Wanted: big thinking for services sector
Speaking in Johannesburg recently at a symposium on inclusive growth, Nobel prize-winning economist Joseph Stiglitz was emphatic that services were the growth sector of the future, not manufacturing, and that this was the case here too.
Globally, manufacturing’s share of the economy has fallen from 19% to 15% since 2000. In the US, it is even lower, with manufacturing now only 8% to 9% of GDP and employment, but in sub-Saharan Africa, which experienced premature de-industrialisation, manufacturing’s share has been constant at about 11% over the same period.
Stiglitz was preoccupied primarily with the horror of the US under Donald Trump, not with the idiosyncrasies of SA’s own economy, and he didn’t put any useful details to his service-sector pitch.
But the clear message to sub-Saharan Africa, and to SA, was that we cannot look to East Asian-type export manufacturing-led growth as a model. The region must find a new growth model led by the services sectors, although in Africa, Stiglitz reckons, agriculture also has enormous potential and there is still some scope for manufacturing.
His comments are part of a debate about the longer-term structural rather than the shorter-term cyclical drivers of the economy.
Even so, looked at through the lens of Stiglitz’s comments, SA’s latest economic growth figures are sobering.
On one level, the numbers look quite good. Third-quarter growth came in at 2%, higher than the market’s expectation of 1.7%. Comparing the first nine months of 2017 with the same period in 2016 — generally a good predictor of the outcome for the full-year — the economy grew 1%. Sadly, our standards are low these days, but it’s better than many economists expected for 2017 and indicates that the growth rate at least won’t be worse than the Treasury’s revised estimate of 0.7%.
Agriculture’s share of SA’s economy remains tiny at 3%, but the sector’s 44% thirdquarter jump was the big driver of growth, with maize and vegetables to the rescue as the sector continues to go from drought famine to bumper crop feast. Even if the bumper crops continue in 2018, the high base means it won’t be able to replicate 2017’s performance.
But the latest quarterly figures show mining continues to rebound too, and even manufacturing seems to be picking up.
There is some good news too on investment spending, which grew in the third quarter after shrinking for the previous seven quarters, although it is still slightly negative for the year to date. And third-quarter growth in consumer spending is showing the typical early signs of a more sustained recovery, with strong growth in spending on durable goods, says Old Mutual MultiManagers strategist Dave Mohr.
However, if one strips out the three highly volatile sectors that drove growth in the latest quarter, the picture is more sobering. Exclude the three big drivers — agriculture, mining and manufacturing — and the growth rate falls to just 0.1% for the quarter. Even more sobering is that the services sector grew at just 0.3%.
The services sector makes up close to two-thirds of SA’s economy and of employment and has long been the more stable core of the economy, driving growth in recent years as agriculture, mining and manufacturing crashed.
Part of the problem in 2017 has been the government, which is a big chunk of the services sector and the economy and has been contracting for the past three quarters. There’s good news in that bad news, which reflects at least that the slowdown in staffing costs and fiscal consolidation promised by the government is happening.
But other key parts of the services sector, such as finance, aren’t shooting out the lights either. And it’s far from clear where the services-led growth model Stiglitz has in mind is going to come from.
Economists used to see manufacturing as key to the “tradables” sectors that drove export-led growth and boosted the fortunes of other sectors such as services. In modern economies, services too have become much more tradable across borders and have the potential to generate business and jobs for other sectors.
When policy makers talk services exports in SA, tourism is usually the one that’s mentioned. It is an important sector for domestic growth and jobs, as well as for exports.
The World Travel and Tourism Council estimates visitors to the country generated 9.9% of total exports in 2016, with the tourism sector contributing 3% of GDP and almost 10% of employment.
There’s scope for SA to do a lot more on tourism. But there’s scope to do a lot more on other services too, expanding what SA is already doing, often quietly, in areas such as selling technology or managing hotels and other facilities on contract in Africa and beyond, as well as in medical tourism or higher education, for example.
But all of that would require a change of mind-set and a more innovative approach that’s tended to be missing in SA policy making, with its “industrial policy” rhetoric and its harking back to the great days of heavy industrial manufacturing. It would also require a government that was serious about growth. That may have to wait a while.
PART OF THE PROBLEM HAS BEEN THE GOVERNMENT, WHICH IS A BIG CHUNK OF THE SERVICES SECTOR AND HAS BEEN CONTRACTING