South Africa: Reviving industry

South Africa’s government is stepping up efforts to revitalise the country’s manufacturing sector and create job opportunities deeper within the country’s interior, seeking to reverse a long-term decline in the sector and address regional disparities in employment and production.

In late January, the trade and industry minister, Rob Davies, unveiled the government’s latest policy initiative to promote industrial development and called for public comment on the new scheme. Under the plan, a series of special economic zones (SEZs) across the country will be set aside for specifically targeted economic activities.

South Africa actually already has a scheme dedicated to facilitating industrial expansion in specified regions: the industrial development zone (IDZ) programme, which was established in 2000 with the aim of attracting foreign investment and promoting the export of value-added commodities. However, these IDZs have not lived up to expectations, as the new policy paper acknowledged.

“The main limitation of the programme was that the IDZs could only be designated adjacent to a seaport or international airport, and that excluded other regions in the country which had industrial potential but did not meet the IDZ criteria,” the paper said.

According to Davies, by introducing a programme with a much broader scope than that of the IDZ scheme, more areas of strategic economic potential can be leveraged to attract foreign direct investment. This would result in the expansion of the manufacturing sector and the creation of additional industrial hubs to regionally diversify the national industrial base.

“The SEZ programme is one of the most critical instruments that can be used to advance [the] government’s strategic objectives of industrialisation, regional development and job creation,” Davies said.

Officials have stressed that the new SEZs will not replace the existing IDZs, but will complement them. Currently, there are three IDZs that are fully functioning, with a fourth, situated close to the OR Tambo International Airport in Johannesburg, still being developed.

The other three, at Richards Bay in KwaZulu-Natal, East London, and Coega, near Port Elizabeth, have struggled to attract the levels of investment the state had hoped. In part, this had been attributed to a failure to offer companies sufficient incentives such as tax breaks, according to Lionel October, the director-general of the Department of Trade and Industry (DTI).

“Our IDZ programme has been restrictive and it had no special incentives to compete with IDZs in Tanzania, China, Singapore, South Korea,” he said in late January.

Mcebisi Jonas, the member of the executive council for Eastern Cape responsible for economic development, said urgent measures are needed to reverse the province’s industrial decline and encourage the growth of skilled jobs, though he is hopeful the new state programme will turn the situation around.

Eastern Cape was facing a very real challenge of what Jonas called “de-industrialisation”, a challenge that had to be met by the national government’s new SEZ policy, he told a meeting of industrialists and state officials on February 20.

“This problem needs to be prioritised and urgent steps need to be taken to ensure that our people don’t lose their jobs. We don’t want to lose any more skilled labour and end up with a problem of special imbalances,” he said.

It is not just Eastern Cape that has seen industrial activity, and with it jobs, on the wane in recent years. It is estimated that over the past 10 years, the manufacturing sector’s contribution to GDP has fallen from nearly 20% to below 14%, with job losses commensurate with this downturn.

Some of this decline has been a result of the lowering of tariff barriers and the opening up of the economy but the strong emphasis on the services and mining sectors may have been to the detriment of industry. Labour costs have also been a consistent bone of contention, with wages in South Africa outstripping those of other major emerging markets on the continent or in Asia.

Other problems that have harmed industry’s cause in recent years have been electricity shortages, rising power costs and weak links in the infrastructure chain, with the flow of raw materials or finished products at times interrupted or delayed. Though South Africa is planning to invest heavily in new electricity generation capacity, bolster distribution networks and reinforce transport infrastructure, these efforts will take time and money.

These issues will be of particular importance to the new SEZs, as many are intended to be set up in areas away from established industrial hubs in outlying areas, some of which may lack full power and logistics connectivity. Learning from the challenges of the IDZs’ development, however, could hasten the pace of rolling out the new SEZs.

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