Rethinking an industrial strategy for South Africa

South Africa’s industrial strategy has not been a success. This is reflected in the ongoing erosion of the manufacturing sector’s contribution to the country’s GDP. According to the World Bank, since 2000, manufacturing value add (MVA) to GDP has dropped from 18% to 12.8% of GDP as at late 2024. Historically, a country’s developmental success is associated with its level of industrialisation. A high employment generative manufacturing sector with growth in product exports was seen as indispensable to economic progress.

Despite the plethora of industrial policies that the South African government has launched over the past two decades, the clear trend is a secular decline in manufacturing. The National Industrial Policy Framework, the Industrial Policy Action Plan and its multiple iterations, the New Growth Path, the Black Industrialist Programme and most recently the Sector Master Plans have not changed the trajectory of the South Africa’s industrial economy. Why is this?

Industrialisation and breaking the inclusive growth link

An expanding manufacturing sector has been the backbone of economic takeoff everywhere since the industrial revolution. However, before World War 2 the production and consumption of manufactured products were bundled together in close geographic proximity due to costs, limited transportation and a rudimentary logistics sector.

After World War 2 the dramatic improvement and efficiency in logistics – later to be supercharged by the IT revolution – enabled companies to rapidly globalise their production, choosing locations where they could combine their proprietary know-how with cheap local wages and ship the products to new markets across the globe. This unbundling of production from consumption, as described by Richard Baldwin, a professor of international economics, was the economic underpinning that powered the success of the East Asian tiger economies, followed spectacularly by China, over the past half-century. A large part of my life was spent in these economies, giving me a front-row seat to the drivers of Far East Asia’s economic transformation and how the rapid expansion of export-oriented manufacturing underpinned the region’s phenomenal economic and social transformation.

It is no surprise that Asia’s manufacturing-centred economies were more “inclusive” than those that were primary commodity driven. These economies saw manufacturing and export growth coinciding with more inclusive income distribution (measured by the Gini coefficient) relative to other developing regions where middle classes expanded alongside industrialisation which delivered growth with lowering levels of inequality.

There is no sector that creates jobs, deepens local value chains, encourages the growth of a services economy and embeds intellectual property like manufacturing. An economy that diversifies is one that enjoys a more inclusive growth model away from the narrow rents collected from the resource sector and towards a more resilient and diffused economy. Harvard economist Dani Rodrik described manufacturing as an “escalator industry” that can drive rapid transformation in developing economies. But this assumption is no longer valid.

South Africa’s manufacturing challenge is to seek the elusive trinity of industrialisation, productivity and employment. Achieving all three simultaneously will, however, not be possible. As productivity has dramatically increased with the convergence of technology, data and robotics through the Fourth Industrial Revolution, growth has led to fewer job opportunities across all economies. Most importantly, productivity improvements have increased the relative demand for skilled workers. The demand for low-skilled workers has inevitably declined. Industrial policy now requires a deregulated labour market and enhanced human capital formation. The new paradigm is one where MVA should grow even if the share of industrial employment declines.

While policy has been well intended, it has also been flawed because it has not taken cognisance of this rapidly changing environment of manufacturing, with the result that industrial resilience has been low. In South Africa and other developing economies, premature deindustrialisation has taken place. It can only be described as premature as it was based on previous models which have now been overtaken by technology and the nature of industrial activity itself.

All well-meaning, but also poorly implemented, industrial policies have failed based on a state-centric underpinning. The oft-proposed concept (in South Africa) of beneficiation of resources into manufactured products also has no market merit. Focusing on raw materials merely distracts policy attention from other opportunities elsewhere in the economy. There are almost no examples of countries that have converted resource endowment into a manufacturing competitive advantage of that resource. Downstream petrochemical industries in oil-rich states may be the exception.

Systems thinking for industry

It is becoming much harder for countries that industrialise later to achieve the employment levels that were achieved earlier. This is deeply structural and requires a rethink of traditional industrial policy. Technology and robotics have undermined low-skilled labour and with it the (obsolete) traditional manufacturing-led inclusive growth model. This is already having profound implications for South African industry and the country’s social developmental trajectory.

The imposition of protective tariffs will also be ineffective in smaller economies that are aimed at retaining or reviving manufacturing jobs. Rather, industrial policy will need to move beyond single sectors and be more expansive, focusing on wider competitive and innovation-driven ecosystems. The convergence of technology, human capital and services should shape new industrial policy thinking.

Thus, industrial policy should no longer be focused on individual sectors but on ecosystems that allow for complementary manufacturing and service functions to thrive. McKinsey has referred to such ecosystems as “arenas” which account for shifts in investment capital, research and development spending and the birthing of new emerging multinationals. They are defined by “high growth and high dynamism” and through innovation, which capture a major share of value and market share (McKinsey Global Institute, October 2024). Such existing industries are biopharmaceuticals, consumer electronics and electric vehicles. Future identified arenas include semiconductors, robotics, batteries and video gaming.

This then begs the question: is the existing definition of “manufacturing” still valid considering this shift in focus from factories to manufacturing value systems?

Industry 4.0 will force us to extend the traditional definition of manufacturing that should pivot from “where value is created” to “what kind of value is created”.

This has implications for governments and how they think about industrial policy. The digital component of manufacturing now needs to be included – for instance, AI, robotics and industrial software as manufacturing capabilities. Manufacturers that do not own or operate factories must be considered legitimate industrial actors and government programmes around human capacity building, research and development and tax incentives must be aligned with wider and real value creation.

Narrowly defined factory manufacturing has indeed declined in many developed and developing countries, but if governments were able to recognise the dramatic shifts that are taking place in MVA and accommodate a wider definition of “manufacturing”, overall industrials may have indeed grown.

New thinking around industrial growth

Considering the profound industrial and competitive structural shifts that are taking place in global industry, South Africa needs to urgently reconsider its industrial strategy. A mindset shift is needed that recognises a simple fact that the trade unions choose to ignore: industrial policy is no longer an employment growth strategy.

Building an industry-centric ecosystem does not come about through a simple policy switch but rather requires active government engagement in close collaboration with industry in order to drive structural transformation.

A new understanding of how technological advancements can impact existing as well as shape new industries and economies must be gained. The agility of Asian economies in adapting and embracing technological change is impressive and holds lessons. Even more so is their ability to create highly competitive workforces that are ready to seize the opportunities offered by the market. Industrialisation strategies cannot be built upon protection and import substitution. They must ultimately centre on human capital formation and the concentration thereof in order to shape competitiveness, deepen value add complexity and drive productivity. DM

Dr Martyn Davies is chairperson of the Downstream and Industrial Committee, Mining Indaba and a former member of the World Economic Forum’s Global Agenda Council on China.