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What to do about the South African economy

23rd January 2015

By: Saliem Fakir


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Improving the performance of, and labour participation in, the primary sectors of the South African economy and the manufacturing sector should be priority. We have had massive job losses in the mining sector, a situation that contrasts with the 1970s. The same is true for agriculture, which has been in decline since the 1990s. Manufacturing has also declined from a high of about 20% of gross domestic product (GDP) to between 11% and 12%.

Some of the decline can be explained by the slow delinking going on between mining and the industrial sector, the effects of trade liberalisation and some stagnation in the adoption of new knowledge and technologies in the manufacturing sector. Merchandise imports were twice our exports from 1994 to 2013. In volume terms, imports increased by about 220%, compared with the growth in exports of 123% over the same period. As result, the South African economy has become much more import intensive. Most of our imports are consumptive in nature rather than in new infrastructure, plants or equipment. Oil and refined fuels constitute a large part of the country’s import bill.


Commodities have come to dominate our exports. To deal with high imports and lower our dependence on commodity exports, we have to diversify our industrial base. We need to look at this issue more closely. South Africa’s economy today is dominated by services, which comprise close to 65% of GDP. Services do play a valuable role in the economy but the number of high-quality jobs that are created is dependent on the educational quality of the workforce. For instance, services related to manufacturing, mining and allied industries can be vastly expanded if we can ensure that our universities churn out high-quality graduates.
When a country is in a countercyclical phase, some form of deficit spend makes sense not only to boost growth but also to restore confidence and new energy in the economy.

I have to state that, while I am a critic of austerity measures, deficit spending should not take place in the absence of certain conditions, including the ability to use the extra money being made available to the economy. The money has to be directed to the right things, such as building the real economy. For this, both private and public means of delivery have to demonstrate capability and absorptive capacity. Secondly, we have to link deficit spending with a reduction in corruption and fruitless expenditure. Thirdly, we need to expand public-sector employment more, particularly in the delivery arms of the State. Fourthly, your rate of growth you stimulate should be designed in a manner that allows the State to ensure high, or some degree of, capital accumulation to continue procyclical measures that continue to sustain growth and income generation. Finally, you probably want to deal with your debt payments, especially foreign debt, as fast as possible during this period.


Deficit spending without a strategy that is linked to high levels of coordination and the ability to capture the proceeds of growth efficiently always risks the danger of being populist, wasteful and untargeted. Deficit spending that results in little to show for itself has the danger of increasing public debt and, if we fail once, there will be a reluctance to continue a second round of deficit spending.

We should be open to experimentation and new ideas that have not had traction in the past. The one thing we should realise is that a lot more emphasis in the future should be placed on ideas and knowledge. There is far too much focus on the ownership of physical objects. These, on their own, have value but gain greater value if they are linked to more useful purposes. So, there is a ‘once’ spectrum of the economic debate that is focused on the mundane – the ownership and possession of physical objects – and another part that is not interested in the transformation of those physical objects into something useful. Here the focus is to maximise the level of return of an existing object or asset and not the creation of new ones.

The primary aim is to sell these goods and services to more and more people. Of course, I am caricaturing something that is far more complicated than what I have just described. It was Paul Romer who once said that, in the long run, if economies just keep on adding forklifts after forklifts, there will be growth for sure, but, over time, growth will drop, unless you figure out how to use forklifts for different purposes and, in so doing, use innovations to drive productivity and growth. The main insight is that you can add lots of bricks and mortar and new infrastructure but if you do not drive new ways of using these for different purposes or create new types of assets and values, there will be a diminishing return.

South Africa’s challenge is transforming physical objects into something useful and of greater value – this should receive renewed attention in our economy. For this, we need to grow the talent of the country. In a period where we have squandered opportunities to grow this talent, we should import more skills – the best people from around the world.


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