What economic future, South Africa?
01 July 2014
by J Brooks Spector
J. BROOKS SPECTOR attends a seminar that looks ahead to South Africa’s economic future twenty years from now – and returns home but chastened and saddened by what he hears about what must be done to convert the fine words of the National Development Plan into reality.
Now that South Africa’s economic future is becoming increasingly cloudy and unsettled, the forecasters are having a field day trying to sort out what is coming down the road. But interpreting those road signs up ahead is an enormously frustrating task.
The signs immediately ahead – the ones that will spell out things like NUMSA strike starts, global rating agencies consider further downgrades, or interest rate hike fails to quell investor fears – are still rather easy to read. But look further down the road, and the signs that speak about Eskom’s failure to meet consumer demand or how the country continues to shed jobs, become less clear. Still further away, the signs speaking to South Africa’s economic circumstances in 2030 more often than not remain so unclear that they read more like they were written in an unknown foreign tongue in an unfamiliar script.
And that’s the trouble – predicting the future ultimately relies upon the assumptions one must make about future government behaviour and the choices the domestic business sector, foreign investors, consumers, and labour all may elect to take. Not an easy business this – but it is one everyone wants to know as much as they can know about the future to help them think about what they should do for the future. Investors hate uncertainty, craving certainty instead. Anything that contributes to that certainty can be valuable – but it can also be greatly unsettling if it contributes clarifies the sense of trouble up ahead.
And so with all these concerns in mind, the writer attended a symposium in Johannesburg on the theme: “Projecting the Future: Two Decades Ahead: South Africa in 2034”, organised by Frontier Advisory, on 25 June. In setting up this discussion, program organisers had asked, “What will happen in the country in the next two decades?... What is the economic growth outlook? Does the economy have a growth speed limit? Will South Africa continue to be able to create world-class companies? Are we developing the talent we require as a developing country? Why can South Africa seemingly not solve its structural unemployment? Will politics help or hinder the nation’s development?... And will South Africa continue to maintain its leadership position in the continent in the face of new competition from other African countries?”
Leading off the discussion, Khulekane Mathe, Acting Head of the National Planning Commission Secretariat, described the emerging NDP vision for 2034. It seemed to the writer that Mathe’s word picture of the NDP’s achievement had taken on something like the finale of that wonderfully imaginative cartoon, “Who Framed Roger Rabbit”, when the characters moved had suddenly from a world painted in the somber shades of black and white to a brilliant full-colour universe in a heart beat.
Mathe argued that a key assumption of the NDP is that the nation will both plan and prioritise the future over the present - deferring some consumption in favour of long-term investment, and investing in enablers for the future. This will become especially important since the South Africa of 2034 will be more than 70% urban; it will exist in a fast-changing global environment in which the country will need to accommodate the challenges of both climate change and ongoing technological revolutions.
As a result of this, the main goal of planning is to achieve socioeconomic change via sustained 5% economic growth, with significant growth in exports to fund the country’s growth, rather than to continue to depend on the inward flow of (inherently unstable, unpredictable) portfolio funds. But that future will not just happen, noted Mathe. To get to this better place, the strategy of the NDP must be to boost educational capacity, to buoy industrial sectors that can absorb labour, to foster growth in higher tech sectors, and to boost the social wage for all South Africans. The mechanisms to achieve this will, however, require more than just those detailed documents. Instead, the task will also be to identify problems and solve them, going forward, in a pragmatic, problem-solving manner.
In response to his presentation, audience members asked Mathe, for example, if, given the evident current circumstances, the country’s state owned enterprises were retardants of development rather than enablers of it, and, if so, would the marketisation of the SOEs become part of the NDP. In response, Mathe argued that the NDP is not a rigid formula, rather its implementers would be carrying out a non-ideological problem-solving stance.
Following Mathe, Miriam Altman, a former NPC commissioner and now the chief corporate strategist for Telkom, argued that while it was important for this country to nurture and grow its manufacturing output, that sector was unlikely to be a major source of employment for the foreseeable future. Altman said there is a real need to figure out, concretely, how the country is going to generate the 11 million jobs by 2030 called for in the NDP; there is a need to stress test the assumptions as well as the dreams of them.
Altman said that realistically, it was unlikely more than 3% of employment created in the country over the next generation would – or could - actually come from the country’s manufacturing sector. The reason for this was that for manufacturing to be globally competitive, productivity needed to increase and that generally came from squeezing out labour in improved production efficiency, rather than adding labour to the manufacturing processes. Or, as Altman told her audience, “That doesn’t mean that we shouldn’t promote manufacturing, but it is very unlikely [the sector will create many new jobs] because a successful manufacturing sector in South Africa would require substantial productivity improvement.” Moreover, because the country had volatile exchange rate circumstances, that put a further crimp on expanding manufacturing, much less labour-intensive manufacturing. Instead, South Africa, like pretty much everywhere else, is going to have to look to the services sector for much of its new job growth. Altman noted, “Most jobs come from services and we need to get a much greater sense of how we promote dynamism in services and how we stimulate services employment.” A further complexity was that while it was the non-traded, export-earning sectors offered the easiest, fastest route to job creation, it was in the traded sectors, the export earners, where higher wages would be found. Indeed, South Africa has not been taking serious advantage of the global trade in services, compared to countries like Malaysia, Korea, Indonesia, or Turkey. In fact, South Africa now invests “pitiful amounts” in human capital, and is, in fact, falling further behind its competitors. Even China, the world’s factory, is promoting growth in services and is shifting of lower level manufacturing outwards to less developed nations in Southeast and South Asia. As a result, South Africa faced a real dilemma in trying to both create employment and achieve higher wages for new jobs. As Altman noted, because “The future of work is in low-paid work,” if cash wages were low, that would actually put further pressure on the government to ensure there was a fuller social security system of social benefits to help relieve the upward demand pressure on cash wages. Altman and Mathe, asked if their presentations seemed to point to a more thorough interrogation of the nation’s political will to make the hard choices needed to get this done, Mathe replied that the nation’s leadership has made the requisite statements about the will to achieve such changes and that “our job is to believe them.” There already is, for example, a ramping up of national investment in infrastructure consistent with the NDP. And Altman added that the president’s recent SONA “gives me good vibes”. Nevertheless, since every country is trying to move in the same upward economic direction, it is, admittedly, hard to see how a country can really do things that much differently. That said, countries like Korea and Turkey have, in fact, managed effectively to establish successful backward-facing linkages in their participation internationally in the construction sector, but these may be exceptions. Nonetheless, the “machinery of government runs at a certain pace.”
At this point, Frontier Advisory head Martyn Davies commented in response that there are some good opportunities that need to be grasped. In the next generation, for example, China will shed some 80 million factory floor jobs, but most of those will more likely go to Southeast and South Asia, rather than Africa. Doesn’t that argue for a movement to achieve greater labour flexibility? In response, Altman replied that there continues to be a social need to protect South Africa’s hard-won labour gains. By this point, this writer was starting to wonder if the recent NUM and the impending NUMSA strikes were in the process of changing the facts on the ground anyway.
Next was a panel discussion in which South Africa-resident Ghanaian investor Fidel Jonah insisted he continued to be optimistic on South Africa’s circumstances for the future. South Africa still holds a comparative skills advantage over most of the rest of the continent and that offers broader competitive advantages and business opportunities. As he said, “As South Africa becomes more comfortable as a ‘driver’, will be a skills advantage for South Africa.” Meanwhile, World Economic Forum Africa specialist Jesmane Boggenpoel added that South Africa remains a globally competitive nation, although it clearly still needs to do more in terms of building skills, and providing more effective policing and health policy.
Synergy Global Consulting Director Paul Kapelus added that the country’s ability to move effectively into other African markets was still being constrained to a degree by the nation’s internal tensions and the fact that it presented a “confused face of South Africa” into Africa. Meanwhile, Deloitte’s Ben Davis offered the cautionary note that innovation will mean many of the old jobs and ways of doing things will disappear, such as routine jobs in transport and logistics. Instead, to do well in the future, South Africa will need to embrace the disruptive impacts of change and the new technologies coming at it. Davis predicted that regardless of government’s best laid plans, sectors like energy and education and training will be significantly privatised by 2034. Kapelus added that in twenty years’ time, the country’s mining sector will be much leaner and smarter (and more automated and mechanised) and that this sector will retreat from the forefront of the South African economy. As a result, marrying social and industry infrastructure will become an increasingly intricate, difficult dance. There will be losers.
After these sobering comments, Financial Mail Editor Tim Cohen argued further that the country’s economy is a glass that is neither half full nor half empty. Rather, it is mostly empty due to the exaggerated expectations of the country. The country needs a healthy dose of reality testing. After the long commodity boom, the country no longer has the flexibility to double government debt to finance things easily because the world’s debt window is now effectively closed. What is open is the policy change window, but South Africa has to be brave enough to step up to it. Cohen argued that the country needs a viable, conscious export-oriented growth strategy; a freeing up of the labour market (stronger unions but more flexibility in hiring and firing by enterprises); emulating places like Malaysia, Chile, Turkey and Colombia rather than China and Brazil; and embracing the logic of markets more, taking those big bets and discovering the new.
Rounding out the day, Frontier Advisory’s Davies painted a picture of the choices various nations have made in their growth and development strategies. Through a series of graphics that described these choices – Davies showed that with Ghana, China, and Thailand, their successes in building export growth have largely come through deliberate – and frequently successful - efforts to move up the value chain of production and – most especially – to embark on a broad diversification of their respective export product mixes.
By contrast, Nigeria, the new economic leader on the continent, has primarily grown its exports on the back of price rises in petroleum and more intensive primary oil production. If anything, its product mix has significantly declined in terms of comparative export earnings as a share of overall value. The result of this is, of course, has been a general lack of a wider distribution of these earnings to the vast majority of the country’s population.
Comparing these circumstances, Davies also offered South Africa’s 1994 and 2010 export mix, noting the relative stagnation of efforts in nearly two decades to significantly change the South African export product diversity. The charts make clear the challenges faced by South Africa, going forward, in trying to turn the promise of the NDP into palpable benefits for the population as a whole. Given the policy stalemate so far, and the seeming absence of any muscular political will to break the log-jam, the prognosis still seems to be guarded for South Africa to be able to move into the ranks of those upper middle income countries where the economic benefits reach deeply into through population as a whole.
Daily Maverick