Man­u­fac­tur­ing stim­u­lus is vi­tal

• No need for new spe­cial eco­nomic zones with set­tled ar­eas such as Vaal Tri­an­gle avail­able

Business Day - - THE BOTTOM LINE - André de Ruyter De Ruyter is chair­man of the Man­u­fac­tur­ing Cir­cle and CEO of listed pack­ag­ing group Nam­pak

Statis­tics SA said on Tuesday that un­em­ploy­ment was 26.5% in the last quar­ter of 2016. There had been a small fall in the to­tal, with 44,000 new man­u­fac­tur­ing jobs. How­ever, the job­less num­ber is still far too high.

Many young peo­ple have given up look­ing for work. From any num­ber of per­spec­tives, this is a cri­sis, and de­serv­ing of ev­ery bit of effort and at­ten­tion that we as a coun­try can throw at solv­ing this prob­lem.

Jobs can­not be cre­ated by leg­is­la­tion, how­ever. They can only be cre­ated through grow­ing our econ­omy. And the em­ploy­ment op­por­tu­ni­ties we want are de­cent jobs that will con­trib­ute to so­cial sta­bil­ity and co­he­sion through mean­ing­ful par­tic­i­pa­tion in the for­mal econ­omy. These jobs can be cre­ated in the man­u­fac­tur­ing sec­tor, which at the mo­ment is idling at 13% of GDP in­stead of revving at 30%, where com­par­a­tive stud­ies sug­gest SA should be per­form­ing for our stage of eco­nomic de­vel­op­ment.

If we could lift man­u­fac­tur­ing out­put so that it does, in­deed, ac­count for 30% of GDP, we would give a ma­jor boost to the econ­omy. Re­vers­ing the loss of close to 500,000 man­u­fac­tur­ing jobs that has oc­curred since the early 1990s would be a first step. The Man­u­fac­tur­ing Cir­cle es­ti­mates that get­ting man­u­fac­tur­ing to 30% of GDP would cre­ate close to 1-mil­lion jobs.

SA’s au­to­mo­tive in­dus­try has demon­strated that we can be glob­ally com­pet­i­tive in man­u­fac­tur­ing given the right reg­u­la­tory struc­ture and in­vest­ment cli­mate. Cars made in SA drive on roads all over the world. We need to repli­cate this suc­cess story across other sec­tors and it starts by mak­ing prod­ucts con­sumers want to buy.

In­dian Prime Min­is­ter Naren­dra Modi has re­alised that man­u­fac­tur­ing is the key to grow­ing his econ­omy. His Make in In­dia cam­paign puts fo­cus and effort into at­tract­ing in­vestors to set up shop in In­dia. Trot­ting out the old mantra that SA is open for busi­ness is not enough to per­suade in­ter­na­tional in­vestors that we are the pre­ferred in­vest­ment des­ti­na­tion.

So what is hold­ing back South African man­u­fac­tur­ing? Im­ports are one rea­son for the ero­sion of our man­u­fac­tur­ing base and there is no short­age of ex­am­ples where a boost in lo­cal man­u­fac­tur­ing could not only re­duce the vol­ume of im­ports but give a boost to our ex­ports as well. A re­cent state­ment by Depart­ment of Trade and In­dus­try di­rec­tor-gen­eral Lionel Oc­to­ber that SA is “naïve” to lower tar­iff bar­ri­ers is spot on: there will al­ways be a com­pet­ing coun­try where gov­ern­ments will give higher sub­si­dies and where work­ers are pre­pared to work for lower wages.

So a race to the bot­tom to out­com­pete low­est-cost coun­tries on an un­even play­ing field only leads to the dec­i­ma­tion of your own man­u­fac­tur­ing base and ex­port­ing of jobs.

Blunt pro­tec­tion­ism is not the an­swer, but a care­fully mod­u­lated im­port tar­iff struc­ture, targeting tar­iff code eva­sion, quick re­sponses to dump­ing and a full un­der­stand­ing of non­tar­iff bar­ri­ers, sub­si­dies and sup­port by their own gov­ern­ments for ex­porters to SA, will go a long way to help­ing lo­cal man­u­fac­tur­ing to com­pete.

Rais­ing a wall of tar­iff bar­ri­ers to pro­tect in­ef­fi­ciency and low pro­duc­tiv­ity at the ex­pense of the con­sumer clearly isn’t the way for­ward ei­ther.

Man­u­fac­tur­ing in SA needs to in­vest in skills and ma­chines to be glob­ally com­pet­i­tive. It is my con­tention that the skills gap is not par­tic­u­larly se­vere at shop floor level, but rather at mid­dle man­age­ment. We need to get bet­ter at the hard-core skills of run­ning a fac­tory, plan­ning pro­duc­tion and op­ti­mis­ing in­ven­tory, while meet­ing cus­tomer re­quire­ments.

The Depart­ment of Trade and In­dus­try-led in­cen­tive scheme un­der sec­tion 12i of the In­come Tax Act has been very suc­cess­ful in fos­ter­ing in­vest­ment in new pro­duc­tive ca­pac­ity. Com­pet­ing for scarce re­sources against other gov­ern­ment pri­or­i­ties, how­ever, has led to other in­cen­tive pro­grammes, such as the Man­u­fac­tur­ing Com­pet­i­tive­ness En­hance­ment Pro­gramme (MCEP), to be sus­pended. The one thing in­vestors crave above all is cer­tainty and in­cen­tive pro­grammes have to be sus­tained if they are to be ef­fec­tive.

Just as the fis­cus giveth in­cen­tives, so it also taketh through taxes. While we un­der­stand that rev­enue is un­der pres­sure, the flurry of new taxes be­ing con­sid­ered (car­bon tax, sugar tax, pack­ag­ing tax) is not go­ing to en­tice in­vest­ment that, through job cre­ation and com­pany prof­its, en­hances tax rev­enue in the long run.

When in­vest­ments are made in new fac­to­ries, bill­boards are put on lamp­posts, rib­bons are cut and plaques are un­veiled by dig­ni­taries. When a fac­tory shuts down it is very of­ten not re­ported. Work­ers are paid sev­er­ance pack­ages, sup­plier con­tracts are ter­mi­nated and prod­ucts are im­ported from In­dia or China.

And thus dein­dus­tri­al­i­sa­tion hap­pens. Not with a bang, but with a whim­per. Driv­ing through the Vaal Tri­an­gle, where job losses have been par­tic­u­larly se­vere, it is clear that the once proud home of some of our ma­jor in­dus­tries is turn­ing into a rust belt of dis­in­vest­ment.

The gov­ern­ment has pub­lished a pol­icy on spe­cial eco­nomic zones (SEZs), which seeks to cre­ate new hubs where man­u­fac­tur­ers can set up shop for ex­ports. But what about stretch­ing the con­cept to in­clude the Vaal Tri­an­gle, where ex­ist­ing in­fra­struc­ture is in place, where there is a large pop­u­la­tion of un­em­ployed work­ers, where we al­ready have schools, univer­si­ties and hos­pi­tals and where we are on the doorstep of the big­gest re­gional mar­ket in SA, Gaut­eng?

Work is al­ready un­der way to pre­pare the ground­work for a Vaal Tri­an­gle SEZ. It’s one of the pro­pos­als be­ing con­sid­ered by the task teams set up by the Trea­sury to ig­nite job cre­ation and growth. CEOs of large com­pa­nies that have op­er­a­tions in the area have given their sup­port to this ini­tia­tive.

Lots more work is nec­es­sary, but this is not a moon shot; the tax­payer will not be asked to in­vest huge amounts in in­fra­struc­ture in the mid­dle of the veld, like an apartheid-era de­cen­tral­i­sa­tion pol­icy.

Nor will years of work be re­quired to build new roads, pipe­lines and rail­way lines. It’s al­ready there and by and large it is not used to full ca­pac­ity. What we need is the pack­age of in­vest­ment in­cen­tives un­der the act that will al­low in­vestors to cre­ate growth and jobs. We don’t think gov­ern­ment should pick in­dus­tries and win­ners. That should be left to the mar­ket. What gov­ern­ment can do is to cre­ate the ecosys­tem in which busi­ness can set up fac­to­ries. The SEZ pol­icy pro­vides the ideal ve­hi­cle for this.

Aim­ing for 1-mil­lion new jobs by boost­ing man­u­fac­tur­ing through a com­pet­i­tive and re­spon­sive global trade pol­icy, im­prov­ing com­pet­i­tive­ness and mak­ing prod­ucts in SA that con­sumers clam­our to buy may seem like a pipe-dream. But surely the al­ter­na­tive of wait­ing for the de­cline and fall of in­dus­try through in­ac­tion is just not on? Busi­ness, labour and gov­ern­ment can and must solve this equa­tion in the na­tional in­ter­est.


/Robert Tsha­bal­ala

Job at hand: The au­to­mo­tive in­dus­try shows that SA can be com­pet­i­tive in man­u­fac­tur­ing, given the right reg­u­la­tory struc­tures and in­vest­ment cli­mate.

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