The multiplier effect of localization could boost the manufacturing sector

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the herald

A study by Pan-African Investment and Research Services, “Revitalizing South Africa’s Manufacturing Sector”, reports that the localization of industry, coupled with a 10% increase in investment in manufacturing, could alter its downward trajectory.

It comes after Statistics SA reported last week that manufacturing shrank 5.9% in the second quarter and contributed -0.7% to the country’s GDP “growth”.

The report says recent ongoing global supply chain disruptions highlight the need for increased localization as a means of expansion, security and survival for specific industries.

“What’s in the manufacturing process that we don’t know about? It may not be that we import air fresheners,” said Dr Iraj Abedian, founder and CEO of Pan-African Investment and Research Services, during a briefing last week.

Abedian says the sector urgently needs a recovery strategy in terms of contributing to the economy, exports and competitiveness.

Recalling a proposal made by the National Development Plan 2030 for boosting the manufacturing sector by leveraging public and private markets to promote localization, the report notes that only 38% of South Africa’s total exports were manufactured in 2020. .

“This indicates that the bulk of the country’s exports have not had much added value, which puts South Africa at a disadvantage in terms of lost opportunities, for example, the opportunities that come with expanding its industrial capacity. “.

He says local sourcing plays an important role in local manufacturing and, if done right, could boost the struggling sector and allow it to contribute more to the country’s sustainable growth.

This, he notes, will further benefit industry sub-sectors – including the food, meat, sugar, furniture, automotive and steel industries – by creating jobs that will fuel the economy.

However, it indicates that investment in the manufacturing sector has been low, including during the pre-Covid years, which has led to a continuous decline in the sector’s contribution to GDP.

“The country’s economy needs to be reconfigured in a way that allows the manufacturing sector to thrive,” Abedian adds, noting the results of a simulated model of the South African economy detailed in the report.

He proposes that a 10% increase in investment across industry can contribute to positive growth in GDP, employment, household consumption, total investment and government revenue.

This includes a medium-term 13% increase in GDP, 8% growth in unskilled job creation, an overall 8.3% increase in investment across the economy, and a further 9% in tax revenues.

According to the simulation, the 10% investment could create 75,300 new jobs in manufacturing, 11,500 in mining and 10,000 in agriculture.

Short term pain, long term gain

“In the short term, some negative impacts are felt due to the crowding out of private consumption and inflationary pressure on prices and downward pressure on the real exchange rate, but these reverse at medium term,” he added.

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The report indicates that a predominant trend in various simulations is the strong impact of the investment stimulus on services, construction, trade, transport, communications and finance.

“Therefore, while this investment is directly in the manufacturing sectors, the related upstream and downstream service sectors also benefit significantly due to the multiplier effects of the circular flow.” – Moneyweb

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