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Building ‘Factory Southern Africa’

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Building ‘Factory Southern Africa’

29th July 2011

By: Terence Creamer
Creamer Media Editor

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The political statements and government policies in favour of further industrialisation have arguably not been as supportive for many a decade. Both the New Growth Path and the Industrial Policy Action Plan explicitly pin a healthy portion of South Africa’s growth, development and employment hopes on increasing manufacturing output and ensuring that value is added to South Africa’s mineral and agricultural resources prior to export.

However, a deep disconnection has emerged between this policy aspiration and the reality on the factory floor, where confidence remains fragile. Moreover, the short- to medium-term outlook appears to have worsened as the global economy enters what some are euphemistically referring to as a ‘soft patch’ in the recovery from the ‘Great Recession’.

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A recent survey of 18 Manufacturing Circle CEOs, who represent companies in sectors as diversely spread as automotive part producers and electrical equipment and pharmaceuticals manufacturers, shows that confidence deteriorated in the first quarter of 2011, despite a strong recovery in production. The future trajectory is also increasingly weighted to the downside, owing to the continued resilience of the rand and the likely cost and output fallout from the recent violent industrial action.

In other words, the transmission mechanisms between policy statements and enterprise development and growth are failing to work effectively and require serious stimulation.

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Without doubt, most manufacturers believe that the immediate answer lies in weakening the rand. But this is easier said than done. It is particularly difficult, given the rand’s high liquidity and given a context where the euro has weakened amid a political muddle on how to handle the sovereign debt crisis, and where the US authorities are hinting at a third round of quantitative easing.

Nevertheless, it remains the most obvious constraint to output growth and thought should, thus, be given to ways of alleviating it: from increasing reserves, to sequestering a certain amount of foreign-exchange reserves through the possible creation of a sovereign wealth fund.

In fact, the sovereign wealth fund concept might actually gel with another longer-term solution raised by the World Bank in its inaugural ‘South Africa Economic Update’.

The document flags the desirability of building ‘Factory Southern Africa’ to boost manufacturing through intraregional trade.

It notes the success of ‘Factory Asia’, whereby multinationals set up effective production value chains across East Asia, with each link in the value chain located according to the comparative advantages of the host countries. Today, East Asia has the highest intraregional trade, comprising largely intermediate goods, which underpins the region’s global trade and competitiveness and serves to attract investment.

Again, this is not an easy solution to implement, particularly given that Southern Africa remains the least integrated region in the world. In fact, the bank notes that, while tariffs have been lowered, significant nontariff barriers remain, covering one-fifth of regional trade. “That undermines regional trade, lowers the region’s attractiveness to foreign investors, and eventually undercuts regional supply chains.”

But, along with development finance, as well as public and private investment, a sovereign wealth fund could be used to support regional infrastructure, such as road, rail and power networks. Therefore, the foreign reserves ringfence could potentially have the double benefit of weakening the rand and creating new markets for South Africa’s relatively advanced manufacturing community. These linkages might also open up prospects for factories to be established regionally in a way that bolsters Southern Africa’s overall competitiveness.

Here again there is growing policy support, parti-cularly in light of moves to form the so-called ‘grand’ free trade area involving 27 Southern, and East African countries. But again, much daylight still exists between the policy vision and actual delivery.

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