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South Africa needs to industrialise to reach NDP targets

31 July 2014 Lullu Krugel, KPMG

Without adequate policy frameworks and planning aimed at adapting the South African economy from ‘consumption based’ to ‘industrialised’, the country will continue on this path of slower growth – rather than improving inclusive economic growth towards the targets laid out in the National Development Plan (NDP) for 2030.

According to Lullu Krugel, senior economist for KPMG South Africa, “The South African economy is feeling the impact of the increased cost of borrowing with consumers and the government likely to have to pay back higher levels of debt at higher interest rates. Even though the Reserve Bank recently increased the repo rate by 25 basis points, while we may not see an increase in interest rates for the remainder of the year, unless inflation comes back in line we will likely see an upswing in inflation in future.”

To put this into perspective, the GDP growth target laid out in the NDP is 5.5%, which while it may seem an ambitious target, it is in fact an attainable one, if considering the country’s output potential is closer to 6%. Yet GDP growth for 2013 was 3.3% and cautious analysts expect this growth may even drop to around 2% - if not below - for 2014. This essentially means that the country is significantly underperforming and as a result, regressing in its economic growth – yet there is still huge potential to turn this around.

Krugel continues: “Firstly, as a country we need to change our mindset from being a gateway into Africa and rather focus more on what will continue to market South Africa as a chief investment destination. Secondly, and closely related to this, we need rigorous policies and planning centred on transforming the economy from a consumption based one, to one that is focused on industrialisation - as growth in manufacturing industries will be key to achieving improved economic growth and transformation in South Africa. Sustained and inclusive growth is dependent on an economy’s ability to diversify. As a keen example, we can look to the U.S who are reverting back to principles of industrialisation to boost their own economy post the global credit crisis.”

However, unbalanced infrastructure, inadequately educated workforces and restrictive labour regulation remain crucial barriers to South Africa’s competitiveness as a global player in manufacturing.

“In recognition of this, Government has made a significant and commendable commitment to invest R847 billion over the next three years in infrastructure development in South Africa,” adds Darrin Green, Chief Operating Officer, WSP Africa, Civil Engineering. “Among the notable projects that will benefit from this commitment are those being driven by Transnet – the plans and projects to increase both rail and port capacity within the country. The additional capacity from these projects will be a significant logistical enabler to export capacity and growth for the South African economy. However, what we do need is investment by public and private sector alike in manufacturing plants to increase the country’s capacity to process raw materials for export.”

Even with infrastructure in place, labour still presents a significant amount of complexity to South Africa’s potential outputs. Krugel adds: “In terms of the cost of doing business, South Africa is currently the most expensive in manufacturing labour. Though what really makes this a ‘hard-sell’ is the inefficiency or unproductively of workforces, which may be associated to inadequate education and/or labour unrest.”

Nicholas de Canha, CEO of Imperial Fleet Management indicates that in a neo-classic view of the economy there wouldn’t be any unemployment as wages would drop and people would be willing to work for less. “This is however not the case in South Africa – instead minimum wages are often too high for entry level, efficiency or productivity of entry level employees is low for at least the first six to twelve months and with labour protection, it’s too expensive and complicated to hire and fire labour, and this structural challenge keeps our unemployment high.”

As an example, the Imperial Technical Training Academy is the second largest of its kind – offering technical artisan training - in the county where the academy ensures that the artisans or apprentices are employed into Imperial’s expansive network of 250 dealerships/workshops. These students are offered employment protection by law, however, the downside is this reduces the number of people accepted. The students applying to learn through the academy undergo a rigorous entry examination process to weed those quality students who will perform and prosper out from those who won’t, which then means that only 1 in every 100 students is accepted and adopted into the academy and offered an employment opportunity.

“This should actually be 100% acceptance, and perhaps in future it could be if certain restrictions in labour protection would drop and Government could help by creating better basic education, as then companies would be keen and able to employ more people. Government’s youth wage subsidy is therefore a great idea, as it will enable more companies to take on more entry level employees with the aim of providing them with real work experience and exposure – that will aid them in finding other permanent employment,” adds de Canha.

de Canha further suggests that while the youth wage subsidy is an avenue for job creation in the short- to medium-term, the subsidy should be viewed as a permanent solution. “For inclusive and sustainable growth, we should look to learn from the success that the UK experienced when they followed a similar process and it had a great effect in up-skilling the youth and giving them necessary exposure that then enabled them to find more permanent employment in mainstream markets.”

“Moving more towards industrialisation would be a game changer for the South African economy – both in terms future growth prospects and being able to attract investment. Though to attract investment and for sustainable industrialisation we do still need to address labour market reform that is aimed more at productivity and can be supported by getting basic education right early on,” concludes Krugel.

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