No point flogging the dead horse of mining – The Sunday Times, 15 August 2015

Aug 18, 2015
Anlaysis of South Africa's economic slump rightly identifies falling commodity prices as a key external driver of this country's weak GDP numbers.

By Frans Cronjé

Analysis of South Africa‘s current economic slump rightly identifies falling commodity prices as a key external driver of South Africa‘s weak GDP numbers. Our assessment is that South Africa‘s policy makers must make peace with the fact that low commodity prices are the new normal, and that this may be a good thing.

In the 1950s, the primary sectors of agriculture and mining jointly contributed around 30% of GDP. Today that figure is just over 10%. These sectors have been usurped by the relatively high-tech, high-skilled, services sector. In the 1950s that sector contributed just on a quarter of GDP — a figure that has risen to almost 45% today.

These changing GDP patterns track changes in employment. Since the early 1990s, the number of mining jobs in South Africa has fallen by almost 30%. Yet, over the past decade, the number of jobs in the services economy has surged by around 40%. Admittedly that figure is somewhat skewed by government jobs, but increases in financial services and the like have followed similar enough trends.

South Africa‘s declining relative share of global gold production, corroborate what we see in the GDP and jobs numbers above.

The point is that over a number of decades South Africa has been migrating away from a primary-sector orientated economy to becoming an increasingly high-tech, high-skilled, tertiary economy. At times this natural evolution has been interrupted by external commodity related events such as the gold price spike of the early 1980s.

One of those events was the commodity boom period of the 2000s. Over that period mining exports as a percentage of total exports rose from 20% to over 40% — further helped by the weakening Rand. At the same time, the relative share of other sectors, such as manufacturing fell sharply.

A recent IRR report, for example, showed that South Africa demonstrated trade deficits with almost every major foreign economy and that, other than motor-related parts and components, manufactured goods did not feature among South Africa‘s major exports.

But in some respects this did not matter as much as it should have as commodities carried the day – helping to drive growth levels to over 5% of GDP at times  and thereby lulling government leaders into complacency on the need for a complete economic repositioning. The current commodity slump has brought South Africa‘s lack of manufacturing and export competitiveness into stark relief.

We do not think the current commodity slump is purely cyclical. Chinese policy planners appear to have taken a firm decision to change the nature of growth in their economy to a more internally consumer-driven economic expansion. Even if this were not the case, Chinese growth is slowing sharply which would in any event have dampened global commodity prices.

As these external forces began to emerge unions, with strong initial government support, were finally, and probably permanently, bringing an end to the era of low-wage labour on S mines ushering a new era of mining mechanisation. Hence South Africa‘s mining industry is unlikely to again be a growing contributor to employment.

Certainly, and this is the crux, South African policy makers can never again rely on the mining industry as a consistent driver of exports and government revenues. The foolish blustering of South Africa‘s mining minister on Glencore last week was an example of beating the proverbial dead horse.

The good news is that, as the realisation dawns that the horse is not getting up again, in time the minister and his Cabinet colleagues may start focussing their policy efforts elsewhere. Such efforts need to reposition our economy as a highly competitive manufacturing destination, able to take advantage of growing consumer demand in Africa and as the services hub for the continent to take advantage of the massive capital flows into Africa.

As regards the first goal BEE, affirmative action, and labour policies will have to be reformed as they discourage fixed investment. To secure our position as a services hub, policy in areas ranging from education to migration, intellectual property rights, and foreign exchange control will have to be reformed.

A successful repositioning will generate a far more resilient South African economy, feeding off high African growth , and therefore well insulated against global equity blow-offs.

* Cronje heads public policy think tank IRR and is the Author of A Time Traveller‘s Guide to Our Next Ten Years.

Read the article in The Sunday Times here.

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