Defend Truth


Why can’t South Africa grow? Perhaps because we no longer see value in making things


Dr Michael Power recently retired from Ninety One where he was the Global Strategist for most of the past two decades. He remains a Consultant to Ninety One. Prior to Ninety One, he had worked in London, South Africa and Kenya for Anglo-American, Rothschild, HSBC Equator and Barings. He has a PhD from UCT, a master’s from the Fletcher School at Tufts and a bachelor’s from Oxford. His primary focus today is doing research into the emerging field of geo-economics focussing in particular on the global implications of the return of the economic centre of gravity to a China-centred Asia.

South Africa needs to create a manufacturing-for-export base. We are not Australia, the Lucky Country, which annually exports over three times the value of commodities we do – including over 50% of the world’s lithium – with less than half our population.

“Real GDP contracted by a marginal -0.1% in the first quarter of 2024” – Stats SA, 4 June 2024

“The official unemployment rate was 32.9% in the first quarter of 2024… increasing by 0.8% from 32.1% in Q4 2023 to 32.9% in Q1 2024” – Stats SA, 14 May 2024

I recently wrote an opinion piece for Daily Maverick, titled Deciphering the Rosetta Stone of world finance — it’s about to become a lot more disorderly”.

In it, I mapped out how the world economy is gravitating towards being made up of two broad economic blocs: the Ecosystem of Capital and the Ecosystem of Trade.

The West inhabits the Ecosystem of Capital: this atmosphere is US-centric, US dollar-based and dominated by US capital markets: US equities accounted for 71% of the MSCI World Index while US bonds were 42% of the FTSE World Government Bond Index, both as of 31 May 2024.

Much of the rest breathes the other atmosphere, the Ecosystem of Trade: this is increasingly geared towards Asia, and, yes, within Asia, towards China. 

Ostensibly it is still US dollar-based but one where value is more driven not by the US dollar at market rates but at purchasing power parity (PPP).

More precisely, the Ecosystem of Trade is geared off the lesser-known sibling of PPP: production power parity (PrPP). 

PrPP is supply-oriented: it instead compares the production costs across countries and, historically, the most important cost has been the minimum wage of a worker.

By contrast, PPP is demand and so consumption-oriented: famously, The Economist uses it to compare the price of Big Macs across countries. 

If parity (“100”) in the PPP Big Mac Index is the cost of a burger in New York, parity in the PrPP index is the minimum wage of a worker in Shenzhen. And, even within China, there are many of its inland provinces which can claim their labour costs to be far less than Shenzhen’s 100.

But for China overall, this wage input is declining in significance in the wake of the country comprehensively upgrading its industrial profile towards higher value products.

There are plenty of products – increasingly those exported by Asean and the Indian subcontinent as well as Mexico – where labour costs are still a key determinant of a nation’s position on the ladder of manufacturing value-added and so most likely the supply price of exported products.

Today’s economic standing of a nation on the PrPP ladder is determined by the level of discount of their production cost structure to that of China. The lower on the PrPP ladder they are, the more competitive they are likely to be as product-exporting nations. This suggests that labour costs still make up a significant proportion of their overall production costs.

Let me be blunt. By not understanding the role played by PrPP in shaping today’s global economy, one cannot grasp how the totality of today’s global economy works and, what’s more, how it is evolving.

My writing focuses on the world of geoeconomics more than geopolitics. But there is a heavy overlap between the countries of the West with those of the Ecosystem of Capital and the Global South with those of the Ecosystem of Trade.

Heavy overlap, yes… but there are exceptions. South Africa is one. 

Economically, we still live largely within the Ecosystem of Capital. Yet politically we are becoming a member of the Global South. By affixing ourselves to the Ecosystem of Capital, South Africa is trapped between these two worlds.

The net result is that we are saddled with very low GDP growth: since 2000, we have even recorded slower growth than most of the snail-paced advanced economies of the West. 

Nations preferring membership in the Ecosystem of Trade – mainly Asian plus Mexico, with Ethiopia and Kenya – generally register noticeably higher levels of GDP growth.

There is an accounting analogy that helps describe the differences between these two ecosystems. 

Those living in – and especially those calling the shots in – the Ecosystem of Capital tend to prioritise their national balance sheets: the annual growth of personal wealth is their primary focus. 

For the US, the S&P 500 index has an especially hypnotic allure. 

By contrast, those inhabiting the Ecosystem of Trade are more geared to their national income statements: the growth of annual “revenue” – especially that earned from exports – is a more important target.

I would argue that for an emerging market, prioritising growing trade revenue is more likely to promote GDP growth than growing the wealth captured by the national balance sheet. However, as East Asia shows, the latter is eventually the consequence of the former. 

But putting the consumption horse before the production horse, as South Africa does today, is the back-to-front way to achieve – on a sustainable basis – GDP growth and employment creation.   

Of course, those who champion the US’ economic performance will no doubt cite the fact that both the US’ “balance sheet” and its “income statement” have recently grown strongly. Wealth has grown as exhibited by the market capitalisation of the S&P 500. And GDP growth has been underpinned by strong employment gains post-Covid.

As the obsequious Mr Salter said to his overbearing employer, the newspaper magnate in Evelyn Waugh’s classic novel, Scoop: “Up to a point, Lord Copper.” In other words, Mr Salter would not agree.

Neither do I. Regarding the health of the US economy, I disagree with the Bloomberg and CNBC narrative that the US is in robust good health. 

It runs an unprecedented 8.0%+ budget deficit to GDP in peacetime and with near full employment. If the US were not the US, the IMF would have it on an austerity diet so severe that even Milei’s Argentina would cry “absolutamente no!”

But the US has its bond market and its currency to “thank” for creating the optical illusion of robustness. This is because the US uses both to paper over its internal deficit (a $2.1-trillion budget deficit in 2023, 43% of all such deficits generated worldwide) and its external deficit (an $820-billion current account deficit in 2023, 62% of all such deficits generated worldwide).

The detritus of these twin deficits is that, internally, US federal debt is fast approaching $35-trillion, having been $8-trillion in 2008. Externally, its net international investment position (what the US owns abroad less what foreigners own in the US) is approaching a deficit of $20-trillion, having been $1.2-trillion in 2008.

To continue the balance sheet analogy, the US asset base is being pummelled by large moves in its constituent parts. On the minus side, internal and external national debts (yes, there is some double counting here) have soared. On the plus side, so too has the market capitalisation of the S&P 500: from $12.5-trillion in 2002 to $44-trillion today.

Likewise, the value of US property assets has increased. The catch to the latter “plus” statistic is that it is far more to the account of the few on Wall Street, while the former “minus” debt growth is overwhelmingly to the account of the many on Main Street: each citizen in the US is responsible for national debt of $102,000, each taxpayer $268,000.

This Wall Street/Main Street dichotomy gives you an insight into the fractured state of the ever more plutocratic US economy and its gerontocratic politics. 

To ravage the “E pluribus unum” motto of the United States, the “pluribus” – the many – are not doing nearly so well as the “unum” – or more precisely, the lucky few.

And one likely consequence of this? Wait for the presidential election outcome this November.

What does this mean for South Africa? In many ways, we emulate the United States model, and our ruling elites – both business and government – often want it that way too. 

We tend to value the wealth of our national balance sheet over our national income (hence our fixation with the value of the rand.)

Our income inequality, as measured by the Gini coefficient, is the worst in the world. (Unsurprisingly the US’ is the worst in the West.) 

We no longer see value in making things: if we need something, increasingly we import it. And to pay for these imports, we extract commodities from the ground and export them. 

The US is increasingly emulating South Africa in this regard: three of their top five export categories in 2023 were oil-related. Whither/wither the US’ 2018 export champion, Boeing?

This bias against manufacturing is bad enough for the US. As Vaclav Smil, Bill Gates’ favourite author, warns: “Advanced economies must still make things. Take away manufacturing and you’re left with… SELFIES.”

For South Africa – with our 61 million population and 33% unemployment rate – such a consumption-before-production bias is not just bad, it is catastrophic.

Our external account used to be like the US’, with deficits on both the trade and the current accounts. In 2006, our current account deficit to GDP troughed at -7.2%; the US’ was then -6.0%.  Both nations required the kindness of foreign strangers to fund these deficits, mostly via bond market inflows.

Both of us still run current account deficits post-Covid: South Africa -1.6% to GDP in 2023; the US -3%. But there is now a fundamental difference between the US and SA economies: our consumer economy has been crushed and remains on its back, hence our near-zero GDP growth. 

Our predilection for manufactured imports has been dramatically curtailed. This means we now run a trade surplus.

Not so the US: their 2023 trade deficit was $773-billion, 94% of their current account deficit of $818-billion. Unlike SA, the US can profligately consume foreign manufactures to its heart’s desire and settle its overseas bills with a combination of printed US dollars and issued US Treasuries, the Monopoly dollars of Never-Neverland. Such is the exorbitant privilege arising from owning the world’s reserve currency.

Without the instruments of this exorbitant privilege, South Africa cannot behave like the US. But then, as an emerging market, neither should we try to. We cannot be – to paraphrase Napoleon’s quip about England – merely a nation of shopkeepers.

In the much-ballyhooed US jobs report on 7 May 2024, less than 3% of the 272,000 jobs created were in production-oriented manufacturing. In more consumption-oriented sectors, 31% were in health, with 16% in government and 16% in hospitality. 

Walmart is now the largest employer in 22 US states. Only one state is represented by a non-service company – one that still “makes something: Washington State by Boeing. Enough said!

The US seemingly prizes consumption above all. Result? Consumption makes up over 70% of the US’ GDP. And while the US owns the world’s reserve currency, they can get away with what is a form of financial fraud: paying their excess import bill with IOUs that will never be redeemed, just rolled over forever.

Hardly surprisingly, US-based economists spend most of their time talking about demand-side considerations; the supply side that involves Smil’s preference for making things is rarely mentioned.

To many Americans, savings are but wasted dollars waiting to be consumed: in 2023, the US’ net domestic saving rate was -0.3% of national income.  

This -0.3% number underpins the wider meaning of a current account deficit: by definition, it means a nation is savings deficient. 

For the US, this deficiency is chronic. With a stable dollar last year, the US sucked in over 60% of the world’s globally mobile savings on their capital account to fund their current account and savings deficit: 92% of 2023’s global inflows went into US debt markets, 8% into equities.

Enough of the US. 

The US’ example would not be a good economic model for anyone… if it were not facilitated by the Almighty Dollar. South Africa, a resource-rich emerging market, but more importantly a country with 61 million people with a third of its workforce unemployed, needs to look elsewhere for inspiration.

And if economic success is a drawcard, Asia offers that inspiration. Yes, some cite the export powerhouses of China, Korea, Taiwan and Singapore. But their economic structure is far removed from South Africa’s.

It is far more instructive to examine the examples of more resource-rich Asian countries like Malaysia and Indonesia. Both have begun “making things beyond their traditional exports of oil, minerals, palm oil, rubber and timber.

It is my strong conviction that South Africa needs to create a manufacturing-for-export base. We are not Australia, the Lucky Country, which annually exports over three times the value of commodities we do – including over 50% of the world’s lithium – with less than half our population.

We need to address our balance of payments constraint: the consumption-led GDP growth we have typically pursued since 1994 blows out our external deficit by boosting imports. The resultant balance of payments crunch sparks a currency crisis prompting sharply higher interest rates. 

This then stalls GDP growth.

Instead, we need to boost the export of manufactures to escape this straitjacket. And production-led GDP growth will help achieve South Africa’s Holy Grail: reducing our chronic unemployment.

So let me ask a series of questions that I will answer in my next opinion for Daily Maverick (the astute reader will already know my answers).

  • Given our production cost structure, where are we on the ladder of value-addedness in the realm of manufacturing exports globally?
  • If our production costs are too high for us to be competitive given the goods we can make, what do we do to address this constraint?
  • Do we promote lower wages? And/or make our exchange rate more competitive? Do we champion tax-free export processing zones (including no income tax on workers)?
  • What can government do to facilitate these changes?
  • Should the Treasury mandate the South African Reserve Bank to reformulate its monetary policy away from only inflation targeting to assist in this transformation?
  • Does South African business have a role to play here… or will the drivers of this redirection of the SA economy mostly be foreign investors?

My answers will be uncomfortable to almost every section of the South African body politic… from the DA on the right to the EFF on the left. Much of the body economic will not like them either. But the demand-biased structure of today’s South African economy needs to be fundamentally recentred on production.

The vested interests of today will push back against my prescriptions. 

And to underline that I intend to take no prisoners among this group of naysayers, perhaps my greatest opponents will be found in the sector where I made my career: finance. 

They will not like the consequences of moving South Africa from the Ecosystem of Capital to the Ecosystem of Trade.

But then, South Africa cannot go on like this:

“Real GDP contracted by a marginal -0.1% in the first quarter of 2024” – Stats SA, 4 June 2024

“The official unemployment rate was 32.9% in the first quarter of 2024… increasing by 0.8% from 32.1% in Q4 2023 to 32.9% in Q1 2024” – Stats SA, 14 May 2024. DM



Comments - Please in order to comment.

  • Robert de Vos says:

    I could write a paper in reply, but it would be too long for this space. One cannot compare Apples with Microsofts. Nor SA with the USA or China.
    We have our weaknesses and our strengths. Production is not one of them. Tourism is.
    Work with what we’re born with.

    • MICHAEL POWER says:

      Sadly, we are not the Seychelles (population: 108,000) but South Africa with 61,000,000. Opening this magnificent country to the outside world is not enough. Look at Vietnam and Indonesia, both wonderful places to visit…but with big populations too. So they must do a whole lot besides tourism.

    • James Baxter says:

      I think that manufacturing is no longer enough for a country to upgrade it’s standard of living and whatnot. Nowadays every country is trying to manufacture and lower it’s labour costs to attract FDI. It’s a race to the bottom in some respect. We need to think outside the box, explore new ways

      • MICHAEL POWER says:

        See my next article. Other nations are pursuing manufacturing so why cannot South Africa? We have to compete and yes the essence of competing is nearly always being price competitive. Hard to think of new ways that create LOTS of jobs and do not export their output…just import more.

    • James Baxter says:

      I think that manufacturing is no longer enough for a country to upgrade it’s standard of living and whatnot. Nowadays every country is trying to manufacture and lower it’s labour costs to attract FDI. It’s a race to the bottom in some respect. We need to think outside the box, explore new ways

  • Dave Callaghan says:

    I’ve long been frustrated by SA’s retarded attitude to manufacturing. Long before 1994, and nothing has changed. We are severely commodities biased to our detriment. Probably from our colonial history. Let the Rand find its own value and empower and protect manufacturing for job creation and growth!

  • Buddy Wells says:

    The author is correct except that he ignores that our current Account is deficit most years because net primarily income outflow (interest, dividends & profit) dwarves our trade surplus. And bank & telecoms oligopoly profit damages our PrPP & current account balance more than our low minimum wage.

    • MICHAEL POWER says:

      You are 100% right, Buddy. I never meant to omit merely to say our trade account is back in surplus having spent most of the past two decades in deficit. Our ‘invisible’ account is nearly always in deficit. So we must grow our trade surplus to the level where it outweighs those invisible deficits.

  • Johan Buys says:

    Manufacturing involves capex and long horizons. Combine our high interest rates & country risk : project feasibility studies cannot beat the required 22% IRR. Our rate policy will not reduce inflation, it will increase it. Rate policy protects the ZAR, which hurts export competitiveness.

    • James Baxter says:

      U r very intelligent. I have a solution to unemployment where we can reduce unemployment rate by 99%. I read a book by a Chinese guy, in it he talks about proto industrialisation. A bottom up approach to industrialisation, I need your help in bringing this industrialisation of SA as outlined in book

    • MICHAEL POWER says:

      My next article will address EPZs, a successful model in Ethiopia, Kenya and many Asian nations. Once you take the ventures ‘outside the SA monetary environment’, you bring down the required IRR, Stay within if and, as you say, it is very hard to see your way clear to making a profit.

  • James Baxter says:

    I am very thankful for such a great article. But I believe that manufacturing is no longer enough to get us to a better place. We need to look at exploring financial sector, especially as a quick fix to industrialisation. The financial sector is global, so there is scale economy in this sector

    • MICHAEL POWER says:

      I do not think manufacturing ALONE does it. Like the English-speaking Philippines and India, we need to explore sectors like business process outsourcing. In fact, it is already starting around Cape Town. Plus build on Amazon’s big ‘cloud services’ investment here too… Both are ‘export-earners’.

  • Deon de Wet-Roos says:

    Thank you for a very interesting article. However, I think the so-called US-centric zone and trade zone (China) oversimplify things. China remains a communist country. It will use any means including economics to gain dominance. Remember Mao’s little red book – promote global socialism.

    • MICHAEL POWER says:

      I have previously written for DM to explain how the Asian Trade Zone is spreading beyond China…to ABC: Asia Beyond China. This is essentially South East Asia and the Indian subcintinent. I am not convinced China will “use any means…to gain dominance”. Such behaviour is rare in Chinese history.

  • Deon de Wet-Roos says:

    China’s use of economic advantages is a strategy aimed at promoting its influence and version of communism globally. Through Initiatives like the Belt and Road, trade partnerships, financial aid and technology exports, China seeks to build a network of economic and political dependencies.

    • MICHAEL POWER says:

      I don’t disagree. This is what Colonial Europe did. The US too. But thus far China’s approach has been remarkably peaceful… even towards the touchy issue of Taiwan… The same could not be said for the Europeans and Americans. Korea, Vietnam, Iran, Iraq, Afghanistan? Not a peaceful record…

      • Deon de Wet-Roos says:

        Thank you for the personal reply. Chinese “colonialization” is extractive, exploits host economies and leads to social injustices and exploitation. It takes away the incentive of own production (utility) in favour of importing Chinese labour, equipment and expertise. Nothing new indeed.

        • MICHAEL POWER says:

          China had good teachers for this model: SA’s economy was founded on mainly UK capital in its extractive industries. I call what China did initially in Africa ‘China 1.0’. Pushback from Angola and Zambia has led to China 2.0… a far more sensitive and subtle engangement…

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