Maverick Citizen Op-Ed
There are no shortcuts to real economic change – real structural transformation is needed
Our research has shown that there are cases where unproductive interests have captured the state and limited its capacity to drive change through industrial policies.
This article is based on “Framing Structural Transformation in South Africa and Beyond”, the first chapter of the book, Structural Transformation in South Africa: The Challenges of Inclusive Industrial Development in a Middle-Income Country. It is authored by the book’s editors: Antonio Andreoni, Pamela Mondliwa, Simon Roberts, and Fiona Tregenna.
In 2020, the Covid-19 pandemic inflicted the deepest recession on the global economy yet registered in peace time. The hardest impact of the recession has been on the most vulnerable in society, increasing inequalities and unemployment, and exacerbating long-standing economic problems. Since the onset of the recession, countries have been looking for a rebound in their economies and new pathways to sustained and more inclusive growth. Some have been more successful than others.
The latest figures for South Africa point to a 1.2% expansion of the economy in the second quarter of 2021, the fourth consecutive positive sign of recovery. However, this expansion is significantly lower than what is needed to return to pre-Covid levels.
In fact Covid pushed back the South African economy to its size in 2017.
This effectively means that three years of economic growth have been lost. Bringing back growth is not the only challenge for South Africa; indeed, in the past the country has experienced some phases of growth. The biggest challenge now is to sustain growth over time and deliver real economic change that is inclusive and sustainable.
Policymakers need to move beyond short-term measures and put in place measures that tackle entrenched, historical problems and enable real economic change. Taking up this challenge, a new volume, Structural Transformation in South Africa: The Challenges of Inclusive Industrial Development in a Middle-Income Country (Oxford University Press, 2021, free for download here) points to key elements of a viable path out of these problems. The bottom line, it concludes, is that there is no shortcut to real economic change, but that real structural transformation is required.
How have we got to this point?
Since 1994, South Africa has struggled to sustain an adequate process of structural transformation. The productive sectors of the economy have seen limited upgrading and diversification, which are prerequisites for this. As a result, the growth in domestic value addition, productivity and employment – especially in the manufacturing industries – has been limited.
We do the same things, and we do not innovate enough in the making. Without such changes in the productive sectors of the economy, opportunities for broader social and institutional transformation remain limited. Social mobility and inclusiveness via better and more jobs cannot materialise.
This is despite the fact that South Africa has, in recent years, looked to industrial policy as an instrument for driving structural transformation.
But while there have been positive developments in specific sectors, overall the industrial structure has changed relatively little since 1994. Fixed investment has remained low, and there has been some premature deindustrialisation. Higher levels of investment are essential for building production and skills across sectors in South Africa. However, we have not experienced the hoped-for broad-based growth which would reverse the legacy of apartheid policies that had focused the economy on a narrow mining and heavy industry base.
The extensive trade liberalisation and international integration starting in the 1990s increased imports and exports, with imports making up around one-third or more of domestic demand for manufactured goods. Overall, while some sectors had lower imports and despite some change around the growth of auto exports, the general picture is one of failure to significantly diversify the country’s export profile – which still sees minerals and resource-based industries constituting a high percentage of exports. Trade liberalisation has contributed to the weakening of South African manufacturing, especially in labour-intensive industries that are directly important for employment.
South Africa’s failure to diversify is evident in two ways.
First, traditional resource-based sectors are mainly responsible for industry output growth in the economy. Second, higher levels of investment in the manufacturing sector have continued to be concentrated in these sectors rather than shifting to more diversified manufacturing activities.
Despite some areas of relative success, overall growth and upgrading in industries have been constrained by low levels of investment. Firms have struggled to build their productive capabilities, diversify their production activities and develop their domestic supply chains. Given this weakening industrial base, the engagements with global value chains (GVCs) and the emerging technologies of the so-called Fourth Industrial Revolution have been limited, and have generally not delivered the desired outcomes. The imperatives of greater inclusion and environmental sustainability are major cross-cutting challenges linked to the overall challenge of structural transformation.
Where do we go from here?
Because real economic transformation is multifaceted, an effective response needs to be holistic and requires purposive and coordinated industrial policies. In today’s globalised economy, South Africa needs to integrate into global value chains in a strategic way.
This means using global market opportunities to build, upgrade and diversify local capabilities among its productive organisations. Industrial policy is, however, doomed to fail without a strong state and all key stakeholders uniting behind a common vision of achieving inclusive growth. This is the direction of growth that the state should pursue.
One of the key ingredients to effecting real economic transformation is starting with what is happening at the level of the firm – exploring how to upgrade technological and organisational capabilities, and translating innovation into production. For industrial policy to be effective, policies must reflect an understanding of what is happening within firms and with their workers – their capabilities and levels of learning. But to also understand capabilities can only develop on the shop floor if the right amount of cooperation and competition are in place.
A second and related point is the need to factor into policies the impact of the rapid pace of technological changes globally, as well as the impact of climate change on industrialisation. In terms of technological change, while this is not a new phenomenon, the ongoing development of wide-scale digitalisation applications is accelerating the pace of change.
The challenge of climate change is to balance the need to reduce carbon emissions with the imperatives of industrialisation – and this needs to be at the core of industrial policy.
A third area to consider is understanding the power dynamics within global value chains: power relations within these chains often imply that the bulk of the value is captured by lead firms that can leverage a combination of direct and diffuse forms of power transmission. Firms in developing economies tend to be involved in low-value areas, so the returns are limited. Upgrading within value chains is crucial, as is the dual “linking-up” with global value chains while “linking back” with local production systems.
Another key element to effecting successful structural transformation is a proactive industrial policy – the main policy process through which the state sets the terms of the social contract underpinning structural transformation. A coherent industrial policy should address the abovementioned issues head-on, in ways that support local capabilities development.
Real economic change is political
The success of industrial policy can be undermined by the fragmentation of interests and power distribution across the economy. The political economy of structural transformation is therefore about not only understanding how the state can drive and give directionality to the process of structural transformation, but also about how the state is formed and shaped by emerging interests, conflicting claims and changes in the distribution of organised power.
Our research has shown that there are cases in which unproductive interests have captured the state and limited its capacity to drive change through industrial policies.
While South Africa faces many challenges – with some seeming insurmountable at present – papering over the cracks in the short term is not going to bring about the desired results. If the political will is there, coupled with the commitment of key stakeholders to really dig deep to understand the needs of their sectors and what is required to move to higher productivity activities, the country could escape premature deindustrialisation and its negative outcomes. DM/MC