To boost the region’s manufacturing competitiveness, Southern African countries – such as South Africa, Mozambique, Botswana, the Democratic Republic of Congo (DRC) and the Indian Ocean Island states – can learn a thing or two from the way in which East Asia transformed itself into the world’s factory.
So says a new World Bank report, entitled South Africa Economic Update – Focus on Savings, Investment, and Inclusive Growth.
East Asia’s rise from a largely agrarian society to becoming the world’s manufacturing hub is seen by many as one of the great economic turnaround stories.
A few decades ago, many East Asian countries had high unemployment levels, much like Southern Africa today.
East Asia, however, managed to transform its economic fortunes through product fragmentation, the concept where each country specialises in the manufacturing of a specific component of a final product. “Say, for example, you are producing a vacuum cleaner. Three or four countries will each produce at least one component of that final product. A country like China will then be responsible for assembly and export. Value is therefore captured in several economies, not just in China,” Standard Bank analyst Simon Freemantle told How we made it in Africa in an earlier interview.
In East Asia, multinational companies established production value chains across the region, with each link in the value chain located according to the comparative advantages of the host country, notes the World Bank’s report. Labour-abundant countries manufactured labour-intensive components, while the more specialised and capital-intensive components where manufactured in countries with the adequate capacity.
“Among the non-western economic blocs, East Asia has the highest intraregional trade,” says the report.
Southern Africa can also benefit by spreading manufacturing across the region, instead of keeping production in a single location. “Southern Africa remains the least integrated region in the world, despite the presence of a customs union (such as the Southern African Customs Union) and a free trade area (such as the Southern African Development Community), and sufficient variations within the region – whether comparing South Africa’s population of 50 million and Seychelles’ population of 85,000, or Mauritius’ per capita gross national income (GNI) of US$7,250 in 2009 and Democratic Republic of Congo’s $160.”
The World Bank says that Factory Southern Africa is being held back by “restrictive regulatory policies that raise trade costs and create uncertainty”.
“While tariffs have been lowered within the Southern African Development Community, significant nontariff barriers remain covering one-fifth of regional trade. That undermines regional trade, lowers the region’s attractiveness to foreign investors, and eventually undercuts regional supply chains.”