Manufacturing Employment and Import Dependence

by DAVIES, R. , 2006
Research Report, Employment Growth & Development Initiative, Human Sciences Research Council

Prof Rob Davies assesses the potential of promoting South Africa’s manufacturing sector through reduced import dependence. He explores two versions of the argument. The first suggests that it would be beneficial to reduce the imported component of inputs into manufacturing production. Imported inputs into manufacturing rose from 13.0% of gross output in 1993 to 15.9% in 2005, driven mainly by increases in the import intensity of manufacturing subsectors, rather than by shifts in production from low- to high-import intensity subsectors. This suggests the scope for reducing these intensities is limited. The second version, is that the economy will benefit if the balance between imports and domestic supplies is shifted towards the latter for all uses, not simply for intermediates. The argument is typically applied to a single sector; the paper explores it in an economy-wide setting by simulating lower imports of a particular good arising from three different causes: higher world prices of imported inputs; productivity increases in the domestic industry; and increased domestic capacity through capital investment. The consequences of the reduction in imports depend on why it occurs. If it is because the world price has risen, the net effects on employment can be negative, primarily because of exchange rate appreciation. If, however, the reduction is because of productivity growth or increased capacity in the industry, leading to increased domestic production, the effects can be positive.