Patterns of industrial performance in South Africa in the first decade of democracy: the continued influence of minerals-based activities

Abstract

Despite major restructuring of industry in South Africa under trade liberalisation, a review of sectoral patterns of development reveals strong elements of continuity. The article explores these patterns, and focuses on two main themes. The first is whether and what diversification has occurred within manufacturing industry in the context of trade liberalisation. The second is the continued significance of minerals-based activities. Against the record in each of these areas it is argued that industrial policy since 1994 has largely failed to come to terms with the key structural challenges of South African manufacturing industry.

Introduction

South Africa has attained moderate growth rates in recent years, but its performance has not been particularly good by comparison with similar middle-income developing countries. Above all, the growth rates have been achieved with very low investment and employment rates. In terms of simple growth accounting, GDP growth has therefore by definition been due to increased productivity. In terms of the major sectoral groupings of the economy, employment has fallen sharply in agriculture and mining, while it has increased in services. Manufacturing has maintained its share of employment in terms of numbers of employees (that is, excluding the self-employed and also domestic workers) at 17 per cent (Bannerjee et al 2006).¹ And, much of the growth in employment in finance and business services is in the business services component which includes the booming private security sector and outsourced cleaning services.²

My review of economic performance starts from the premise, accepted in the government's Accelerated and Shared Growth Initiative for South Africa (ASGISA), that manufacturing industry is central to South Africa's development trajectory. How to encourage growth of diversified manufacturing has been the focus of several of the papers produced in 2006 for the South African Treasury by the team of economists convened by Harvard's Centre for International Development (see Rodrik 2006, Hausman and Klinger 2006a, Edwards and Lawrence 2006).

The overall performance of South African manufacturing industry in the first decade of democracy reflects the complex and far-reaching restructuring of the South African economy, during which industries have responded to trade liberalisation and increasing international integration of the South Africa economy. At the same time, the tightening of macro-economic policy to reduce the government budget deficit, and higher interest rates aimed at reducing inflation, has meant weak domestic demand and investment remaining at very low levels. I review the sectoral patterns of development to assess to what extent there has been diversification and why, critically assessing recent arguments with regard to trade liberalisation and international competitiveness.

Industrial policy in the past decade has been broadly focused on 'competitiveness', with cross-cutting measures to encourage investment, technological improvements and exports, and to support small, medium and micro enterprises. A raft of incentive programmes were developed which can be described as functional and supply-side in that they rewarded firms for certain behaviour with regard to investment, technology and skills. Together with trade liberalisation, the expectation was that these measures would counteract the apartheid government's support for large-scale capital-intensive industries which, together with protection, led to poor productivity and competitiveness (see Hanival and Hirsch 1998, Joffe et al 1995).

The focus on undoing the misdirected and interventionist policies of the apartheid government meant the democratic government shrank from targeting specific industries or from significantly altering incentives (beyond that of liberalisation) to create dynamic comparative advantages or to 'govern' the market (Amsden 1989, Wade 1990). The South African policy stance thus largely accepted the importance of 'government failure' which characterised the World Bank's interpretation of the East Asian countries' industrialisation (World Bank 1993). The South African approach was avowedly market-friendly, 'following' the private sector and emphasising 'business confidence' as the key to increased investment and growth. The 'Integrated Manufacturing Strategy' (DTI 2002) represented a change in portrayal to an extent, with scope for 'customised sector programmes' for different industries. The first customised sector programmes were only approved in 2006, and...