South Africa has historically relied on its manufacturing sector to drive economic growth and job creation. The manufacturing sector is a significant employer in the country and accounts for about 13% of the country’s GDP. However, the sector has been struggling in recent years, with declining productivity, rising costs, and increased competition from other countries. Added to this is the ESKOM challenge, which is having a marked impact on the sustainability of the industrial sector. This has led to deindustrialization in the country, a phenomenon that has a muti faceted impact on the country. Deindustrialization refers to the decline in the manufacturing sector’s contribution to the overall economy, resulting in a shift towards a more service-based economy. This shift can be detrimental to economic growth, job creation, and income generation.
There are several factors contributing to the decline of the industrial sector of South Africa, including the infrastructure challenge (road, water, electricity etc), investors disenchantment and skills gap. The electricity challenge in South Africa is one of the leading reasons for the deindustrialization of South Africa, especially in recent times. As there is a direct correlation between electricity generation and manufacturing in South Africa, and the rapid decline in the electricity provision in the country has a direct impact on the capacity for manufacturing in the country, hindering industrialization efforts in the country. In our experience, we have seen several light industries forced to close their businesses as the lack of affordable electricity has changed their operating model, and made their businesses unprofitable.
South Africa also has a skills gap challenge, leading companies to be unable to innovate and compete globally, leading to a decline in the country’s manufacturing sector. This, in turn, leads to a loss of jobs, lower economic growth, and an increase in poverty and inequality. Deindustrialization leads to a decline in manufacturing jobs, which can have a significant negative impact on the economy. Manufacturing jobs tend to pay higher wages than jobs in other sectors, so the loss of these jobs can lead to a decline in average wages and an increase in poverty and inequality. In South Africa, self-employment represents only 10% of all jobs, as against 30% in most upper-middle-income economies, such as Turkey, Mexico, and Brazil. The emerging start-up sector in South Africa could help close this gap, it is thus necessary for this sector to be intentionally supported.
Deindustrialization poses several risks to the economy of South Africa including the reduction in economic growth as manufacturing is a key driver of economic growth. Hence, when the manufacturing sector declines, it can drag down the rest of the economy, leading to slower economic growth and reduced prosperity. This leads to an increased reliance on imports, which can have negative impacts on the balance of trade and the current account deficit. This can make the economy more vulnerable to external shocks and reduce its ability to withstand economic crisis. Also as manufacturing is often associated with technological innovation, when the manufacturing sector declines, there is a risk that technological innovation will also decline, which can lead to a loss of competitiveness and reduced productivity. Finally, as manufacturing requires specialized skills and expertise, when the manufacturing sector declines, there is a risk that these skills and expertise will be lost, which can make it more difficult to rebuild the sector in the future.
The risks associated with deindustrialization are significant and can have long-lasting impacts on the economy, it is therefore critical to identify significant mitigants. Firstly, investment in infrastructure such as roads, water and energy needs to be prioritised to create a conducive environment for industrial growth. This will attract investment, reduce the cost of production, and create jobs. South Africa also needs to invest in the education and training of its workforce, particularly in technical skills that are in demand by employers. This requires a collaborative effort between the government, businesses, and education institutions to develop effective training programs and ensure that they are accessible to all South Africans. There is also a need to encourage innovation and entrepreneurship to create an environment that encourages innovation and entrepreneurship. This could include tax incentives, research and development funding, as well as access to finance for startups. Furthermore, South Africa needs to focus on developing export-oriented industries that can compete in global markets. This will require a shift in focus from the domestic market to export markets. Finally, South Africa needs to encourage public-private partnerships to develop infrastructure and promote industrial growth. This will leverage private sector funding and expertise to support government-led initiatives.
By taking these steps, South Africa can help to safeguard its manufacturing sector and promote sustainable economic growth. These strategies require a long-term commitment and collaboration between various stakeholders. If implemented effectively, they could reverse deindustrialization and create a sustainable industrial base in South Africa.