Table Of ContentNombulelo Gumata · Eliphas Ndou
The Secular Decline
of the South African
Manufacturing
Sector
Policy Interventions,
Missing Links and
Gaps in Discussions
The Secular Decline of the South African
Manufacturing Sector
Nombulelo Gumata • Eliphas Ndou
The Secular Decline of
the South African
Manufacturing Sector
Policy Interventions, Missing Links and Gaps
in Discussions
Nombulelo Gumata Eliphas Ndou
South African Reserve Bank South African Reserve Bank
Pretoria, South Africa Pretoria, South Africa
ISBN 978-3-030-55147-6 ISBN 978-3-030-55148-3 (eBook)
https://doi.org/10.1007/978-3-030-55148-3
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P
reface
This book examines the secular decline of the South African manufactur-
ing sector. In doing so, we highlight the missing links and gaps in aca-
demic and policy discussions regarding policy interventions to stem the
secular decline in the manufacturing sector. The book does not offer a
review of policies that have been implemented thus far, although their
assessment is indirectly implied in the findings and the recommendations
of new policy interventions. The analysis in the chapters in this book is
theoretically grounded and this is demonstrated by the theoretical chan-
nels of the transmission mechanism of the shocks discussed. The introduc-
tion of each chapter begins with the main aspects examined under
“Research Questions Explored” and the conclusion in each chapter offers
the summary of the findings and policy implications. The last chapter of
this book summarises the main findings in each chapter and highlights the
main policy implications.
We use data trends, simple and advanced statistics and econometric
modelling techniques to show the relationships between the variables.
Thereafter, we derive policy implications, recommendations, interventions
and initiatives to stem the decline and resuscitate the manufacturing sector
to achieve the set objectives in the South African National Development
Plan (NDP).
Why is focus on the manufacturing sector as a driver of growth impor-
tant? First, under various scenarios, the NDP projects that the manufac-
turing sector employment levels will range between 1.880 million and
v
vi PREFACE
2.289 million by 2030.1 Second, the NDP targets to increase the labour
participation rate to 65 per cent by 2030. Third, on a bilateral basis, the
manufacturing sector explains 71 per cent of the variation in aggregate
GDP growth and 41 per cent of the variation in private sector employ-
ment growth. However, its contribution to aggregate GDP and the share
of this sector’s employment to total non-agricultural employment has
been on downward trend.
This book brings the role of capital flow episodes, income inequality,
financial regulatory and macroprudential tools whose macro-economic
effects are the least researched and discussed policy areas in South Africa
in relation to the manufacturing sector dynamics. Financial regulatory and
macroprudential tools policies, while working independently as regulatory
policies, they interact with other policies in a complementary and non-
complementary manner. The book brings these macro-economic effects
on the manufacturing sector to the fore. The book anchors the academic
and policy discussions about the secular decline of the manufacturing sec-
tor in South Africa and recommended policy interventions to stem the
decline under six themes as below:
• The contrasting effects of globalisation, trade-openness and import
penetration on inflation, the output-gap, activity in the manufactur-
ing sector and income inequality.
• The effects of commodity price booms, capital flows episodes, global
trade uncertainty and the exchange rate volatility on the manufactur-
ing sector.
• The impact of investment growth, credit booms, economic policy
uncertainty, financial and credit cycles, business and consumer confi-
dence on the manufacturing sector.
• The role of financial regulatory and macro-prudential tools in sup-
porting the housing market, residential investment and the spill-over
effects to activity in the manufacturing sector.
• The effects of electricity price inflation regimes on the manufactur-
ing sector output growth, employment growth, labour absorption
and participation rates.
1 See for further details https://www.gov.za/sites/default/files/gcis_document/201409/
ndp-2030-our-future-make-it-workr.pdf.
PREFACE vii
• The transmission channels of minimum wage shocks, labour produc-
tivity shocks, market concentration, mergers and acquisitions on the
manufacturing sector.
The book is suitable for market commentators, academics, researchers,
financial analysts, policymakers and those working for policy think-tanks.
Key Issues exPlored In the BooK
Fiscal Policy, Monetary Policy and Macroprudential Policy
Interactions Matter for Developments in the Manufacturing Sector
Finance matters via its costs and how financial regulations affect financial
institutions. In addition, financial regulation is not macroeconomic neu-
tral2 and the manner in which it interacts with fiscal and monetary policies
matters. Macroprudential policy tools and financial regulations are the first
line of defence for addressing financial risks. This is because macropruden-
tial tools can be tailored to the identified emerging financial risks. As
shown in Fig. 1, there are interlinkages between fiscal policy, monetary
policy and financial stability objectives. The conduct of each policy can
have side effects on the objectives of the other. The objectives and expected
Fig. 1 Interaction among policies, tools and objectives. (Source: Authors’ draw-
ing and adapted from Nier and Kang (2016) and Smet (2013))
2 See Blanchard et al. (2010).
viii PREFACE
financial and macro-economic effects of these policies imply that policy
co-ordination between fiscal policy, monetary policy and financial stability
is essential.3
On the aspect of policy coordination, the book explores the interaction
between the accommodative monetary policy stance and reduced excess
capital adequacy ratio (CAR) on the manufacturing sector activity. Other
macroprudential tools explored include the loan-to-value (LTV) ratio,
repayment-to-income (RTI) ratio, sectoral countercyclical capital buffer
(SCCyB) and excess liquid asset holdings (ELAH) of banks on activity in
the manufacturing sector.
These financial regulatory and macroprudential tools impact credit
supply and demand, and the relative cost of credit in the targeted sector.
As such, they can be more effective financial regulatory and macro-
prudential tools. We explore the direct effects and spill-overs of these
financial regulatory and macro-prudential tools into activity of the manu-
facturing sector because they are still unknown in South Africa.
Global Trade and Economic Developments, Import Penetration
and Trade-Openness Ratios Matter for Activity
in the Manufacturing Sector
From a global perspective, the book departs from the observation that
literature and empirical evidence shows that governments (countries) that
achieved and surpassed their target economic growth and development
goals, co-ordinated policies across sectors over the long-run. These coun-
tries co-ordinated policies across sectors, pursued aggressive import sub-
stitution strategies and export supporting policies over the long-run and
became industrialised nations.4 Furthermore, international trade is trans-
formative, has significant benefits, distributional costs and adjustment
costs.5 We examine how global trade uncertainty and the exchange rate
volatility affect the South African manufacturing sector output growth,
investment growth and employment growth. The understanding of the
trade-openness and import penetration threshold effects is very important
to guide policymakers to design and develop effective tools for managing
and mitigating the costs of trade adjustment on activity in the
3 See Cassola et al. (2019).
4 See Nayyar (2019), McNabb and Said (2013).
5 See Autor et al. (2013) and Pierce and Schott (2016).
PREFACE ix
manufacturing sector and the associated Gini coefficient (income inequal-
ity) dynamics. Thus, there is a role to use trade-openness and import pen-
etration ratio thresholds as guides to policies geared at the import
substitution strategies. This will help policy makers to design appropriate
policy responses to assist in the sector’s adjustment to various trade shocks.
In addition, such an approach means that structural reforms and policy
efforts to rebalance the economy from high dependency on imports,6
should take into account the contrasting effects of globalisation, trade-
openness and import penetration on inflation, the output-gap, activity in
the manufacturing sector and income inequality. The fact that the high
import content affects the sectorial distribution of output growth, employ-
ment growth and income inequality should not lose sight of the benefits
that accrue from global trade activity.
The Direct and Indirect Costs of Capital Flow Episodes,
Commodity Prices and Financial Asset Price Booms and Busts
Shocks on the Manufacturing Sector Activity
Academic and policy discussions have paid little and even no consideration
on the effects of capital flow surges and sudden-stop episodes, commodity
prices and financial asset price booms and busts episode shocks on the
South African manufacturing sector output growth, investment growth
and employment growth. Hence the book explores these as some of the
missing links and gaps in academic and policy discussions regarding policy
interventions to stem the secular decline in the manufacturing sector. A
thorough understanding of these effects will help policymakers to design
appropriate policy responses to assist the manufacturing sector adjustment
to various capital flow surges and sudden-stop episodes, commodity prices
and financial asset price booms and busts episode shocks and is necessary
to develop effective tools for managing and mitigating the costs of trade
adjustment.
Are There Policy Lessons from the Macro-economic Conditions that
Existed between 2005Q1 and 2008Q3?
This book analyses the macro-economic conditions that existed between
2005Q1 and 2008Q3 which is the period during which the
6 Alternatively, to reduce the import penetration ratio.
x PREFACE
manufacturing sector performance improved in recent history. Between
2005Q1 and 2008Q3 the manufacturing sector maintained a level of 1.44
million jobs, the labour participation and absorption rates averaged 57.79
per cent and 44.53 per cent, respectively. We analyse the macro-economic
conditions during this period because a number of financial and macro-
economic indicators were undergoing major structural shifts, implying
that the interactions and spill-overs policies during this period were some-
what different to what has become the new normal post-2009. For
instance, to name a few developments, the government budget balance as
a ratio of GDP was in surplus, household consumption expenditure
growth reached an all-time high, the exchange rate pass-through was
declining, non-performing loans as ratio of total loans were at their lowest
levels, labour productivity growth grew at a consistently robust rate, there
was a capital flow surge episode, commodity prices and financial asset
prices were in a boom episode, the lending rate-repo rate margin and the
loan intermediation mark-up were at all-time lows. In addition, electricity
prices were in the low inflation regime, alternatively, much more afford-
able compared to the period post-2009 and the electricity availability was
certain. Thus, the confluence of these factors created different macro-eco-
nomic conditions for the manufacturing sector at the time.
The Impact of Costs of Inputs, Productivity Growth, Confidence,
Mergers and Acquisitions on Activity in the Manufacturing Sector
The book explores the impact of the cost of inputs in the form of electric-
ity price inflation, the binding minimum wage, the exchange rate changes
and volatility on the manufacturing sector. The effects of the trade balance
deficits and surpluses, productivity growth, surges in business and con-
sumer confidence on activity in the manufacturing sector are also explored.
The analysis of the effects of the binding minimum wage and labour pro-
ductivity growth is important because it reveals whether the efficiency
wage theory or institutional model holds. Furthermore, it shows that
labour productivity growth is necessary and has to accompany increases in
the minimum wage as an adjustment channel in the manufacturing sector.
The electricity price inflation environment also plays an important role in
the state of activity in the manufacturing sector. Evidence shows that elec-
tricity price inflation regimes below 6 per cent are good for the manufac-
turing sector output growth and employment growth. The policy
implication is that to create a conducive environment for growth in the
