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The case for making South Africa a globally competitive country again - Part 1

by , 07 January 2016

1994, apartheid ended and democracy was born. It was the beginning of a bright future for South Africa.

Over two decades of freedom, South Africa worked hard to revitalise the declining economy left by apartheid.

Between 1994 and 2013, the South African economy experienced positive growth in every quarter except for 2 of the 78 quarters. In both instances where the South African economy experienced negative economic growth, international crises triggered the contraction.

Nevertheless, South Africa hasn't been able to maintain a strong annual growth rate. In short, it's been slowly declining.

In 2015, the problems we encountered are much worse. I’ve mentioned this before, but just to recap:

The rand's performance is terrible and there are no signs that it's slowing down. The rand currently stands at an all-time low of R15.73 to the dollar. That’s around a 25% decrease since the start of 2015.

In March, we saw a hike in tax rates by 1%. Unemployment rose from 25% to 25.5%. South Africa’s ease of doing business ranking dropped from 69 to 73.  Not to mention consumer confidence is treading at a low of -5.

South Africa’s business confidence index fell in November due to lingering uncertainty about a possible local sovereign credit downgrade and the timing of US interest rate hikes. The Business Confidence Index (BCI) fell to 82.7 from 88.4 in October.

This has all impacted on South Africa's economic growth. In November, we barely avoided a recession and our actual economic growth rate stands at a meagre 1%.

Going into 2016, there’s not much hope that things will get better.

But what are the solutions to our present problems? Can we somehow get out of this slump and make positive progress in the future?

Identifying the five bold opportunities that can reignite South Africa’s progress

According to a new McKinsey Global Institute report, South Africa must prioritise five opportunities. They’re called the ‘Big Five’.

The McKinsey report estimates that if our government and businesses prioritises these five opportunities, our GDP growth could increase by 1.1% every year. It also mentions that it’ll add R1 trillion to the annual GDP by 2030 and create more than 3.4 million new jobs. 

The ‘Big Five’ opportunities South Africa must prioritise are
  1. Creating a global competitive hub in advanced manufacturing.
  2. Making infrastructure investment more productive to boost growth in the economy.
  3. Harnessing natural gas for power generation and industrial development.
  4. Boosting service exports of services to the rest of Africa and the world.
  5. Unlocking South Africa’s full agricultural production and processing potential.
I’m going to talk about the first one today and I’ll go in more depth with the other four in other articles.

Creating a global competitive hub in advanced manufacturing

Manufacturing is a major sector in any developing economy, driving productivity gains and generating a large share of total exports that’ll deliver significant growth.

But in South Africa today, manufacturing contributes only 13% to GDP, compared with the 20% in comparable economies. In 1990, manufacturing contributed just over 20% to our GDP. This is a significant decline in 20 years.

In 2013, South Africa’s exports of advanced manufacturing products were valued at R190 billion. According to Mckinsey’s analysis, manufacturing exports could reach R700 billion rand by 2030.

If this were to happen, South Africa wouldn’t only boost its GDP by R540 billion, it would also create over 1 million jobs.

But there’s one problem...

South Africa’s government would need to make an effort to increase the output and export of manufacturing products. The government and the private sector will need to invest in skills development to make sure we increase and strengthen our productivity of exports and remain competitive.

Where South Africa is failing, its competitors are thriving

In emerging economies like Indonesia, Malaysia, South Korea, Turkey and Mauritius, manufacturing counts for over 15% of GDP.

South Africa could learn from other countries’ experiences. For example, manufacturing in Mauritius grew from 15% of GDP in 1980 to 25% of GDP in 1988.

More than 300,000 South African manufacturing jobs have been lost or exported to other countries since the beginning of 2008.

Manufacturing in Mauritius is an important pillar of the economy, where it contributed nearly 17% of the GDP in 2013. From 2009 to 2013, manufacturing grew a healthy 36% to R3.3 billion. In 2014 alone, manufacturing grew 4.4%

In 2014, the South African manufacturing industry shrunk 3.4% in the third quarter, 4,0% in the second quarter  and 6,4% in the first quarter.

The manufacturing industry in a country is one of the most important fundamentals to increase GDP growth. It promotes innovation, productivity, trade and employment.

It’s no wonder that Mauritius boast a 3% annual growth rate compared to South Africa’s 1%.  It’s no surprise that the Ibrahim Index of African Governance hails Mauritius as the best run country in Africa.

Now we’ve ticked the first priority that South Africa needs to do to reignite growth. Next, we move on to improving investments in overall infrastructure productivity.

As an intro… South Africa invests heavily in infrastructure, but key holes remain in electricity, water, and sanitation. The cash is there, but is South Africa using it wisely to improve its overall infrastructure productivity?

Stick around and you’ll see the importance of improving infrastructure productivity. And how prioritising in South Africa will help its economy grow. I’ll show you all this in the second part of this series.

Knowledge brings you wealth,
 

Joshua Benton
MoneyMorning Editor,
FSPInvest.co.za


The case for making South Africa a globally competitive country again - Part 1
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