Multiplier effect of localisation could boost manufacturing sector

A study by Pan-African Investment and Research Services, ‘Revitalising South Africa’s Manufacturing Sector’, reports that localising the industry, together with a 10% increase in investment in manufacturing, could shift its downward trajectory.

This comes after Statistics SA on Tuesday indicated that the manufacturing industry shrunk by 5.9% in the second quarter and contributed a -0.7% percentage point towards the country’s GDP ‘growth’.

Read: GDP shrinks by 0.7% in Q2

The report says recent ongoing global supply chain disruptions highlight the need for increased localisation as a means of expansion, security and survival for specific industries.

“What is in the manufacturing process that we do not know? It can’t be that we are importing air freshener,” said Dr Iraj Abedian, founder and CEO of Pan-African Investment and Research Services, at a briefing on Thursday.

Abedian says the sector is in urgent need of a turnaround strategy in terms of its contribution to the economy, exports, and competitiveness.

Recalling a proposal made by the 2030 National Development Plan for the stimulation of the manufacturing sector by leveraging public and private procurement to promote localisation, the report notes that only 38% of South Africa’s total exports were manufactured in 2020.

“This indicates that the bulk of the country’s exports have not had much value added to them, hence putting South Africa at a disadvantage in terms of lost opportunity, for instance, those opportunities that come with expanding its industrial capacity.”

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Local procurement

It says local procurement plays an important role in the local manufacturing sector and, if done right, could boost the struggling sector and enable it to contribute more towards the country’s sustainable growth.

This, it notes, will further benefit the industry’s sub-sectors –including the agro-processing, meat, sugar, furniture, automotive and steel industries – by adding jobs that will feed into the economy.

However, it says investment into manufacturing has been low, including during pre-Covid years, resulting in the sector’s continued declining contribution to GDP.

“The country’s economy needs to be reconfigured such that it enables the manufacturing sector to flourish,” adds Abedian, noting the results of a simulated model of the South African economy detailed in the report.

It proposes that a 10% increase in investment in the entire industry could contribute towards positive GDP growth, employment, household consumption, total investment, and government revenue.

This includes a medium-term 13% boost to GDP, 8% growth in unskilled employment creation, 8.3% overall increase in investments across the economy, and an additional 9% in tax revenue.

According to the simulation, the 10% investment could add 75 300 new jobs to the manufacturing sector, 11 500 to mining, and 10 000 to agriculture.

Short-term pain, long-term gain

“In the short term, some negative impacts are experienced due to the crowding-out of private consumption and the inflationary pressure on prices and downward pressure on the real exchange rate, but these are reversed in the medium term,” it adds.

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The report says a prominent pattern across various simulations is the strong impact of the investment boost on services, construction, trade, transport, communications, and finance.

“Therefore, although that investment is directly into manufacturing sectors, forward- and backward-linked services sectors also benefit substantially due to the multiplier effects of the circular flow.”

Nondumiso Lehutso is a Moneyweb intern.