South Africa faces severe structural crisis

South Africa is facing a severe structural crisis, largely due to self-inflicted problems that could cost the country billions a year.

This is according to the Centre for African Management and Markets (CAMM) director, Professor Adrian Saville.

He told Kaya Biz that the first reason for this crisis is that South Africa has been in an “investment drought or an investment boycott” for many years.

“This is contrary to what the industry had anticipated as the industry in the early 2000s, late 1990s, invested significantly in anticipation of ongoing growth and infrastructure spend.”

“The pronouncements that have been made many times in public policy have simply not materialized as government spending has been crowded out and moved from investment spending to consumption spending.”

In addition, the industry has increasingly been subject to “an explicit and legally proven dumping of imports”.

This means the imports arrive in the country at a price point that is lower than the cost of production and transport in their home economy.

This effectively ensures that South African manufacturing firms are not on a level playing field with other markets.

“So you’ve got this double whammy of over-investment in capacity, under-investment in infrastructure and then the headwind of dumped imports,” he said.

Saville said he has noted a long structural decline in South Africa’s competitiveness.

He said this can be measured by just two numbers: The contribution that manufacturing makes to GDP and South Africa’s share of the global export market.

30 years ago, manufacturing made a 25% contribution to GDP. Today, this contribution is only around 12%.

“It really has been hollowed out in a case of comprehensive, persistent deindustrialization.”

In terms of the world export market, South Africa’s share has been in steady decline since the 1970s and 1980s, when gold prices were booming.

“We’ve really done very little to find our way into the world export market,” he said.

“So you’ve got these two hard pieces of evidence, and what it translates into is a steady fall in profitability of the manufacturing sector,” Saville said.

Historically, the sector’s profitability margins sat at 8% and are at 2%, he said.

“It’s just this multi-faceted corrosion, a loss in government revenue, a loss in export revenue, fall in employment. This takes on the shape of a structural crisis that demands address,” he said.

If this crisis remains unaddressed, there is a likelihood that the sector “simply shuts up shop or takes on a different form and competes with the importers by importing”, he warned.

While higher tariffs on dumping might provide some relief for these firms, what’s even more critical is the ability of domestic manufacturers to rely on uninterrupted energy, Saville said.

“You keep turning off the energy grid, and you’re putting domestic manufacturers with one hand behind their back.”

“It’s hard to imagine an environment in which you’ve got energy insecurity as a place that builds a competitive industry.”

Similarly, he said the country’s transport infrastructure and logistics challenges are making it increasingly difficult for the local sector to remain competitive.

In addition, Saville said South Africa should prioritise the ease of doing business in the country – something which has slowly declined over the past decade.

In 2010, South Africa ranked 30th in the world in ease of doing business. Today, the country ranks 80th in the world.

“I don’t have to infer or imply, I’ll say it quite clearly – we have got in our own way in terms of building an inclusive economy,” he said.