How to fix our manufacturing

14 July 2016


IT MAY be a case of clutching at straws, but any piece of economic good news is to be welcomed. The May news on manufacturing is good, with production increasing a better-than-expected 4% on a year-on-year basis.

This is higher than the April increase, and with the first two months of the second quarter now looking reasonably healthy, the sector may help the economy to avoid a technical recession.

The economy contracted a shock 1.2% in the first quarter of 2016 and, though manufacturing barely helped — with a positive contribution of just 0.1% — it didn’t do any damage either. Even modest growth for the second quarter would be helpful.

If the latest two months look reasonable, the longer-term picture is much more disappointing. SA’s manufacturing sector has been hobbling along for years. In the past 18 months, it has contracted for three of the six quarters. Investec’s economists describe the underlying growth momentum as relatively weak, with production up just 1% for the first five months of 2016.

Nor does the outlook look all that much better, with the second-quarter manufacturing confidence survey showing that a meaningful turnaround in conditions was not expected anytime soon. Domestic demand has weakened. Exports have disappointed. And policy uncertainty has weighed on confidence and investment.

This is not good. Manufacturing has long ago lost the pre-eminence it used to have in SA’s economy, and shrunk to just 13% of GDP, making it the economy’s fourth-largest sector. SA has been getting most of the little private sector growth and job creation it does have from services sectors including financial and business services, as well as trade and tourism. There is nothing wrong with that, and a lot more can be done to boost and grow the services sector and exports. Agriculture could do with a lot more focus too.

But most economists would argue that an economy needs a vibrant manufacturing sector if it is to thrive. That’s not necessarily the old smokestack industries, but newer and more innovative industries. Manufacturing industry, in economists’ speak, is important because of the extensive forward-backward linkages it has with the rest of the economy — with supply chains and with customers.

So, what’s wrong with South African manufacturing, and how can it be fixed? The Centre for Competition, Regulation and Economic Development argued, in an op-ed piece in Business Day this week, that "the structure of SA’s economy welcomes few entrants".

The centre’s economists, at least one of whom used to work for the competition authorities, focus on the need to open up sectors to greater competition and entrepreneurship, including by the black industrialists the government is keen to promote.

Many of SA’s major markets are dominated by just a few incumbent players who tend to call the shots, making it difficult for new competitors to enter. Tackling those incumbents and reforming some of the dysfunctional regulatory environment that keeps them dominant is important, and is at the centre of the researchers’ focus.

Economists at the IMF and OECD have also argued for SA to free up product markets to greater competition in an effort to boost entrepreneurship and growth. And SA’s competition authorities have done some good work in busting cartels and taking aim at uncompetitive behaviour.

But reining in cartels and dominant players is not nearly enough to ensure that new entrants can come into the market to create more dynamism and competition.

The World Bank’s Doing Business index reminds us every year how much of a stranglehold SA’s red tape imposes on business, especially smaller businesses and new entrants. It’s very tough in SA just to start a new company, never mind to get it up and running. Smashing those regulatory constraints is crucial to growth, in manufacturing as in other sectors.

This article was published on BDLive.