Amid power shortages, job losses and flagging economic growth, there hasn’t been much good news for South Africans of late.
But new research by the McKinsey Global Institute suggests the picture may not be as bleak as it is often portrayed. In fact, South Africa has some clear advantages and strengths that it can capitalise on to expand the economy and create jobs.
The report, South Africa’s Big Five: Bold Priorities for Inclusive Growth, suggests key sectors could grow our economy by R1-trillion and create 3.4-million jobs by 2030.
It highlights the need to revisit the relationships between labour, business and the government in some cases and to overhaul how South Africa educates and trains its workforce.
The five sectors are manufacturing, infrastructure productivity, natural gas, service exports, and raw and processed agricultural exports, which – if developed and promoted – could help the country to realise the ambitions of the National Development Plan.
Some sectors, such as infrastructure, have already been identified by other pundits as spheres in which to solve some of our economic challenges, but the report reveals some surprising facts about other areas in which South Africa could realise its growth potential.
The often maligned manufacturing sector is one example.
Its decline has been well documented, and there are legitimate concerns about its input costs such as labour and steel, which the report acknowledges. But McKinsey says “the pessimism is overstated”.
The report identifies advanced manufacturing subsectors, including vehicles, transportation equipment and chemicals, as ways to boost gross domestic product (GDP) by an estimated R540-billion and create 1.5-million jobs if properly sustained and developed.
The report says that, despite our energy woes, South Africa’s electricity prices for industrial users remain, for now, very low compared with other countries, and cheaper than in the United States, China and India.
South Africa also has other advantages over competitor countries such as its “attractive, relatively low-risk” business environment, particularly in tax policy, foreign trade and payments.
The report found that the overall productivity of the economy is comparable with the likes of China and Brazil, and in 2012 was higher than that of Indonesia, Nigeria and Kenya. But it warns: “South Africa will need to maintain its focus on investing in productivity, which is improving at a slower rate than in other emerging economies.”
Advanced manufacturing subsectors have seen growth even though manufacturing’s overall share of GDP has been declining steadily. The report notes that exports of basic metals grew at 4.7% a year between 2003 and 2013; coke and refined petroleum products by 4.4 %; machinery and equipment by 4.3%; food and beverages by 4.2%; and chemicals and chemical products by 4.2%
“There is a lot of pessimism in manufacturing, but this [report] is not unfounded optimism. We have really interrogated global demand and the strength of our current capability,” Christine Wu, a partner at McKinsey, told the Mail & Guardian.
“But, at the same time, this is not an opportunity that will stick around forever.”
To boost advanced manufacturing, more work is needed to develop South Africa’s special economic zones, according to the report.
Although the government has increased the number of zones and given them further support, of the 10 to be launched this year seven are inland and “face exaggerated transport costs”.
“Moreover, the intended focus of these zones is on petrochemicals, agroprocessing, renewable energy and textiles, with little emphasis on the types of products that can bring large export growth – that is, industrial machinery and vehicles,” it says.
To improve productivity, as well as achieve economies of scale and innovation, the report says “relationships between unions, government and business also need to be completely revisited so that all three can work together to increase South Africa’s output and ensure higher wages in manufacturing and more employment in the broader economy”.
Another sector identified is that of natural gas, which would address South Africa’s perennial power shortages and which, McKinsey estimates, could potentially add R138-billion to South Africa’s GDP as power and industrial output increases.
But key to the development of this industry is reforming government policy, notably the updating of its electricity road map, the Integrated Resource Plan, to allocate more electricity generated by gas.
It also emphasises the need to finalise amendments to the minerals law and clear up uncertainty over the proposed state entitlement to a 20% “free carried interest” in oil and gas developments.
“Alternatives to consider might include applying this provision only after companies recover their initial investment and allowing the government’s share of profits to rise in better years and shrink in weaker years,” the report suggests.
Skills are a major stumbling block to implementing this strategy.
“The priorities identified in this report could create 3.4-million jobs by 2030, but the reality is that much of today’s workforce will not be able to fill those jobs.”
According to the report, employers say that not only do school leavers perform poorly in mathematics, science and general problem-solving, and lack verbal and written language skills in English, they also lack “soft skills, such as self-discipline and teamwork”.
It recommends a number of ways to fix this, including promoting alternative education and career paths, such as vocational training, a deeper involvement by industry to identify critical training and occupational needs and programmes to strengthen young people’s readiness for work.
Despite the task being “large and complex”, the experience of other countries and initiatives carried out in South Africa suggest the “goal of moving millions of young South Africans from joblessness to work and hope is eminently attainable”.