The impact of manufacturing and its sub-sectors on GDP and employment in South Africa : a time-series analysis

Abstract

The manufacturing sector plays an integral part in driving industrialisation of a country and inducing economic progression by precipitating structural change, technological innovation, sustainable GDP growth and productive employment. The reason for that rests in the features of the manufacturing sector (e.g. high magnitude of capital; (2) technology, increasing returns as well as the multiplier effects; (3) employment potential; and (4) forward and backward linkages) that collectively corroborate the sector necessary for economic progression. As such, the manufacturing sector impels economic growth and employment in various countries. In South Africa, a resilient manufacturing base is established and, over the years, the country has managed to induce substantial competence in the automotive, metal, chemical, food and beverages, and clothing sectors of manufacturing. However, production in the South African manufacturing sector and its sub-sectors has been experiencing a downswing over the last two decades and this is due to impediments or challenges to effective manufacturing production arising from both the domestic and global constraints. This involves the inadequate electricity supply, high administrative costs, skills inadequacies, antiquated technologies, effects of the 2008/09 global financial crisis and global competition. As a result of the aforementioned constraints, production in the South African manufacturing sector has been lacklustre, despite the efforts undertaken to induce effective South African manufacturing production. The Economic Development Department of South Africa have annunciated that the manufacturing sector has long been a vehicle for economic growth and is one of the labour-absorbing economic sectors in South Africa. Thus, suggesting that the modern-day poor performance of the South African manufacturing sector has mirrored the country’s sluggish GDP growth rates and high unemployment levels. This imposes negative implications to the South African economy. In view of the above discussion, the primary objective of the study is to appraise the existing South African manufacturing base and analyse the impact of production in the manufacturing sector and its predominant sub-sectors on GDP and employment in South Africa. Considering this, the empirical objectives of the study were: (1) to establish the effect of production in the manufacturing sector and its predominant sub-sectors on the South African economy; (2) to analyse the relationship between GDP, employment, production in the manufacturing sector and its predominant sub-sectors in South Africa; and (3) to formulate policy recommendations for improved sectoral development regarding manufacturing production and job creation. In achieving these empirical objectives, secondary data were derived from the South African Reserve Bank (SARB) and Statistics South Africa (Stats SA). The secondary data used covered a period 1998 Q1 to 2017 Q1 (i.e. 77 quarterly observations) and the choice of using data that covers the aforementioned period was motivated by the availability of data. As such, to analyse the data, an econometric models used included the autoregressive distributed lag (ARDL) and error correction model (ECM). The results of the study indicated that production in the manufacturing sector and its predominant sub-sectors under study has a long-run impact on GDP and employment in the South African economy. However, production in the total manufacturing sector and four (automotive, chemical, food and beverage and metal) of the five predominant sectors of manufacturing under study increases South Africa’s GDP in the long run. In other words, production in the clothing sector decreases South Africa’s GDP in the long run. At the same time, production in the total manufacturing sector and four (i.e. automotive, food and beverage, clothing and metal) of the five predominant sectors of manufacturing under study has a positive long-run impact on employment in the South African economy. That is to say, production in the chemical sector of manufacturing decreases employment in the long run. In the short run, production in the manufacturing sector increases both GDP and employment, however, only production in the automotive and metal sectors of manufacturing increase GDP in the short run. While production in the metal and food and beverages sectors of manufacturing increases employment in the short run. Therefore, based on the discussed empirical findings, the study provides recommendations for improved sectoral development regarding manufacturing production and job creation. The study also concludes that the South African government should spend its limited fiscal resources to support and boost overall effective manufacturing production, as this can induce both GDP growth and employment in the short- and long run