Industry concentration in South Africa

Abstract

Understanding the reasons for industry concentrating in certain areas is an important policy issue. South Africa has experienced a socio-political policy of apartheid that had an industrial counterpart: an industrial decentralisation programme. Since 1994 and the country's first democratic elections, a new industrial policy has been pursued with the aim of facilitating industrial activity in certain areas of the country. This study addresses the issue of manufacturing industry concentration in South Africa. First, a review of the theory of industry location and concentration is undertaken. This includes the theory of industry location put forward by Weber and Marshall. Then, more recent work by Krugman is examined within the context of the so-called New Economic Geography. The literature emphasizes the importance to industry location of factors such as being close to a supply of labour, minimization of transport costs and proximity to a market or source of demand for output. The New Economic Geography also deals with the notion of the development of an industrial "core" of the economy and a deindustrialised "periphery". The development of industrial policy in South Africa is dealt with. This includes an overview of development of the South African economy from a geographical perspective. This is followed by a review of key policy changes affecting industrial development in South Africa. This includes Industrial Decentralisation Policy and the Regional Industrial Development Programme pursued in the apartheid era. An examination is undertaken of industrial policy in the democratic era in terms of the spatial development initiatives and the Regional Industrial Location Study. Data that could be used in the analysis of industry concentration is reviewed. Then, the study examines the research hypothesis to be used in the study, namely that industry concentration in South Africa is a function of education level of the population, skills level of the workforce, average household income, urbanisation level of the population, population density and transport infrastructure density. The models involve cross-section analysis testing whether manufacturing industry concentration (measured in terms of manufacturing establishments) and manufacturing industry size (measured by manufacturing output) can be explained by factors such as education level of the population, skills level of the workforce, average household incomes, level of urbanisation, population density, road transport infrastructure density, as well as a dummy taking account of the decentralisation programme. The empirical analysis involves the use of the Cotton-Neumark decomposition method to test whether the attributes of the models can explain the differences in concentration of the manufacturing industry across provinces in South Africa. The study concludes that the attributes of the models can explain differences in industry concentration between Gauteng province on the one hand and the remaining provinces on the other. Attributes such as education and skills levels are shown to be important in the case of provinces such as Gauteng, KwaZulu-Natal and Western Cape. Attributes such as incomes and population density are identified as important in provinces such as Northern Province and North West. Road transport infrastructure density is significant in Gauteng and KwaZulu-Natal. The decentralisation programme was found to be important in influencing industry location in the Eastern Cape Province. Finally, it is argued that industrial strategy in South Africa with a spatial or geographic element, such as the spatial development initiatives, must be implemented taking full account of factors that are most important in influencing industry concentration in a particular region.