Content Page Number

1. Abstract ...............................................................................................................2

2. Intoduction ...........................................................................................................2

3. Trade liberalization...............................................................................................5

4. IMPORT COMPETITION, EXPORTS, AND RESTRUCTURING…………………6

4.1 Trade Liberalization and Restructuring………………………………………….6

4.2 Trade Liberalization and Competitiveness……………………………………...7

4.3 Globalization and Foreign Ownership…………………………………………...7

5. RESTRUCTURING AND IMPACTS ON EMPLOYMENT AND WAGES………..8

5.1 Employment Changes Across the Sector……………………………………….8

5.2 Employment Changes and Restructuring at the Firm Level…………………..8

5.3 Wages……………………………………………………………………………….9

5.4 Skills………………………………………………………………………………..10

6 CONCLUSIONS…………………………………………………………………………10

7 LIST OF ABBREVIATIONS………………………………………….…………………10
8 Acknowledgement………………………………………………………...……………..11
9 Bibliography………………………………………………………………………………11

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1 Abstract

South Africa rejoined the international community during the early 1990s and embarked
on a massive policy of liberalization of its economy. There was and still is a huge impact
of those globalization policies on South African businesses.
This paper examines the responses or the impact of liberalization on firms in South
Africa. One such firm is the clothing and textile industry. The paper will reveal that there
have been increased exports accompanied by reductions in employment and
contraction of production of yarns and fabrics. But, liberalization has also been
accompanied by much upgrading of equipment and by increased specialization and
vertical disintegration in order to develop competitive niches despite South Africa's
manufacturing wage levels being higher than those of many of its international
competitors

2 Key Words

Clothing,textile,globalization,employment,growth, Trade liberalization, import, export

competition, restructuring.

3 Introduction

Globalization is one of the most powerful forces to have shaped the world economy
during the past 50 years Frankel (2000:2). E.loots(2001) however states that
globalization is not a new phenomenon, O’Rourke and Williamson (2000:1) quotes
many historians who attributed the ‘big bang’ significance of globalization back to when

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Columbus landed in the in 1492 as well as Vasco de Gama journeyed around Africa
1498 .However, Williamson (1996) disagrees ,He surmises that actually the first
globalization took place in the late nineteenth century when there was a huge
realization in the benefit of the recently invented means of distant transportation and
communication. The result of this was rapidly growing trade spanning the globe. From
here onward I will use the terms globalization and liberalization interchangeably.

According to E.Loots(2001) globalization is characterized by the fact that distance and

national borders no longer matter, she goes ahead to explain the degree of ease when
it comes to doing business with a customer across the globe, in this scenario the
national borders and geography per say fails to become pertinent or relevant for
economic purposes. She also argues that while the purported opportunities and benefits
of the opening of economies are emphasized by its proponents and supporters, a
feeling of worry and concern is growing among many politicians and economists about
the risks involved in the liberalization of the economy as well as the impact of it on
future growth prospects.

The focus of this paper is on economic globalization and its impact on South African
Businesses, and I concur with E.Loots(2001) when she quotes a superb definition used
by the World Bank (2000b), which states that, “in recent years a quickly rising share of
economic activity in the world seems to be taking place between people who live in
different countries”. Somehow Harris (1993:755) came to the conclusion that economic
globalization is “the increasing internationalization of the production, distribution and
marketing of goods and services”.

According to E.Loots, a lot of authors seem to agree (see Rodrik, 1997; Frankel, 2000;
Hemmer, 2001; etc.) that the driving forces behind economic globalization are the
following:

o A reduction in transport and communication costs in the private sector.

o Reduced policy barriers to trade and investment by the public sector.

o An increase in the availability of and access to information and technology.

o The speed with which information and technology can be transmitted across
national boundaries.

Walker (1992:2) argues further that the process of financial globalisation is the most
important part of the process of globalisation. It is possible to gain insight into the
general process of globalisation by studying the process of financial globalisation. From
here onward I will only be referring to economic globalization when I bring up the
concept of globalization. With the aforementioned definition of globalization and its
subsequent yardstick or its attributes, I will be able to demonstrate or measure pretty
effectively the effects of globalization in the South Africa milieu.

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The legacy left on the country’s industries and business by apartheid policies and the
resulting sanctions were devastating (DTI, 2007a). Chang (1997) further concurs that
policies that had been designed to benefit just 25% of the population had created an
inefficient industrial structure. This is important to note because the notion of
globalization existed during the apartheid era. Protectionist policies, and the subsequent
international sanctions, isolated South African firms from the global market and
therefore business relied on producing goods and services for the domestic market
(Barnes & Kaplinsky, 2000; Roberts & Thoburn, 2004).

According to the department of trade and industry (DTI, 2007a). the apartheid regime
also intentionally did not invest in developing the human capital of the majority of the
population (DTI, 2007a). All this resulted in an unproductive manufacturing sector
characterized by outdated technology, processes and organization (Joffe et al, 1995).
Chang (1997) explains that the country’s economy only survived due to the countries
abundance of natural resources. Given this, when South Africa re-integrated into the
international economy in the early 1990s (Loots, 2001), the survival chances of much of
South Africa’s industry was questioned (Chang, 1997) especially manufacturing.
However, entry into the global economy was planned, with globalization or trade
liberalization and occurring in stages (Kusi, 2002) alongside a range of industrial
policies designed to increase productivity and promote exports (DTI, 2007a). As a
result, South Africa was able to seize the opportunities and overcome many of the
challenges that globalisation presented.

The textiles industry stand both as an opportunity and a threat from globalization. The
industry usually accounts for a significant share of employment and of manufacturing
value added so adjustments can have significant effects on local incomes and
employment. The potential loss of the domestic market to imports as well as the
opportunity to expand production for export requires the restructuring of production.
This has complex implications for businesses .employment and wages, and thence for
poverty

S.Robert and JT.Thoburn (2004) argues that the capabilities developed to withstand
import competition have been important in generating export competitiveness—an issue
made more pressing by the phase out of the international Multi-Fibre Arrangement by
the start of 2005 under the Agreement on Textiles and Clothing of the Uruguay Round.
After the MFA phased out, South African textile and garment exporters found
themselves under greater threat in the US and the EU from unrestricted exporters.

• AGOA, the United States Africa Growth and Opportunities Act, which came into
effect in early 2001, provides qualifying countries with reduced duties for exports
of clothing to the US market for an initial period of eight years.

• The EU-SA Trade and Development Cooperation Agreement, the free trade
agreement which came into effect on 1 January 2000, provides for EU tariffs to

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 be reduced to zero over six years, and for South African tariffs to be reduced to
half of MFN tariff level over eight years.

These two agreements were also important in attracting international buyers to source
from South Africa and in encouraging inward investment. But sadly they came and went
and the South African textile industry found itself incapable of competing international
and locally as well.

Section 3 now looks at trade liberalization and Section 4 at the restructuring of the
South African textiles sector. Section 5 draws out the implications for employment and
wages of the industrial restructuring under trade liberalization. Section 6 presents
conclusions.

3 Trade Liberalization

According to Cassim et al(2002), From between 1993 and 2004 tariffs in this industry
has been reduced by almost 40%, the little protection left on this industry even after
liberalization policy are constantly been eroded by the following reason

• There has been significant import penetration by illegal imports as a result of

ineffective customs procedures, and by ‘dumped’ imports, according to our
interviewees.

• Competition in the domestic market can erode anti-export bias by causing

domestic prices to fall to a level below the import price tariff. That is, there can be
tariff redundancy.

• Anti-export bias estimates do not take account of export incentives such as

import duty rebates and drawbacks on imported inputs, and the export incentive
Duty Credit Certificate [DCC] scheme.

• Domestic firms facing competition in the home market may turn to exports to
maintain their capacity utilization, since low capacity utilization leads to rising
costs in textiles.

• Anti-tradable anti-export bias (that is, the bias against both exports and import
competing goods generated by whatever degree of real exchange rate

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 overvaluation has been caused by continuing protection11) has been reduced by
capital-account driven depreciations of the Rand.

According to Sandrey, R. and Fundira, T(2008) some imported fabrics and yarns now
are cheaper than their South African equivalents even after import duty has been paid,
and despite some domestic prices falling because of domestic competition. This is true
even of imports that do not appear to be ‘dumped’. In part the problem arises because
of excess capacity in the textile industries of East Asia, and because of the exchange
rate depreciations in Asia following the 1997 Asian financial crisis. The import
penetration ratio in textiles rose from 27 to 37 per cent over the period 1990 to 2001,
and the share of exports in total textile output rose from 16 to 23 per cent. While South
African textile imports remained substantially more than textile exports, the net trade
ratio had fallen from -0.66 in 1990 to -0.41 in 2001 Roberts and Thoburn
(2003a).Despite a rapid expansion in its clothing exports; just over half of South Africa’s
total clothing and textile exports are of textiles, a higher proportion than in world trade.

4 IMPORT COMPETITION, EXPORTS, AND RESTRUCTURING

4.1 Trade Liberalization and Restructuring

Maree (2005) states that the textile industry faced trade liberalization against a long-
term background of weak investment since the mid-1970s. The textile sector share in
manufacturing capital stock halved between 1972 and 1983. Low investment levels
meant that capital stock became very dated, and by 1992 the average age of most
machinery in spinning, weaving and knitting was between 14 and 20 years. While South
African capital stock was judged to be quite out-of-date early in the decade, Cornia,
G.A. and Court,J( 2001) argues that there was significant upgrading of machinery in the
mid-1990s. And that subsequently investment levels also rose sharply in 2000 as firms
prepared to meet increased demand for textiles from garment producers taking up
export opportunities under the AGOA bill.

In the postal survey carried out by (Roberts and Thoburn,2003a), textile firms recorded
the impact of trade liberalization as greatest in terms of competition from imports. And
further that globalization has also had a major impact in terms of decisions to export on
profitability and employment, as well as on product development, the product range and
changing technology. Walker, GR en Fox, MA. (1999 ) attributed strong association
between experiencing a very high impact of increased import competition and having
made changes in production techniques, suggesting that liberalization or globalization
has contributed to production changes and restructuring. They further observed that on
the export side, responses to a question on the motivations for exporting indicate that

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there was a significant proportion of exporting firms that were doing so for defensive
reasons as a result of threats to the domestic market.
Across the textile industry liberalization has required firms to invest in new machinery,
rationalize their production and, if possible, focus on niches and more differentiated
types of products SouthAfricaInfo (2010). A critical element has therefore been access
to capital, along with management skills able to design and implement constructive
strategies. The upgrading and restructuring programs have also involved significant job
losses, however Hemmer, HR (2001) argues that many firms have reacted to
liberalization differently, some unable to adopt or develop more constructive strategies,
has focused their energies on defensive cost-cutting measures whereby it mainly
manifest itself in the form of reductions in employment, and incremental shifts in the
product mix. He argues that some firms have simply lost segments of their business to
imports, in the higher volume more standardized product areas, and have closed down
parts of their business as a result. For example, one firm had ceased to make ribbons
and concentrated on labels, and another had closed its blanket manufacturing division.
These decisions ,he noted are distinct from the specialization within product groupings
that also occurred such as a firm concentrating on spinning only cotton yarns. Finance
constraints experienced by some firms compound the problem. Commercial banks have
been very reluctant to lend to the sector, especially after several large closures, while
firms operating in a group with financial backing have been notably better able to invest
and restructure.

4.2 Trade Liberalization and Competitiveness

Frankel, JA (2000) observes that the sources and foundations of international

competitiveness are closely linked to the responses to trade liberalization. And, with
liberalization, the standards expected in the local market are now increasingly similar to
those in export markets. He argues that the legacy of high levels of protection in the
form of production of a wide range of products to satisfy the domestic market has had
the dual effect of firms being relatively uncompetitive in commodity-type products such
as basic fabrics, but being quite flexible in responding to differing customer needs.
He notices that the more successful firms, seeking out niches, are attempting to
compete on quality design and delivery terms rather than price. An especially interesting
group of firms are those that have developed particular technical production capabilities.
These capabilities He argued, which have enabled export competitiveness in industrial
textiles to be achieved, are based largely on domestic demand patterns. These patterns
have supported both adaptation and genuine innovation. The most striking example is
the single most successful company in terms of export competitiveness. The company
is one of the three leading global manufacturers of top quality parachute fabric, and also
makes material for bullet-proof vests and motor vehicle airbags. The background to
these dynamic competitive strengths is the demand from the South African army under
sanctions. Its competitive success is evident in that it earns a higher price in export
markets than domestically, and that it only changes (US dollar) prices once every two
years.

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4.3 Globalization and Foreign Ownership

Maree J(1995) found that many of South Africa’s textile firms have their historical origins
in European investors and engineers, and still have international ties, especially with
German and British firms. However He also notes that there has also been an
economy-wide process of South African conglomerates focusing on their core business
after their previous diversification that resulted from sanctions and protection. For
example, the Anglovaal and Tongaat-Hulett conglomerates have both disposed of their
textile interests. Such divestments have offered opportunities for acquisitions by foreign
investors.
The capital requirements of restructuring have opened up major opportunities for further
foreign involvement, and a third of textile firms are now foreign-owned, often as a result
of acquisitions. One of the most significant developments linked to access to capital has
been the major role played by a German investor, Claas Daun Rodrik, D, (1997).
He further notes that the foreign ownership appear not to bring technology transfer or
benefits from internalization of transactions. There is in fact little involvement in the day-
to-day management of the firms. The acquisitions instead appear to have been driven
by opportunism afforded by weakness in the sector and the corresponding low price of
textile firms. Taiwanese based firms have been expanding in the Southern African
region in both clothing and textiles, that had been especially to take advantage of the
opportunities offered by AGOA. They bring capital, expertise and some links with
international buyers.

5 RESTRUCTURING AND IMPACTS ON EMPLOYMENT AND WAGES

5.1 Employment Changes Across the Sector

Textile production has stagnated and textile employment has fallen significantly. There
were particularly sharp reductions in employment in the last three years of the 1990s
with corresponding increases in labor productivity. Employment has fallen in all the main
textile sub-sectors, with the largest losses being in spinning, weaving and finishing
where employment in 2001 was 45 per cent lower than in 1996.
Spinning, weaving and finishing is the most capital intensive of the textile categories
however, employment in textiles has been in long-term decline since the early 1980s
(Maree, 1995).
In a postal survey, carried out by S. Roberts and J T. Thoburn(2004) 62% of firms
recorded contractions in employment between 1995 and 1999, spread across all sub-
sectors. This under-represents employment losses, given the number of firms which
have closed down. It is evident that liberalization has placed pressure on all firms to
respond. What distinguishes firms is the nature of their response. Firms in the postal
survey which compete on quality and delivery time in export markets are much more
likely not to have cut employment than firms which compete on price. Intense
competition in design instead of price In our postal survey. The effects of retrenchments
on workers have been particularly severe since alternative work is difficult to find in an

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economy with such high unemployment already Bezuidenhout et al. (2003). The
Proudly South African Campaign has also come out for consuming local products

5.2 Employment Changes and Restructuring at the Firm Level

The largest employment losses have been in the big, vertically integrated firms. These
firms used to incorporate many different products, from spinning through fabric
manufacture (knitting or weaving) to dyeing and finishing Williamson, JG(1996). He
argues that rationalization of operations and products, investment in new machinery,
and improved management have all meant major reductions in the work force.
Furthermore, the new generation of machines purchased by firms in recent years have
much greater throughput than those they replace. For example new loom or dyeing
machine may increase production by 50 to 100 per cent over the machines they
replace. This means higher labor productivity and lower unit labor costs, along with
reductions in employment. Even if the textile sector were significantly to increase
production and exports (both direct and indirect), it is evident that it would not create
significant amounts of new employment relative to the jobs that have been lost. Textile
factories have become progressively more capital-intensive, with increases in output
possible without much new employment. However Hemmer, HR (2001) states that
greater employment creation is possible at the level of garment manufacture, which
remains relatively labor-intensive.

One of the prime factors leading to the loss of jobs and closure of factories in the local
textile industry is cheap and illegal imports from China Harris, RG (1993). The price of
goods from China is far lower than clothing made in South Africa. The reasons for that
he argues are low labour costs in China (a quarter of those in South Africa) and the
economies of scale (large production runs). Also, more than 50 % of China's textile
sector and 25 % of the apparel sector is state-owned and subsidized by the state and
other government authorities. He further notes that in addition, China gives its textile
and clothing exporters a 13 % rebate or export incentive. Chinese banks also make free
loans to build textile and clothing plants.

It is estimated that at least 40 000 jobs have been lost in the South African clothing and
textile industry from 2003 to 2005, leading to threats of mass action against some
clothing retailers by trade union federation COSATU. COSATU and the clothing trade
union SACTWU also demanded that retailers commit themselves to local purchases of
75 % DTI, (2007b).

5.3 Wages

Average real wages declined in textiles slightly until 1996 and then rose sharply in 1998
Cornia, G.A. and Court, J(2001).They realize that the coincidence of this rise with a very

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large reduction in employment suggests employment losses were predominantly of
lower waged employees. Employment losses were not driven by rising wage rates;
trade union agreed wage rates increased only slightly,. The interpretation is also
consistent with the reductions in average wages in the last two years, during which
employment stabilized somewhat. The reductions in real wages are an indication of
downward pressures due to high levels of unemployment and import competition. Loots,
E(2001) sums that average all manufacturing remuneration is well above that of textiles
and clothing. Which reflects the orientation of South African industry, with above
average wages in very large scale industry such as chemicals, basic metals, as well as
in machinery and motor vehicles?
She further observes that the textiles sector differs considerably from garments with
regard to labor costs. However established garment firms have been relocating to peri-
urban and rural areas where wages are very much lower than in unionized urban areas
like Cape Town and industrial sites in the Eastern Cape and KwaZulu-Natal provinces,
downward pressure on wages has been intense and minimum wage legislation
frequently has been ignored. New and existing investors in garments, particularly well-
established foreign investors from Taiwan, have been locating in rural areas in order to
use lower wage and generally non-unionized labor, but there have also been relocations
to neighboring countries such as Lesotho.

5.4 Skills

The upgrading of capital equipment mentioned in an earlier subsection has not

necessarily been accompanied by significant increases in formal training. Many firms
interviewed were placing greater emphasis on numeracy and (English) literacy in new
recruits, but most important was the knowledge gained on-the-job in understanding the
operation of the machines S. Roberts and J T. Thoburn(2004). Stability and experience
were highlighted over and above formal education. A shift to higher levels of education
(typically a school leaving certificate) also appeared to be due to the availability of
applicants with such qualifications given the high levels of unemployment prevailing.
The AIDS epidemic in South Africa though, besides the personal tragedies that it
creates, is a problem and a cost for firms, which lose trained workers.

6 CONCLUSIONS

South Africa rejoined the international community during the early 1990s and embarked
on a massive policy of liberalization of its economy. Various definition of globalization
has been given which all boils down to mean opening up of the economy for global
trade and competition.
Although there are some negative perceptions attached to globalization, Roberts, S. &
Thoburn, J. (2004) are of the opinion that “policies that make an economy open up to
trade and investment with the rest of the world are needed for sustained economic
growth”. The evidence on this is clear. They state again that all the countries that have

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made in economic success, and be able to increases living standards for its people, are
those that have open up to the rest of the world and liberalize their economy. With the
history of heavy protection and late entry into the liberalized economy, the prognosis for
the South African businesses did not appear good in the face of the pressures of
globalization. What the evidence at the sector level also suggests, however, is that
trade liberalization and exporting are not necessarily platforms for growth. Rather,
growth depends on a range of factors that condition firms’ responses to liberalization.
Liberalization has been a major impetus to restructuring of the sector but in many firms
this has taken the form of cost cutting, downsizing, and most firms have reduced
employment, in many cases drastically. Many industries has benefited from the
liberalization of trade but the textile industry has not been lucky. Finally the impact of
globalization on the clothing and textile industry as a whole in South Africa has not been
a positive one.

7 List of Abbreviations

7.1 WTO World Trade Organization

7.2 IMF International Monetary Fund
7.3 FDI Foreign Direct Investment
7.4 GDP Gross Domestic Product
7.5 ILO International Labor Organization

8 Acknowledgement

Special thanks and appreciation to S. Roberts and J T. Thoburn for their in depth
research and survey carried out within the textile industry

Bezuidenhout, A., Khunou, G., Mosoetsa, S., Sutherland, K. & Thoburn, J for their
excellent expose on the impacts of globalization and restructuring in the Textiles
Industry of South Africa.

9 Bibliography

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