South Africa’s (SA) economy has been growing since 1994, with a period in the mid-2000s when growth exceeded the 5% target of the National Development Plan (NDP). This period of 5% economic growth came to an abrupt end when the Global Financial Crisis struck in late 2007. The resultant slow pace of growth both in SA and globally, has forced us to think more carefully about the nature of the economic growth we have seen thus far.
Our analysis shows that when our economy grew by 5% and more, this growth was fuelled by (1) substantial growth in access to credit – including by informal lenders (Mashonisa) and unsecured lending, and (2) rapidly rising commodity prices for coal, iron-ore and platinum.
This credit-fuelled growth path has proven to be unsustainable and has had far-reaching consequences for SA society. As we found in the aftermath of Marikana, informal lenders charging excessive interest rates and operating illegally, accounted for a large part of the reason why mine-workers were struggling to make ends meet.
The commodity ‘super-cycle’ where the price of some commodities increased by 400% over 4-5 years – largely as a result of China industrialising – encouraged SA firms to invest in mines and ramp-up exports of unprocessed minerals.
These two factors have put SA on a growth path that is unsustainable, does not create sufficient jobs at appropriate skill levels, and has little impact on poverty and inequality. The commodity super-cycle primarily benefited a very narrow group of mining Executives and shareholders, while mineworker conditions remained largely unchanged.
In addition, as the commodity boom strengthened the Rand, the productive sectors of Agriculture and Manufacturing have suffered increased competition on both the export market and SA’s domestic market.
The onset of the Global Financial Crisis has laid bare some key structural weaknesses in the SA economy.
1. The Productive Sectors are not growing fast enough..
The Services or Tertiary sector now accounts for more than ? of SA GDP. The productive sectors of Mining, Agriculture and Manufacturing have steadily declined as a share of GDP. Financial and Business Services alone accounted for about 17% of Gross Value-added in 1994 and now accounts for almost one-quarter of SA’s total Gross Value-added. SA’s Agriculture sector has been particularly badly affected by SA’s too rapid trade liberalisation and accounts for a much smaller share of value-added and jobs than in comparative emerging economies. Figure 1 shows just how small the contribution from Agriculture and Manufacturing has become.
Figure 1: Industrial Intensity of SA Economy – Gross Value-added by Sector
Sometimes people argue that the structure of the economy does not matter. This is a very simplistic view for an economy such as South Africa’s for a number of reasons. First, many parts of the Services sector are inter-dependent on strong Agriculture and Manufacturing sectors – for example farmers need crop insurance, manufacturers need working capital and investment finance.
Secondly, the productive sectors of Agriculture, Mining and Manufacturing have very substantial linkages to the rest of the SA economy – for example the Automotive sector links to other sectors such as car-seat manufacturers who in turn by leather from tanneries who in turn buy hides from farmers. These linkages create a network of inter-dependent sectors and businesses who grow together but can also decline together if the productive sectors are not prioritised.
Thirdly, as Table 1 shows, the Finance sector’s skills composition is biased towards highly skilled and skilled work while Construction, Manufacturing and Mining provide the largest shares of unskilled work. Given SA’s unemployment rate and the skills profile of our job-seekers it is consequently crucial that the productive sectors grow far faster than their historical trend.
Table 1: Skill Composition by Sector
|Wholesale and Retail Trade||16.5%||68.2%||15.3%|
|Community, Social and Personal Services||18.1%||68.5%||13.4%|
Source: Labour Market Intelligence Partnership, 2014.
2. Under-investment in economic infrastructure…
SA has experienced a lengthy period of under-investment in economic infrastructure starting in the late 1980s. Although the previous and current Administrations have taken bold decisions to expand and renew SA’s economic infrastructure in electricity, ports and rail, and dams this will take time.
3. South Africa’s growth has been import-intensive…
The strong growth rates experienced in the period immediately before the GFC proved to be import-intensive – at least in part because the substantial improvements in SA’s terms of trade as a result of the rapid increase in commodity prices also served to strengthen the value of the Rand. In addition, as the US battled to kickstart economic growth, its loose monetary policy led to substantial inflows of ‘hot money’ – portfolio investment which seeks out the highest financial returns and which can easily be withdrawn by international investors. This type of investment offers SA relatively little as it does not lead to a direct increase in industrial capacity. This has led to the emergence of a substantial current account deficit, which has highlighted the fragilities of the SA economy and our exposure to global investors’ sentiment.
4. Exports are dominated by unprocessed, volatile commodities…
SA’s trade profile has become increasingly commodity dependent. While mining accounted for 70% of goods exports in 1994, by 2013 this had grown to almost 80%. The onset of the GFC and the accompanying dive in commodity prices has exposed the fragilities of the SA economy. It is SA’s relative openness to the global economy, the twin fiscal and current account deficits, the relatively low levels of foreign reserves, and the undiversified structure of the SA economy that account for its relative vulnerability to global economic changes.
In many respects, the SA economy therefore continues to bear the hallmarks of a typical developing country in colonial Africa, which has as its foundation exploitation of natural resources for export while value-added goods are imported. This colonial development pattern relegates developing countries to being a source of cheap labour and minerals with little chance of inclusive growth and at the mercy of volatile commodity prices. The pattern of growth that SA has seen up to now has not been sufficient to create large numbers of jobs at appropriate skills levels.
Breaking the apartheid and colonial pattern of primary exports and value-added imports requires coordinated, purposeful interventions at a scale that can deliver ‘critical mass’. This requires:
- Deeper and wider industrialisation and moving up the value-chain in Agriculture, Mining and Manufacturing,
- Access to appropriately-priced energy, water, transport and ICT economic infrastructure,
- Appropriate alignment of policy instruments to the industrialisation imperative, and
- Addressing the root causes of workplace unrest such as the particularly high levels of inequality and persistent discrimination.
Concerted intervention is required – but there is no ‘silver bullet’ or quick fix. If transformation and inclusive growth are the twin goals of national policy, there is no viable alternative to the state actively pursuing and driving structural change in the SA economy.
Radical Socio-economic Transformation therefore cannot be the creation of small numbers of high-skill Financial services jobs or the creation of jobs for domestic workers and shop assistants to serve an emerging middle-class. Industrialisation of Agriculture, Mining and Manufacturing, adding value to SA’s incredible mineral wealth as well as unlocking our small enterprises including township and rural economies, driven by a strong domestic market engine must be fundamental to radical socio-economic transformation.
Local value-addition and industrialisation create the opportunity to maximise tax collection, creation of sustainable and decent jobs and skills deepening. To give a practical illustration of the potential benefit to the SA economy of moving up the platinum value-chain: SA could export an ounce of ‘raw’ or unprocessed Platinum for $1,372 or a fuel-cell electricity generator for $20,000. This is not a myopic view of the potential to move up the value-chain, DST has funded the development of a locally-produced fuel-cell electricity generator at the University of the Western Cape which was launched in 2014. In addition, a Canadian company is partnering with a local platinum miner to test the technical viability of fuel-cell electricity generators for rural households.
To escape the current low-growth trap, SA needs a ‘big push’ of simultaneous action in key strategic areas – at scale – to ignite economic growth. The NDP correctly emphasises the dynamism of growth – we don’t need to address all impediments to growth simultaneously, we need to identify a small number of binding constraints and decisively address these.
These interventions if well chosen will ignite inclusive growth with the accompanying benefits of decent jobs, skills development, and declining poverty and inequality that our supporters demand.