South Africa’s Economic Growth Challenge:Convergence or Divergence?

Haroon BhoratDevelopment Policy Research Unit

School of Economics, University of Cape Town

2014 SA Technical and Vocational Education and Training Conference

Tuesday, 18th November 2014

Outline

• The South African Economy: The Genesis of An Emerging Market Growth Trap– Economic Growth Trends In Global Comparison– Savings and Investment Trends – Export Composition and Global Competitiveness: Perpetuating a

Growth Trap

• The Socio-Economic Outcomes of our Growth Trap• Policy Challenges for Growth Convergence: Some Concerns

– Unintended Consequences: A Economic Growth Path Dependency? – Schooling, Skills and Higher Education: Building Linkages– Industrial Policy: From Capital Intensity to Relative Prices and the Informal

Sector

• Conclusions

The Genesis of A Growth Trap:Real GDP Index,1990-2013

Source: IMF World Economic Outlook, 2014

0

500

1000

1500

2000

2500

3000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

GD

P In

dex

Brazil India Indonesia Malaysia Philippines South Africa Turkey

The Genesis of A Growth Trap:Average Annual growth of GDP p.c.:1990-2013

Source: IMF World Economic Outlook, 2014

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

South Africa Brazil Philippines Turkey Indonesia Malaysia Korea India China

CA

GR

, GD

P p

er c

apit

a

The Genesis of A Growth Trap:Gross Domestic Fixed Investment (Percentage of GDP)

0

10

20

30

40

50

60

China India Indonesia Korea Malaysia Philippines Brazil Turkey SouthAfrica

% o

f GD

P

1990 2000 20002010

Source: IMF World Economic Outlook, 2014

The Genesis of A Growth Trap:Gross Domestic Savings (Percentage of GDP)

0

10

20

30

40

50

60

China Malaysia India Indonesia Korea Philippines Brazil South Africa Turkey

% o

f GD

P

1990 2000 2010

Source: IMF World Economic Outlook, 2014

The Genesis of A Growth Trap:Exports as % of GDP

-15

-10

-5

0

5

10

15

20

25

30

Malaysia Indonesia Turkey South Africa Brazil Korea Philippines India China

% o

f GD

P

1990 2000 2010

Source: IMF World Economic Outlook, 2014

The Genesis of A Growth Trap:High-Technology Exports (Percentage of Manufactured Exports)

0

10

20

30

40

50

60

70

80

Brazil China India Indonesia Malaysia Philippines South Africa Turkey Korea, Rep.

2000

2012

Source: World Bank Databank

% o

f Man

ufac

ture

d E

xpor

ts

The Genesis of A Growth Trap:Manufacturing vs. Metals?

Source: World Bank Databank

0

10

20

30

40

50

60

70

80

90

100

Brazil China India Indonesia Malaysia Philippines SouthAfrica

Turkey Korea,Rep.

Manufacturing

Iron Ore & Metals

% o

f Mer

chan

dise

The Genesis of A Growth Trap:Unemployment Rates in the Emerging World

Source: IMF World Economic Outlook, 2014

0

5

10

15

20

25

30

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Une

mpl

oym

ent

Rat

e (%

)

Brazil China India Indonesia Korea Malaysia Philippines South Africa Turkey

The Socio-Economic Outcomes of our Growth TrapReal Growth Incidence Curve for South Africa, 1995-2010

Source: Statistics South Africa (1995 and 2013); Own Calculations using Per Capita Household IncomeNotes: 1. The 1995 population weights are based on the cross-entropy methodology calibrated using ASSA’s

2003 population model. 2. The 2010 population weights are based on the 2001 Population Census.

The Socio-Economic Outcomes of our Growth TrapIncome and Expenditure Inequality: Gini Coefficients, 1995 and 2010

Source: Statistics South Africa (1995 and 2010) and Authors own calculations Notes: The asterisk (*) sign suggests statistically significant at the five percent level

Income Expenditure

1995 2010 1995 2010

Total* 0.663 0.696 0.618 0.660

By Race of Household Head

African* 0.587 0.645 0.548 0.581

Coloured* 0.489 0.588 0.474 0.542

Asian 0.462 0.522 0.445 0.489

White 0.446 0.469 0.397 0.450

By Gender of Household Head

Male* 0.641 0.667 0.606 0.647

Female* 0.647 0.679 0.575 0.619

Policy Challenges for Growth Convergence: An Unintended Political Economy Path Dependency?

Source: S. Mahajan, World Bank, 2012.

Policy Challenges for Growth Convergence: Education: Standardised Test Scores: A Southern Africa Comparison

Source: SACMEQ (III) Notes: SACMEQ III was undertaken from 2005 to 2010, targeted all pupils in Grade 6 level (at the first

week of the eighth month of the school year) who were attending registered mainstream primary school. The desired target population definition for the project was based on a grade-based description and not age based description of pupils.

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100

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300

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500

600

700T

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Swaz

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ReadingMathematics

Policy Challenges for Growth Convergence: Education: Average Grade Test Scores

Source: Development Indicators 2012, The Presidency, based on SACMEQ III project results

0

10

20

30

40

50

60

Mathematics Home Language

Grade 3Grade 6Grade 9

Policy Challenges for Growth Convergence: Education: Production Function Estimates of Schooling

Source: PALMS, 1995-2012. Authors own calculations.Notes: Standard errors in parentheses, ** p<0.05

Variables Coefficient

None -0.024

Primary -0.023

Secondary 0.145

Matric 0.159

Certificate -0.05

Degree 0.104**

Policy Challenges for Growth Convergence: Education: Production Function Estimates of Schooling

• These Learning Deficits are located in the Arts and Sciences.• Tend to Increase Over Time.• Shapes the Economic Growth Opportunities and Outcomes for the Country.• Creates the Market to Reduce Such Deficits.• Shows challenges in the schooling pipeline and FET system in bid to

contribute significantly to long-run economic growth.• TVET System:

– ‘Grade-Hiring Inflation’• The quality of both the schooling as well as the FET college system is

hampering labour market absorption of those qualified with less than a university degree.

Policy Challenges for Growth Convergence: Labour and Capital: Real Wage and Employment Growth

Source: Stats SA, QLFS 2000 - 2012

Policy Challenges for Growth Convergence: Labour and Capital: Annual growth in Capital Investment by Sub-Sector, 1990-2012

Source: Quantec-8.0% -6.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0%

A13411: Medical, dental and veterinary services [93]

A13412: Excluding medical, dental and veterinary services [94-96]

A1123: Other mining [22/24/25/29]

A12152: Basic non-ferrous metals [352]

A1231: Building construction [51]

A12193: Other manufacturing [392-393]

A12141: Glass and glass products [341]

A1221: Electricity, gas and steam [41]

A12123: Printing, publishing and recorded media [324-326]

A12133: Other chemicals and man-made fibers [335-336]

A1343: General government services [99]

A1312: Catering and accommodation services [64]

A1332: Business services [83-88]

A12154: Machinery and equipment [356-359]

A12101: Food [301-304]

A12142: Non-metallic minerals [342]

A12134: Rubber products [337]

A1122: Gold and uranium ore mining [23]

A12113: Leather and leather products [316]

A12153: Metal products excluding machinery [353-355]

A12182: Other transport equipment [384-387]

A12111: Textiles [311-312]

A12112: Wearing apparel [313-315]

Policy Challenges for Growth Convergence: Labour and Capital: Capital & Employment Growth:

Sample of Manufacturing Industries, 1996-2012

Source: PALMS, Quantec

-60%

-40%

-20%

0%

20%

40%

60%

Clothing andTextiles

Metal andmachinery

Coke,petroleum,

chemicals andrubber

Food andBeverage

Vehicles

Capital Employment

Policy Challenges for Growth Convergence: Transport: A Case of the Policy Trap and Growth Path Dependency

Source: National Ports Regulator, 2012

Policy Challenges for Growth Convergence: Transport: A Case of the Policy Trap and Growth Path Dependency

Source: M. Eichhorn (2014) “Building a pro-poor public transport subsidy for urban Cape Town”, Unpublished Masters Thesis. University of CapeTown, Cape Town.

7.950.2

110.05

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20

40

60

80

100

120

Bus Taxi MyCiTi

City of Cape Town: Subsidy per passenger

Policy Challenges for Growth Convergence: A Study in Sectoral Contrasts I

Automotive Sector• Subsidies under Automotive Production Development

Programme (APDP) constitute 20% of total industrial support in South Africa. Highly capital-intensive; very poor job generator.

• Investments of R12 billion since 2000 have resulted in virtually no job growth in vehicle assembly.

• Employment in components production (including tires) has grown by barely over 1% p.a. over the same five-year period.

• Technical, skills and knowledge spillover effects? Repatriation of profits?

Policy Challenges for Growth Convergence: A Study in Sectoral Contrasts II

Clothing and Textile• In 2010/11, the clothing and textiles competitiveness

programme: to encourage production and job creation activities more directly.

• Estimated that 728 enterprises had been supported and approximately 62 350 jobs had been saved, although unclear how many new jobs have been created.

• Productivity incentives conditional on compliance with Minimum Wage regulation and the subsidy is generally taken up by larger firms.

Industrial Policy Revisited

• An industrial strategy focused on K-intensive industries.

• Symptomatic of the policy trap and the growth path dependency?

• Where is employment creation as a target in industrial policy?

• The role of microenterprise growth as a target in industrial policy?

Conclusions

• South Africa is the poster child for the middle income country growth trap analogy

• Can we:– Increase savings and investment?– Diversify exports?– Generate light-manufacturing jobs?

• Some of our Growth Path Dependency Constraints Reinforced by:– Political Economy Issues which lead and shape wage and investment decisions– Human Capital Investment not yet sufficiently positive return to economic

growth– ‘Path-dependent’ decisions in numerous areas related to microeconomic

policy which reinforce our growth trap

Thank you