NPC Online | Sector trends and competitiveness

Sector trends and competitiveness

Between 1994 and 2010, growth averaged 3.2 percent. Following a sharp fall in 1998, the country experienced a period of high growth between 2004 and 2008. During this period GDP growth averaged 4 percent a year, reaching a high point of 5.6 percent in 2006. The global crisis that began in 2008 led to a domestic recession in 2009, with a contraction in GDP of 1.7 percent. Among upper middle-income countries, South Africa ranked 22 out of 33 for growth over the period.

In recent years, the strongest growth has been in transport, construction and financial services sectors. Growth in sectors such as agriculture, mining and manufacturing has been sluggish.

Real GDP growth per person in the period 1994 to 2009 was 1.6 percent, but was close to 4 percent a year for the period 2004 to 2008. There has been a steady decline of the proportion of the primary sector (mining, agriculture and fishing), from 15 percent in the 1980s to about 9 percent in 2010. The secondary sector (manufacturing and construction) declined and then stabilised; and there has been steady growth in the tertiary sector (services) from 56 percent of GDP in the 1980s to about 67 percent in 2010. Despite high world prices for commodities, South African mining did not keep pace with the average growth of the economy; and similarly, agriculture has faltered. Manufacturing has declined somewhat although it remains substantial at just under 20 percent of total GDP.

Most value-add occurred in finance, communications, retail and business services. These four sectors accounted for two-thirds of all economic growth between 1994 and 2010. Growth in general and mining-based construction was somewhat faster than in business services and retail; but the sectors themselves remained relatively small.

The South African economy remains highly concentrated, with a small number of large firms dominating important sectors. As a result of this and factors such as import-parity pricing, price mark-ups in South Africa are high by international standards. This is particularly true in intermediate product groups such as beverages, paper and paper products, coke and petroleum products, basic chemicals, basic non-ferrous metals, and ferrous metals. High prices for these products reduce the returns to downstream, more labour-absorbing activities. Lawrence Edwards and Johan Fedderke have both shown similarly high mark-ups in skill intensive services sectors.

Despite some diversification of exports since 1994, South Africa is a basically minerals exporting services economy. High-value mineral resources do have some benefits. But without strategic interventions, these endowments can constrain the development of manufacturing, including through a skewed allocation of capital, and an overvalued and volatile exchange rate.

South Africa is among the minerals exporting economies that can mobilise significant domestic financial resources for investment. But unlike other more successful mineral exporters, South Africa has not invested sufficiently in human development or achieved educational outcomes that are in line with high levels of resource allocation. And its health services are iniquitous and woeful by any standards.

The minerals resource base obscures the true position of the economy and can induce complacency. A minerals economy can carry on for long periods without including the broad population in production processes. For instance, between 1996 and 2006, the global market share of South Africa’s exports fell by volume. However, rising commodity prices have buffered the economy, particularly since 2002, raising South Africa’s global market share by value. The rising terms of trade have been based on volatile commodity prices. In the long term, this undermines the ability to diversify production.

According to the World Economic Forum’s global competiveness report, while South Africa does quite well on legal rights, financial sector management and corporate governance, it does very poorly on education, cost of crime to business and labour regulations. South Africa also performs poorly on pay and productivity, the availability of scientific and engineering skills, and on the quality of education and health systems.

While productivity improved in industries such as glass, footwear, apparel, textiles, food and related products, productivity in industrial chemicals, printing and publishing, transport equipment, furniture and fixtures and other manufacturing industries declined over the period 2001-2010.

South Africa’s hourly manufacturing wage is about five times that of Sri Lanka, India, Philippines and China; about thrice that of Mexico and Malaysia; and higher than those of Russia, Brazil, Turkey and Hungary.