ISS Today: Electricity matters, but poor human capital is SA’s real problem

First published by ISS Today

Action must be taken to solve South Africa’s electricity crisis, and quickly. That is the conclusion of modelling from the Council for Scientific and Industrial Research (CSIR), which finds that even in the best case scenario, South Africa will experience “sustained and rising load shedding” that inhibits economic growth to at least 2022.

It is disheartening that South Africa faces yet more economic anaemia. A renewed focus on the country’s energy crisis highlights a key barrier to growth, but in the long run, others are just as important and far harder to resolve.

Research by the Institute for Security Studies (ISS) hopes to answer the question: Just what will it take to consistently grow the country’s economy? Using the International Futures (IFs) modelling system, an ISS report will be released on the topic in March. To look forward though, we must first look back.

South Africa has been on an economic divergence pathway since the 1980s. Mainstream analysis is that it is caught in a middle-income trap. This is classically defined as a situation where a country cannot compete with the low cost of labour in low-income countries, but doesn’t have the technological prowess to compete with high-income countries.

But South Africa’s growth struggles may go deeper. Its economic position is the result of the skewed, two-legged structure of its economy: a small, skilled and highly productive (private) sector on the one hand, and a large, poorly skilled and unproductive (unemployed and informal) sector on the other – with a substantive public sector somewhere in between.

This structure is rooted in apartheid, and has been exacerbated by the global financial crisis, poor governance, bad policy and lack of implementation, and state capture. The resulting weak growth pattern has set the country on a pathway of divergence, not only from high-income countries, but also from its middle-income peers.

In 1980, South Africa’s GDP per capita was valued at nearly 40% of that of the United States. This drops to less than 25% in 2044 in the business-as-usual Current Path scenario developed by the ISS’s futures analysis. This is a stark contrast to countries like South Korea and Hong Kong. Even India, with its massive poverty challenges, is catching up with South Africa (Figure 1).