markets or had
declined in growing markets, with adaptability and competitiveness effects central to the
direction of the growth trends.
These trends are based on the outcome of the ITC research in which South Africa’s economy and
its sectors were compared against 184 economies around the world and 14 economic clusters for
the period 1997-2001. The research used changes (which measures the export performance of the
economy and its sectors) and position (which measures recent growth trends in export
performance) indicators which were then compared with those of economies and its sectors to
measure trade performance. The former measured dynamic and the latter measured static trade
performance. Although there has been a general improvement in competitiveness in most
manufacturing industries in the 1990s relative to other countries, it has been due to declining
wages rather than a rise in relative productivity rate.
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Golub & Edwards (2003) revealed that labour-intensive industries had large improvements, led
by leather and footwear. Industrial chemicals, non-ferrous metals and professional equipment
were other industries that experienced large declines in relative unit labour costs. Compared to
other developing countries, South Africa’s absolute advantage is rather weak for aggregate
manufacturing; but not as much as against developed economies.
The analysis is important in that South Africa competes with other developing countries for
developed country markets. Further it emerged that natural resource based sectors (food, paper,
iron and steel, with the exception of non-ferrous metals which appeared highly competitive)
showed a decline.
Labour-intensive industries showed mixed growth trends with leather and
footwear improving sharply but others (textiles and clothing) loosing ground. Similarly,
indifferent competitiveness levels emerged for chemicals, machinery and metal products. For the
durable manufactured exports, there has been significant improvement in this regard with
electrical machinery, motor vehicles, parts and accessories and transport equipment leading.
The results indicate that levels and changes in competitiveness in South Africa are inconsistent
with sectoral characteristics such as factor content, skills intensity, size and trade orientation. As
a result, it is difficult to choose “winning” and “loosing” industries in the manufactured export
sector vis-à-vis competitiveness tendencies. Therefore, industry and trade policy biases against
and/or in favour of some industries over others are not advisable. Instead, a general environment
that fosters productivity growth and wage moderation, as well as a competitive exchange rate,
will entail rapid growth. Then, forces of the market will determine which industries particularly
succeed in exporting.
Other influential factors include foreign links and the size of the firm. The former factor seems to
suggest that foreign links is an important conduit for the transfer of technology and technical
know-how, whereas the size (in combination with efficiency) of a firm emerged as a driving
force behind South African manufacturing firms’ choice of exporting, in the SADC region.
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However, once firms start exporting, size does not seem to count. In South Africa manufacturing
firms at middle size level tend to export more than smaller and larger exporters. It therefore
seems to imply that there are fixed costs and the efficiency thresholds that need to be overcome
in order for a firm to venture into global markets.
South African manufacturing firms tend to regard exporting as a risky venture and thus
concentrate on the domestic market. This is indicated by the lower output-export ratios in spite of
having more firms exporting. For South African manufacturing firms, it was found that firms that
export outside SADC are more efficient than firms that export only to SADC or do not export at
all. This may suggest that efficient firms self-select into export markets or that firms become
efficient once they are exporting (Giersch, 1987).
Furthermore, manufacturing firms may lack information about potential markets or it may be
considered unprofitable (and even risky to find out). Other factors relate to supply-side
constraints such as lack of skilled workforce, outdated capital and/or lack of access to finance.
Alternatively, there may be limited demand for South African products because they do not meet
international standards, or too expensive because of variable costs such as transport charges, high
domestic costs and the strength of foreign exchange (Cooper, 1995 & Naude, 2001:124).
5.6. Summary and conclusions
In the wake of the declining importance of traditional exports, South Africa has adopted a
rigorous export policy aimed at boosting the manufactured export sector. It emerged that South
Africa’s overall export performance was superior in the period 1970-80 compared to the 19802000 decades. The poor performance of 1980-2000 was mainly due to the weaker gold price and
falling production.
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Export growth by major economic sectors (mining, agriculture and manufacturing) indicates a
downward growing trend for mining and agriculture such that structural change in the
composition of South African export basket set in motion the emergence of the manufacturing
sector as a major contributor to export growth. Despite the continued decline in the share of the
primary clusters to total manufactured exports, it appears that the RCA of South Africa still
remains in the primary commodities.
South Africa’s top regional markets for manufactured exports show a fairly consistent pattern,
with EU, SADC & Eastern Asia and NAFTA dominant. These results are hardly surprising given
South Africa’s top trading countries. Geographical breakdown of South Africa’s manufactured
exports shows that SADC is the main market for South African manufacturing sector.
The geographical destination of manufactures remained relatively constant for most industries
with food, chemicals, basic iron and steel and non-ferrous basic metals prominent in almost all
the regional markets. Manufactured exports are increasingly becoming a dominant feature in the
EU market, but agricultural and mining products still contribute a sizeable share of total exports.
The SADC market exhibits a sectoral dispersion of manufactured exports different from the
other major markets. Equally important are both primary and manufactured exports, although the
former is the only sector wherein South Africa consistently registers a trade surplus. Growth
trends in the South African manufactured export industry show growth in every exporting
industry, and natural resource-based, durable and labour-intensive industry groups have shown
significant growth rates. The growing trend towards dominance of durable manufactured exports
indicates the structural shift towards high-valued exporting behaviour. A major challenge for
South Africa’s manufactured export industry is the low levels of competitiveness, specialisation
and adaptability rates in key major exporting groups and regional markets.
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In recent years, there has been an increasing improvement in these variables and somewhat
positive growth trends by key durable exporting industries inclusive of non-electrical machinery,
information technology and consumer electronics. The lack of competitiveness was seen as a
major factor inhibiting growth in the manufacturing sector. The research outcome makes it clear
that whilst the early 1980s experienced negative growth rates, significantly unprecedented
growth trend was prevalent in the last half of the 1980s.
By great contrast, the rest of the 1990s were characterised by positive yet relatively downward
trend in South African manufactured export industry. As the 1990-2002 current prices analysis
indicated, the growth rates of manufactured export industry were not enough to surpass annual
average rates of growth achieved since mid-1980s and early 1990s. The results of the analysis si
essential in identifying growth trends and growing industries and markets with a view to
channeling resources to such industries, and not waste on fading industries.
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CHAPTER SIX
SUMMARY, CONCLUSIONS AND RECOMMENDATIONS
6.1 Concluding remarks
If exports are to play a pivotal role in the future economic growth and development of South
Africa, then manufactured exports are specifically important. The primary aim of the research
was to investigate the nature of growth trends and identify export industry champions in South
Africa’s manufactured export industry since the 1980s. The extent and nature of factors
influencing the growth trends of manufactured exports were also researched with the view to
identifying the possible prevalence of future obstacles and stimulants of South Africa’s
manufactured export industry.
The structure and performance of the manufactured export industry in South Africa was a direct
consequence of natural-resources endowments, which also shaped industrial and trade policy
design. It was indeed the discovery and exploitation of diamonds and soon afterwards, of gold
which was responsible for developing the modern industry in South Africa. The deliberate
involvement of government through the provision of infrastructure and promotion of import
substitution strategies had been the driving force behind the development of industry in South
Africa. In an attempt to curb the wide divergence of economic opportunities around South
Africa, an industrial policy shift towards decentralisation around major cities was deemed
necessary. The early stages of manufacturing development in South Africa were dominated by
heavy industries, unlike in most developing countries where textiles and clothing led the
industrial process. Industrial development in South Africa has not been without its difficulties.
Significant growth of manufacturing in South Africa was hampered by various structural
constraints such as high levels of import-intensity, bias against export of manufactures, the small
size of the domestic market and skewed income distribution and the industrial strategy of import
substitution.
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Consequent to these features were low levels of investment, sub-optimal utilisation of capacity,
and low levels of employment and productivity growth. Researching the structure of the South
African economy, it emerged that the manufacturing sector dominated the secondary sector of
the economy and occupied an important role in the economy of South Africa. The South African
manufacturing sector showed high levels of concentration with regard to geography, distribution
of output, employment, sales, ownership and control.
Through special programmes initiated under the SDI and IDZs, the post-1994 government hoped
to stimulate the growth of manufacturing by increasing competitiveness, levels of investment and
sustainable foreign trade balance. The government has adopted a new industrial development
strategy - IMS – based on two competing developments in the manufacturing sector for the past
five years. Mainly, the IMS strategy aimed at promoting competitiveness and providing
infrastructure and logistical support to eight manufacturing sectors.
In the light of the growing employment deterioration and the subsequent increasing poverty
levels in South Africa, the growth of manufacturing was deemed imperative. That required the
clear identification of sources of growth to ensure that manufacturing would continue to grow
towards a situation where it became self-supporting. However, it appears that while the structure
of the South African economy has adopted the global trends with a move in the direction of a
“New Economy” it also became clear that the structural change of the economy is insufficient to
address the unemployment crisis.
The path of economic development in South Africa, just as in many developing countries, was
first premised on import substitution with outward-looking strategy implemented later. The
extent of success and failures concerning the diversification of the economy of South Africa and
those of other developing countries remained a matter of serious debate.
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The growth of the economy was achieved in most developing countries but with little
improvement of the lives of ordinary people due the existence of pervasive unequal distribution
of income-generating opportunities. Although some countries made some remarkable growth in
non-economic variables, others continue to exist in the shadow of the successful industrialising
nations.
World War II had a very important impact on the thought of what determines economic
development in the economy. The linear stages of economic development explained the course
of development as a simple series of steps, which all countries must pass, based on the
phenomenal successful path of the now developed countries. Rostow’s stages of growth model
argues that countries must pass through successive stages along the development path. He
identified five stages: the traditional society, pre-condition for take-off into self-sustaining
growth, the drive to maturity and the age of high mass consumption. Each stage is identified by
its characteristics, which overlap into those of the other stage(s). Of the five stages, the take-off
stage is regarded as the most important as it involves overcoming stumbling blocs such as rising
investment and accumulation of necessary technical know-how to expand industries.
The first stage of development in South Africa occurred before the late 1800s when subsistence
agriculture dominated the economic activity. However, the course of development in South
Africa was geared up by the mining industry, which laid the necessary conditions for take-off
into self-sustaining stage. The political instability in the late 1970s and the unequal distribution
of income in South Africa nearly constrained the stage of high mass consumption, which was
achieved in 1975.
A number of constraints and criticism are being leveled against the linear stages of growth
model. The main constraint concerned the low level of new capital formation in most developing
countries attributable to the low levels of income and thus savings in these countries.
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Criticisms against the stages of growth model included the assumption that savings and
investment was the sufficient condition, when in reality, was rather the necessary condition for
economic development; confusion of economic growth as meaning economic development;
inability to recognise the diverse structural features of the developing countries; and the
assumption that diversification into manufacturing equaled development.
It was because of these numerous obstacles and constrains, and criticisms of the strictly stages of
growth model that led to the emergence of the structural-change model which took a differently
radical position. The model recognised the fact that the contemporary developing countries are
part of the web of external forces. One of the best-known early theoretical models of structural
transformation was that of the Lewis Two-Sector model. The theory consisted of the traditional,
overpopulated rural subsistence sector which was characterised by zero marginal productivity of
labour, and a high-productivity modern sector into which labour from the former sector was
gradually transferred. The three main assumptions of the model, for which proponents of the
model were criticised, include the unlimited supply of labour from the rural sector, reinvestment
of profits by capitalists and constant wage rate until surplus labour was exhausted. The model is
criticised for failing to consider the possibility of upward pressure on wages despite the presence
of unemployment and the possibility of capitalists competing among each other and the capital
flight argument.
Like the Lewis model, the patterns-of-development analysis of structural change focuses on the
sequential process through which the economic, industrial and institutional structure of an
underdeveloped economy should be transformed over a period of time to permit new industries
to replace traditional agriculture as the engine of economic growth. The well- and best-known
patterns of development model is that based on the empirical work of H. Chenery.
According to the empirical structural-change theory developing countries are confronted by a
host of domestic and international constraints that lie beyond these countries. These numerous
structural forces could either promote or inhibit the structural transformation of these economies.
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Sources of industrial growth include investment and growth, sources of demand, savings,
channeling savings to investors, and the domestic capacity building and productivity.
Diversification of developing countries’ economies requires the well-planned establishment of
manufacturing industries which could make inroads into foreign markets. It emphasises the
promotion of international trade, in manufactures in particular, as an integral part of the
development strategy for developing countries. Trade was broadly analysed by studying trade by
country, geographical area and commodity.
In pursuit of the reasons why countries trades with each other, different theories of trade emerged
to explain forces behind international trade. The most notable ones include Ricardo’s and the HO trade theories based on comparative advantage. Both theories attribute trade to different factor
endowments, although the H-O theory was regarded as the more sophisticated. Trade can also be
explained through theories such as the Leontieff, technology, taste differences, and cyclical
conditions in the economy. Many economists considered R&D, economies of scale, and natural
resources among the possible determinants of the sources of trade.
Foreign trade in South Africa has been characterised by restrictions, incentives, exhortations and
other forms tinkering with the economy. But since the 1990s, the key features of South Africa’s
patterns of trade changed significantly. Consequently, the composition of South African exports
was diversified with manufacturing, contributing a sizeable exporting value to the total GDP.
However, export growth trends indicated that South Africa’s exports were mainly derived from
the skill-intensive and mineral-intensive industries. The export structure and pattern of export
growth by factor intensity in South Africa explained partly why the manufacturing sector has not
seen any major job creation despite rapid export growth in the 1990s. Reducing the import bill in
the manufacturing sector could be achieved with a concerted effort to encourage R&D, thereby
increasing the innovation capacity of the manufacturing sector and the economy in general.
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To share in the fruits of outward-oriented trade policy, South Africa initiated trade liberalisation
even before bounding itself to the WTO liberalisation programme in the mid-1990s. The first
episode of trade ilberalisation took place in the 1970s, heralded by the recommendations of the
Reynders Commission which largely encouraged an “export incentive scheme” to achieve
greater export orientation.
The start of the 1980s signaled a process of intensification of a strategy of trade liberalisation,
characterised by the elimination of dual exchange rates and implementation of export subsidies.
Towards the end of the 1980s, South Africa’s commitment to trade liberalisation became more
evident when the BTI begun hardening its stance towards private sector’s requests for protection,
and instead opted for the introduction of “Selective Sectoral Programmes”. For the manufactured
export industry, the South African economy appeared to be heading for a relatively full-scale
tariff liberalisation with certain “sensitive” industries under gradual liberalisation progress.
The 1990s experienced the birth of a massively significant period of economic, political and
social changes following the first democratic elections in 1994. Consequently, South Africa
undertook a massive trade reform programme. But most important was market access initiatives
that resulted in various bilateral and multilateral agreements. These market access initiatives
significantly altered the composition, structure and the destination of the South Africa’s
manufactured exports. Major regional markets include the EU, SADC, Eastern Asia and
NAFTA. These agreements encourage South African manufacturers to specialise in the
industries in which they hold a degree of competitiveness and encourage investment by South
African manufacturing firms to adjust to foreign competition.
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In the wake of the declining importance of traditional exports, South Africa has adopted a
rigorous export policy aimed at boosting the manufactured export sector. It emerged that South
Africa’s overall export performance was superior in the period 1970-80 compared to the 19802000 decades. The poor performance of 1980-2000 was mainly due to the weaker gold price,
falling production and lack of competitiveness.
Export growth by major economic sectors (mining, agriculture and manufacturing) as a
percentage of total exports indicated a downward growing trend for mining and agriculture. As a
result, the structural change in the composition of South African export basket set in motion the
emergence of the manufacturing sector as a major contributor to export growth. The main
concern was the continued deterioration of the export performance of the mining sector as a
share of South Africa’s total exports given the principal role that the sector was expected to play
in generating employment and foreign exchange.
Despite the continued decline in the share of the primary clusters to total manufactured exports,
it appeared that the RCA of South Africa still remained in the primary commodities. However,
the concerted efforts by the relevant government institutions hope to break the traditional pattern
of RCA of South Africa trade. Even though recent manufactured exports showed an increasingly
growing trend, it was lower than emerging economies. Furthermore, the well-documented
consistently high manufacturing trade deficit was the worrying factor since manufactured export
industry was considered as the engine and/or facilitator of economic growth, and the lack of
“self-reliance” by the industry could serve as a constraint to growth in the long-run.
South Africa’s top regional markets for manufactured exports showed a fairly consistent pattern,
with EU, SADC & Eastern Asia and NAFTA dominant. These results were hardly surprising
given South Africa’s top trading countries. Geographical breakdown of South Africa’s
manufactured exports showed that SADC was the main market for the South African
manufacturing sector.
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The geographical destination of manufactures remained relatively constant for most industries
with food, chemicals, basic iron and steel and non-ferrous basic metals prominent in almost all
the regional markets. Manufactured exports were increasingly becoming a dominant feature in
the EU market, but agricultural and mining products still contributed a sizeable share of total
exports.
The SADC market exhibited a sectoral dispersion of manufactured exports different from the
other major markets. Equally important were both primary and manufactured exports, although
the former was the only one wherein South Africa consistently registered a trade surplus. Growth
trends in the South Africa’s manufactured export industry showed growth in every exporting
industry, and natural resource-based, durable and labour-intensive industry groups have shown
significant growth rates. The growing trend towards dominance of durable manufactured exports
indicated the structural shift towards high-valued exporting behaviour.
A major challenge for South Africa’s manufactured export industry is the low levels of
competitiveness, specialisation and adaptability rates in key major exporting industry groups and
regional markets. In recent years, there has been increasing an improvement in these variables
and somewhat positive growth trends by key durable exporting industries inclusive of nonelectrical machinery, information technology and consumer electronics.
The outcome of the research has shown that South African manufacturing firms have access to
all global markets, and therefore a constraint to export growth rest on the fact that South African
exporting manufacturers were not competitive with respect to similar from other countries. In the
final analysis, it was clear that whilst the early 1980s experienced negative growth rates, a
significantly unprecedented growth trend was prevalent in the last half of the 1980s. By great
contrast, the rest of the 1990s was characterised by positive yet declining trend in South Africa’s
manufactured export industry. As the 1990-2002 current prices analysis indicated, the growth
rates of manufactured export industry were not enough to surpass annual average rates of growth
achieve since the mid-1980s and early 1990s.
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The results of the analysis are essential in identifying growth trends and growing industries and
markets with a view to channeling resources to such industries, and not waste on fading
industries. The research found that there was a considerable shift of South Africa’s
manufacturing from resource-intensive to durable exports, which was in line with international
trends. South Africa is not yet by world standards a major industrial economy even though the
secondary sector (manufacturing in particular) plays an important role in the economy and
foreign trade.
6.2 General recommendations
The more open trade environment has increased the outward orientation and external exposure of
South Africa’s manufactured export industry. Exports of manufactures have since grown
strongly and the continued different supply-side programs in the wake of the current tariff
reduction continue to further stimulate the manufactured export sector.
The limited absorptive capacity of the African market for South Africa’s manufactured exports
was likely to impact negatively on sustainability in the long run. The growing large
manufacturing trade surplus in the African market could spike major economies (such as
Zimbabwe where massive import duties hikes were reported) practicing protectionism, which
could adversely disengage growth of South Africa’s manufactured exports.
The successful integration of South Africa’s manufactured export industry will depend largely on
penetration of markets in major developed economies, but not neglecting market potential in
Asia, South America and other regional markets in Africa. Large potential markets such as
ECOWAS have hardly been tapped by the South African manufacturers and in the medium term,
the establishment of free trade in SADC will improve South Africa’s market access.
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In order to attain and sustain international success in large difficult-to-enter markets, South
Africa should vigorously structure its industrial and trade policy so as to create an environment
in which a large and increasing number of manufacturing firms can optimise opportunities to
develop
the
combination
of
technical
skills
necessary
and
dynamic
managerial
and
organisational capabilities for efficiently and effectively responding to the competitive needs.
The most significant development of the three decades has been the massive extension and
deepening of markets. Markets have extended globally to encompass those that previously
excluded South Africa. Consequently, increasing market access for South African goods,
especially manufactures, should be advanced vigorously.
The extent and pace of trade agreements that are being sought in key markets like India, China,
Nigeria, Brazil, Japan and the US should be expanded. In cases where South Africa’s exporters
of manufactures are in the declining difficult-to-enter markets the focus should be on increasing
diversification towards potentially realistic growth opportunities such as Turkey, Spain,
Hungary, Poland, Sweden and former USSR economies. In addition, the Middle East, which
emerged more prominently in the 1990s as a promising trading partner, offers a huge market
potential. The strategy to develop a proper base for manufactured export diversification will
require some of the following elements:
??Revision of incentives: Avoiding support to exporters whose export capabilities,
experience and products are not sufficiently well developed to have realistic chances of
competing successfully in difficult-to-enter markets. Furthermore, the DTI must be in the
forefront of dissemination of information about foreign market opportunities.
??Intensify export entry strategy: Any grant or financial assistance in favour of the
development of new markets and/or products should be a prerequisite. It emerged that the
issue facing South Africa is to identify value added manufactured exports in which the
industry can trade competitively.
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If the future of economic growth of South Africa is dependent on export growth of
manufactures, it is essential that South Africa understand the exporting industries that
have the greatest competitive potential. It must be noted that while it may be possible to
set up strongly selective support programs, it is difficult to identify those manufacturing
industries that will become competitive in the future.
??The DTI should conduct impact analyses on the likely benefits and costs of trade
agreements on specific sectors of the South African economy. This is necessary as some
countries are likely to become a conduit for the export of cheap goods from the rest of the
world.
??A shift in the orientation of the manufacturing sector towards exports at the early stages
of development should be encouraged. Since manufactures exports is a policy goal in
South Africa, then the focus should be on encouraging firms to export more, rather than
having more firms exporting, i.e., increase the export-output ratio.
??Restructure government expenditure by (1) raising public investment in key infrastructure
and (2) maintaining sound and stable macroeconomic policy capable of either supporting
or driving growth of manufactured exports destined for the world markets.
??Foster a culture of high degree of competitiveness in manufactured export industry
through technological upgrading. This should not be at the expense of labour and natural
resource-intensive industries. These industries have the ability to cushion the rate of
accumulation of technologically sophisticated sectors, increase the rate of learning; act as
a hedge against the transition to hi-tech manufactured exports, and make it possible for
South Africa’s manufactured export industry to respond to competition from lower wage
economies “coming from behind”.
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??Streamline and expand South Africa’s shipping capacities in all modes of the
transportation system (rail, road, air, and water) for efficient delivery frequency, and
facilitate regular lead times.
Since South Africa’s large manufacturing sector is a key source of sustained export-led growth
path, the sector inherently has numerous structural constraints that require a well-thought
approach from policy makers. The policy option will require alleviation of these constraints in an
effort to better position South Africa’s manufactured export industry so as to influence
manufactured exports to take off. This requires a well-coordinated implementation of a supplyside export support system and technology measures, improved education and skills training and
the relaxation of import of scarce skills controls. It also requires close coordination between key
public sector institutions such as the DTI, Finance and Education departments, as well as the
private sector.
It must be considered that the problems of the South African manufacturing
sector and its prospects of growth cannot be seen in isolation from the rest of the world. Global
forces have contributed to the deterioration of South Africa’s growth performance in the past and
will affect its growth trajectory in future.
It is particularly difficult for a natural resource abundant South African economy, with an
intermediate skills endowment, which despite having had a relatively mature and diversified
manufacturing sector at the beginning of the 1970s, is a relative latecomer to export-oriented
industrialisation. Policy arguments have suggested that South Africa should thus make the most
of its comparative advantage in natural resource-based products to raise its exports and output,
while upgrading its competitiveness levels in manufactured exports, hi-tech manufactured
exports in particular.
The on going economic structural change to a “New Economy” should not lead to policy-bias
against manufactured export industry as the growth of the service sector depends largely on
improved growth of the durable goods manufacturing industries, which requires input materials
from the agricultural sector.
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The determinants and policy implications of the manufactured export industry and the change in
the nature of growth trends must be understood if the prospects for sound export growth
strategies in South Africa and the successful entry and growth in the global markets are anything
to go by.
_____________________________________
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