Political Economy Watch

Creating a real ‘good story to tell’ the world

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South Africa can, despite the prevailing general pessimism, realise its long-held vision of a ‘rainbow nation’, characterised by prosperity shared by all.

But for this to happen, business and government need to come together in a new partnership defined by shared vision, collaboration and trust.

In an article about present turmoil on global markets we recently advocated that for economic survival’s sake “… the time has come to pull representatives from the leadership of these sectors together in an ‘economic war room’ …”

In a just-published report the McKinsey Global Institute (MGI) delivers a much more positive perspective on what the country can achieve – if government and business get their act together.

Titled South Africa’s bold priorities for inclusive growth, the report concludes: “By 2030, South Africa (SA) can realistically aim to be a country at the core of Africa’s economic engine, with a cohort of innovative, dynamic businesses working hand in hand with government to drive sustainably high rates of GDP growth, and millions of skilled, motivated young people playing their part in a vibrant economy.”

One common theme stood out from their research – for SA to achieve accelerated growth, the public and private sectors will need a coordinated and sustained effort to raise productivity and strengthen competitiveness.

It will also have to prepare millions of young people for the jobs of the future. It needs to reshape its system for developing human capital and, in particular, drive a massive expansion of vocational training programmes to build the technical and personal skills needed in a more competitive world.

In brief  

In brief, the report states that while SA has travelled a remarkable road since its transition to democracy, since 2008 the average annual GDP growth has slowed to just 1.8% and unemployment stubbornly remained at 25%.

It identifies five bold opportunities that can reignite SA’s progress and increase GDP growth by 1.1% per year, adding one trillion rand ($87 billion) to annual GDP by 2030 and creating 3.4 million new jobs. These opportunities are:

  • Advanced manufacturing. SA can draw on its skilled labour to grow into a globally competitive manufacturing hub focused on high-value added categories such as automotive, industrial machinery and equipment, and chemicals. However, SA’s manufacturers will have to pursue new markets and step up innovation and productivity.
  • Infrastructure productivity. SA is investing heavily in infrastructure, but big gaps remain in electricity, water, and sanitation. By forging a true partnership, the public and private sectors together can drive three strategies to make infrastructure spending up to 40% more effective: making maximum use of existing assets and increasing maintenance, prioritising projects with the greatest impact and strengthening management practices to streamline delivery.
  • Natural gas. SA’s electricity shortage has constrained growth and, despite new capacity, another shortfall is projected between 2025 and 2030. Natural gas plants – which are fast to build, entail low capital costs, and have a low carbon footprint – can provide an alternative to diversify the power supply. With the necessary regulatory certainty, it is estimated that South Africa could install up to 20GW of gas-fired power plants. Gas can be provided through imports, local shale gas resources (if proven), or both.
  • Service exports. SA has highly developed service industries, yet currently captures only 2% of the rest of sub-Saharan Africa’s service imports market, which is worth nearly half a trillion rand ($38 billion). With the right investments, service businesses could ramp up regional exports and government can help by promoting regional trade deals. Construction sector opportunities range from design to construction management to maintenance services. In financial services, promising growth areas include wholesale and retail banking and insurance.  
  • Raw and processed agricultural exports. Consumption markets are rising throughout sub-Saharan Africa and Asia. SA could triple its agricultural exports by 2030. This could be a key driver of rural growth, benefiting the nearly 10% of the SA population dependent on subsistence or smallholder farming. It will require a bold national agriculture plan to ramp up production, productivity, and agro-processing.  

But the country will need to embrace some fundamental changes first to become more globally competitive, including addressing a serious skills shortage through a dramatic expansion of vocational training.

Strengths

A great deal of SA’s promise remains unrealised. The country, however, also has a number of strengths on which to build, including:

  • A highly rated business environment;
  • A strong legal and governance framework;
  • Excellent transport links;
  • Robust investment, and competitive firms;
  • A 2014 GDP of R3.0 trillion ($261 billion), making it Africa’s second-largest economy after Nigeria. In fact, its economy is larger than that of Malaysia or Chile, two other pivotal emerging markets;
  • Having one of Africa’s most diversified economies, including a sophisticated financial services sector accounting for some 62% of GDP;
  • An overall economic productivity that compares well to that of many of its peers and is similar to China’s and Brazil’s;
  • Equities and bonds that are attractive to international investors. In 2013, the equity market capitalisation of South African companies stood at 132% percent of GDP – higher than the figure in most advanced economies –  ranking it tenth in the world;
  • The level of investment reflects the country’s many globally competitive firms;
  • Overall, South Africa has attracted foreign direct investment inflows equalling 2 percent of GDP, and is the eighth-largest outward investor on the African continent;
  • A growing share of urban households, forming part of the consuming class, meaning that they have reached a level of income that allows for discretionary spending, a trend expected to continue, with the number of ‘struggling’ households expected to decrease by a third by 2025; and
  • Related to the previous point, South Africa has six vibrant, dynamic cities with populations of at least one million each. By 2025, nearly three-quarters of urban households will be members of the consuming class.

Overall, South Africa ranks 49th out of 131 countries on MGI’s Global Connectedness Index and has risen four places since 1995. It also ranks seventh in the world for the development of its financial markets and ninth for the efficiency of its legal framework.

All of these factors position South Africa to boost long-term growth, raise employment, and create a vibrant, inclusive, globally competitive economy for the 21st century, the report states.

At the same time it warns that South Africa has no time to waste in jumpstarting economic growth if it hopes to meet its national goals for eliminating poverty and substantially reducing inequality by 2030.

Potential

The ‘big five’ priorities each has the potential to boost economic growth significantly and create many thousands of new jobs by 2030, generate substantial additional tax revenue for priorities such as infrastructure funding, educational programmes or welfare grants – all of them important for creating a more inclusive society and improved quality of life.

A rough estimate puts the combined GDP impact of the five priorities at exceeding one trillion rand ($87 billion) by 2030, which would boost annual GDP by 19%.

Moreover, together it could create 3.4 million additional jobs by 2030, making major strides in reducing unemployment and poverty.

Between them, the ‘big five’ will also bring important broader societal and economic benefits such as stimulating investment, increasing productivity, raising innovation and accelerating rural development. They will also have a significant direct and indirect impact on other sectors of the economy.

The ‘big five’ are mutually reinforcing, with likely cumulative effects between them.

What the report does not refer to is the role of organised labour. Without them having been pulled into a “partnership characterised by shared vision, collaboration, and trust”, the ‘good story to tell’ will remain an elusive dream.

by Piet Coetzer

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