OP-ED

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

By Alanna Markle and Jakkie Cilliers ISS TODAY 4 February 2020
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(Photo: Adobestock)

Poor health and education systems are the main culprits behind South Africa’s weak long-term growth outlook. 

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).

Figure 1: Economic convergence in SA, select Asian countries and average for other upper-middle-income countries (excluding the outlier China)

Source: IFs v 7.45, initialised using historical data from: World Bank, World Development Indicators

 

So where is South Africa going wrong? Beyond electricity shortages, bad policy and an ideological antipathy towards private sector-led growth efforts, our analysis reveals that poor human capital is by far the largest structural drag on South Africa’s economy when compared to its peers.

This is an unexpected conclusion in a country that also suffers from a lack of investment and numerous self-inflicted constraints. The lingering effects of the HIV/Aids epidemic plays a role, but the impact of apartheid, subsequent implementation challenges and weak health and education systems appear to be the main culprits.

The most telling metric in education is test scores – a proxy for quality. South Africa’s scores on globally standardised tests put it at the bottom of the list among upper-middle-income countries (Figure 2).

Figure 2: Education quality in SA and other upper-middle-income countries, estimate of average test scores in secondary school, 2019

Source: IFs v 7.45, initialised using historical data from: Altinok, Nadir; Angrist, Noam; Patrinos, Harry Anthony. 2018. Global Data Set on Education Quality (1965-2015). Policy Research Working Paper; No. 8314. World Bank, Washington, DC. © World Bank. https://openknowledge.worldbank.org/handle/10986/29281 Licence: CC BY 3.0 IGO

 

Looking at health, South Africa’s mortality profile more closely resembles a low-income country, with its high concentration of deaths from communicable diseases and injuries. Many of these could be prevented through a well-functioning universal healthcare system. However, public health and safety concerns such as high levels of violence and malnutrition, particularly among young children, must also be addressed.

In the short term, the government will be right to focus on resolving the crisis in electricity. It must also continue pushing to reform state-owned enterprises including restructuring Eskom and restoring investor confidence.

In the medium term, it must work more effectively with the private sector (since the public sector is highly indebted and inefficient), and enhance innovation by investing in research and development as well as information and communications technology infrastructure.

There is no quick fix, and immediate priorities will shift over time. But no crisis should fully overshadow South Africa’s fundamental human development needs. So, while the country stabilises policy, roots out corruption and restructures state-owned enterprises, it also needs to fix national health and basic education, pursue early childhood development, and invest in vocational training.

None of this is possible without much more rapid economic growth. And that, in turn, is only possible through public sector reform and a partnership between the public and private sector. Even then, this is going to be a generational challenge. DM

Alanna Markle is a researcher and Jakkie Cilliers, Head, African Futures and Innovation, ISS Pretoria.

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