South Africa

South Africa is quite different from the other countries examined, given its much more diversified economy, well-established industrial base and long history of

industrialization. Figure II.10 presents the most prevalent reasons for underutilization as a share of total underutilization. Most firms identified insufficient demand as the most important reason for underutilization, across all years from 2009 to 2017. This was followed by “other reasons” (downtime due to maintenance, changes in productivity and seasonal factors), then the shortage of raw materials, shortage of skilled labour and shortage of semi and unskilled labour.

Notwithstanding these reasons for underutilization, capacity utilization rates in South Africa are high relative to other regional averages and much higher than our case study countries. Perhaps key to understanding this is that only large firms are surveyed, in contrast to the other countries that do not have private sectors comparable to South Africa’s in terms of firm size, longevity and sophistication.

Figure II.10

South Africa, annual average, reasons for underutilization, share of total, 2009–2017

Source: Author’s calculations, based on data from Statistics South Africa (2018).

Reasons for underutilization, represented in figure II.11, were also collected across industries using the Standard Industrial Classification of all Economic Activities (SIC) breakdown. Total underutilization is a weighted average of the underutilization reported in the SIC breakdown. Respondents were asked to rank in order of importance (1, 2 or 3) up to three reasons for underutilization, in each of the SIC sectors, where five options were presented, as shown in the legend below. These reasons were weighted, relative to the importance of the reasons presented, by the respondents. If respondents provided three reasons for underutilization, the

following weights applied: 0.5 for the most important reason; 0.33 for the second-most important reason and 0.17 for the least important reason. The percentage of underutilization for each reason was arrived at by multiplying these weights by the total underutilization reported by the respective respondent (Statistics South Africa, 2017). Most industry sectors reported insufficient demand as the most important reason for underutilization, except for the coke, petroleum products and nuclear fuel sector, citing “other reasons” as their largest constraint. “Other reasons” and the shortage of raw materials are the next dominant constraints, varying between sectors.

Figure II.11 South Africa, reasons for underutilization per SIC category, average, % share of total, 2004–2017 Source: Author’s calculations, based on data from Statistics South Africa, 2018.

7. Nigeria

Since we do not have survey data setting out the reasons for manufacturing capacity underutilization in Nigeria, we provide a brief political economy discussion of the main factors that have shaped the statistics presented in the previous section.

The 1970s were characterized by sharp increases in oil revenues, sparked by the 1973 OPEC embargo and the 1979 Iranian Revolution. As an oil export-dependent nation, Nigeria was able to accumulate windfall wealth and was therefore able to carry out a large-scale public investment programme that sought to expand and improve its infrastructure and social services, in a period of just over 10 years (World Bank, 1994).

Initially, Nigeria’s public investment campaign relied on international debt financing, and so the country was exposed to major exchange rate risk. When the United States Federal Reserve hiked interest rates in 1981 to curb inflation, Nigeria was subjected to high interest payments on United States dollar-denominated debt. In 1984, the Government attempted “budget-tightening” mechanisms, which led to a slowdown of economic activity, but instead of adopting a flexible exchange rate regime (allowing the exchange rate to depreciate), to boost demand, the Government opted to sustain an appreciated currency to curb inflationary pressures. However, inflation increased, and the competitiveness of non-oil sectors such as manufacturing decreased (ibid.). When the international oil price fell in December 1985, Nigeria’s export revenues tumbled. The combination of dwindling export revenues and higher interest payments on foreign debt led to Nigeria becoming embroiled in the emerging markets debt crisis of the 1980s, and adoption of an IMF Structural Adjustment Programme (SAP). This entailed exchange rate policy adjustment (to depreciate the currency), trade policy liberalization, and

“stabilization” policies to restore economic efficiencies and invigorate the private sector. Some implementation of these policies continued throughout the SAP era (1986–1992), though some were implemented inconsistently. This is shown for instance, in the repeated pattern of spending by the Government in the 1990 period, once oil prices recovered, which led to larger fiscal deficits, requiring further macroeconomic interventions (ibid.).

In relation to these significant macroeconomic developments, Mojekwu and Iwuji (2012) noted that Nigeria’s manufacturing woes began in the 1970s after the sharp increase in international oil prices, and the government’s adoption of an import substitution strategy.

Clearly macroeconomic forces played a major role in the problems experienced by the manufacturing sector, negatively impacting capacity utilization. Simon-Oke and Awoyemi’s (2010) report examined the impacts of capacity utilization in Nigerian industry from 1970 to 1998. They noted that the manufacturing capacity utilization rate in the late 1970s was as high as 78.70 per cent but plummeted to 43.80 per cent in the 1980s, only recovering in the late 1990s (ibid.: 267). They ascribe the precipitous decrease to inadequate infrastructure and the lack of proper incentives to boost manufacturing activity in Nigeria. They argued that the SAP at the time did not improve matters but led to an inflationary period that decreased the competitiveness of domestic manufacturers (ibid.). In their view, this led to knock-on effects such as scarcity of raw materials, high productiknock-on costs and large inventories of unsold goods, resulting from a decrease in purchasing power. By contrast, the World Bank (1994) notes that the 1986 fall in world oil prices was the major cause of the further depression of the economy, rather than the SAP per se.

Furthermore, because the assembly-based manufacturing sector relied on imported inputs, it contracted during the SAP era reducing competitiveness (ibid.).

In addition, the import substitution policy, which was generally favoured by some in the country, relied on importation of inputs. The use of imported inputs resulted in high production costs for manufacturers, especially during a time of high inflation and a depreciated currency. Subsequently, the bulk of manufacturing capacity remained unutilized and the provision of public utilities deteriorated alongside other social services (Simon-Oke and Awoyemi, 2010: 268). Turning to broader, horizontal considerations, the empirical analysis by Simon-Oke and Awoyemi (ibid.: 272) shows a long-run positive relationship between industrial productivity (development) and the present rate of manufacturing capacity utilization. This is because improved industrial development, in the long run, creates an environment for higher levels of manufacturing capacity utilisation. In this regard, the study by Mojekwu and Iwuji (2012) suggests that power supply has a positive and significant impact on capacity utilization, and that the Government should play a role in improving the reliability of power supply. Some recommendations include looking at alternative sources of power (i.e. wind, coal, biofuel and solar energy) and privatization of the sector by adopting a comprehensive independent power supply strategy.

Adeyemi and Olufemi (2016) performed an empirical analysis to establish the determinants of capacity utilization within Nigerian manufacturing firms from 1975 to 2008. They argued that low production in the sector could be ascribed to “high cost of imported raw materials, machinery, and spare parts owing to increased

interest rate and exchange rate” (ibid.: 29). In addition, infrastructure facilities performed poorly especially due to the volatile electricity supply. Furthermore, “the gross under-utilization of resources in the Nigerian Manufacturing Sector has been attributed to the… lack of adequate funds to procure inputs and fallen demand for manufactured goods” (ibid.: 21).

A report by Allinson (2010) mentions that the manufacturing sector is constrained by a number of factors, including: (a) heavy reliance on imports of finished goods, leading to closure of manufacturing firms, as this decreases demand for locally produced products; (b) smuggling and dumping of restricted goods; (c) prevalence of fake and mediocre products; (d) high taxes and levies (aggressive taxation was an initial reason for production to shut down and operationalize exits to other countries); (e) poor administration and management at ports; and (f) insufficient financial support for the sector.

In sum, the review of the reasons for low capacity utilization of enterprises in the seven countries studied suggests that both demand and supply factors contribute to the excess capacity in the manufacturing sectors of African economies. While these constraints are in general similar across countries, their relative importance varies from country to country. For example, low or volatile demand seems to be the dominant factor in the case studies of Rwanda, the United Republic of Tanzania and South Africa. In Ethiopia, the dominant factor is the shortage of raw materials, and in Kenya it is the high costs of electricity, fuels and other inputs. The next section discusses how to address these and other binding constraints to the use of existing productive capacities in Africa.