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Improving Manufacturing Performance in South Africa: A Contrary View

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Trevor Bell (1995). Improving Manufacturing Performance in South Africa: A Contrary View. Transformation 28.
Type journal article
Scope Economics and economic history of apartheid
Method mixed
Period studied 1917–1995
Regions South Africa, Latin America (Brazil, Mexico, Colombia), East Asia (Korea)
Themes manufacturing industrial policy, macro fiscal finance debt, business and state, transition post apartheid, comparative theory, sanctions divestment, methods data sources
Citation key bell1995

Argument

Bell reviews the 1995 Industrial Strategy Project (ISP) report and argues that it mis-diagnoses the ills of South African manufacturing. The ISP treats slow, exceptionally poor productivity growth, plus supply-side factors (concentration, industrial relations, skills) and import-substituting industrialisation (ISI), as the main causes. Bell uses international TFP comparisons, capacity-utilisation adjustments and investment/GDP data to argue that productivity decline was mostly a consequence of macro-economic shocks, above all the foreign-exchange shocks and the 1985 debt crisis. He contends that economic restructuring needs attention to the balance of payments, including the import side. Export expansion alone may be insufficient, import liberalisation may do net harm, and some further import substitution may be needed.

Evidence and method

Secondary comparative TFP estimates (Young, Page, Wright, Nishimizu and Robinson, Helleiner's 14-country volume); Wright's (1993) South African TFP and capacity-utilisation estimates; SARB investment/GDP series 1946-94; IDC export data for 1972-93; import-substitution indices for 1917-88 (du Plessis, South African Statistics) compared with Mexico; IMF and World Bank trade ratios; close reading of the ISP report.

Place in the debates

Findings

  • South Africa's declining economy-wide TFP is common internationally, so the ISP's 'highly unusual' claim fails. (p. 3)

    It seems, therefore, that South Africa is by no means alone in having experienced low and declining economy-wide TFP growth rates

  • On international comparison of manufacturing TFP, South Africa is mid-table once Korea is excluded. (p. 4)

    Excluding Korea, South Africa's manufacturing TFP growth was about equal to the median in the sample, and thus not exceptionally poor compared to these other countries.

  • Capacity-utilisation adjustment removes almost all of the measured 1980s TFP decline (Wright's estimates). (p. 6)

    Excess capacity thus accounts for virtually all the measured decline in TFP in 1981-90 (Wright, 1993:58-59).

  • The debt crisis, a key source of the manufacturing crisis, is entirely ignored by the ISP. (p. 9)

    The debt crisis, perhaps the most obvious source of all, seems to get not one word of mention in the entire ISP report.

  • A sharp swing in the capital account in 1984-85 dwarfs any import-ratio change as the source of the foreign-exchange constraint. (p. 10)

    the huge 6.7 percent of GDP swing in the capital amount, from a net inflow of 1.6 percent in 1984 to a net outflow of 5.1 percent in 1985

  • Investment/GDP did not decline persistently before 1984, so low investment is a symptom of the post-1984 macro crisis rather than an inherent business propensity. (p. 10)

    The I/GDP ratio of 24.9 percent in 1984 was about as high or higher than it was in all but three years from 1949 to 1968.

  • The shift from ISI to export-oriented industrialisation was forced by 1980s macro shocks. (p. 17)

    South Africa was forced by the macro-economic shocks of the early- to mid- 1980s to shift abruptly from ISI to EOI, and there can be no going back on that.

  • Export growth in 1988-93 was too weak to relieve the foreign-exchange constraint, as gold and agricultural exports fell. (p. 16)

    The result was a meagre increase in total exports, measured in these terms, of only 1.1 percent per annum.

  • South Africa was not unusually closed in trade or protection terms, contradicting the autarky narrative. (p. 20)

    In fact, neither in terms of its trade/GDP ratios, nor its levels of protection has the South African economy been exceptionally closed.

  • Import-substitution indices show no sanctions-era 'semi-autarkic' turn. (p. 22)

    There is no support in Figure 3 for the contention that government in its efforts to withstand the threat of sanctions in the period 1967-85, had pursued a 'semi-autarkic' strategy (Becker and Pollard, 1990).

  • Bell rejects a theoretical link between concentration and low productivity growth. (p. 26)

    There is also no theoretical basis for a negative relation between productivity growth and market concentration.

Evidence ledger

Sources used

Source Kind Period How used
South African Reserve Bank Quarterly Bulletin, Supplement June 1994 (p B-12) and September 1995 issue: investment and GDP expenditure series, 1946-94 official statistical series 1946-1994 Builds Figure 1, the investment/GDP ratio, to argue the post-1984 decline reflects macro-economic shocks rather than low propensity to invest.
IDC export data (current Rand values by sector, 1972-93) official statistical series 1972-1993 Used to show the manufactures share of exports and to compute 1988-93 export growth rates for manufactures, gold, agriculture and total exports.
Wright (1993) estimates of South African manufacturing TFP growth, including capacity-utilisation adjustments and international comparisons secondary literature compilation 1945-1990 Supplies South African TFP growth estimates, adjusted for capacity utilisation, and the comparisons with other countries that rebut the ISP claim of exceptionally poor productivity.
Page (1990) industry TFP estimates for 17 countries (Figure 1) secondary literature compilation within 1956-1982 Cross-country comparison of TFP, total factor input and output growth, to which Wright added South Africa.
Nishimizu and Robinson (1984) sectoral TFP estimates (2-digit ISIC) for India, Korea, Turkey, Yugoslavia, Japan secondary literature compilation 1955-1980 (varies by country) Allows comparison of South African sectoral TFP growth with that of five countries via Wright.
Helleiner (ed.) (1994) Trade Policy and Industrialisation in Turbulent Times (country studies of manufacturing TFP, macro environment, trade orientation) secondary literature compilation 1970s-1980s Evidence that manufacturing TFP slowdowns and negative TFP were common and that macro conditions and capacity utilisation drive TFP and output.
Young (1994) TFP estimates based on the Summers and Heston (1991) Penn World Table data set secondary literature compilation 1960-1985 Shows that about 53 countries had zero or negative economy-wide TFP growth, so negative TFP is not unusual.
Joffe, Kaplan, Kaplinsky and Lewis (1995), ISP Report (Table 1 on TFP; figures on investment; export and trade statements) commission or official report 1960-1990s The object of the critique; its TFP table and other evidence are examined and found inadequate.
IMF, International Financial Statistics (Brazil investment ratios; import/GDP and export/GDP ratios, Yearbook 1992 pp 136-139) international trade or finance data 1980s-1990 Brazil's investment fall after its debt crisis, and trade/GDP ratios for Figures 2a and 2b comparing South Africa with other developing countries.
World Bank, World Development Report 1989 (population and GNP per capita) international trade or finance data 1980s Used to compute GNP in US dollars for the size axis of Figures 2a and 2b.
T.A. du Plessis (1965) constant price data, 1916/17-1956/57 (unpublished DCom thesis, UNISA) secondary literature compilation 1916/17-1956/57 Source of the early import-substitution index series in Figure 3.
South African Statistics (various issues), current price data 1961-88 official statistical series 1961-1988 Used to calculate the import-substitution index (imports/total supply) for 1961-88 for consumer, intermediate and capital goods.
Villarreal (1990) Mexican import-substitution data and goods classification (Tables 11.2, 11.4) secondary literature compilation 1927-1988 Comparator series for Figure 4 showing similar South African and Mexican import-substitution trends.
World Bank (Belli et al, 1992) review of South African trade policies commission or official report early 1990s Cited to show South Africa was not an overly protected economy.

New data

Author-computed (with Greg Farrell) investment/GDP series 1946-94, export growth rates 1988-93 by sector in constant US dollars, and import-substitution indices for South Africa 1917-88 compared with Mexico, all compiled from official published series.

Inference

Quantification: Descriptive tables.

Critical review essay. It rebuts the ISP report by re-reading other researchers' cross-country TFP estimates, then uses simple time-series figures (I/GDP, export growth, import/supply ratios) and a one-country comparison with Mexico to support a macro-economic, balance-of-payments interpretation. There is no regression or formal testing.

Key claims

Claim Basis Strength
South Africa's manufacturing TFP growth was not exceptionally poor by international standards; negative or declining TFP was common in developing countries. (p. 4) Page (1990), Wright (1993), Nishimizu and Robinson (1984), Helleiner (1994) and Young (1994) comparisons, read against the ISP's one economy-wide TFP table. Partial data
Measured TFP decline in the 1980s was largely a result of excess capacity, so productivity is a dependent variable driven by output and macro conditions. (p. 6) Wright (1993) capacity-utilisation adjustment, supported by Helleiner (1994) and Ocampo (1994). Partial data
The fall in the I/GDP ratio after 1984 is a symptom of balance-of-payments and debt-crisis shocks, not an inherently low propensity to invest. (p. 10) SARB investment series for 1946-94 (Figure 1), plus Brazil's IMF data as a comparator and a capital-account swing of 6.7 percent of GDP in 1984-85. Partial data
Export growth prospects are poor: total exports grew only 1.1 percent a year in 1988-93 in constant US dollars and fell in 1990-93, so export expansion alone may not relieve the foreign exchange constraint. (p. 16) IDC sectoral export data deflated by the US PPI; the author acknowledges these are preliminary estimates. Partial data
The South African economy has not been exceptionally closed, and its import-substitution trajectory resembles Mexico's, so further import substitution is not implausible. (p. 20) IMF/World Bank trade ratios (Figures 2a, 2b), the import-substitution index from du Plessis and South African Statistics (Figures 3, 4), and the World Bank protection finding; Mexico is the only comparator. Partial data
The ISP report fails to substantiate its claims about market concentration, SME entry barriers and the effects of dominant firms. (p. 25) Textual reading of the ISP report, which finds no evidence presented, and Helleiner's findings of a positive association between concentration and productivity in some countries. Illustrative or anecdotal

The author's caveats

Acknowledges that comparative manufacturing TFP data are scarce and fragmentary, especially for the 1980s, and that the Mexico comparison rests on one country chosen for data availability. Notes the lack of a suitable export price deflator, so constant US dollars are used, and calls the export analysis preliminary. Also flags that ISP data sources are not given.

Gaps in the evidence

The argument that macro shocks rather than micro-level inefficiency caused the manufacturing slowdown rests on foreign studies and a few aggregate South African ratios, with no South African industry-level or firm-level analysis. Firm-level productivity, concentration and R&D data, and proper export price deflators, would allow direct tests of the competing explanations; the official series existed then, and are better documented now. A formal macro or balance-of-payments model would be needed to test the claimed foreign exchange constraint and the need for import substitution.

Replicability: Data described but not public.