The influence of Industry in GDP growth

In this third note in a five-part series*, Ron Sandrey, tralac Associate, discusses the rise of industry in Asia and the growth of global value chains

Perhaps the rise of industry may be a better explanation of the Asian growth ‘miracle’, and here we examine industry value-added as a % share of GDP over the period from 1960 to 2015 for our economies where data is available. In particular, we look at the change in this ratio over the period, with this ratio expressed as the combined values of the last two periods over the first two period to even out anomalies. The data shows that for most of the more mature economies are stable, and that now includes China. Both South Africa and Japan have declined, while Korea, Indonesia and the three Tiger Cubs of Cambodia, Laos and Vietnam have ratios

Next we look at manufactures exports as a % of merchandise exports to assess if that is a better way of looking at the Asian growth miracle and how it may be applicable to South Africa. China has risen dramatically, and to the extent that most of its merchandise exports are manufactured products according to the World Bank. Similarly for Malaysia, Thailand and the Philippines, but India, Korea and the world average have stayed somewhat constant. Data is not available for Laos, but Asia’s ‘litter cubs’ of Cambodia and Vietnam have a stable high share and an increasing share respectively. South Africa is again the odd one out, although its earlier missing years are probably attributable to the isolation period and its relatively low shares of later years are probably a reflection of the importance of minerals in merchandise exports. This does seem to be a contributing factor.

Isolating out Indonesia, South Africa, Thailand and Vietnam for a comparison we see that Thailand reached a high level early on and stayed there, while Vietnam started much lower but eventually caught Thailand. Indonesia and South Africa have had a similar profile from the 1990s but South Africa has been marginally in front recently though both are declining in recent years.

As a practical example we look at the global clothing exports as (a) it is a manufacturing sector where low cost labour is a starting board and the Asian economies have become prominent and (b) it is a sector where South Africa has showered considerable trade policy attention on to attempt to gain an international exporting foothold, The data shows clearly that South Africa has not succeeded here, although there has been an increase from its trough of 2009. We note that the role of Hong Kong is diminishing, but as the ITC trade data shows that most of Hong Kong’s exports are in fact just re-exports this suggests that a more careful examination of trade in the clothing sector may be important.

Global value chains (GVCs)

The new wave of industrialisation is all about becoming an integral part of the global value-added chains whereby a particular country will add value in the form of a component to a manufacturing product (whether that component be an actual part or a service in the form of perhaps final packaging) and then send it down the chain. An example of where South Africa is firmly entrenched into these chains is the vehicle manufacturing industry, an industry clouded in an opaque subsidy regime in South Africa. Another regional example is the Lesotho clothing sector, a sector that is driven by China (and wider Chinese-related) interests that solely owes its existence to preferential access to both the US and South African markets.

The argument goes that with wages rising rapidly in China, parts of these GVCs are migrating elsewhere in the region and globally, and SACU potentially stands to benefit. After all, the region has natural capital and surplus labour, relatively good infrastructure and a quality institutional environment. This of course ignores electricity and labour market unrest, both of which deter prospective partners. More problematically is that the region is not placed well to logically become a part of the GVC. For example, as the World Bank says, Mexico and Central America are sourcing hubs for ‘Factory North America’, Central & Eastern Europe and to a lesser degree North Africa for ‘Factory Europe’, and parts of Southeast Asia for ‘Factory Japan’ and increasingly ‘Factory China’ Not only is South Africa geographically standing outside of the locations, it is also disadvantage by several infrastructural and related problem and ‘Factory Africa” is getting to be a lonely and almost abandoned warehouse site. Perhaps regional integration efforts in Africa will help by enhancing “Factory Africa” but indications are not promising for either regional integration or “Factory Africa”.

Importantly, the World Bank points out that while GVCs creates opportunities for developing countries, and this brings with it exports and jobs, it does not guarantee their quality or sustainability. Lesotho is an example, where while its experience has been a huge success after 30 years Lesotho still has no locally-owned exporters or even subcontractors and no local firms providing any strategic goods and services inputs to the sector. It has to rely on wage restraint, trade preferences, and fiscal incentives to maintain its tenuous position. For South Africa, joining GVCs is not enough, and as the World Bank points out that they must establish value-adding positions in these production networks, and upgrade continuously if they are to use GVCs effectively as an instrument for inclusive growth. To quote James Bond, “Never say Never”, but there is a mountain to climb.

* This Discussion is part of a series prepared by Ron Sandrey examining specific issues raised in a new tralac Working Paper of the same title, available to download here: While South Africa slept: why is it not like an Asian economy?

Tell us what you think.

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References

Levine, R. and D. Renelt, 1993. ‘A sensitivity analysis of cross-country growth regressions’, The American Economic Review, Volume 82, Issue 4 (Sept, pp. 942-963).

Rodrik, D., 2014. Why an African Growth Miracle Is Unlikely, Milken Institute Review, October 20, 2014. Available at http://www.milkenreview.org/articles/why-an-african-growth-miracles-unlikely

World Bank, 1993. The East Asian Miracle: Economic Growth and Public Policy. New York: Oxford University Press. Prepared by a team led by John Page and comprising Nancy Birdsall, Ed Campos, W. Max Corden, Chang-Shik Kim, Howard Pack, Richard Sabot, Joseph Stiglitz, and Marilou Uy.

World Bank, 2015 “Factory Southern Africa? SACU in Global Value Chains”, Summary Report, November 2015.