No point flogging the dead horse of mining

ANALYSIS of South Africa’s economic slump rightly identifies falling commodity prices as a key external driver of this country’s weak GDP numbers. Our assessment is that policymakers must make peace with the fact that low commodity prices are the new normal — and that this may be a good thing.

In the ’50s, the primary sectors of agriculture and mining jointly contributed around 30% of GDP. Today, that figure is just over 10%. These sectors have been usurped by the relatively hi-tech, high-skilled services sector. In the ’50s, that sector contributed just on a quarter of GDP — a figure that has risen to almost 45% today.

These changing GDP patterns track changes in employment. Since the early ’90s, the number of mining jobs in South Africa has fallen by almost 30%. Yet over the past decade, the number of jobs in the services economy has surged by around 40%. Admittedly, that figure is somewhat skewed by government jobs, but increases in financial services and the like have followed similar-enough trends.

The point is that for several decades, South Africa has been migrating from a primary-sector economy to an increasingly hi-tech, high-skilled, tertiary economy. At times, this natural evolution has been interrupted by external commodity-related events — such as the spike in the gold price in the early ’80s.

During the commodities boom of the 2000s, mining exports as a percentage of total exports rose from 20% to more than 40% — further helped by the weakening rand. At the same time, however, the relative share of other sectors, such as manufacturing, fell sharply.

A report by the Institute of Race Relations showed that South Africa had trade deficits with almost every major foreign economy and that, other than motor-related parts and components, manufactured goods did not feature among South Africa’s major exports.

But in some respects this did not matter as much as it should have, because commodities carried the day — helping to drive growth levels to more than 5% of GDP at times — thereby lulling government leaders into complacency on the need for a complete economic repositioning. However, the current commodity slump has brought South Africa’s lack of manufacturing and export competitiveness into stark relief.

We do not think this commodity slump is purely cyclical. Chinese policy planners appear to have decided to change the nature of growth in their economy: focusing on internal consumers to drive economic expansion. Even if this were not the case, China’s growth is slowing, which would in any event have dampened global commodity prices.

With the unions, initially with strong government support, finally, and probably permanently, bringing an end to the era of low-wage labour on mines — which ushered in a new era of mining mechanisation — South Africa’s mining industry is unlikely to be a growing contributor to employment again.

Certainly, and this is the crux, South African policymakers can never again rely on the mining industry as a consistent driver of exports and government revenues. The foolish blustering of South Africa’s mining minister on Glencore last week was an example of flogging the proverbial dead horse.

Policymakers must make peace with the fact that low commodity prices are the new normal

The good news is that, as the realisation dawns that the horse is dead, the minister and his cabinet colleagues may start focusing their policy efforts elsewhere. Such efforts need to reposition our economy as a competitive manufacturing destination, able to take advantage of growing consumer demand in Africa and as the services hub for the continent to take advantage of the massive flow of capital into Africa.

In this regard, BEE and labour policies will have to be reformed, because they discourage fixed investment. To secure our position as a services hub, policy from education to intellectual property rights and foreign exchange control will have to be reformed.

A successful repositioning will create a more resilient South African economy: it will be feeding off high African growth, which will insulate us from global commodity blow-offs.

Cronjé heads the Institute of Race Relations, a public policy think-tank, and is the author of ‘A Time Traveller’s Guide to Our Next Ten Years’.