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Structural Transformation in South AfricaThe Challenges of Inclusive Industrial Development in a Middle-Income Country$

Antonio Andreoni, Pamela Mondliwa, Simon Roberts, and Fiona Tregenna

Print publication date: 2021

Print ISBN-13: 9780192894311

Published to University Press Scholarship Online: September 2021

DOI: 10.1093/oso/9780192894311.001.0001

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date: 23 January 2022

Structural Change in South Africa

Structural Change in South Africa

A Historical Sectoral Perspective

Chapter:
(p.28) 2 Structural Change in South Africa
Source:
Structural Transformation in South Africa
Author(s):

Nimrod Zalk

Publisher:
Oxford University Press
DOI:10.1093/oso/9780192894311.003.0002

Abstract and Keywords

This chapter traces how policies and institutions flowing from the post-apartheid political settlement in South Africa gave rise to a range of rents and rent-like transfers, which have not, however, been adequately invested to advance structural transformation. Rather, corporate and industrial restructuring has been associated with a ‘high-profit and low-investment’ economy and deindustrialization. Low investment, job losses, and limited black participation in the ‘commanding heights’ of the economy from the mid-1990s spurred the political impetus for a stronger role for the state during the 2000s. The formal introduction of industrial policy in 2007 has had some successes and helped to avert even deeper deindustrialization. However, it has been undermined by unsupportive macroeconomic policies and a weak articulation between policies to advance black ownership and structural transformation. Rising corruption and maladministration have further undermined structural transformation. Implications are drawn from South Africa’s experience for middle-income countries more generally.

Keywords:   South Africa, structural change, industrial development, deindustrialization, rents

2.1 Introduction

Structural transformation is central to economic development through mobilizing fixed investment and shifting people to industries with increasing returns, and the associated institutional learning to acquire industrial capabilities that are becoming ever more sophisticated. Manufacturing has historically been the primary site of increasing returns, hence industrialization’s centrality in structural transformation (Kaldor, 1967; Thirlwall, 1983; Amsden, 2003; Rodrik, 2012; Szirmai et al., 2013). It involves not only the development of capabilities at the firm and sectoral level, but supportive economy-wide policies and institutions that span the macroeconomic and financial arena, and infrastructure and skills (Thirlwall, 2002; Ocampo et al., 2009).

Successful structural transformation involves profound changes to economic structure, requiring corresponding institutional development (Gerschenkron, 1962). This is an iterative process with economic and political–institutional structures being shaped over time by the interactions between them (Hirschman, 1971). The interplay between the two can be understood through a country’s evolving political settlement that reflects the accommodations forged among powerful political and economic actors around the generation and distribution of rents (Khan and Blankenburg, 2009). Political settlements thus often reflect ‘elite bargains’ struck between powerful economic and political elites (Di John and Putzel, 2009; and Chapter 14). Various rents and rent-like transfers, rather than being aberrations, are pervasive in capitalist development. These include rents derived from market dominance, natural resources, transfers from real economy to financial sector actors, conditional industrial policies to promote the acquisition of industrial capabilities, and state licensing and procurement instruments. Furthermore, various ‘rent-like’ transfers to social constituencies are frequently deployed to secure political support and maintain political stability (Khan and Jomo, 2000; Storm, 2018).

(p.29) What is thus important is the form rents take, the political economy effects of the processes—often highly contested—through which they arise, and whether or not they are used to finance productive investment in sectors with increasing returns. In neoclassical terms, various forms of rents, including returns earned by firms in excess of total costs (including financing costs), are generally considered wasteful (Tollison, 1982). In contrast, in the classical economic tradition profits, regardless of whether they exceed costs, are the primary source for financing capital accumulation (Thirlwall, 2002).

Across developing regions, internally generated revenues and reinvested profits are the primary source of funding for firm-level investment (UNCTAD, 2016). A virtuous ‘profit-investment nexus’—where firms make profitable investments, funded through retained earnings, which underpin further investment—is thus especially important for industrial growth in these regions. This positive feedback mechanism was central to East Asia’s rapid industrialization, with the state intervening to accelerate productive capital accumulation (Akyüz and Gore, 1996). High levels of fixed investment which build industrial capabilities in sectors that provide increasing returns lead to rising productivity, enhancing export competitiveness and alleviating the balance-of-payments constraint to growth (Thirlwall, 2002).

Thus, three empirical regularities characterize developing countries that have achieved rapid catch-up with advanced economies: first, a high share of fixed investment in gross domestic product (GDP); second, a high share of manufacturing in GDP; and third, substantial increases in the level and sophistication of their exports (Hausmann et al., 2005; World Bank, 2008). As reflected in Chapter 1 (Table 1.1) South Africa has performed disappointingly relative to peer middle-income developing countries (MIDCs) against all three measures.

Section 2.2 of this chapter reviews the patterns of post-apartheid fixed investment, profitability, value added, and employment. It highlights inadequate investment in diversified industries, low profitability, a declining share of tradable sectors in value added, and dramatic declines in employment. This reflects deindustrialization, as discussed further in Chapter 11. Fixed investment has been particularly low in manufacturing and agriculture, with investment in the capital-intensive mining industry growing slightly more than the economy-wide average.

Section 2.3 considers the links between the economic performance and key phases of post-apartheid economic policy, including industrial policy. It traces how orthodox policies and institutions arising from the post-apartheid political settlement accelerated deindustrialization through corporate and industrial restructuring that enabled high corporate profits in some areas of the economy, but not the virtuous profit–investment nexus in the tradable sectors which are needed to drive sustained growth. It argues that the formal introduction of industrial policy reflected a significant policy shift, with some important successes and helped (p.30) avert even deeper deindustrialization. However, it has been undermined by unsupportive macroeconomic policies and state-owned corporations (SOCs), and the weak articulation between policies to advance black ownership and structural transformation. Rising corruption and maladministration has further undermined structural transformation, particularly through a deteriorating national electricity system.

Section 2.4 concludes that the post-apartheid economy has undergone substantial structural change but limited structural transformation, with some implications for other MIDCs.

2.2 Low Levels of Productive Investment, Declining Manufacturing Profitability, and Limited Structural Transformation

There have been substantial shifts in the corporate and industrial structure of the post-apartheid economy flowing from the political settlement forged during the transition from apartheid to democracy.

2.2.1 High Corporate Profitability, Low Fixed Investment, and the Shift to Low-Tradability Sectors

At the core of changes in the corporate and industrial structure has been the shifting orientation and investment decisions of the country’s largest financial and non-financial firms, many of which are listed (Bosiu et al., 2017b). The unbundling of apartheid-era conglomerates and subsequent corporate reconsolidation along more narrowly defined sectoral lines has sustained and often deepened concentration, enabling a small number of large firms to cement their domination of most sectors (Buthelezi et al., 2019).

Concentration and associated market dominance often go hand in hand with high corporate profitability. High returns of listed firms in the 2000s, which had increased substantially from the 1990s, have been widely observed by the International Monetary Fund (IMF) (2011, 2014, and 2016) and World Bank (2011). Similarly, UNCTAD (2016) calculates that South African listed firms have recorded among the highest levels of profitability on MIDC stock markets in the period 1995–2014, with the banking sector particularly profitable. However, South Africa’s financial system aggregates far lower levels of savings and fixed investment than peer MIDCs (Bell et al., 2018; and Chapter 1). Fixed investment has been particularly low in two major tradable sectors—agriculture and manufacturing (see Table 2.2)—with profoundly negative consequences for growth, employment, and exports. This is despite tremendous growth in the size of stock market. The market capitalization (p.31) (p.32) of South Africa’s fifty largest listed firms, excluding cross-listed firms operating predominantly outside South Africa, was equivalent to 162 per cent of GDP in 2017 (Bosiu et al., 2017b), more than double the upper-MIDC average of 60 per cent of GDP.

Relative sectoral profitability is a major factor accounting for patterns and changes in fixed investment. Sectors with the highest average profitability from 1994 to 2019, as measured by net industry markup, were limited tradability service sectors, notably communication (43 per cent); wholesale and retail (41 per cent); business services (35 per cent); finance and insurance, and transport and storage (both 32 per cent); as well as agriculture (33 per cent) (Table 2.1). By contrast, average post-apartheid manufacturing profitability was 8 per cent in 2015 and had fallen to 4 per cent in 2019. Heavy-industry profitability was slightly higher than diversified manufacturing during the commodity boom of the 2000s but fell sharply thereafter. Yet a sizeable and influential literature asserts that South African manufacturing commands high markups, particularly Aghion et al. (2008), Faulkner et al. (2013), and Fedderke et al. (2007 and 2018). This is routinely cited by multilateral institutions and in South Africa’s overarching economic strategy: its National Development Plan. Far more plausible than the hypothesis that manufacturing exhibits ‘excessive profitability’ is Rodrik’s (2008: 669) assessment of ‘the decline in the relative profitability of manufacturing in the 1990s as the most important contributor to the lack of vitality in that sector’.

Table 2.1 Net markup by broad sector %, 1994–2019

Average 1994–9

Average 2000–4

Average 2005–9

Average 2010–14

Average 2015–19

Average 1994–2019

Agriculture, forestry, fishing Mining, and quarrying

40.5%

34.8%

36.0%

28.2%

25.9%

33.3%

17.1%

29.6%

39.0%

35.6%

24.7%

28.8%

Manufacturing

12.3%

11.0%

8.6%

3.4%

3.9%

8.0%

Heavy-industry

11.6%

12.8%

9.8%

0.6%

−1.0%

7.0%

Diversified manufacturing

12.6%

9.9%

7.8%

5.0%

6.9%

8.6%

Electricity, gas, and water

14.6%

15.1%

12.1%

41.2%

37.1%

23.7%

Construction

14.6%

13.4%

19.9%

20.0%

18.0%

17.1%

Wholesale and retail trade

37.7%

38.1%

39.7%

46.3%

44.0%

41.1%

Catering and accommodation

11.8%

11.3%

13.7%

21.6%

19.6%

15.5%

Transport and storage

28.7%

24.6%

41.0%

35.1%

29.9%

31.7%

Communication

48.9%

50.3%

52.7%

35.8%

23.9%

42.6%

Finance and insurance

28.4%

31.6%

39.5%

37.3%

25.6%

32.3%

Business services

40.4%

34.5%

36.9%

33.2%

28.5%

34.9%

Community, social, personal

21.2%

18.9%

21.3%

23.9%

20.8%

21.2%

Notes: Net markup is an industry’s net operating surplus as a percentage of the sum of its intermediate inputs, wages, and capital depreciation (Quantec, n.d.). It factors in capital intensity, to an extent, as more capital-intensive industries are likely to have higher levels of depreciation. Heavy-industry comprises: Paper; coke, petroleum and nuclear fuel; basic chemicals; other chemicals; other non-metal minerals; basic iron and steel and non-ferrous metal sectors. Diversified manufacturing sectors comprise all other manufacturing industries.

It is important to note that the Quantec data are not official statistics. They have been compiled using data from Statistics South Africa, with some computations by Quantec, and this should be borne in mind.

Source: Quantec.

Within a context of lacklustre overall investment described in Chapter 1, compound annual growth (CAGR) in gross fixed capital formation (GFCF) increased most in the communication (11.5 per cent), construction (7.0 per cent), transport and storage (6.7 per cent), and community, social, and personal services (5.9 per cent) sectors (Table 2.2). The 6.1 per cent increase in electricity GFCF is overstated in that it includes massive cost overruns of two new coal-fired plants incurred by state-owned Eskom amid corruption and maladministration (Watermeyer and Phillips, 2020), as well as private investment in renewable energy projects.

Table 2.2 Gross fixed capital formation, gross value added, and employment, 1994–2019

Gross fixed capital formation

Gross value added

Employment

2019 Share

CAGR 1994–2019

2019 Share

CAGR 1994–2019

2019 Share

CAGR 1994–2019

Agriculture, forestry, and fishing

2.7%

0.6%

2.1%

1.2%

7.1%

−0.9%

Mining and quarrying

11.3%

4.7%

8.3%

−0.4%

3.1%

−0.9%

Manufacturing

14.3%

2.3%

13.2%

1.8%

9.3%

−0.5%

Heavy-industry

7.4%

2.6%

•3.9%

2.5%

1.9%

−0.7%

Paper and paper products

0.8%

2.1%

0.5%

1.7%

0.2%

1.0%

Cake, petroleum products, and nuclear fuel

1.6%

4.0%

1.0%

4.9%

0.2%

1.5%

Basic chemicals

1.3%

2.4%

0.5%

2.7%

0.2%

0.3%

Other chemical products

0.5%

1.9%

0.8%

3.3%

0.5%

3.2%

Other non-metal mineral products

1.1%

1.8%

0.4%

−0.2%

0.5%

−2.3%

Basic iron and steel products, casting of metal

1.1%

2.8%

0.4%

2.3%

0.2%

−3.2%

Non-ferrous metal products

0.9%

2.8%

0.3%

1.6%

0.1%

−2.0%

Diversified manufacturing

6.8%

1.9%

9.3%

1.5%

7.4%

−0.4%

Food, beverages, and tobacco

3.1%

1.7%

3.7%

1.4%

1.9%

−0.1%

Metal products

0.3%

1.6%

0.7%

1.0%

0.8%

−0.2%

Machinery and equipment

0.4%

2.8%

0.8%

2.2%

0.9%

1.2%

Motor vehicles, parts and accessories

0.6%

2.3%

0.9%

3.8%

0.7%

−0.4%

Other diversified manufacturing

2.5%

1.9%

3.2%

1.1%

3.1%

−0.9%

Electricity, gas, and water

11.1%

6.1%

3.8%

0.7%

0.4%

1.0%

Construction

1.9%

7.0%

3.8%

3.8%

5.8%

2.0%

Wholesale and retail trade

6.3%

5.3%

14.3%

3.1%

19.8%

2.9%

Catering and accommodation services

0.8%

2.0%

0.9%

1.5%

3.4%

1.4%

(p.33) Transport and storage

16.3%

6.7%

7.9%

2.8%

3.9%

4.5%

Communication

1.6%

11.5%

1.8%

7.3%

0.7%

−0.4%

Finance and insurance

3.9%

2.8%

6.4%

4.2%

2.5%

1.0%

Business services

12.9%

2.3%

13.3%

3.4%

15.0%

3.4%

General government

15.2%

4.3%

18.2%

1.9%

12.9%

1.6%

Community, social, and personal services

1.7%

5.9%

5.9%

2.6%

16.0%

1.2%

All sectors

100.0%

•4.0%

100.0%

•2.3%

100.0%

•1.4%

Note: Growth rates of Gross Fixed Capital Formation and Gross Value Added have been calculated from constant 2010 price series; the shares of sub-sectors in economy totals for GFCF and GVA are calculated from current price data for 2019.

Source: Quantec RSA Standardised Industry Indicator Database.

(p.34) By contrast, a striking pattern of low investment in agriculture and manufacturing is evident (Table 2.2). Agriculture GFCF grew marginally between 1994 and 2019 (with a CAGR of just 0.6 per cent) and manufacturing by only 2.3 per cent, while mining grew by 4.7 per cent. Within manufacturing, the heavy-industry grouping recorded GFCF growth of 2.6 per cent and diversified manufacturing 1.9 per cent. Agricultural investment has been curtailed by low public investment (particularly in water infrastructure, and research and development), slow progress by the Department of Agriculture in negotiating access to fast-growing East Asian markets for horticultural products, and land-tenure uncertainties from unresolved contestation over land reform (Cramer and Sender, 2015). Low agricultural investment has prevailed in parallel with relatively high profitability, as corporate consolidation following the liberalization of the sector in the 1990s enabled a small number of large agroprocessing producers to dominate the sector (Bell et al., 2018). Higher mining investment has been constrained predominantly by protracted contention over levels of black ownership in the sector (Jonas, 2019).

As with investment, value added has grown most in the generally more profitable service sectors with limited tradability, notably communication (7.3 per cent), finance and insurance (4.2 per cent), construction (3.8 per cent), business services (3.4 per cent), and wholesale and retail (3.1 per cent). Lacklustre growth in all three major tradable sectors has prevailed, well below the economy-wide average of 2.3 per cent, namely: agriculture (1.2 per cent), mining (−0.4 per cent), and manufacturing (1.8 per cent). The capital-intensive heavy industries (2.5 per cent) grew faster than diversified manufacturing (1.5 per cent) sectors.

Large-scale job losses have been recorded in all three major tradable sectors, albeit reflective of significant shifts within these sectors. Between 1994 and 2019, over one-fifth of the workforce was lost in both mining (−23 per cent) and agriculture (−21 per cent), while manufacturing employment fell by 12 per cent. However, an under-recognized process influencing recorded manufacturing employment has been extensive outsourcing starting in the 1990s. Between 1997 and 2007, an estimated 300,000 workers, such as security guards and cleaners, were statistically ‘transferred’ to business services while they continued to work (under different employers) in manufacturing (Tregenna, 2010). This implies that job losses in manufacturing may not have been as extensive as reflected in official employment statistics. However, changes in employment survey methodology make it difficult to estimate the precise impact of outsourcing over the 1994–2019 period (Kerr and Wittenberg, 2019).

Mining job losses have been mainly due to the long-term decline in labour-intensive gold mining, which has not been offset by growth in other minerals such as platinum (Ritchken, 2018). Agricultural job losses have taken place in field crops and livestock, while, as elaborated in Chapter 6, horticulture has represented a welcome site of employment and export growth (Chisoro-Dube et al., 2018; Zalk, 2019).

(p.35) 2.2.2 Intra-manufacturing Patterns: Limited Diversification and the Continued Dominance of Heavy Industry

As manufacturing’s overall share in GFCF fell to 14 per cent in 2019 in line with the sector’s share in the economy, above-average GFCF growth has been recorded in coke and petroleum (4.0 per cent), and in basic iron and steel, non-ferrous metal products, and machinery and equipment (which each grew GFCF at average annual rates of 2.8 per cent). Motor vehicles grew at the manufacturing average of 2.3 per cent.

Value-added growth leading up to the global financial crisis was driven chiefly by the chemical and primary metal sectors, and associated strategies of dominant firms including increasing internationalization. The coke and refined petroleum, and basic chemicals sectors, accounting for 14 per cent of manufacturing value added, have been dominated by formerly state-owned Sasol. Sasol benefits from a legacy of state support, vertically integrated coal supply, and cheap natural gas from Mozambique, as well as monopolistic pricing and market conduct (Bell et al., 2018; and Chapter 4). Sasol has internationalized through a secondary listing on the NASDAQ and various expansion projects outside South Africa, the largest being its Lake Charles Chemicals gas-to-liquids project in Louisiana in the USA. However, the combination of vast cost and time overruns constructing the Lake Charles plant, combined with low oil prices, has created a debt crisis for Sasol (Theunissen, 2020), the resolution of which could have damaging consequences for South African manufacturing.

While basic iron and steel and non-ferrous metals grew significantly above average until the crisis, lacklustre growth after 2009 reflected a confluence of global steel and aluminium oversupply, weak domestic demand exacerbated by low public investment, and low investment in plant maintenance in primary steel. Rapid escalation of electricity prices and the unreliability of supply have precipitated the closure of many foundries (Rustomjee et al., 2018). Formerly state owned Iscor’s 2001 unbundling saw its steel operations transferred to transnational ArcelorMittal with the contractual right to iron-ore supply on concessional terms from Anglo subsidiary Kumba that had acquired Iscor’s iron-ore assets. Concurrently, ArcelorMittal South Africa (AMSA) exerted its monopoly power to charge domestic customers import parity prices (Roberts and Rustomjee, 2010), as touched on in Chapter 3. Rather than the anticipated efficiencies the state naively assumed would flow from foreign ownership, AMSA systematically underinvested amid multiple plant failures and escalating inefficiencies, extracting as much cash as possible to its global parent (Zalk, 2017). These inefficiencies were brutally exposed after world steel prices fell in the aftermath of the 2008 global financial crisis, throwing the South African steel industry into deep crisis. As part of Anglo’s restructuring strategy to meet shareholder expectations that it become a ‘focused mining group’ it sold off the second-largest steel producer to Evraz in 2007, which, like AMSA, failed to invest (p.36) and extracted cash to help service the debt of the global group (Zalk, 2017; Rustomjee et al., 2018).

Three main diversified manufacturing sectors recorded meaningful real value-added growth: motor vehicles and parts, food and beverages, and machinery, with the remainder collectively little larger in real terms than they were in 1994. Chapter 3 highlights how industrial capabilities in machinery were developed to service the mining sector. However, substantial industrial capabilities and opportunities have been lost through Anglo and Rembrandt/Remgro’s disposal of their most significant engineering subsidiaries: Dorbyl, Boart Longyear, and Scaw Metals over the 2000s (Zalk, 2017). Chapter 4 provides a contrast between South Africa and Thailand’s plastics industry, demonstrating how tight integration with the latter’s automotive policy has driven a far more dynamic trajectory than in South Africa. Chapter 5 highlights how the automotive sector has attracted substantial foreign investment by assemblers and first-tier original equipment manufacturer (OEM) suppliers through South Africa’s flagship sector policy programme, but that rising exports have not been accompanied by adequate increases in domestic value added on a per vehicle basis.

Food and beverages has been one of the few diversified manufacturing sectors where the main firms have domestic market power, dominated by a handful of large producers (Chisoro-Dube et al., 2018). It is notable that two major sub-sectors—sugar and poultry—were among the few that secured sustained import protection amid the general slashing of industrial tariffs during the 1990s. Remgro (previously Rembrandt), the second-largest business group at the end of the apartheid era and co-founder with Anglo of the South Africa Foundation that advocated the liberalization of various markets, retained substantial interests in both sectors, and food and beverages more generally (Mondliwa et al., 2017). Concentration in food and beverages has overlapped with, and mutually reinforced, market dominance in the supermarket sector, as large producers have offered terms to retailers which cannot be matched by smaller producers (Bosiu et al., 2017a).

Manufacturing job losses have been more pronounced in heavy-industry (−0.7 per cent (CAGR)) than diversified manufacturing (−0.4 per cent) (Table 2.2). The dominant explanation given for poor manufacturing employment performance is that inordinate labour-market protections were extended over the 1990s, raising unskilled workers’ wages, while weak vocational education has led to a shortage of skilled workers and raised their wages (Levinsohn, 2008; Kaplan, 2015a and 2015b; Nattrass and Seekings, 2019). While South Africa is clearly not a very low-wage manufacturing economy, various indicators cast doubt that its uniquely high unemployment is explained predominantly by market inflexibility. First, nominal international wages in tradable sectors are highly sensitive to exchange rate movements. Periods of overvaluation push up relative wage costs in dollar terms, even as labour productivity has roughly matched Rand increases in the wage bill (Rodrik, 2008; Zalk, 2014).

(p.37) Second, there is no obvious relationship between measures of labour-market rigidity and unemployment across a range of developing countries. A number of other middle-income countries have been ranked with similar levels of labour market rigidity as South Africa over the past two decades but have not experienced anywhere near the levels of unemployment that South Africa has.1 Far more plausible is that low profitability and correspondingly tepid rates of investment in diversified manufacturing in general, even while there have been higher investment rates in capital-intensive heavy industries, are the primary factors in poor manufacturing employment growth. Third, while there are clearly deep problems with both South Africa’s education and vocational training system, the greatest constraint cited by firms for unutilized capacity and in business confidence surveys is lack of demand. This is in no way to suggest that skills formation is irrelevant. Rather, a poorly performing secondary and vocational education system has provided, at best, no particular advantage to South African manufacturers. Indeed, inadequate skills would likely become a more significant constraint with any acceleration of manufacturing growth. Furthermore, Chapter 12 emphasizes that increasing technological sophistication and digitalization of production systems mean that the intensity and complexity of skills required are set to rise, both in manufacturing and in progressively more integrated ancillary service sectors, such as data mining.

South Africa remains heavily dependent on primary and semi-processed mineral exports, accounting for 57 per cent of merchandise exports in 2019, while aggregate export growth and diversification have been lacklustre (Chapter 1). Import growth and dividend outflows have outstripped export growth with the balance-of-payment constraint increasingly financed by short-term capital inflows (Strauss, 2017). Agricultural export growth has been driven predominantly by the horticulture sector, particularly of high-value fresh fruit (Chapter 6).

The following section turns to the phases and processes of industrial restructuring that have given rise to the limited post-apartheid structural transformation described above.

2.3 Phases and Processes of Industrial Restructuring and Policy

Three phases of post-apartheid industrial restructuring and policy can be identified, reflecting both significant continuity since the 1990s, particularly with respect to macroeconomic policy, as well as important policy shifts.

(p.38) 2.3.1 Phase 1: Core Bargains, Liberalization, and Stabilization

South African deindustrialization began in the early 1980s due to an inability to develop internationally competitive manufacturing sectors outside of the heavy ‘mineral-energy-complex’ industries built up under apartheid (Fine and Rustomjee, 1996). Profitability of the handful of private conglomerates that dominated the economy faltered together with private and public investment, amid a deepening political and economic crisis (Morris, 1991).

The orthodox orientation of economic policy which has prevailed to a greater or lesser degree in the post-apartheid period—with its emphasis on macroeconomic ‘stability’, Anglo-American-style capital markets, and the removal of market distortions—was effected through processes of contestation and accommodation during South Africa’s transition from apartheid to democracy. From the late 1980s, dominant conglomerates sought to secure policies that would restore profitability and, above all, maximize their freedom to restructure capital domestically and abroad (Zalk, 2017). Their central contention was that efficient capital allocation and higher fixed investment would best be secured, not by state-directed restructuring, but by further deepening Anglo-American-style capital markets in which shareholders and lenders overwhelmingly shape capital-allocation strategies (South African Foundation, 1996). A multi-pronged effort was pursued to legitimate this objective. This included relentless lobbying of senior African National Congress (ANC) leaders and economic policy office-bearers (Spicer, 2016), rhetorical and ideological appeals to the benefits of ‘free markets’ (South African Foundation, 1996), and the initiation of narrow-based black economic empowerment (BEE) asset transfers to politically influential individuals (Kantor, 1998) in a series of highly leveraged ‘first generation’ BEE deals.

Momentum for a putatively market-led restructuring was bolstered by selective appeals to scholarship contending that apartheid industrialization had failed due to a range of product and factor market distortions, which incentivized capital-intensive investment while disincentivizing the employment of unskilled labour (Lipton, 1986; Nattrass, 1989; Holden, 1992; Fallon and de Silva, 1994). Overlaid upon this market distortions thesis were various ideological claims, inadequately substantiated by empirical evidence. These included that public investment crowded out private investment, that macroeconomic stabilization of public debt and inflation would raise investment via an ill-defined ‘business confidence’, and that South Africa’s industrial import tariff structure was high relative to developing-country peers (Macroeconomic Research Group, 1993; Michie and Padayachee, 1998; Weeks, 1999).

The adoption of the Growth, Employment, and Redistribution (GEAR) strategy reflected this confluence of interests, selective reliance on scholarship, and ideology. Neither the surge in private investment in export-oriented manufacturing nor the 600,000 jobs predicted by GEAR materialized. The concurrent (p.39) adoption of legislation strengthening de jure worker protection is often conveyed as inconsistent with GEAR’s liberalizing thrust (Nattrass, 1998). However, it is doubtful whether GEAR could have been politically feasible without it (Jonas, 2019), while extensive outsourcing and casualization have in practice weakened de jure worker protections (Tregenna, 2010).

Trade liberalization was intended to induce manufacturers to shift from ‘excessively’ profitable domestic markets to less profitable (but presumably not loss-making) export markets. Average manufacturing tariffs were cut from 28 per cent in 1990 to 23 per cent in 1994 and 8 per cent by 2004 (Edwards and van de Winkel, 2005). These went well beyond the reductions South Africa had committed to when it joined the World Trade Organization (WTO) in 1993 (Davies, 2019).

In the absence of any overarching manufacturing strategy, particularly for underdeveloped diversified sectors outside heavy-industry, industrial policy was relegated to a set of dispersed incentives supposed to assist firms adjust to trade liberalization. Only two sector-specific programmes were formalized: the Motor Industry Development Programme (MIDP) (Chapter 5) and a Duty Credit Certificate Scheme (DCCS) for clothing and textiles. In parallel, and stark contradiction with their disavowal of state intervention, private conglomerates secured extensive public support for heavy-industry expansions throughout the 1990s, supported by tax incentives, co-funding by the Industrial Development Corporation (IDC), and cheap electricity (Zalk, 2012 and 2014).

Similarly, the ‘free market’ commitment of large business groups was contradicted by their intense contestation of a revised Competition Act, which succeeded in circumscribing the competition authorities’ ability to deal with anticompetitive conduct and not to tackle the pre-existing market concentration directly (Makhaya and Roberts, 2013).

Although the envisaged privatization was only partially implemented, a general de-emphasis of public fixed investment prevailed as SOCs were commercialized with a view to selling them to BEE investors. Low public investment meant the social infrastructure envisaged by the Reconstruction and Development Programme (RDP)2 did not meaningfully materialize. This translated into weak demand for infrastructure-linked sectors, such as steel and engineering (Zalk, 2017). The commercialization of SOCs entrenched existing biases in the provision of electricity, rail, and ports in favour of the export of primary and semi-processed mineral commodities, rather than diversified manufacturing exports (Department of Trade and Industry, 2018a).

From the early 1990s, influential institutional investors secured the long-desired unbundling of apartheid-era conglomerate structures, shifting the (p.40) balance of power from founding families to shareholders, with the objective of ‘unlocking shareholder value’ and paving the way for greater internationalization (Malherbe and Segal, 2001; Chabane et al., 2006). Capital-account liberalization and offshore listings would, proponents argued, attract foreign direct investment and provide access to cheaper international capital to invest domestically (Walters and Prinsloo 2002). However, offshore listings by major corporations acted as a platform for international expansion rather than raising funds for investment in South Africa (Chabane et al., 2006). Most prominent was Anglo’s listing on the London Stock Exchange (LSE) in 1999, with two of its biggest industrial subsidiaries, South African Breweries (SAB), and paper, pulp, and packaging producer, Mondi. Rising demands for Anglo to unlock value for shareholders by becoming a focused mining company saw it dispose of its remaining industrial subsidiaries, including chemicals producer AECI, bottler Bevcon (Mohamed 2020) and its steel and engineering investments (together with co-investor Remgro)—with profoundly damaging effects on industrial capabilities in the sector.

Rather than attracting long-term foreign direct investment, potentially investable long-term capital has been drained through offshore listings and rising ownership by foreign institutional investors. The associated stream of dividend outflows has become a substantial part of a persistent current-account deficit (Strauss, 2017). Long-term sources of capital have been replaced by more volatile short-term portfolio flows into South Africa’s expanding stock, bond, and money markets (Hassan 2013). Illegal capital flight is said to have exacerbated the exit of long-term capital (Ashman et al., 2011; Ndikumana, 2016) although estimates of its extent and magnitude are contested (Östensson, 2018).

In the context of legislation that did not empower the competition authorities to deal with the pre-existing monopolistic market structures, the unbundling of highly concentrated apartheid-era conglomerates across the economy was followed by consolidation of control within industries, in which high levels of profitability could generally be secured. Heavy industries including petrochemicals, carbon and stainless steel, and aluminium retained their ability to impose monopolistic pricing on downstream customers (Roberts and Zalk, 2004; Zalk, 2017; Rustomjee et al., 2018). As discussed in Chapter 9, large business groups have often incorporated BEE partners to help entrench their market dominance, rather than open up space in the economy for smaller and black-owned entrants (Bell et al., 2018).

By the end of the 1990s, many ‘first generation’ BEE deals, which served to bolster the legitimacy for an overwhelmingly orthodox policy path, collapsed in the wake of the 1997/8 Asian financial crisis. A brief period that saw black ownership on the Johannesburg Stock Exchange (JSE) rise and peak at around 7 per cent was rapidly reversed (Mcgregor’s, various years). This prompted the establishment of a BEE Commission that in 2001 called for BEE to be included in legislation rather than left to the discretion of large business groups. The (p.41) limitations of this ‘stabilization’ phase in the 1990s became increasingly apparent as fixed investment fell, unemployment and inequality soared, and BEE ambitions remained unrealized.

2.3.2 Phase 2: The Illusion of Progress, the Ostensible Shift to a ‘Developmental State’, and the Introduction of Industrial Policy

The 2000s saw both continuity of orthodox policy and some significant shifts. Two main groupings in and around the ANC challenged the direction of policy, but for different fundamental reasons. The first sought a shift to East Asian-style intervention to reverse deindustrialization and associated job losses. The second grouping wanted the state to reorient its procurement, licensing, and regulatory powers in their favour. The government belatedly recognized that public investment was essential to crowd in private investment (Presidency, 2006) and public investment began to increase, particularly to address a mounting backlog in electricity supply Concurrently prepare for the country’s hosting of the 2010 World Cup. Concurrently BEE became increasingly entrenched in legislation, policy, and procurement practices of the state and SOCs.

Meanwhile, corporate restructuring bore fruit as ‘value’ was increasingly disgorged to shareholders through dividends and share buybacks. Based on estimates by Wesson (2015), dividends to and repurchases from institutional investors on the JSE between 1999 and 2009 were equivalent to 17 per cent of total gross fixed formation (GFCF) or 61 per cent of manufacturing GFCF over the corresponding period. This is a lower-bound estimate as it excludes firms that form part of two of the largest sectoral indices of the JSE: basic materials and financials, as well as formerly South African companies listed offshore. Thus, it excludes Anglo’s large-scale programme between 2005 and 2008 to repurchase shares from LSE investors (Coulson, 2009), which coincided with the destructive unbundling of its steel and engineering businesses discussed above. Sizeable transfers also accrued to beneficiaries of BEE deals. Based on estimates by Theobald et al. (2015) the net value transferred to beneficiaries of BEE deals from the one hundred largest JSE-listed firms between 2000 and 2014 was equivalent to 8 per cent of total GFCF and 29 per cent of manufacturing GFCF over the same period (Zalk, 2017). Thus, very sizeable (and conservatively estimated) flows of potentially investable funds have accrued as rents or rent-like transfers to both entrenched and new shareholders. But these have not translated into levels or patterns of fixed investment capable of shifting South Africa onto a structurally transformed growth path.

Despite low investment and exceptionally high unemployment and inequality, macroeconomic policy continued to be cast as ‘state of the art’ and declared a success in terms of intermediate measures such as lower inflation, fiscal deficits, and tariffs. Weak manufacturing performance was attributed to a lack of (p.42) ‘microeconomic reforms’, particularly labour market deregulation, deeper trade liberalization, incomplete privatization, and limited competition (Edwards and van de Winkel, 2005; Du Plessis and Smit, 2007). A ‘Microeconomic Reform Strategy’ echoed the dogma of irreproachable macroeconomic policy, emphasizing further microeconomic reforms and an ill-defined shift towards greater manufacturing ‘knowledge intensity’. The latter was not, however, accompanied by any meaningful sector strategies beyond automotives, and clothing and textiles. Over this period, the IDC shifted its emphasis from financing capital-intensive mega-projects to BEE ownership transfers that were delinked from new industrial investment capacity (Mondi and Roberts, 2005).

Although the 2000s saw a brief period of improvement in GDP, investment and employment, this was driven by an unsustainable confluence of the global commodity boom, a surge in short-term capital inflows, and a domestic consumption-led boom underpinned by unsustainable increases in household debt (Bell et al., 2018). The disjuncture between industrial and macroeconomic policy over this period was manifested most starkly by the failure to act meaningfully against prolonged currency overvaluation, which dramatically eroded the competitiveness of diversified manufacturing industries (Zalk, 2014). Furthermore, rail and port SOCs Transnet and Portnet have favoured bulk primary and semi-processed commodity exports over diversified value-added exports. Port unit costs are considerably higher than developing-country comparators and exceed those of either primary commodity exports or the imports of manufactured goods (Ports Regulator, cited in Department of Trade and Industry (2018a: 58)).

The belated adoption by the Mbeki administration (1999–2008) of the ‘developmental state’ nomenclature in the second half of the 2000s represented more an attempt to shore up legitimacy within the ANC than present a serious policy alternative (Fine, 2010). However, it was inadequate to stave off the accession of Jacob Zuma to the Presidency in 2008, supported by an uneasy coalition of ANC factions: one envisaging a shift from orthodox policies, the other eyeing unproductive accumulation opportunities through the state. On the cusp of this transition, Cabinet adopted the first formal, overarching, post-apartheid industrial policy, the 2007 National Industrial Policy Framework (NIPF) (Department of Trade and Industry, 2007). The NIPF’s core objective was to guide and facilitate government-wide policy aimed at the reversal of deindustrialization and the diversification of manufacturing beyond heavy-industry.

2.3.3 Phase 3: Industrial Policy—Formally Embraced, Undermined in Practice

The introduction of the NIPF and a series of rolling Industrial Policy Action Plans (IPAPs) marked a consequential policy shift. It raised fundamental questions (p.43) about the appropriateness of orthodox policies in light of weak domestic investment and manufacturing performance since 1994 and the onset of the global financial crisis in 2008. In order to reverse a growth path ‘driven by unsustainable increases in credit extension and consumption, not sufficiently underpinned by growth in the production sectors of the economy’ (Department of Trade and Industry, 2010: 4), it highlighted the need for supportive macroeconomic policy, scaled-up industrial financing including via development banks like the IDC, the strategic use of trade policy instruments, and the leveraging of public procurement.

The automotive sector, supported by the Automotive Production Development Programme (APDP) and notwithstanding the weaknesses discussed in Chapter 5, has grown to become the leading export sector outside of heavy-industry. The Clothing and Textile Competitiveness Programme (CTCP) has helped to stabilize the sector after mass job losses during the 1990s, through rapid productivity growth and the better integration of manufacturers in retail supply chains. The agroprocessing, metals and machinery, film, and business-process industries have also been supported. These measures have helped to avert even deeper deindustrialization. However, notwithstanding formal adoption of the policy by the Cabinet in 2007, industrial policy and structural transformation have been undermined in practice in three main ways.

First, monetary and fiscal policy have been misaligned with structural transformation and industrial policy. National Treasury took over five years to implement Cabinet-mandated regulations enabling the designation of publicly procured products for domestic manufacture. No real increase in on-budget industrial financing materialized until the 2009/10 financial year (Zalk, 2014) and these have subsequently been reversed with the Department of Trade, Industry, and Competition’s (DTIC) incentives budget declining by 19 per cent in real terms between 2012/13 and 2018/19 (Zalk 2014; Department of Trade and Industry, 2018b). Since the introduction of the NIPF, the IDC has raised its levels of disbursements. However, its ability to provide long-term concessional funding has been constrained by limited access to low-cost funding streams, in the face of rising costs of capital (Goga et al., 2019), that have been the lifeblood of successful development banks elsewhere in the world (Griffith-Jones and Ocampo, 2018).

Second, discordant objectives for an expanded role for the state and SOCs became increasingly manifest, particularly with respect to the exercise of the state’s licensing and procurement powers. The DTIC and the Economic Development Department (EDD) envisaged an expanded role of the state and SOCs to reverse deindustrialization and place it on a more diversified path (Economic Development Department, 2011). However, much of government and the SOCs placed particular emphasis on BEE ownership transfers with limited regard to structural transformation and employment considerations. For instance, the 2002 Mining Charter (Republic of South Africa, 2002) required a minimum (p.44) 25 per cent black ownership and to cascade these ownership requirements to mining suppliers, often sucking in imports from ‘empowered’ importers (Zalk 2014 and 2017; and Chapter 9). Efforts to forge a stronger link between BEE and the development of productive capabilities included introducing enterprise and skills development elements into a revised Broad-Based Black Economic Empowerment (BBBEE) Act (Republic of South Africa, 2014) and a black industrialist programme to support active black ownership in manufacturing (Department of Trade and Industry, n.d.; and Chapter 9). However, this effort has come up against lobbying for the inclusion of importers rather than manufacturers, limited budget, and lack of support from SOCs in procuring from bona fide black manufacturers (Vilakazi, 2020; and Chapter 9).

Rising corruption and maladministration under the Zuma administration (2009–18) further weakened manufacturing. Many SOCs and government departments have not complied with local content requirements (Department of Trade and Industry, 2018a). The most conspicuous lost opportunity was the subornment of SOCs Transnet and Prasa’s rail recapitalization programme to renew their ageing freight and passenger rail fleets. Widespread irregularities and corruption in contracts to acquire rolling stock, have invariably involved the minimization of local content in favour of imports. (Bhorat et al., 2017; Crompton et al., 2017).

Corruption and maladministration have been accompanied by a generalized deterioration in the public provision of electricity, rail, and port services. Electricity prices increased more than 240 per cent above inflation between 2004 and 2017 (Statistics South Africa, cited in Department of Trade and Industry (2018a: 57)) as Eskom’s debt surged due to massive capital cost overruns and maladministration. Periodic electricity supply outages have had an extremely adverse impact on manufacturing and mining. State guarantees on Eskom’s debt have become so large that they have triggered a sovereign credit rating downgrade to sub-investment level, with an associated increase in the cost of debt (South African Reserve Bank, 2020).

2.4 Conclusions

This chapter traces how the post-apartheid political settlement and associated policies and institutions have been shaped by a confluence of interests, selective appeals to scholarship, and ideology. These policies and institutions have given rise to a range of rents and rent-like transfers including monopolistic profits as well as via BEE deals. However, these rents have not been adequately channelled into levels of fixed investment or increasing return sectors capable of shifting the economy onto a path of decisive structural transformation. Corporate and industrial restructuring has been associated with a ‘high-profit-low-investment’ economy and deepening deindustrialization. Low investment has prevailed, (p.45) notwithstanding the rapid growth and high profitability of the finance sector, with institutional investors the major beneficiaries of these monopoly rents. Within a context of low overall fixed investment, capital has shifted away from the two major tradable sectors essential for structural transformation and job creation: agriculture and an increasingly low-profitability manufacturing sector. Together with mining, these tradable sectors have experienced large declines in employment. Rather, investment has moved predominantly to limited-tradability services sectors.

Industrial policy interventions have played an important role in supporting growth, competitiveness, and jobs in a number of diversified manufacturing sectors, particularly automotives, and clothing and textiles. However, increasingly internationalized heavy industries have continued to dominate through their weight in manufacturing investment and value added, their ability to impose monopolistic pricing for their output on downstream industries, and a continued reliance on mining and mineral processing for close to two-thirds of South Africa’s merchandise exports. Rather than ‘excessive’ worker protections, poor manufacturing employment outcomes are mainly due to low rates of manufacturing investment, with low and declining profitability and weak demand.

Low investment, job losses, and limited black participation in the ‘commanding heights’ of the economy from the mid-1990s spurred the political impetus for a stronger role for the state during the 2000s and 2010s. In this context the formal introduction of industrial policy in 2007 reasserted the centrality of structural transformation, supported significant sectoral advances, and helped avert even deeper deindustrialization. However, industrial policy has been undermined by the disarticulation between the policy objective of structural transformation, subordinated to the domain of ‘microeconomic reforms’ on the one hand, and macroeconomic and other economy-wide policies and institutional arrangements on the other. Monetary, fiscal, and financial policy as well as policies to advance black ownership have generally been disconnected from the economy-wide imperative of structural transformation. Strategic SOCs, particularly those providing electricity, rail, and port infrastructure as well as technical and vocational educational and training (TVET) institutions, have at best provided no particular advantage to diversified manufacturing sectors. Rising corruption and maladministration have fundamentally weakened these SOCs, increasing costs and further lowering efficiencies for diversified manufacturing in particular. The emerging cornerstone of industrial policy and structural transformation, under the ‘New Dawn’ of the Ramaphosa administration that commenced in 2018, are sector master plans to be forged through social compacts between the state, business, and labour (Republic of South Africa, 2020). There is a danger that these continue to be relegated to the domain of ‘microeconomic reforms’ rather than elevated as an economy-wide imperative that enjoys appropriate and coherent support across the state and SOCs.

(p.46) Despite its own specificities, the South African case has important similarities with and some implications for other MIDCs. These include the need to ensure that industrial policy and structural transformation are treated as economy-wide rather than ‘microeconomic’ imperatives. This implies that associated policies and institutions, including fiscal and monetary policy, are supportive of structural transformation. For resource-dependent countries, this includes managing resource rents over the commodity cycle: sterilizing and saving commodity windfalls during the peak and deploying these savings in a counter-cyclical way when the cycle turns downwards. Policy space needs to be preserved to use trade and other policy instruments strategically in engagements with global, regional, and bilateral trade and investment negotiations. The sequencing and orientation of financial-sector policy and regulation should focus on mobilizing finance and channelling it to productive investment in increasing return sectors rather than uncritical ‘financial deepening’. Taxation and other policies have a role to play in encouraging the reinvestment of retained earnings rather than maximizing their disgorgement to shareholders. Development banks have a critical role to play and require access to concessional sources of funding to help underwrite the lengthy and risky process involved in firms acquiring industrial capabilities. Finally, the South African experience reflects how the failure to foster meaningful structural transformation can help create fertile conditions for unproductive rent-seeking and corruption to flourish.

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Notes:

(1) See for example, World Bank measures of labour market rigidity reviewed in Zalk (2017).

(2) The RDP was a socioeconomic programme of the incoming ANC government that envisaged large-scale investment to address social and infrastructural backlogs.