By Rob Jeffrey

South Africa is at a crossroads in its economic, social and political development. Hard choices need to be made, which will determine whether the country is to grow and help its people prosper or whether it is to sink into a long period of slow growth, stagnation, declining standards of living and steadily rising unemployment. Much will depend on the vision and courage of its political and business leaders in fostering a spirit of cooperation and support from all citizens and groups.

South Africa is blessed with a treasure trove of natural resources. Some say the country holds the richest reserves of minerals in the world. It also has a population with the abilities and cultural diversity to develop them. It is indeed a country with huge possibilities and opportunities. In addition, it offers a gateway and hub to a continent with vast market and economic growth potential.

Yet the signs are not good. Indeed, at the moment, they are ominous. Since 1986, the secondary sector has fallen from 30% to about 21% of gross domestic product (GDP), while the mining sector has fallen from representing 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 last seven years – since 2008 – have seen the situation worsen, with GDP growth falling to below 2%. Growth in mining and manufacturing has been negligible, while agricultural growth has averaged only 1% a year. Since 1995, the population has grown from 45-million to 55-million, and unemployment has grown from 3.7-million to 7.7-million. Since 2008, only about 500 000 jobs have been created, almost all of which have been in the services sector, with the larger portion in government.

Some argue that South Africa needs to move away from mining and manufacturing. The direction they favour is an economy based on the service sectors. They take the current trends as signs that South Africa is moving in this direction. 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. The skewed growth in services at the expense of mining and manufacturing growth, far from being an indicator of a successful change to a services- based economy, is an indication of the country’s inability to grow its goods-producing sectors and that it is destructively deindustrialising.

Objectives and Policy
The current inequity in South Africa is reflected by the fact it has an excessively high gini coefficient. Unemployment is currently running at over 25%, while, among those aged from 16 to 24 year olds, it is close to 50%. After assessing the age distribution of the population, it is estimated that, between 2015 and 2030, about 16-million people will enter the labour market. However, with a sustainable GDP growth rate of only 2.5% a year, less than six-million jobs will be created by 2030. Unemployment will almost double and increase to close to 15-million.

This cannot be done without transforming the economy and focusing on raising the sustainable economic growth rate. This has to be the priority. All other priorities need to be of a secondary nature and rank far behind. All policies should be assessed by whether they are more likely to contribute to economic growth. If they do not and/or there is a likelihood that they will reduce economic growth, then they should be struck off the list or materially altered to reflect the priority objective – economic growth. Government has many such present and proposed policies that in practice, or will in practice, reduce economic growth. Such policies include minimum wages, the National Health Insurance scheme, the carbon tax, the renewable-energy programme and the sugar tax, to name a few. All these have the potential to significantly reduce investment, slow economic growth and increase unemployment. The key to success in the future is reindustrialisation, as envisaged in the National Development Plan.

The Future
South Africa desperately needs five important components for its future economic success. Firstly, the country needs to have its leadership positions filled by people who have impeccable credentials and are capable of giving clear leadership and guidance to a country of talented people.

Secondly, it needs people of vision. The country requires a more equitable developmental model that is based on its strengths. It is imperative that South Africa urgently reindustrialise. Many of the same industries remain important but different, new industries are required for the modern world.

Thirdly, there is need to withdraw restrictive legislation and introduce legislation that fosters an environment that promotes both foreign and domestic investment.

Fourthly, it needs a government that is steadfast and firm enough to instil confidence that the future course will be strictly followed.

Finally, it urgently needs to ensure security of supply of sufficient baseload electricity at competitive prices, which are necessary for an industrialising economy.

In summary, the leadership and government must recognise that there are many conflicts in a diverse emerging economy and that compromises are necessary. For success in the reindustrialisation process and to restore domestic and foreign investor business confidence in South Africa, leadership should:

• Unequivocally lead the country away from interventionism and hold the leadership accountable to effect this.
• Remove all barriers to market entry and foster a spirit of unity and cooperation, as JF Kennedy did when he said: “Ask not what your country can do for you; ask what you can do for your country.” Government, by its laws and actions, must lead the reunification of South Africa. Adapt, or withdraw, a host of well-meaning policies that could restrict fair and equitable labour-market practices, leading to low productivity and loss of efficiency. These policies often have unintended consequences that benefit the few but often, in practice, make matters worse, not better, for the poor.
• Adapt policies that are abused and lead to increases in graft and corruption or ensure that there is accountability for misconduct.
• Ensure that decisions are made on a competitive basis and are based on efficiency and cost. The economy remains largely untransformed. This needs to be urgently addressed by adopting policies that focus on creating economic growth rather than focusing on policies which restrict participation.
• While the premise on which preferential supplier agreements are enacted should be lauded, these agreements often have significant unintended consequences. Apart from encouraging corruption, they frequently increase prices and inefficiency and, hence, reduce the rate of economic growth and increase unemployment.
• Base its legislation on improving productivity, efficiency and effectiveness. The laws governing procurement and the restrictions on market entry have a profound negative impact on all these matters.
• Adapt land reforms to cater for the requirement that agricultural production needs to be secure. Agriculture is one of the foundations of the country’s economy. South Africa needs to ensure a healthy commercial agriculture industry to ensure food security, profitable yields and the wellbeing of farmers and farm workers.
• Privatise many State-owned companies and assets. This should involve an arm’s-length, market-related transaction involving the sale of shares and genuine control into private, competent ownership, whether this involves foreign or domestic investment, or both.
• Finally, and most importantly, ensure that a large segment of education moves its focus from an academic orientation to a vocational skills-based approach to cater for the needs of an industrialising economy and the skills of the broad majority of its youth.

Only by making significant progress in each of these areas can the economy move towards higher economic growth based on reindustrialisation. In short, it is necessary that government and leadership “stop cutting the cake and instead put the ingredients in place to start baking it”.

The reindustrialisation of South Africa is critical for growing the economy and increasing employment in the country. The goods-producing industries – mining, manufacturing, agriculture and agricultural processing – are crucial job drivers in the country’s 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 the social upliftment of communities. Together, these industries, with their upstream and downstream linkages, make a significant contribution to the South African economy as a whole in terms of GDP, employment, compensation, government revenue, exports and capital investment.

Reindustrialisation, electricity and employment growth are the keys to South Africa’s future economic, social and political prosperity, sustainability, stability and individual economic freedom. For this to occur, it is essential that government, business, trade unions and the people of South Africa recognise their obligations and work towards the common goal of making this process a success.

Jeffrey is MD and senior economist of Econometrix (this article is adapted from the full article that first appeared in the South African German Chamber of Commerce Annual Report 2016)