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This book examines the global and domestic factors that have influenced the decline of South African manufacturing. Quantitative and econometric techniques are used to analyse the macroeconomic conditions that derive improved performance within the manufacturing sector. Empirical evidence is used to set out policy recommendations that would allow the South African National Development Plan to meet its objectives.

This books aims to bring together analysis of industrial policy, competition policy, and merger remedies to produce a framework on how to preserve a competitive environment and support output, investment, and employment growth. It is relevant to those interested in African, development, and labour economics.

Inhaltsverzeichnis

Frontmatter

Chapter 1. Introduction

Abstract
What explains the secular decline in the South African manufacturing sector? How would the policy interventions, missing links and gaps in academic and policy discussions explored in this book have changed the performance of the manufacturing sector? This book explores these questions from various perspectives including the interaction between foreign and domestic factors, various policies such as monetary policy, fiscal policy, trade policy, labour market policies, industrial policy, mergers and acquisitions, financial regulation and macro-prudential policies. The analysis in the book highlights that policy lessons can be learned by understanding the macro-economic conditions that existed between 2005Q1 and 2008Q3. This is the period during which the manufacturing sector employment growth recorded a recent high average level of 1.44 million jobs. The labour participation and absorption rates averaged 57.79 per cent and 44.53 per cent, respectively during the same period. This is meant to draw lessons and policy recommendations so as to achieve the set objectives in the South African National Development Plan (NDP). Under various scenarios, the NDP projects that policy intervention will increase the manufacturing sector employment levels to range between 1.880 million and 2.289 million by 2030. In addition, the NDP targets to increase the labour participation rate to 65 per cent by 2030. We use several statistical and quantitative techniques to assess the robustness of our findings to derive policy implications and recommendations thereof.
Nombulelo Gumata, Eliphas Ndou

The Contrasting Effects of Globalisation, Trade-Openness and Import Penetration on Inflation, the Output-Gap, Activity in the Manufacturing Sector and Income Inequality

Frontmatter

Chapter 2. The Rationale for Focusing on the Manufacturing Sector as an Important Driver of Growth, Missing Links and Existing Policy Gaps?

Abstract
Under various scenarios, the South African National Development Plan (NDP) projects that the manufacturing sector employment levels will range between 1.880 million and 2.289 million by 2030. In addition, the NDP targets to increase the labour participation rate to 65 per cent by 2030. Thus, the manufacturing sector has an important role to play towards the achievement of lifting the domestic GDP growth to sustained higher levels, increasing the employment intensities of output growth with the aim of lowering the unemployment rate and the re-industrialising of the South African economy. This chapter explains why the manufacturing sector is an important driver of economic growth and shows the missing links in academic and policy discussions. The policy interventions (policy mix) that can be adopted to stem the secular decline in the manufacturing sector adopted are derived from the perspectives of monetary policy, financial regulation policy, macroprudential policy, trade and industrial policy, competition policy, exchange rate developments, global and domestic macroeconomic uncertainties.
Nombulelo Gumata, Eliphas Ndou

Chapter 3. Does Trade-Openness Affect the Role of the Domestic Output-Gap on Inflation? If So, What is the Role of the Global Output-Gap?

Abstract
Are there changes in the impact of the South African and Chinese output-gaps as trade-openness moves from a low to a high trade-openness regime? Evidence is this chapter shows that the impact of the Chinese output-gap increases as the trade conditions move from a low trade-openness regime to a high trade-openness regime. The Chinese output-gap has a bigger impact on domestic inflation as trade-openness increases. At the same time, the role and impact of the domestic output-gap on domestic inflation diminishes. In addition, we find that the impact of the South African output-gap declines when moving from a low regime to a high trade-openness regime. These results are consistent with prediction of the inflation globalisation hypothesis and the importance of trade-openness in changing the manner in which the foreign output-gap affects the domestic inflation. In addition, the degree of trade-openness affects the rate at which the external output-gaps impact the transmission of import price inflation and the exchange rate changes via changes in the domestic output-gap. The policy implication is that the degree of trade-openness matters for the impact of global output-gaps on domestic inflation irrespective of the exchange rate changes. Structural reforms and policy efforts to rebalance the economy from high dependency on imports should not lose sight of the benefits that accrue from global trade activity. Hence, the consideration of the trade-openness and import penetration regimes plays an important role in guiding policy interventions in the manufacturing sector.
Nombulelo Gumata, Eliphas Ndou

Chapter 4. Does an Increase in Trade-Openness and Import-Penetration Affect Income Inequality? Evidence from the Manufacturing Sector Output Growth and Employment Growth

Abstract
Does an increase in trade-openness and import-penetration affect income inequality? We find that the manufacturing sector output growth and employment growth decline in response to positive trade-openness and import penetration shocks. This results in an increase in the Gini coefficient (income inequality). These results concur with vast literature and empirical findings showing that trade globalisation has a positive impact on income inequality. Furthermore, different sizes of positive shocks to trade-openness and import penetration depress the manufacturing sector output growth and employment and result in an increase in the Gini coefficient (income inequality). The results also show that the manufacturing sector output growth and employment growth decline more when the import penetration ratio is active in the model than when it is closed (the counterfactual response). Similarly, the Gini coefficient increases more when the import penetration ratio is active in the model than when it is closed. Thus, we conclude that the import penetration ratio amplifies the effects of trade-openness on the Gini coefficient and the manufacturing sector activity.
Nombulelo Gumata, Eliphas Ndou

Chapter 5. What Is the Impact of Chinese Import Penetration on the South African Manufacturing Sector?

Abstract
What is the impact of Chinese import penetration on the South African manufacturing sector? Are there import penetration regime effects that convey important information to policy makers? Evidence in this chapter shows that the estimates of the Chinese import penetration thresholds of 6 per cent and 2.48 per cent can be used as import guides to manage the impact of the Chinese import competition on the domestic manufacturing sector. We find that the Chinese import penetration regimes matter for the South African manufacturing sector. High import penetration regimes result in the decline in the domestic manufacturing output growth, employment growth and labour productivity growth. This contrasts with the effects of low Chinese manufacturing sector regimes. The domestic manufacturing sector output growth, employment growth and labour productivity growth increase due to a low Chinese import penetration regime shock. Furthermore, the low Chinese import penetration regime shock amplifies the effects of positive labour productivity shocks on the manufacturing sector output growth, employment growth and labour absorption. Thus, the low Chinese import penetration regime is important for the transmission and amplification of positive labour productivity shocks on the manufacturing sector. The policy implication of these results is that the estimated Chinese import penetration ratios can be used as a guide to manage the impact of the Chinese import competition on the domestic manufacturing sector.
Nombulelo Gumata, Eliphas Ndou

Chapter 6. What Is the Impact of Shocks to Imports by Stage of Production on the Manufacturing Sector Output and Employment Growth?

Abstract
What is the impact of positive global, advanced economies and emerging market trade uncertainty, and the R/US$ exchange rate volatility shocks on the manufacturing sector output, investment and employment growth? We find that heightened trade uncertainty shocks depress activity in the domestic manufacturing sector. The decline in investment growth is more than double that of output growth. Furthermore, we establish that the R/US$ exchange rate volatility amplify the decline in the manufacturing sector output and employment growth decline in response to positive global trade uncertainty shocks. The propagation effects are particularly pronounced on account of the permanent R/US$ exchange rate volatility component. Similarly, evidence shows that low business confidence amplifies the decline in the manufacturing sector output and employment growth due to positive global trade uncertainty shocks. Thus, the concurrence of heightened global trade shocks, R/US$ exchange rate volatility shocks and low business confidence is not good for the domestic manufacturing sector output, investment and employment growth. It is imperative that policy makers address issues that lead to heightened trade policy uncertainty, embark on policy interventions that reduce the exchange rate uncertainty and boost (strengthen) business confidence.
Nombulelo Gumata, Eliphas Ndou

Chapter 7. What Is the Impact of Imports by Stage of Production and the Manufacturing Sector Investment Growth?

Abstract
Do trade openness and import penetration regimes matter for the manufacturing sector output and employment growth in South Africa? Evidence indicates that both output and employment growth decline in response to positive trade openness and import penetration shocks. Trade openness and import penetration regimes matter for the manufacturing sector output and employment responses. The manufacturing sector output and employment decline sharply followed by a prolonged decline in the high trade openness and import penetration regimes compared to the low regimes. The high import penetration regime amplifies the adverse impact of the high trade openness regime. The import penetration ratio increases in response to positive shocks to the R/US$ appreciation, whereas it declines due to R/US$ exchange rate depreciation. The R/US$ exchange rate depreciation and appreciation shocks exert different effects on the manufacturing sector output and employment growth. The R/US$ exchange rate depreciation shocks amplify the impact of the low import penetration regimes shocks on the manufacturing sector output and employment growth. The policy implication is that there is case to lower the import penetration levels in order to support the manufacturing sector output and employment growth. Policymakers can pursue an exchange rate policy that facilitates the expenditure switching role of the exchange rate, the substitution between home and foreign traded goods and the adjustment of the trade account.
Nombulelo Gumata, Eliphas Ndou

The Effects of Commodity Price Booms, Capital Flows Episodes, Exchange Rate Volatility, Global Trade Uncertainty and Economic Policy Uncertainty on the Manufacturing Sector

Frontmatter

Chapter 8. What Is the Impact of Global Trade Uncertainty and the Exchange Rate Volatility on the Manufacturing Sector?

Abstract
How sensitive are the categories of imports by stage of production to the R/US$ exchange rate appreciations and depreciations shocks? Evidence shows that all the categories of imports are decline in response to the R/US$ exchange rate depreciation shock. The manufacturing sector output growth and employment growth decline in response to the exchange rate appreciation shock. These results reflect the dominating impact between the expenditure switching effects and the production costs hypothesis associated with trade exposure of the manufacturing sector to low cost imports and competitors. Positive shocks to the importation of capital and intermediate goods result in a decline in the manufacturing sector output and employment growth. These effects contrast with those due to positive shocks to the importation of consumption goods. These results indicate the disconnect between growing access to imported capital and the role of intermediate inputs as a key channel through which technology is transferred to the manufacturing sector output and employment growth in South Africa. The positive effects of the imports channel as a major channel through which technology is transferred to the manufacturing sector in South Africa are far too limited to reverse the current downward trajectory of the manufacturing sector output and employment growth. This especially important given the fact that the importation of capital goods and intermediate goods constitute more than 82 per cent of imports by stages of production.
Nombulelo Gumata, Eliphas Ndou

Chapter 9. How Does Activity in Manufacturing Sector Respond to Trade and Exchange Rate Shocks? Evidence from Trade-Openness and Import Penetration Thresholds

Abstract
What is the impact of imports by stage of production and the manufacturing sector investment growth? We find that the manufacturing sector output growth, investment growth and employment growth decline in response to positive shocks to the importation of capital and intermediate goods growth. This contrasts with the increase due to the importation of consumption goods. Furthermore, we find that the R/US$ exchange rate appreciations and depreciations propagate the impact of positive imports growth on activity in the manufacturing sector in different directions. In the absence of the R/US$ exchange rate appreciation, the manufacturing sector output growth, investment growth and employment growth responses to positive shocks to imports growth are lower compared to when this channel is inactive in the model. Hence, the results indicate that the exchange rate appreciation tends to amplify the responses of the manufacturing sector output growth, investment growth and employment growth to positive shocks to imports growth.
Nombulelo Gumata, Eliphas Ndou

Chapter 10. What Is the Impact of Heightened Economic Policy Uncertainty and Adverse Financial Conditions on the Manufacturing Sector?

Abstract
What is the impact of heightened economic policy uncertainty and adverse financial conditions on the manufacturing sector? Evidence in this chapter shows that the manufacturing sector output growth, investment growth and employment growth decline in response to heightened economic policy uncertainty and adverse financial conditions. In addition, the counterfactual scenarios show that the R/US$ exchange rate volatility and the tight financial conditions channels amplify the adverse shock effects of heightened economic uncertainty shocks on activity in the manufacturing sector. These results imply that the concurrence of heightened economic uncertainty, tight financial conditions and high exchange rate volatility shocks is not good for the manufacturing sector. Uncertainty shocks via the financial frictions channel tend to induce a wait and see approach by firms with adverse effects on economic activity. The financial frictions channel provides additional mechanism through which uncertainty shocks affect the economy by increasing the risk premium. Thus, policymakers have to adopt policies that reduce economic policy uncertainty. This is important because uncertainty shocks have a significant macroeconomic impact in cases where they elicit a tightening of financial conditions. Tight financial conditions shocks have a significant adverse effect on economic outcomes.
Nombulelo Gumata, Eliphas Ndou

Chapter 11. What Is the Impact of Commodity Price Booms and Capital Flows Surges Episodes on the Manufacturing Sector?

Abstract
What is the impact of commodity price booms and capital flows surges episodes on the manufacturing sector? We find that a positive shock to the commodity price boom and a capital flows surge episode result in an increase in the manufacturing sector output growth, employment growth, investment growth, labour participation and absorption rates. On the contrary, a sudden stop capital flows shock results in a decline in the manufacturing sector output growth, employment growth, investment growth, labour participation and absorption rates. The counterfactual analysis shows that the capital flows surge episode channel amplifies the responses of the manufacturing sector output growth, employment growth, investment growth, labour participation and absorption rates to a commodity price boom episode. This indicates that a capital flows surges shock on its own does not lead to a sustained increase in the manufacturing sector output, employment growth, investment growth and labour productivity growth. Rather, it amplifies the positive shock effects of the commodity price boom episode. Between 2005Q1 and 2008Q3 the commodity price boom and the capital flows surge shocks contributed to the sustained increase in the manufacturing sector output growth and employment growth. In the absence of the commodity price boom the manufacturing sector output and employment growth would have been much lower. Thus, the concurrence of these shocks contributed to the performance of employment growth in the manufacturing sector.
Nombulelo Gumata, Eliphas Ndou

Chapter 12. What Are the Effects of Capital Flow Shocks on the Domestic Manufacturing Sector?

Abstract
What are the effects of capital flow shocks on the domestic manufacturing sector? We find that the share of the manufacturing sector output and investment increase in response to positive shocks to the capital flows surge episode. However, the share of the manufacturing sector employment declines and the Gini coefficient increases. Furthermore, a comparison of the sectoral output share responses shows although the share of the manufacturing sector output increases more compared to that of the construction, the wholesale and retail trade, catering and accommodation sectors. Its employment share declines while the share of these two sectors increases. The contrasting sector effects may be because the output growth in the construction, wholesale and retail trade, catering and accommodation sectors tends to be employment intensive. In addition, the manufacturing sector is highly sensitive to exchange rate movements and declines following the exchange rate appreciation shock. This reflects the dominating impact between the expenditure switching effects and the production costs hypothesis. Whereas, the construction sector tends to benefit more from capital flow surges episodes and asset price booms. The policy implications of these results are that a thorough understanding of the channels of transmission of capital flows surge on the different sectors of the economy is important. This will help policy makers to design appropriate policy responses to assist in the sector adjustment to various trade shocks.
Nombulelo Gumata, Eliphas Ndou

Chapter 13. Does the Persistent Widening in the Trade Deficit Explain the Decline in the Manufacturing Sector Output and Employment Growth?

Abstract
Does the persistent widening in the trade deficit explain the decline in the manufacturing sector output and employment growth? We find that the trade balance deficits and surpluses exert opposing effects on the manufacturing sector output growth and employment growth. Furthermore, the trade deficit (surplus) channel amplifies the decline (increase) in the manufacturing sector output growth and employment growth in response to positive trade balance shocks. The R/US$ exchange rate appreciation shocks amplify the impact of positive trade deficit shocks on the manufacturing sector output growth and employment growth. The results from the historical decomposition approach indicate that in the absence of the trade deficit shock, the manufacturing sector output growth and employment growth would have been higher. As such, the trade deficit shock resulted in much lower manufacturing sector output growth and employment growth. Thus, the trade deficit shock dampened the manufacturing sector output and employment growth between 2005Q1 and 2008Q3. Widening and persistent trade deficits dampen the rate at which the manufacturing sector output growth and employment growth benefit from the heightened aggregate domestic demand shocks.
Nombulelo Gumata, Eliphas Ndou

The Impact of Investment Growth Shocks, Credit Booms, Financial and Credit Cycles, Business and Consumer Confidence on the Manufacturing Sector

Frontmatter

Chapter 14. Do Credit Booms, Financial and Credit Cycles Affect Activity in the Manufacturing Sector?

Abstract
Do credit booms, financial and credit cycles affect activity in the manufacturing sector? Between 2005Q1 and 2008Q3, credit growth, commodity price growth and nominal house price growth were in a boom period. The boom in nominal house price growth had preceded that of credit growth and other financial variables as it started in 2002. The results indicate that the manufacturing sector output growth, employment growth, investment growth, labour participation, labour absorption and labour productivity growth also increase due to positive shocks to credit growth booms, nominal house price booms and commodity price booms. The historical decompositions of positive credit growth, commodity price growth and nominal house price booms shocks on the manufacturing sector output growth and employment growth show that these shocks made positive contributions to the manufacturing sector output growth and employment growth for a large part of the period between 2005Q1 and 2008Q3. The fact that the results in this chapter show that the credit growth boom made the most persistent positive contributions to the manufacturing sector output growth and employment growth implies that the sectoral allocation of credit matters. These results concur with the findings that there is a case for a sectoral countercyclical capital buffer especially to increase the financial sector’s resilience to shocks and reduce credit growth procyclicality.
Nombulelo Gumata, Eliphas Ndou

Chapter 15. What Is the Role of Business and Consumer Confidence in Amplifying the Transmission of Positive Shocks into the Manufacturing Sector?

Abstract
What is the role of business and consumer confidence in amplifying the transmission of positive shocks into the manufacturing sector? This chapter explores whether business and consumer confidence amplify the transmission of positive shocks effects of commodity price boom, credit growth boom, nominal house price boom episode, capital flows surge, household consumption growth and investment growth into the manufacturing sector. Evidence shows that the manufacturing sector output growth and employment growth increase in response to positive business and consumer confidence shocks. In addition, the surge in consumer and business amplifies the transmission of positive shocks effects of commodity price boom, credit growth boom, nominal house price boom episode, capital flows surge, household consumption growth and investment growth into the manufacturing sector. Thus, the surge in consumer and business confidence plays an important role in amplifying financial and macro-economic shocks into the manufacturing sector.
Nombulelo Gumata, Eliphas Ndou

Chapter 16. Do Positive Investment Shocks in the Manufacturing Sector Result in Increased Labour Absorption and Participation Rates?

Abstract
Do positive investment shocks in the manufacturing sector result in increased labour absorption and participation rates? We find that manufacturing sector output growth and employment growth are highly responsive to positive investment growth shocks. The increase in the manufacturing sector employment growth due to positive investment growth shocks spill over into the other labour market indicators as the unemployment rate declines and the labour participation and absorption rates increase. Furthermore, manufacturing sector investment growth and business confidence channels propagate the impact of the manufacturing sector output growth shocks on employment growth, labour market participation and absorption rates. In the absence of the investment growth channel, the manufacturing sector employment growth, labour market participation and absorption rates are lower. Thus, we conclude that business confidence and investment growth are important channels through which the shocks to the manufacturing sector output growth are transmitted into the labour markets.
Nombulelo Gumata, Eliphas Ndou

What Is the Role of Financial Regulatory and Macro-prudential Tools in Supporting the Housing Market, Residential Investment and the Spill-Over Effects to Activity in the Manufacturing Sector?

Frontmatter

Chapter 17. Did the Decline in the Excess Capital Adequacy Ratio Amplify the Monetary Policy Easing and Credit Cycles on Activity in the Manufacturing Sector?

Abstract
Did the decline in the excess capital adequacy ratio (CAR or the countercyclical capital buffer) amplify the effects of monetary policy easing and credit cycles on activity in the manufacturing sector? Evidence in this chapter shows that gross fixed capital formation (investment) in residential buildings reached the highest level in 2007Q2 and this period falls within the period during which the manufacturing sector employment growth recorded a recent high average level of 1.44 million jobs. The manufacturing sector output growth and sales growth increase in response to a decline excess CAR shock. The accommodative monetary policy stance amplifies the effects of a loose excess CAR shock. The nominal house price growth and mortgage credit growth channels amplify the effects of a loose excess CAR shock on activity in the manufacturing sector. Furthermore, the historical decompositions show that a loose excess CAR shock, positive nominal house price growth and mortgage credit growth shocks made positive contributions to the manufacturing sector output growth and employment growth between 2005Q1 and 2008Q3. In their absence, the manufacturing sector output growth and employment growth would have been much lower. In addition, the varying sizes of loose excess CAR shocks and positive residential investment growth shocks exert varying degrees of increases in the manufacturing sector output growth and employment growth.
Nombulelo Gumata, Eliphas Ndou

Chapter 18. Did the Increase in Excess Liquid Assets of Banks Amplify the Effects of Tight Macro-prudential Tools on Activity in the Manufacturing Sector?

Abstract
Did the increase in excess liquid assets of banks amplify the effects of tight macro-prudential tools on activity in the manufacturing sector? Evidence in this chapter shows that declines in excess liquid asset holdings (ELAH) of banks increased post-2009 resulting in an increase in credit to government and a decline in credit to the private sector. Positive shocks to credit to government crowd out credit to the private sector. Thus, an increase in bank credit to government tends to depress credit to the private sector. In addition, different regimes of ELAH by banks exert opposing shock effects on the activity in the manufacturing sector. The manufacturing sector output growth and sales growth increase (decrease) in the low (high) ELAH regimes. In addition, ELAH above 10 per cent results in the decline in the manufacturing sector output growth and employment growth. The decline is amplified by the tight (low) loan-to-value ratios and high repayment-to-income channels as the actual manufacturing sector output growth and employment growth decline more than the counterfactual responses. The results imply that there is a case to lower the ELAH of banks in order to channel the funds towards the financing of projects in the manufacturing sector. The results also imply that the ELAH threshold matters for the macro-economy.
Nombulelo Gumata, Eliphas Ndou

Chapter 19. Did Loose Loan-to-Value and Repayment-to-Income Ratios Amplify Commodity Price Booms on Activity in the Manufacturing Sector?

Abstract
Do macroprudential tools impact activity in the manufacturing sector? Evidence in this chapter shows that the manufacturing sector output growth, employment growth, labour participation and labour absorption ratios increase in response to positive shocks to the loan-to-value (LTV) and repayment-to-income ratios (RTI). This means that the loosening of the LTV and RTI, alternatively, the lending criteria has a positive effect on the manufacturing sector activity and labour market. The historical decomposition approach shows that positive shocks to LTV and RTI made positive contributions to the manufacturing sector output growth between 2005Q1 and 2014Q4. In the absence of accommodative LTV and RTI positive shocks the manufacturing sector output growth would have been much lower. It is also evident that post-2009 when the LTV and RTI were tightened they were a drag on the manufacturing sector output growth. Furthermore, the results indicate that the loose LTV and RTI channels propagated the effects of positive shocks to commodity price boom episodes on the manufacturing sector output growth, employment growth, investment growth and labour productivity growth.
Nombulelo Gumata, Eliphas Ndou

Chapter 20. Do Tight Loan-to-Value and Repayment-to-Income Ratios Amplify the Effects of Tight Monetary Policy Cycles on the Manufacturing Sector Activity?

Abstract
Do tight loan-to-value and repayment-to-income ratios amplify the effects of tight monetary policy cycles episodes on the manufacturing sector activity? Yes, they do. We find that the LTV and RTI tighten in response to a positive (increase) repo rate shock. The results indicate that the RTI tightens more compared to the LTV, meaning that banks tighten the repayment-to-income ratio threshold more. This is probably informed by the fact that the LTV is driven more by the value of the asset being purchased compared to the RTI which is driven more by the changes in the interest rate charged on the loan. In addition, the results show that the repo rate shock explains a higher level of the variation in the RTI compared to that of the LTV. Tight RTIs and LTVs reinforce the adverse effects of tight repo rate shocks on the manufacturing sector output growth and employment growth. Thus, we conclude that monetary policy and macro-prudential tools interact and impact activity in the manufacturing sector.
Nombulelo Gumata, Eliphas Ndou

Chapter 21. What Is the Impact of Selected Financial Regulation and Macro-prudential Tools on Credit to the Manufacturing Sector?

Abstract
What is the impact of selected financial regulation and macro-prudential tools on credit to the manufacturing sector? We find that the countercyclical capital buffer (CCyB), excess liquid asset holdings (ELAH) of banks, loan-to-value ratio (LTV) and repayment-to-income (RTI) ratio lead to an increase in credit growth to the manufacturing sector and activity in this sector. The different sizes of positive shocks to credit growth to the manufacturing sector result in incremental positive effects on the manufacturing sector output growth and employment growth. However, evidence shows that credit growth to the manufacturing sector increases more due to a decline in excess CAR compared to an accommodative LTV or RTI shock. Nonetheless, this does not diminish the effectiveness and important role of LTVs and RTIs as macroprudential tools play in managing credit growth booms and house price growth booms. Rather these results indicate the importance of the CCyB and the sectoral credit risk weights. Thus, there is a case for a sectoral countercyclical capital buffer (SCCyB) especially to increase the financial sector’s resilience to shocks and reduce credit growth procyclicality. In addition, a SCCyB by changing the relative cost of credit in the targeted sector, can be a more effective financial regulatory and macro-prudential tool.
Nombulelo Gumata, Eliphas Ndou

Chapter 22. Did Monetary Policy Easing Cycles Propagate the Impact of Credit and Financial Boom Cycles on Activity in the Manufacturing Sector during 2005Q1 and 2008Q3?

Abstract
Did monetary policy cycles propagate the impact of credit and financial boom cycles on activity in the manufacturing sector during 2005Q1 and 2008Q3? Evidence in this chapter shows that a decline in the repo rate leads to an increase in the manufacturing sector output growth and employment growth. Increased activity in the manufacturing sector in response to accommodative monetary policy shocks spills over to the labour participation and absorption rates. Furthermore, the responses of the manufacturing sector output growth and employment growth were higher during the period 2002M1 to 2005M9 compared to those during the period 2008M3 to 2013M3. At peak response, the increase in the manufacturing sector output growth during the period 2002M1 to 2005M9 was more than double that during the period 2008M3 to 2013M3. Furthermore, monetary policy easing cycles amplified the transmission of positive shocks to commodity price growth, credit growth, nominal house price growth and equity price growth boom on the manufacturing sector.
Nombulelo Gumata, Eliphas Ndou

Chapter 23. What Was the Role of Demand Shocks, Supply Shocks, Productivity Shocks and Monetary Policy Shocks on the Manufacturing Sector during 2005Q1 and 2008Q3?

Abstract
Did monetary policy cycles propagate the impact of credit and financial boom cycles on activity in the manufacturing sector during 2005Q1 and 2008Q3? Evidence in this chapter shows that a decline in the repo rate leads to an increase in the manufacturing sector output growth and employment growth. The increase in activity in the manufacturing sector in response to accommodative monetary policy shocks spills over to the labour participation and absorption rates. Furthermore, the responses of the manufacturing sector output growth and employment growth were higher during the period 2002M1 to 2005M9 compared to those during the period 2008M3 to 2013M3. At peak response, the increase in the manufacturing sector output growth during the period 2002M1 to 2005M9 was more than double compared to the period 2008M3 to 2013M3. Furthermore, monetary policy easing cycles amplified the transmission of positive shocks to commodity price growth, credit growth, nominal house price growth and equity price growth booms on the manufacturing sector.
Nombulelo Gumata, Eliphas Ndou

The Impact of Electricity Price Shocks, Manufacturing Sub-sector Output and Employment Growth on the Labour Absorption and Participation Rates

Frontmatter

Chapter 24. The Role of Electricity Price Shocks on the Manufacturing Sector Output and Employment Growth

Abstract
What is the role of positive electricity price shocks on the manufacturing sector output and employment growth? We find that the manufacturing sector output and employment growth decline in response to a positive shock to electricity price inflation. Prior to 2008 June the electricity price inflation increased at lower rates. We use 6.01 per cent to delineate low and high electricity price inflation regimes. Evidence shows that electricity price inflation regimes exert different effects on the manufacturing sector output and employment growth. The counterfactual results indicate that the recession in 2009 amplified the decline in the manufacturing sector output and employment growth due to positive electricity price inflation shocks. In addition, the repo rate tightening amplifies the rate of decline in the manufacturing sector output and employment growth responses to positive inflation shocks. The concurrence of high electricity price inflation alongside monetary policy tightening results in a sharper decline in the manufacturing sector output and employment growth. The policy implications are that electricity price inflation above 6 per cent matter for the manufacturing sector output and employment growth. To create a conducive environment for growth in the manufacturing sector, policy makers have to design policy interventions that stabilise electricity price inflation below 6 per cent.
Nombulelo Gumata, Eliphas Ndou

Chapter 25. What Is the Impact of the Manufacturing Sector Output and Sub-sector Employment Growth on the Labour Absorption and Participation Rates?

Abstract
What is the impact of the manufacturing sector output and sub-sector employment growth on the labour absorption and participation rates? We find that positive employment growth shocks in all the manufacturing sub-sectors result in an increase in the manufacturing sector employment growth, labour participation and absorption rates, albeit at differing degrees. For instance, we find that the manufacturing sector employment growth is more responsive to employment growth in the textiles, food and non-metallic products, basic metals products, wood, transport equipment and furniture products sub-sector employment growth shocks over longer horizons. In addition, the labour participation and absorption rates are more responsive to positive employment growth in the food, textiles, wood and refined petroleum, transport equipment and electrical machinery products.
Nombulelo Gumata, Eliphas Ndou

Chapter 26. What Is the Nature of the Output-Employment in the Manufacturing Sector? Evidence from the Manufacturing Subsectors

Abstract
What is the nature of the output-employment in the manufacturing sub-sector? The point elasticities and impulse responses of all the sub-sector employment growth rates increase due to the increases in the manufacturing sector output growth. However, the output-employment elasticities vary depending on the sub-sector analysed. Evidence shows that employment growth in the (i) food products and beverages; (ii) textiles, clothing, leather and footwear; (iii) transport and equipment; and (iv) metals, metal products, machinery and equipment are amongst the sub-sectors with the highest output-employment growth elasticities. In addition, data shows that the manufacturing sub-sectors that have the highest income concentration ratios do not necessarily contribute more to the manufacturing sector employment growth. Furthermore, large firms dominate all the manufacturing sub-sectors, with medium, small and micro enterprises playing a very small. The policy implication being that medium, small and micro enterprises can play a meaningful role in increasing the manufacturing sub-sector output-employment intensities, especially given the fact that they tend to contribute more to employment growth relative to large firms.
Nombulelo Gumata, Eliphas Ndou

The Transmission Channels of Minimum Wage Shocks, Market Concentration, Mergers and Acquisitions on the Manufacturing Sector

Frontmatter

Chapter 27. What Are the Effects of the Minimum Wage and Productivity Growth on the Manufacturing Sector Output and Employment Growth?

Abstract
What are the effects of the minimum wage and productivity growth on the manufacturing sector output and employment growth? We find that a positive shock to the minimum wage shock results in an increase in the manufacturing sector output growth, employment growth, labour productivity growth, unit labour costs and a decline in hours worked. These results are consistent with the institutional model, which postulates that the passthrough of an increase in the minimum wage and labour costs into higher prices is neutralised by the increase in efficiency and productivity gains. In addition, the increase in the labour productivity growth due to positive minimum wage shocks indicates that the efficiency wage theory holds. The imposition of a higher minimum wage in the manufacturing sector does not necessarily destroy jobs growth. In fact, it leads to improvements in labour productivity consistent with the efficiency wage theory. However, positive shocks to labour productivity growth and unit labour costs exert opposing effects on the manufacturing sector output growth and employment growth. Positive shocks to labour productivity growth lead to an increase in the manufacturing sector output growth and employment growth, whereas positive shocks to unit labour costs have the opposite effect. Furthermore, evidence shows that the labour productivity channel amplifies the positive shock effects of the minimum wage on the manufacturing sector output growth and employment growth. In the absence of the labour productivity channel, the manufacturing sector output growth and employment growth are lower. Thus, the increase in labour productivity growth is necessary and has to accompany increases in the minimum wages as an adjustment channel in the manufacturing sector.
Nombulelo Gumata, Eliphas Ndou

Chapter 28. What Is the Impact of Market Income Concentration and the Mergers and Acquisitions Channel on the Manufacturing Sector?

Abstract
What is the impact of market income concentration on the manufacturing sector? We find that the manufacturing sector output growth, investment growth and employment growth decline in response to a positive shock to the number of merger transactions notified with the Competition Commission. Similarly, the manufacturing sector output growth, investment growth and employment growth decline in response to positive shocks to the income concentration ratios of the top enterprises in the manufacturing sector. Nonetheless, the results show that investment growth declines more in response to positive shocks to the number of mergers and acquisitions, and income concentration ratios of the top enterprises in the manufacturing sector. Furthermore, changes in mergers and acquisitions activity amplify the negative effects of income concentration ratios on activity in the manufacturing sector. In the absence of the mergers and acquisitions channel, the manufacturing sector output growth, investment growth and employment growth decline by a less magnitude compared to when this channel is active in the model. The policy implications of the results in this chapter is that competition policy and merger remedies can be used effectively to preserve a competitive environment that supports output growth, investment growth and employment growth in the manufacturing sector whilst reducing income inequality.
Nombulelo Gumata, Eliphas Ndou

Chapter 29. Conclusion

Abstract
This book examined the secular decline of the South African manufacturing sector with the intention of deriving policy interventions that will stem the decline. In the process, the book laid bare the missing links and gaps in academic and policy discussions regarding the necessary policy interventions in the manufacturing sector. We used data trends, simple and advanced economic modelling techniques to show relationships amongst variables. Thereafter, we derived policy implications, recommendations, interventions and initiatives to stem the decline and resuscitate the manufacturing sector. This chapter gives a summary of the main findings and the policy implications from the chapters in the book.
Nombulelo Gumata, Eliphas Ndou

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