South Africa desperately needs five important components for its economic success.
COMMENT
The decline in the rate of economic growth, the balance of payment deficits and the low increase in the rate of employment, particularly for less skilled workers and youth, are structural problems. They are caused partially by the relative decline of the country’s goods-producing industries – in effect the deindustrialisation of South Africa – and partially by well-meaning policies that have had unintended detrimental consequences.
The ratings agencies have clearly stated that the sovereign rating of South Africa will be lowered unless the economic growth rate is raised, the balance of payments improves and employment increases. One way for this to occur would be for the country to reindustrialise.
Since 1986, the secondary (or manufacturing) sector has fallen from 30% to about 21% of gross domestic product (GDP), and the mining sector has fallen from about 13% to 7%. In the meantime, the tertiary sector has grown from 51% to 69% of GDP. Some of these trends are a normal development in economies with a rapidly growing standard of living, but for a country at this stage of its economic development, these shifts are excessive. The past seven years since 2008 have seen the situation worsen, with GDP growth falling to below 2%. Growth in mining and manufacturing has been negligible, and agricultural growth has averaged only 1% a year. Financial services and personal service growth have averaged 2.4% and 2.8% a year respectively and government services 3.3% a year.
Since 1995, the population has grown from 45-million to 55-million, but unemployment has grown from 3.7-million to 7.7-million. Since 2008, only half a million jobs have been created, most of which have been in the services sector and the larger portion in government.
Many believe the recent decreasing trends in electricity demand and electricity intensity are signs that South Africa is moving in this direction naturally. This is incorrect. It is actually a strong sign of failed economic, industrial and energy policies. South Africa is still in an industrialising phase of its economic development. Like many other emerging economies, less than 25% of the population account for more than 75% of all energy, goods and resources usage, and unemployment remains high.
The objectives of government are to reduce unemployment, poverty and inequality. This cannot be done without transforming the economy by focusing on raising the economic growth rate and increasing employment and raising the standard of living of all South Africans, particularly the poor.
The mining and manufacturing industries are important contributors to the economy, representing 7% and 12% of South Africa’s GDP respectively. Their effect on the total economy, however, is far greater because of their linkages with other important sectors of the economy. More importantly, these two sectors account for more than 70% of the country’s exports. The skewed growth toward the government and services sectors and inadequate growth of goods-producing sectors have resulted in a structural account deficit with insufficient exports and higher imports.
There are many policy issues causing bottlenecks, which have resulted in an inflexible labour market, uncertainty about ownership and infrastructure weaknesses, particularly with regard to electricity.
The challenge of the modern government and leadership is to provide vision and direction that incorporates all South Africans.
In the 1920s, the man with the vision and the ability to execute these tasks was unquestionably Dr Hendrik van der Bijl. There were others but it was his vision and guidance that laid the foundations for the development of industry and modern South Africa.
At that time, he concluded that cheap, secure electric power, cheap steel and financial and technical assistance to the developing industries were the prerequisites to further development. The capital would be provided by the state and the companies would be run on commercial lines. This led him to found Eskom in 1923, followed by Iscor, the Industrial Development Corporation and Amcor for the beneficiation of South Africa’s base minerals, and Van der Bijl Engineering for the establishment of a heavy engineering industry. The key components of the strategy depended on the cheap energy source that the rich resources of local coal allowed. One of the key decisions was that the country’s industrial development be based on secure low-cost electricity.
By 1975, South Africa was faced with potentially increasing isolation and rising levels of sanctions. There was a considerable need to become more self-sufficient in its energy requirements. Although independent in terms of its electricity-generating requirements, South Africa remained heavily dependent on imported oil and chemicals.
Out of necessity Sasol was established in 1952 and significantly reduced South Africa’s dependence on imported hydrocarbons. Today, Sasol’s Secunda operations are one of the world’s largest petrochemical operations and manufacture more than seven million tonnes of fuels and chemical feedstock a year in their primary production phases.
The strategy was in effect a developmental state policy, philosophy and strategy, albeit a deeply flawed government policy model based on cheap labour and the equity was mainly held by a privileged segment of the population. Nevertheless, its impact propelled South Africa and the majority of its people from an agricultural and resource commodity-based trading economy to become a modern mixed economy with a solid economic base for future development and growth.
Although the other sectors of the economy may appear to be independent of mining activity today, the initiation of many value-added chains can be traced back to a combination of the historic demands and wealth of the mining sector and its current output and export contribution to the economy. All this has been based on the security of supply of electricity, for which the energy source has been coal.
It is not suggested that in the future South Africa is going to depend on the same industries as set out above to the same extent. Mining will take some time to recover from the recent global reduction in demand and low prices. There are new industries that require development for the modern economy. But these industries remain the essential building blocks of almost any successful sustainable economic development for many years to come.
Reindustrialisation can only happen if the rate of growth of the electricity-intensive goods-producing industries are substantially increased. If this does occur, then the electricity intensity in the country may well increase or at least stay constant. For this to occur, the correct economic policies must follow. Energy and electricity will never again be cheap, but for higher economic growth there has to be security of supply of electricity at competitive prices. Unfortunately, economic growth models based on relatively low electricity growth forecasts become self-fulfilling prophecies.
South Africa desperately needs five important components for its economic success.
First, the country needs its leadership positions filled by people with impeccable credentials, capable of giving clear leadership and guidance.
Second, a more equitable developmental model based on its strengths.
Third, there is a need to withdraw restrictive legislation and introduce legislation that fosters an environment that promotes both foreign and domestic investment.
Fourth, it needs a government steadfast and firm enough to instil confidence that the future course will be strictly followed.
Finally, it urgently needs to ensure a steady supply of sufficient base load electricity at competitive prices.
The reindustrialisation of South Africa is critical for growing the economy and increasing employment. The goods-producing industries are crucial job drivers in the economy. These industries have significant upstream and downstream linkages to other sectors in the primary, secondary and tertiary sectors. The socioeconomic contribution of these sectors is vital in contributing to social upliftment.
South Africa has had many national plans, including AsgiSA, Gear and the New Growth Path, to guide the industrialisation of South Africa. All of these have not achieved their objectives. Today it has the National Development Plan. It must not be allowed to fail. South Africa is not short of talented political, economic, religious, social and business leaders of all backgrounds to guide the country out of its current difficulties.
Rob Jeffrey is managing director and senior economist of Econometrix (Pty) Ltd