Researchers at the National Institute for Economic Policy (NIEP), a Johannesburg-based non-governmental organisation, have published a critical analysis of the South African manufacturing sector.

The document, entitled 'Where has all the growth gone? South African Manufacturing Industry 1970–2000', has been compiled by Prof Trevor Bell and Nkosi Madula.

The paper offers a number of fresh perspectives, arguing, for instance, that since 1985 the manufacturing industry has been in export-orientated stagnation.

Engineering News has, therefore, decided to publish extracts from the paper.

At the end of the 1960s, after a half-century of rapid industrialisation, South Africa had a relatively advanced and diversified manufacturing sector.

However, since the early 1970s, South Africa's manufacturing growth performance has deteriorated greatly, and has been especially poor since the early 1980s.

The NIEP study aims to provide an overview of the evolution of South African manufacturing industry over the past 30 years and the larger forces which have affected its growth and structure.

Overview of the evolution of South African manufacturing industry At the time of World War I, South Africa was heavily dependent on imported manufactures.

Therefore, there was much scope for relatively easy import replacement and, from World War I through to the end of the 1960s, South Africa industrialised largely through a process of import substitution.

The upshot of these developments was that, by the early 1970s, resource-rich South Africa had a more mature and diversified manufacturing sector than resource-poor South Korea.

But the 1970s saw the beginning of the decline of growth rates, and of the descent towards stagnation of the economy as a whole, but especially the stagnation of manufacturing, which has characterised the period since the early 1980s.

Superficially, conditions for growth were very favourable in the 1970s in general.

The commodity price boom resulted in large foreign exchange windfalls.

The effect on the foreign-currency value of South Africa's exports of goods, particularly of gold and other minerals, was dramatic.

A significant effect of this in the 1970s was a substantial real appreciation of the rand.

The commodity-price boom affected the manufacturing industry in the following ways: n The export growth of commodity-type natural-resource-based manufactures accelerated.

n The sectoral allocation of investment within the manufacturing industry was significantly affected.

Most notably, there was a remarkable increase in the share of chemicals in manufacturing investment, due mainly to Sasol II and Sasol III – high oil prices, very low real interest rates and a strong rand made conditions for these projects extremely favourable.

n There was a substantial increase in gross domestic fixed investment in the economy overall.

However, despite the commodity-price boom gross domestic product (GDP) and manufacturing value-added (MVA) growth rates declined significantly in the 1970s.

With the collapse of the commodity price boom, during the Organisation for Economic Cooperation and Development (OECD) downturn of 1980 to 1983, exports fell sharply.

The real exchange rate depreciated precipitously, culminating in the debt crisis of August 1985.

The result was a 20% decline in gross domestic fixed investment between 1984 and 1986, and an abrupt involuntary shift from import-substituting to export- orientated industrialisation.

Owing mainly to the real depreciation of the rand, the revival of OECD economies, and domestic recession, there was, in terms of constant US dollars, a much-needed substantial acceleration in the growth of manufactured exports in 1985 to 1990 but, in constant price trade-weighted foreign currency units, the acceleration was much smaller.

There was, however, a marked shift in the sectoral composition of manufactured exports in 1985 to 1990, with the export growth rate of natural resource-based manufactures falling considerably compared to the 1970s, and that of the downstream durable goods group – represented in the study by metals products, machinery and equipment, electrical machinery, motor vehicles, and other transportation equipment – increasing greatly.

The rate of growth of total manufactured exports increased further in 1990 to 1995 and, though it fell off after that, export growth in the durable-goods group of industries continued to exceed export growth in other major manufacturing categories.

Measured by the ratio of exports to gross output, the manufacturing industry has become increasingly more export-orientated since 1985.

This is a sign, not of the success of the manufacturing industry, but of its deep-seated problems.

Value added in manufacturing as a whole has stagnated.

The very manufacturing category that has experienced the most rapid export growth, and the largest increase in export orientation – the durable goods group – has had the worst output growth performance.

Just as the durable-goods group grew fastest in 1970 to 1981, when the investment rate rose to unprecedented levels, so it has been hardest hit by the decline in levels of capital formation.

Hence, since 1985, the manufacturing industry has been in a phase of what might be called export-orientated stagnation.

Perspectives on the deterioration in South Africa's GDP and MVA growth The study offers various possible perspectives on the deterioration in South Africa's GDP and MVA growth performances over the past 30 years.

Firstly, it should be noted that South Africa has not been alone among developing countries in experiencing economic stagnation since the early 1980s.

The per-capita growth rate of developing countries in general fell substantially in 1980 to 1998 compared to 1960 to 1979, and relative to developed countries.

The percentage points decline in South African per-capita growth since the early 1980s has been of about the same order of magnitude as in developing countries in general.

Although there were some factors peculiar to South Africa that may partly account for the decline since the early 1980s, a crucial question concerns the reasons for the deterioration in growth of developing countries in general.

But a deterioration in growth performance in the 1970s was also not peculiar to South Africa; a decline in the growth trajectory of the world economy took effect from about 1972 to 1973.

The percentage points decline in the per-capita growth rate between 1960 to 1973 and 1973 to 1982, however, was evidently significantly greater in South Africa than in developing countries in general.

It seems therefore, that, so far as the relatively large decline in South Africa's GDP growth between 1960 to 1973 and 1973 to 1982 is concerned, the causes must be sought in factors peculiar to South Africa, as well as in factors common to developing and developed countries.

One factor, peculiar to South Africa, which, it is argued, contributed significantly to the decline in GDP and MVA growth, was the decline in the physical volume of output of gold, and in value added in gold-mining, in the early 1970s.

It is estimated that the direct effects alone of the sharp absolute decline in real value added in mining as a whole in 1970 to 1975 would have had a significant negative effect on GDP.

Another perspective involves the view that, since the early 1980s, there has been a foreign exchange constraint on domestic output and investment.

For example, in 1985 to 1990 South Africa's total exports, measured in constant price trade-weighted foreign currency units, declined in absolute terms at 0,8% a year, hence, aggravating the problem of foreign exchange scarcity caused by the foreign debt crisis.

In the 1990s, following the global recession of 1990 to 1992, South Africa's export growth rate improved considerably, and, as would be expected in a situation in which there is a foreign exchange constraint, GDP growth improved substantially compared to the 1980s.

However, GDP growth in 1992 to 2000 was modest by the pre-1980s' standards, and MVA growth remained relatively low.

One suggested reason for the failure of accelerated export growth to substantially alleviate the foreign-exchange constraint and so to spark yet faster GDP and MVA growth, is the rapid rate of growth of merchandise imports, and rapidly rising import penetration ratios in the 1990s, especially after 1993.

Another is the evident long-term tendency for output-capital ratios to decline.

The output-capital ratio in manufacturing continued to decline in 1992 to 2000, and there have been persistently high levels of excess capacity in this sector.

This and other evidence is symptomatic of a foreign exchange constraint.

The question is raised whether a shortage of skills is a fundamental reason for the stagnation of South African manufacturing industry.

There is evidence of a significant increase in the demand for skilled relative to unskilled workers in the economy as a whole, consistent with the idea that a growing scarcity of skills is an effective constraint on MVA growth.

But while the labour force in the financial intermediation, insurance, real estate and business services (the FIRE) sector is much smaller than in manufacturing, the increase in employment of highly-skilled workers in FIRE in 1993 to 1997 was two-thirds greater than in manufacturing as a whole.

This seems to create a puzzle: if a shortage in the supply of skills, as such, is a binding constraint on the growth of manufacturing industry, how is it that the output and employment growth of the FIRE sector, a far more skills-intensive sector, was so vastly superior to that of manufacturing, especially in the 1990s? This suggests that the problems of manufacturing, rather than lying in skills shortage, lie more deep-seatedly in manufacturing itself.

The fundamental reasons for the deterioration in South Africa's growth performance, therefore, must be sought elsewhere.

One possible perspective is the rather pessimistic one that, having seen the rise of an unusually minerals-rich economy, we are now witnessing its more or less inevitable decline.

But the problems of the South African economy, and the prospects for its recovery, cannot be seen simply in such South Africa-centred terms.

Global forces have contributed to the deterioration of South Africa's growth performance in the past, and will affect its growth trajectory in future.

Various reasons have been proffered for this adverse global trend.

Some economists, for instance, believe the 'long downswing' in the advanced industrial countries has been caused by intensified international competition, which has resulted in overproduction and excess capacity in world manufacturing industry, putting downward pressure on the price of manufactured goods, and on the rate of profit in manufacturing.

Others suggest that, so far as the worsened performance of developing countries is concerned, the skills-biased technological advances of the 1980s and 1990s may have favoured developed countries, leaving less developed countries, such as South Africa, behind.

Yet others argue that there was 'one big wave' in US productivity growth between 1913 and the early 1970s, during which it was much faster than before or after.

This occurred mainly because of a concurrence of many important inventions prior to and at the beginning of this rapid growth period.

And some of these inventions made themselves felt in South Africa in the manufacture of new products relatively quickly.

The NIEP study notes that counterparts of such new products today, during the so-called information revolution, are not readily apparent.

Another perspective considered is the prevalent sanguine view of the stagnation of manufacturing industry, and the shift to services, as a natural and beneficial transition from the old to the new economy.

But in South Africa, employment has fallen in both manufacturing and formal sector services, as well as in the primary sector.

The increased share of services in GDP has been largely due to slow growth in the rest of the economy.

Therefore, economic revival depends to a significant extent on improved growth of the durable goods manufacturing sectors as continuing increases in the relative importance of services are incompatible with further increases in the GDP growth.

Finally, it is argued that the challenge facing South Africa is that of climbing the international ladder of industrial production to more high-tech, more skills-intensive, higher-value-added manufacturing activities, but that the obstacles to this are formidable in today's global conditions.

It is particularly difficult for a natural-resource-abundant 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-orientated industrialisation.

Numerous countries in the meantime have entrenched themselves in world markets for manufactures.

In a world in which many developing countries are striving for the same thing, raising levels of educational and skills attainment – while very necessary – will not necessarily increase comparative advantage in skills-intensive activities, or therefore increase the growth rate.

In these circumstances dependence on natural-resource-based (primary and manufactured) products, it is suggested, may be more of a blessing and less of a curse than it has sometimes appeared to be in the past.

Indeed, it may now be positively advantageous.

Furthermore, South Africa is likely to remain heavily dependent on natural-resource-based products for a considerable time to come.

South Africa should thus make the most of its comparative advantages in natural-resource-based products, to increase its exports and output, while upgrading its skills and educational levels, and in other ways trying to promote the further diversification of the economy.

Much seems to depend on the future growth of the advanced industrial countries.

The improvement in South Africa's GDP growth in the latter half of the 1990s occurred during the protracted US upswing from 1992 to 2000, which saw US GDP growth accelerate to 3,9% a year in 1995 to 2000.

We must hope, therefore, for a quick and sustained resumption of such growth rates; and, hence, that the analyses with pessimistic implications for the US economy are wrong, and that the New Economy optimists are right – and that we have so far seen only the beginnings of another 'big wave'.