Where are the truly Big Ideas as to how best to fit South Africa’s economy into the rapidly changing and reorienting global economy? Where is South Africa’s equivalent of the Big Four Ideas that underpin Kenya’s Vision 2030, in which promoting manufacturing plays such a critical role?
‘All politics is local” is a phrase popularised by former US House Speaker, Tip O’Neill. Elections throughout the world this year have mostly confirmed this aphorism, and none more so than in South Africa where provincialism is writ large across our parliamentary and provincial results.
But does this mean all economics is local too? No, even if many politicians wish it to be so, as most do in South Africa. This uncomfortable realisation is even being reflected in the rising rhetoric of politicians everywhere in the West.
In Europe, foreign inflows – immigrants from Ukraine, the Middle East and Africa; manufactured products from China – are framing the economic debate as never before.
In the US, foreign inflows – immigrants coming across the Rio Grande and Chinese-made products (some also crossing the Rio Grande from Chinese-owned Mexican factories) – are featuring daily in debates in the run-up to their November elections. Expect both Democrats and Republicans to try to outdo each other when it comes to bashing the rapidly ascending productive prowess of China.
China trade
Free trade is rarely championed in the West anymore: the preferred mantra is “fair trade before free trade”. Today’s economic speechifying in Washington DC and Brussels is increasingly focused on the geographical routing of global supply chains from Asia to the West. Their politicians ask: Is it better to onshore production? Or nearshore? Or friendshore?
Whatever course is taken, direct trade with China by Europe and the US is being progressively impacted via tariffs, though not yet quotas.
But, beneath the noise, the Chinese trade is far from being eliminated. Western consumers still want the often cheaper – or increasingly much better – products that China can supply: Exhibit A, the iPhone 15.
And they are finding ways to get them, even if it means buying products made by Chinese companies located in Vietnam or Mexico or via China’s ultra-efficient answers to Amazon: Shein and Temu.
Plus, the erstwhile facilitators of much of the China-US trade – the likes of Walmart and Target – are not going to give up on this lucrative business without a fight.
One statistic suggests 5% of the West-to-East seaborne trade across the Pacific Ocean from China to the US is to Walmart’s account.
The China trade is alive and well: it is just being “redwashed”.
Meanwhile, the non-Western Rest is increasingly trading among themselves: trade volumes in this sphere are growing far faster than they are between the Rest and the West – 30% of China’s 2024 steel exports have gone to Asia versus only 4% to the EU and 1% to the US. The top five destinations for Chinese wind turbines in 2023 were all non-Western: Uzbekistan, Egypt, South Africa, Laos and Chile.
Shifting gravity
The world is not deglobalising; it is reorienting. And the centre of trade gravity – but not yet the centre of capital gravity – is moving to Asia.
In this new world economic order, even if politics is still largely local, economics is ever more global… and a nation has little say in this matter unless it wants to live in an autarchic walled garden.
Not that any of the above appears to be grasped by the political parties of South Africa. Reading the election manifestos of all South Africa’s main parties – notably those now in the government of national unity (GNU) – would lead you to conclude the economy of South Africa lives in a bubble.
And you would be right: the economic thinking of the South African body politic does live in a bubble. We take products out of the ground and off the land, add in some tourism and this is what we export. With our foreign earnings, we buy imports while aiming to run a trade surplus. To all intents and purposes, that’s the end of it.
But the net result is we cannot meaningfully grow our GDP. We cannot create new jobs. Yet our government debt-to-GDP continues to rise.
It is not that our political parties have bad ideas as to how to fit the South African economy into a reorienting world economy: they simply have no ideas at all. And surprisingly, this even includes the “business-friendly” DA as well as most of our private sector economists and think tanks.
Sure, we should make our transport infrastructure run better. Agreed, we should keep our lights on and our water flowing. Yes, we must encourage a better run and more technocratic civil service.
Big Ideas
But where are the truly Big Ideas as to how best to fit our economy into the rapidly changing and reorienting global economy? Where is South Africa’s equivalent of the Big Four Ideas that underpin Kenya’s Vision 2030, in which promoting manufacturing plays such a critical role?
China is a significant consideration in Kenya’s Vision 2030. But it is by far from being the only one. When President William Ruto was quizzed by Richard Quest of CNN after his successful 2024 state visit to the US as to which way – East or West – Kenya looked, he succinctly replied, “Neither. We look forward.” Please listen, Pretoria!
For our part, it seems our politicians are only looking inward.
They are too busy defending the status quo or trying to tear it down to look beyond our national borders and “think outside the SA economic bubble”. But the longer we wait, the harder it will be to join the new world arising.
In the meantime, as a quip from one of President Cyril Ramaphosa’s chief economic advisors has it, “Kenya is eating our lunch”. A decade ago, the size of the South African economy was 10 times that of Kenya; last year this ratio had shrunk to 3.7 times.
And the story continues: Kenya, Africa’s 7th largest nation by population and economic size, received the largest private equity inflows in 2023 of any economy in Africa. Microsoft recently announced it is building a $1-billion data centre outside Nairobi.
So where do we in South Africa start?
Upfront, we must acknowledge that no one silver bullet will cure what ails us: a series of connected and reinforcing policies must be implemented. And be forewarned: what I recommend will be noisily resisted by vested interests across the political and economic spectrums… and most loudly from the right, as they have the best access to megaphones!
Bubble-dwellers do not like their insular worlds being popped.
Up the global ladder
The central aim of this set of policies must be that we address how much our semi-skilled labour can earn – in dollars or even in Indonesian rupiahs – thereby allowing us to make and export manufactures profitably and getting South Africa onto the global ladder of value-addedness.
We need to improve our Productive Power Parity ranking (see my previous article as to why PrPP is so vital in today’s world). If we decline to do this, this discussion is an exercise in futility. As things stand, the US dollar wages of our semi-skilled labour are higher than our Asian competitors and much higher than our African peers.
Note that the benchmarks below exclude China: the latter is moving up the value-added scale so rapidly that it is manufacturing products we are not remotely qualified to make.
The gargantuan scale of China’s recent industrial upgrading, largely undertaken beneath the fog of Covid, is only just beginning to dawn upon the West.
For example, Saudi Arabia has asked France and China to bid on building a nuclear power station. Market chatter has it that China has offered to build four plants for the same price as one from France.
For South Africa, Vietnam and Indonesia are far more appropriate Asian comparisons than China. It is important also to compare ourselves to emerging African peers: Kenya, Ethiopia and even Lesotho. (Yes, Lesotho! The latter’s largest export today is textiles, equally to South Africa and, via the Agoa Treaty, to the US.)
Minimum wages
Here are the latest approximate minimum wages in US dollars per hour:
- South Africa: $1.56
- Indonesia: $1.18
- Vietnam: $0.76
- Lesotho: $0.41
- Kenya: $0.26
- Ethiopia: $0.13
Let me suggest a combination of ideas whose net intent is to narrow the US dollar wage gap between us and this competitor list, and by making the labour market globally competitive.
The upfront twin benefits of this programme will be to create jobs and boost exports. Longer term, this will promote “balanced and sustainable growth in the Republic”; a weighty phrase deliberately chosen, which I source below:
- Export processing zones (EPZs) – and not just in name, as has been the case until now – should be established in mostly coastal cities; coastal as it is often important to be near port facilities with international connections. But coastal is not essential: Addis Ababa’s thriving EPZs are located in land-locked Ethiopia, connected to Djibouti’s Doraleh Port via a 759km-long railway (China’s economic miracle in the 1990s was launched via similar Special Economic Zones).
- An EPZ for business services to cater to the sub-Saharan African market – just as Montevideo’s Zonamerica provides commercial services to Latin America – should be located in Johannesburg. (South African service companies would be especially welcome in this zone, provided 95%+ of business revenues they generated were from foreign sources.)
- No taxes of any variety – none, zilch, nada, zero – should be levied on operators in these zones for 10 years. And, critically, this would mean not merely no taxes on the companies located there, but no income taxes on those employed by those companies, as this will help increase the take-home pay of workers and narrow that wage gap with competitor countries. Again, to repeat: NO TAXES OF ANY VARIETY WHATSOEVER.
- EPZ wages would be set by what the market would determine.
- The rand’s value needs to be engineered down to a more competitive level to realign our US dollar wage rates more closely with our Asian and African peers. The champions of the rand’s current value might claim: “But we are still a cheap Europe!” That no longer matters. The current value of the rand means, when it comes to our PrPP ranking, that we are an expensive Asia and a very expensive rest-of-Africa.
- To achieve currency competitiveness, the mandate that the Treasury asks the Reserve Bank (Sarb) to pursue needs to be refocused on the second part of the Sarb’s constitutional objective. The aim is to boost South Africa’s PrPP by pricing the currency more appropriately. Our Constitution stipulates: “The primary object of the South African Reserve Bank is to protect the value of the currency in the interest of balanced and sustainable economic growth in the Republic.” But, as the current set of policies being pursued is not producing “balanced and sustainable economic growth in the Republic”, the specifics of the Treasury’s mandate need to be re-examined. In particular, the following hard question must be asked: “What is the value of our currency that must be protected so that it would assist in promoting ‘balanced and sustainable economic growth in the Republic”? (We need to take note of the fact that the economies of East Asia – especially after the 1997 Asian Crisis – were rebuilt on competitive currencies, as were Germany’s and Japan’s in the post-WW2 period. Indeed, even British industrialists in the 1890s complained the US dollar was too competitive. Today’s New Asia stars like Cambodia, Laos and Bangladesh likewise maintain competitive currencies to support their export industries and so promote job creation and economic growth.)
- The new Government of National Unity needs to get in the way – to set up a robust EPZ framework and then stand back to let that EPZ framework work. This means very little red tape on the tax-free import of raw materials into the EPZs and re-export of finished products fabricated from them. Work permits for key managers of foreign companies in the EPZs should be freely granted. (Of course, South African health and safety regulations must be complied with.)
- The government needs to ensure port and rail infrastructure can serve these zones efficiently. Port terminals with foreign ownership and management serving the EPZs should be permitted, as in Djibouti, Maputo and Dar es Salaam. Likewise, electricity and water provided to these utilities might in part be met by EPZ zone-dedicated solar, wind and desalination capabilities. There is already a precedent for this: Amazon’s new data centre in Cape Town is supplied with electricity from an investment in a solar plant in the Northern Cape, and its water needs are supplemented by an investment in the Greater Cape Town Water Fund.
- A corresponding set of “hands-on-then-hands-off” government policies for the Johannesburg Service EPZ should also be instituted. (I am sure the rugby-obsessed Uruguayans would happily share their very successful Montevideo model with us.)
- South African business has a role to play but it will likely not be as high profile as many might want. The jury is out on best practice, but, to avoid conflicts of interest, one may need to prevent direct involvement by local companies during the first few years of an EPZ’s operation. Remember an EPZ cannot “export” products into its home country: that defeats the object of the exercise as these zones are there to serve foreign consumers and, yes, above all, provide work for South African employees… but not South African consumers. If South African businesses can supply inputs into these zones at world-beating prices, all the better. Such backward integration by EPZs into the host country is a profoundly important secondary benefit arising from their establishment. But it should happen only where the prices of those South African-sourced inputs are globally competitive. (Many of the ventures in Kenya’s EPZs are in agribusiness, adding value to Kenya’s vibrant horticultural sector).
Here then is a series of connected and reinforcing policies that would fundamentally reorient the South African economy in a fundamentally reorienting global economy.
Job creation
Will they be listened to? I fear not, if, in the wake of the new political order in South Africa, the overwhelming priority of the new government will be better domestic service delivery in all its traditional forms. But the GNU must remember that no greater service can be delivered than to facilitate the creation of jobs for our unemployed.
The common perception of the Serengeti gnus is that they are stupid creatures, wandering around aimlessly, only to end up a year later where they started; to outsiders, it seems they are simply there to be preyed upon by lions and crocodiles. This is plain wrong: being the most numerous big species of the Serengeti-Mara ecosystem, they are – in a very real sense – its most successful. And why do they prosper? Because no species is better able to search out the greener pastures of the Greater Serengeti than the ungainly gnu.
May our own GNU succeed in being able to search out greener pastures for South Africa and, above all else, greener pastures for those unemployed South Africans adrift in today’s fast-changing global economy. DM