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Work2001
WORK2001 First International Conference on
Employment Creation in Development
University of the Witwatersrand
Johannesburg, South Africa, 2-5 April 2001
EMPLOYMENT PROMOTION IN A MINERALS ECONOMY
Miriam Altman1
Graduate School of Public and Development Management, University of the Witwatersrand
Abstract
There is a sense of mystery and frustration that the SA economy has not grown as much as
expected nor generated employment in the 1990s. GEAR incorrectly assumed that growth would
be premised on foreign direct investment, which was meant to spur new value-adding industries
and related clusters. It is not surprising that this did not occur. The SA economy can be
characterised as a minerals economy, with a small market and low skill levels. Hence, most
foreign investment is attracted to resource extraction, basic beneficiation or government-
generated opportunities. There are many indications that SA suffers from the ‘resource curse’.
The dominance of basic minerals and metals in SA’s export profile contributes to business cycle
volatility, making it difficult for more employment-generating domestic market-oriented firms to
expand.
How can a resource-based economy shift its competitive advantage so that the
composition of its domestic production and export profile reflect a higher value added? Why and
how is this relevant to employment generation?
Some authors argue that the promotion of higher value-added, higher productivity
tradeables is inappropriate in a labour surplus economy. This paper argues that a sustainable
industrial strategy in SA must rely on the development of a core of higher productivity or higher
value industries: these industries are reflective of SA’s cost structure and would support a
dynamic or virtuous development cycle. It is the incomes and demand from these industries that
support employment multipliers in the low productivity, job-creating industries. In a context of
extremely high household dependency ratios and low wage elasticities, it is argued that the
incomes from the high productivity core would have a more important impact on household
welfare, and direct and indirect employment generation, than would a strategy that relies on a
core of low wage, low productivity industries. Job creation is more likely to be found in the
promotion of low productivity non-tradeables and non-traded goods and services, but the
expansion of these activities will rely on the stable generation of incomes and foreign exchange
from higher value tradeables. Low-productivity mass employment is supported by these incomes
through indirect demand and intra-household and fiscal transfers. A social contract is formed,
where it is implicitly or explicitly agreed that fiscal transfers will be made to protect or generate
large numbers of low-productivity jobs in non-tradable goods and services.
Keywords: employment creation, GEAR, minerals economy, tradeables
1 This is a part of a longer paper that could be made available upon request, via the author’s email address.
1. Introduction
It is not surprising that South Africa has not attracted sufficient foreign investment to induce
higher growth rates and absorb its substantial labour surplus. It can be characterised as a
minerals economy, primarily attracting resource-based investments and government induced
opportunities. The minerals rents enabled the government to by-pass the development of labour
absorbing sectors in favour of highly capital intensive energy and chemicals industries: now the
cost structure is inappropriate for the mass creation of jobs in labour intensive low productivity
exports.
How can SA shift from its current base as a minerals exporter, attracting capital intensive
resource based investments, to a more labour absorbing trajectory? It is argued that SA must use
its points of leverage as a minerals economy to shift to this path. The path would entail the
promotion of high value exports, with substantial transfers into low productivity non-tradeables.
The core of higher productivity investments must be promoted to induce the required growth
rates, underpin national income and reduce vulnerability in global markets. These investments
are difficult to attract to a minerals economy that has weak clusters, low skill levels and a small
domestic and regional market. The high value tradeables would be promoted with a targeted
technology policy that enables the re-orientation of existing know-how to higher growth
applications, cluster development and international joint ventures. The use of government
procurement is an important tool in this regard. The high value industries generate income and
foreign exchange to support low productivity, labour intensive non-traded goods. A ‘social
contract’ will be required to underpin society’s acceptance of large transfers from high to low
productivity sectors.
2. The Unemployment Problem in South Africa
The unemployment problem in South Africa has been developing over many years and is
certainly not a recent phenomenon (Bhorat and Hodge 1999, Edwards 2000, Kaplinsky 1995,
Klasen & Woolard 2000, Meth 2001, RSA 1998). Employment numbers in manufacturing have
been stagnant since the early 1980s, in a context of high population growth and a net inflow into
the labour market. Since 1988, employment has fallen dramatically. Between 1988-1997,
approximately 691,000 formal jobs were lost (Edwards 2000). At least 228,000 formal jobs were
lost between 1996-9 (Meth 2001)2. At the same time, the labour market expands on average by
about 250,000 net new entrants each year and so, the broad unemployment rate rose from 33.0%
to 36.2% between 1996-99. 3
Increasing unemployment has been attributed to a number of factors. Distorted factor costs, and
particularly rising black wages over the 1980s is the most common explanation (eg. Business
2 A recent review of the recently released October Household Surveys for 1997, 1998 and 1999 shows growth in the
agricultural and informal sectors, by 340,000 and 911,000 jobs respectively (Meth 2001). These figures require
investigation: agriculture has been shedding jobs rapidly in the 1990s. The expansion might be explained by
improved estimates of informal activity, which may also explain the OHS’s doubling of net labour force expansion
from 250,000/year to 500,000/year!
3 The strict unemployment rate in 1999 was 23.3%. The broad unemployment rate is an important indicator since
the majority of discourage workers are ‘African’. Of the 5.88 million workers who are unemployed, 2.7 million are
discouraged. Only 40.7% and 31.5% of urban men and women respectively that were defined as strictly unemployed
had previously had a job. One-third to one-half of the ‘strictly-defined’ unemployed had been out of work for more
than 3 years. A jobs ‘queue’ extends into ages 25-34 for 40% of the ‘African’ workforce.
South Africa, Fallon and Pereira de Silva 1994, Fallon and Lucas 1998, Fedderke et al 1999,
South African Foundation 1996). A newer argument, emerging over the 1990s, has attributed
much of this problem to globalisation and the increasing openness of the SA economy (Bell and
Cattaneo 1997, Bhorat and Hodge 1999). Arguments relying on distorted factor costs and
globalisation may be linked, since international trade has led to a shift in the skills composition
in the demand for labour. From a policy perspective, these are static arguments.
Slow growth and limited job creation from the mid-1990s has also been laid at the foot of the
ANC government’s “Growth Employment and Redistribution Plan” (GEAR). The GEAR
emphasized the importance of achieving a stable macro-economic environment that would be
conducive for investment, achieved with the reduction of the fiscal deficit and tight monetary
policy, in conjunction with trade liberalisation: other interventions were of a secondary
importance (Weeks 2000).
In stabilising the economy, the GEAR was very successful to the extent of achieving an upgrade
of SA’s sovereign debt rating to an investment grade by S&P and Moody’s. Inflation is relatively
low, and interest rates are substantially lower than they have been for years4. This is a major
achievement. Under these conditions, it should be expected that investment and therefore
employment would rise.
But it hasn’t. And this is not really so surprising.
Contrary to the GEAR, which projected employment growth, net employment has fallen,
exacerbating the unemployment crisis.
Private investment performance and savings rates have been extremely weak. Gross Domestic
Savings has fallen from around 24% of GDP in 1983 to about 15% in 1999. Growth rates of
private capital formation were very poor in 1996 and 1997, while 1998 and 1999 were
characterised by negative growth rates in private capital formation, as seen in Table 1. As
compared to rates of around 27% in 1983, Gross Fixed Capital Formation as a percentage of
GDP has been below 17% through the 1990s (SARB 2000). To offer perspective, in 1998, gross
domestic investment as a % of GDP in SA was about half that in Malaysia or Thailand. Most
economies that have sustained real growth rates of 3% or more have had investment and savings
levels in excess of 20% of GDP. Ultimately, SA needs growth rates that are even higher.
While GEAR may have laid a solid macroeconomic foundation for growth, it has ignored some
of the key elements that drive employment and investment growth in a developing economy
plagued by severe distortions and poor ‘market’ or institutional coordination. GEAR was more a
stabilisation plan, not an integrated growth and development strategy.
Both higher economic growth rates and far greater labour absorption rates (ie. jobs per Rand
invested) are required to address SA’s unemployment problem. Endogenous growth theory puts
forward that growth is dependent on technological progress and diffusion, improvements in the
labour input (size and quality of labour force), and in the capital input. Subsequent additions to
this thinking emphasize the importance of social capital (eg. strength of institutions, or the extent
4 Until the middle of 1999, real short term interest rates were considerably higher in SA than in a very wide range of
comparable countries, exceeded only by Brazil and Indonesia. Due in part to the contagion of the Asian currency
crisis, real interest rates are still far above GEAR projections (see Table 1). Real interest rates fell steadily during
the latter part of 1999 to a level which is now, for the first time in many years, in a position which is similar
(although still at the high end) to a wide range of middle income countries.
of corruption) and the orientation of economic policy (eg. whether it is outward or inward
looking).
While macro-economic tools may enable stabilisation, they are blunt when it comes to solving
major employment and growth problems. Of course, higher savings rates and lower interest rates
would bolster investment; yet, structural unemployment with serious supply constraints for
labour and finance are a legacy of the apartheid regime. In this context, a leap of faith is
required to believe that savings will flow into productive, job creating investment.
Table 1: GEAR: some projected and actual results
Private investment
(% change) 1
Employment
(% change)
CPI inflation2 Real bank/repo rate
Ye ar
Projected Actual Projected Actual Projected Actual Projected Actual
1996 9.3 7.4 1.3 -1.1 8.0 7.4 7.0 8.4
1997 9.1 4.7 3.0 -1.8 9.7 8.6 5.0 8.2
1998 9.3 -2.9 2.7 -3.7 8.1 6.9 4.0 11.6
1999 13.9 -5.3 3.5 -3.0 7.7 8.0 3.0 14.3
2000 17.0 – 4.3 - 7.6 – 3.0 -
Source: GEAR and SARB Quarterly Reports
Notes:
1. Private gross fixed capital formation, in constant 1995 prices
2. Refers to core inflation.
3. Growth and Labour Absorption in a ‘Minerals Economy’
3.1 Development in “Minerals Economies”
SA is a “minerals economy”, with all the attendant complications associated with a ‘resource
curse’ (Auty 1993, 1994, 1994a, Owens and Wood 1997, Davis 1995, _stensson 2000 and
Uwizeye-Mapendano 2000). In general, minerals economies tend to grow and to experience
structural shifts more slowly than non-minerals exporters. This can be explained by a number of
characteristics that are common to these economies.
Overvalued exchange rates caused by minerals exports earnings, render labour intensive
agricultural and manufactured exports uncompetitive. Other developing countries go through a
phase of low wage, low productivity manufacturing development that has the impact of mopping
up the labour surplus5. The pattern of development experienced by labour surplus developing
economies usually follows along a familiar path, where under-productive labour moves off the
farms, and into labour intensive manufacturing tradeables sectors. As there is a labour surplus,
wages are low, and the sectors can therefore be highly competitive internationally. As the labour
market becomes tighter, wages rise, and there is a shift to investment in more capital intensive
5 There is much evidence showing the positive correlation between GDP per capita and the contribution of
manufacturing value-added and supporting functions to production and to exports. There is a particularly strong
positive relationship between the contribution of machinery exports and GNP per capita. Conversely, the evidence
shows a negative correlation between the proportion of natural resources in exports and GDP per capita. The greater
the share of light manufacturing, namely food, clothing and textiles, generally, the lower is the GDP per capita
(Syrquin and Chenery 1989, Monitor 1999, Tybout 2000).
Table 2: Macroeconomic Indicators
Indicators 1980-85 1986-90 1991-95 1996 1997
Real GDP Growth (%)
2.3
1.6
0.8
3.2
1.7
Growth of real GDP per capita (%)
-2.6
-0.7
-1.4
1.1
-0.4
Gross Domestic Investment/GDP (%)
26.1
19.7
16.6
17.2
17.4
Gross Domestic Savings/GDP (%)
25.8
22.2
17.4
16.9
15.2
Consumption Expenditure/GDP
Private
Government
54.1
15.3
56.1
18.3
60.5
20.4
61.0
20.4
61.6
21.3
Labour productivity (% change) 0.8 -0.1 1.7
4.5 7.1
Unit labour costs (% change) constant prices 0.9 0.0 0.8 -4.2 -6.2
Export Growth, Volume (%) including
gold
excluding gold
0.8
1.6
2.3
4.9
3.5
6.4
7.4
14.9
5.2
5.3
Import Growth, Volume (%)
0.8
3.5
10.3
11.5
4.9
Real effective exchange rate
Change in %
-25.0
19.5
-0.5
-8.3
0.7
Terms of Trade (Merchandise) (%)
including gold
excluding gold
-17.7
-9.4
-4.9
2.6
0.3
0.3
2.4
0.4
-1.3
1.0
Real interest rates
Short term (3 month TB)
Long term (15 year Govt stock)
1.1
0.4
-2.1
0.5
2.0
3.8
7.7
8.8
6.6
5.6
Source: Black and Kahn (1998), sourced from South African Reserve Bank
activities. Only once there is a tighter labour market do wages begin to rise and the economy
moves into the development of more capital and skill intensive industries. The emphasis on
labour intensive tradeables is a necessary step in an economy that is capital and forex
constrained. Ultimately, the more successful NICs are those that simultaneously invested in
human capital development, so that the skills base developed alongside these structural shifts.
In contrast, the minerals economies tend to leap-frog from the resource base into heavy and
chemicals industries (HCI) development, by-passing the development stage of labour intensive
manufacturing: this is made possible by the large resource rents. The mass creation of jobs in
labour intensive tradeables is not really viable in a context of high domestic cost structures and
overvalued exchange rates. Nor is it a requirement of manufacturing development, as it is in
developing economies that don’t have ready access to capital and forex. This means that the
benefits of the minerals economy do not tend to spread widely and high levels of income
inequality and unemployment result, since the HCI sector is capital intensive. Hence, these
economies often have limited expansion of domestic demand. Mineral economies, like other
resource-based economies, also suffer from volatile export prices and falling terms of trade. This
results in balance of payments constraints on growth, unstable national income, a business cycle
linked to commodity prices, and relatively lower levels of national income per capita. In
addition, these industries tend to have lower employment multipliers and less dynamic linkages
(see Auty 1993, 1994, 1994a, 1998).
3.2 South Africa as a “Minerals Economy”
The build up of unemployment in SA over the past decades can most accurately be attributed to
the demise of jobs in traditional resource based industries in agriculture and mining, without a
concomitant employment take-up in more advanced industrial sectors, as would be expected in a
process of structural change and development.
The demise of employment in major primary resource based industries can be explained by
commodity price trends, technical conditions (in mining) and domestic market deregulation and
fear of potential land tenure claims and labour rights (in agriculture). The slow pace of land
reform and protectionist stance of the US and the EU further limit the expansion of new
agricultural activity.
SA bypassed the phase of development where large numbers of workers are absorbed into low
cost, low skill labour intensive tradeables. The ideal period for this phase arises where there is a
labour surplus in a context of low economy-wide cost structures. In other words, the context of a
less developed country where labour is cheap, but so is the cost of living. The low cost structures
are often maintained by an agriculture sector that supports large numbers of under-employed
workers. While labour intensive industries such as clothing have been promoted in South Africa
since the 1920s, this was done within a context that severely limited its growth: a closed
economy with constrained domestic demand. So, between 1972 – 90, the capital stock in the
clothing sector fell by 19%. Similarly, there was only marginal investment in the four most
labour intensive industries over this 18 year period, amounting to only R 251mn which is
equivalent to the average investment in the basic chemicals sector in less than 3 months
(Kaplinsky 1995). Between 1984 – 1990, investment was so low that it did not even cover
depreciation, so that the manufacturing capital stock actually diminished. The main investments
prior to 1984 were largely directed to capital intensive resource-based projects in basic chemicals
and metals.
In fact, there has been fairly substantial restructuring in manufacturing, but towards a capital-
using base. Table 3 shows that manufactured exports rose from 5% to 20% of total exports
between 1988-1996. Yet, the majority of manufactured exports are still material intensive
products such as beneficiated iron and steel, processed chemicals, processed foods, paper and
paper products, and non-ferrous metals, constituting 62% of manufactured exports by 1996.
Since the mid-1990s, substantial growth in exports of mechanical machinery, motor vehicles,
electrical machinery, transport equipment and wine have taken place, although increasing from a
small base (Black and Kahn 1998).
These shifts have not translated into net employment gains. This is partly due to the capital
intensive nature of these activities. In addition, the shifts have not resulted in increased
proportion of value added contributed by secondary production. In fact, the share of gross value
added by both primary and secondary sectors fell from 48.3% to 34.5% between 1975-1999.
This partly explains the fall in employment by 40.7% and 15.2% in primary and secondary
sectors respectively, which has mainly taken place in the 1990s (Abedian 2000). The tertiary
sectors contributed the greatest growth to gross value added and employment, particularly
financial services and community, social and personal services, although most of these gains
took place before the 1990s. Table 4 summarises these changes.
Table 3: Composition of SACU’s total export basket by Stage of Manufacturing
Percentage of Total Exports
Category 1988 1991 1994 1997
Gold 44% 34% 30% 21%
Primary Products 21% 23% 22% 23%
Beneficiated Primary
Products
25% 27% 27% 29%
Material Intensive
Products
5% 6% 6% 7%
Manufactured products 5% 10% 15% 20%
Exports as % of GDP
(incl. Gold)
27% 22% 22% 25%
Source: Black and Kahn(1998), fromTrade for Growth, IDC, May 1998
Table 4: Summary table of sector changes
Sector
Share of real
GVA (%)
Change
in
share
(%)
Growth
in real
GVA
(%)
Change in
Employment
(%)
Change in
real
GVA/Empl
(%)
Change in
capital/labour
ratio (%)
1976 1999 1976- 1976-1999 1976-1999 1976-1997
Primary sector 17.9 10.1 -43.6 14.0 -40.7 89.1 n/a
Agriculture, forestry and
fishing 6.7 3.7 -44.8 56.7 -42.7* 173.7 0.8
Mining and quarrying 11.2 6.5 -42.0 -2.9 -36.6 46.7 175.6
Secondary sector 30.4 24.4 -19.7 28.5 -15.2 49.2 n/a
Manufacturing 23.0 18.2 -20.9 41.7 -2.9 46.3 114.0
Electricity, gas and water 2.6 3.3 26.9 163.2 10.9 131.6 75.6
Construction 4.8 2.9 -39.6 -19.8 -52.3 55.2 27.0
Tertiary sector 51.7 65.5 26.7 70.7 16.2 45.3 n/a
Wholesale, retail, catering
and accommodation 13.0 13.1 0.8 33.6 21.1 10.8 34.4
Transport, storage and
communication 9.2 10.0 8.7 120.5 -31.4 211.5 82.8
Financial intermediation,
insurance, real estate, and
business services
12.7 19.3 52.0 94.3 84.5 1.9 -23.4,
Community, social and
personal services 16.6 23.1 37.5 68.0 19.8 38.0 n/a
Total economy 100 100 47.3 4.6 39.1 65.1**
Source: Abedian(2000), sourced from SARB, Stats SA and the National Productivity Institute (NPI)
Notes: GVA is Gross valued added, * Using farming employment, ** private economy including agriculture, n/a is
not available
Table 5: Education Profile of African Workers
Men Women
Mean years of
education
Proportion of
the workforce
that has passed
Std 10
Mean years of
education
Proportion of the
workforce that has
passed Std 10
Formal (urban) 9.0 27.2 9.7 35.6
Formal (non-urban) 7.3 10.2 8.1 19.1
Informal (urban) 8.0 14.0 8.5 17.1
Informal (non-urban) 7.2 7.3 7.0 8.1
Domestic (urban) - - 7.2 6.3
Domestic (non-urban) - - 6.9 4.3
Agricultural (formal, non-urban) 6.3 5.2 6.5 6.5
Agricultural (informal, non-urban) 6.5 8.8 6.6 8.0
Source: Meth 2001, calculated from October Household Survey 1999.
Note: Excludes the 8.6% of workers with post-secondary qualifications
The historically slow growth in secondary and tertiary sectors can be attributed to the apartheid
minerals economy that restricted international interaction, small business entry, effective demand
and labour market functions such as skilling, spatial and occupational mobility, affordable cost
of job search, and circulation of market information. These conditions were created by the
approach to import substitution industrialisation, international sanctions, legal restrictions on
ownership of assets and businesses by the black population, and controls over the labour market
and access to education6. Table 5 offers one demonstration of the severe gap in skills attainment,
with a very small proportion of the African workforce having finished a secondary education.
In other words, most of the elements that underpin growth, and the efficient coordination of
factor and product markets were purposefully undermined by the apartheid government. The
minerals base made this possible on a sustained basis with the misallocation of mineral rents,
particularly in the context of dramatic increases in the gold price in the early 1970s.
Certainly, minerals revenues enabled the spending on defence and on capital intensive projects
that marked the former regime. For example, basic chemicals and basic metals accounted for
66.7% of investment made between 1972 and 1990: by 1990, basic chemicals and basic metals
sectors accounted for over half SA’s capital stock. The politically driven Mossgas and Sasol
alone accounted for more than half the growth in manufacturing investment over this period: “all
6 The concept of “Separate Development” strategy entailed that the black population would be kept out of the central
urban areas, and that production become increasingly capital intensive to reduce dependence on black workers. The
black population would be moved to outlying (and generally uneconomic) areas, where labour intensive industries
were encouraged to move. So, most of the legislation was aimed at saving economic opportunity for the White
population. Examples of these controls included job reservation, the Bantu education system, severe limits by race
on access to occupation, certification and education, GroupAreasAct and Influx Control, and racial applications of
labour law. Since the black population could not own neither a business nor property, large parts of the population
now lack assets to put forward as collateral. In this context, the idea that low savings rates or high wage rates limit
investment is a nonsense: these are severe distortions that are related to asset ownership, spatial dislocation, and
skills gaps, not factor price distortions.
available evidence suggests that calculated on an ex-ante basis, these investments in synfuels are
economically unviable, requiring an oil price equivalent in excess of $35/barrel” (Crompton
1995, Kaplinsky 1995). The ANC’s Macro-economic Research Group(MERG) recognised this
and attributed growing unemployment to the crowding out by the capital intensive Minerals-
Energy-Complex or MEC (Fine and Rustomjee, MERG). Kaplinsky (1995) argues that these
capital intensive investments did not crowd out labour intensive ones: rather investment was
stagnant across the board through the 1980s. However, this view ignores the impact that SA’s
main exports, namely basic minerals and metals, have had on the economy’s cost structure.
Davis (1994, 1995) queries the policy implications of the resource curse thesis. Would minerals
economies be better off if they were to restrain the extraction and sale of their valuable
resources? Where they are exploited, should this be done in enclaves separate to the rest of the
economy? Of course not. The problem lies in the application of the resources.
The misallocation of resource rents has left SA as a highly distorted middle income economy,
with a cost structure and domestic market-oriented production sectors that reflect this middle-
income status but a human development index, skills level and export profile that is more
reflective of a less developed country (Kahn and Black 1998, Klasen and Woolard 2000)7.
A strategy to reduce unemployment will need to address these structural problems.
4. The Role of Tradeables and Non-tradeables in Job Creation
Ultimately, the levers by which the SA economy can move from a resource-based exporter with
a low labour absorptive capacity to one that exports higher value goods and that generates much
greater numbers of jobs must be identified. It is proposed that there are two interconnected legs
to this shift, where the state is actively involved in promoting of both higher value tradeables and
low productivity non-tradeables. The economic thinking in South Africa has tended to polarise
these activities. One rests on the importance of a stable macroeconomic environment and labour
market flexibility to encourage the expansion of low-productivity tradeables, most likely through
foreign direct investment (GEAR 1996, SAF 1996). The other relies on state financed
opportunities, namely public works, mass-housing, and more equitable asset and income
distribution to expand domestic demand (MERG 1993, Social Equity 1996). The first stylised
approach ignores SA’s structural constraints and the second does not reflect on the source of
income to pay for domestic demand expansion. Neither approach recognises the supply
constraints that limit the expansionary impact of either programme. An employment plan is
needed that identifies sources of foreign and local demand, the ability of the economy to
respond, and their contributions to national income, forex or employment.
4.1 Tradeables
Will Low-Productivity Tradeables Generate Sufficient Employment?
A low productivity, low wage export strategy seems like the obvious strategy in a labour surplus
economy with a small market. Examples include a diverse range of manufacturing industries
such as commodity apparel, low skill assembly or some metals fabrication. It might also include
tourism and some personal services. Here, the idea is that SA has an abundance of un- and
under-employed low skill workers, and so a strategy must generate jobs that absorb these people
7 South Africa can be described as a middle income country with an annual per capita income of $2,850 in 1999.
Yet, a recent report on poverty in SA shows that 16.5% of households have expenditure below $ 932 per year, and
24.8% have expenditure between approximately $ 932 and $1554 per year (SSA 2000).
in a realistic way (Nattrass 2000). Intuitively, this makes a lot of sense, while a high
productivity, high skill approach appears naïve.
This strategy relies on low wage competition. But it is not realistic to expect a middle income
country to compete on the basis of low wages. To maintain this strategy for any length of time,
it would be necessary to continuously reduce the cost of living (eg. price controls on wage
goods, generous provision of social wage as proportion of incomes) or reduce real wages (either
through exchange rate devaluations or some sort of wage control). Otherwise, it is unlikely that
these goods would be competitive in international markets. The “wigs and ashtrays” strategy
made sense for the NICs of the 1960s and 1970s, as they did have a lower cost structure. Notice
that even Mauritius has pulled out of this approach (clothing and tourism) as soon as it possibly
could. South Africa, on the other hand, is a middle-income country with a cost structure to
match. In the context of SA’s present technological capacity and know-how, a more virtuous
cycle could be achieved (and far more easily) by improving know-how than by reducing wages.
There are further limitations to the expansion of low-productivity tradeables such as clothing or
agricultural products: the main markets in the EU and USA are highly protected and subsidised.
Jobs may well be created, but not nearly to the scale that many seem to implicitly believe.
A third reason to avoid this approach: it leads to a low-level equilibrium from which, as a
strategy, it would be difficult to emerge: this is due to the global image that would be created for
low value goods (McMillan et al. 1999).
For these reasons, a low productivity strategy, as the dominant driver of employment, would
preclude the possibility of developing a high value strategy, both because it draws down on the
labour force and diminishes SA’s product image overseas. In the context of a middle income
country, low productivity exports may to some extent rely on strongly segmented labour
markets, where higher wage workers do not experience downward pressure from the low wages
in certain segments (regionally or sectorally), and so the their expansion is not welfare-reducing
where net new jobs are created. Traded services such as finance or tourism and non-tradeables
such as domestic services are examples.
Do High Value Tradeables Distract from an Employment Generating Path?
Workers in a middle-income country must earn wages that reflect the cost of living. Otherwise,
the human resource is undermined. In a country with a small domestic market, this requires that
the production structure and the export profile reflect this cost structure. The labour market
segmentation literature shows that high productivity industries generally pay workers with the
same educational attainment more than lower productivity sectors. Ultimately, it is essential that
increasing number of investments fall within this category, with high productivity, and strong
local linkages.
In the South African economy, a proposal for high value tradeables is often confused with the
huge, capital intensive beneficiation projects. It seems obvious: SA has abundant natural
resources, and so there should be a focus on promoting local resource-based industries. SA and
the region have a small market and has difficulty attracting investment on that basis. One of SA’s
few attractants is its resource base. Hence, the strategy entails building on this base, with the idea
of first attracting investments that result in improving the efficiency and price with which they
are offered as inputs to other industries. Particularly in the case of non-renewable resources that
are extracted, namely minerals and metals, the idea is to attract world scale production to
improve efficiency, enabling the provision of input costs at world prices (or less). The provision
of cheap energy underpins this strategy.
Three main concerns arise with this approach8: first, many resource based countries have
difficulty moving up the value chain. This is partly because of the reliance on basic resource and
slightly beneficiated exports that have the effect of over-valuing the currency, thereby raising the
price of manufactured exports and of domestic wages. This approach also subjects the economy
to all the problems associated with a weak terms of trade and balance of payments problems.
Second, the lags in this strategy are very, very long. Large beneficiation projects take many years
to negotiate and have long gestation periods….and so, many years before the low cost inputs are
made available to investments further downstream. Having devoted much administrative and
financial resources to encouraging these investments, the scale, scope and timing of expected
output and employment multipliers is uncertain. Investments further upstream take less time to
negotiate, have shorter gestation periods and generally cost less to the state in terms of
infrastructure and incentives. Third, it is essential that downstream investment projects simply
have access to inputs at world prices: it is these projects that enable a shift in the export profile
that contributes to a rising terms of trade. While it is useful to have some reliance on local
sourcing, this is less important for commodity inputs. Intuitively it seems better to source
commodity inputs locally, and avoid imports thereby increasing net foreign exchange earnings.
Yet the slow beneficiation strategy may actually preclude the ultimate goal. It may make more
sense to start the strategy closer to the goal, that is, further upstream. Once these industries are
in place, they may themselves attract the large beneficiation projects.
The economy requires at least a critical minimum mass of industries or firms that can earn
incomes and forex and drive productivity growth on the basis of technological and product
change. Tentatively, it might be said that there are two ideal sorts of investments sought,
simultaneously: OEMs (original equipment manufacturers) and domestic products containing
some intellectual property. In between these two types are variations that, for example, might
entail international joint ventures that also result in technology transfer or improved positioning
in product markets, particularly for SMEs.
OEMs are important since they have well-developed global markets, offer potential for
technology transfer and learning and, often encourage other suppliers to locate nearby. Not all
OEMs fit this strategy: the emphasis is on OEMs that require many separate parts, where the
process of global M&As has not led to excessive concentration and where the MNCs have a
reputation for developmental behaviour. For example, motor industry or electronics related
investments tend to have many parts and prefer to locate within regional clusters of suppliers.
Investments in ‘white goods’ or ‘brown goods’ may lead to very few multipliers where there is
dramatically increasing global concentration and where in some products the technology requires
a diminishing number of parts.
An essential part of this strategy to move up the value chain requires that domestic firms hold
proprietary knowledge and have as much control over the value chain as possible. In this way,
domestic firms garner the most value and profits, underpinning a greater ability to pay higher
wages (assuming that workers have bargaining power) and earning more revenue for the state.
Generally, the company that holds the ‘brand’, the technology or of the distribution channels is
the one that takes the largest proportion of the revenues. This is partly why developing countries
have lower incomes.
8 These concerns are levelled at the metals and minerals beneficiation projects situated relatively far upstream.
These concerns would not apply to projects in jewellery. Nor would it apply to agriculture based projects, where
high value basic and processed products help to rejuvenate a traditional industry.
Ernst, Ganiatsos and Mytelka (1998) assert that “the key determinant of success in expanding
exports has to do with small and medium sized developing country firms’ abilities to
continuously and iteratively develop new technological capabilities….(this) is less about
acquiring or leasing formal technology per se than it is about mastering the myriad of process
innovations which must be made by firms with respect to internal organisation, interaction with
foreign buyers and suppliers, production processes, research and development, marketing,
etc….”. While labour cost advantage may have been important for the initial export success of
some NICs, the ability of firms to develop higher value product niches, diversify markets,
develop other organisational and design innovations have been extremely important to their
continued success.
This would require that policy emphasize the generation of proprietary knowledge and products,
taking these to scale in global markets. These industries are essential to encouraging growth,
underpinning incomes reflecting SA’s middle income status, stabilising national earnings and
foreign exchange, improving SA’s terms of trade, and augmenting the technological base. This is
a serious challenge! It appears that only developed mineral economies such as Canada, Finland,
Sweden and Brazil to some extent, have managed to shift into higher value, knowledge based
exports: these economies had the benefit of a stronger skills base, access to growing markets, and
lacked the acute labour surplus.
A range of generic policies are, of course, essential to the expansion of these industries, related
to trade policy (eg. reducing anti-export biases, enabling the purchase of inputs at world prices,
efficient logistics, opening access to foreign markets), finance (eg. access to finance, reducing
capital bias, or risk reduction support), policy stability generally, education and skills
development. Weak skills levels will particularly act as a brake on the expansion of both high
and low productivity tradeables directly and on any spill-over effects that form an important
source of growth (Tybout 2000). Some of this problem might be addressed through an active
promotion of skilled immigration, thereby expanding the base and reducing the cost.
A minerals economy has specific advantages that have been used successfully by countries such
as Finland, Canada and Brazil to diversify. In South Africa, these advantages include:
oMineral rents that enable more autonomous policy making than would be
possible in a context of reliance on foreign aid or debt. Examples include:
The creative use of government procurement to leverage-in new forms of
investment through ‘offsets’ and countertrade.
Financial incentives to attract investment.
State investment in critical infrastructure
oPockets of technological know-how and excellence, that have been generated as
a result of the minerals base or related military requisites. For example, Finland
has shifted from a reliance on pulp and paper exports to environmentally-
friendly technology for the pulp and paper industry. A technique called
‘technology roadmapping’ has been used effectively in Australia and Canada to
identify high growth applications of existing know-how, so that the country is
trading on knowledge, not resources.
oControl of state-owned enterprises, that have been used critically in Finland to
expand new industries.
4.2 Non-Tradeables
Low-Productivity Non-tradeables
It is unlikely that exports will substantially eat into the unemployment problem in SA. Even with
an optimistic scenario, the economy faces a net new entry of about 250,000 workers into the
labour force each year, and a backlog of about 5.5 million unemployed.
The jobs could be created by increasing domestic demand for more employment-absorbing low
labour productivity non-tradeable sectors. Intuitively, tradeables would seem the more likely
source of mass job creation, given South Africa’s small market. Yet, it is possible that a focus
on non-tradeables and non-traded goods and services may generate more employment due to
SA’s cost structure. The problem of cost structure is not only related to wages, and so could
really only be addressed with either a large real currency depreciation or the introduction of
enclave-type export zones, neither of which appear to be consistent with current economic
policy9. Barriers to trade in major markets forms another major hindrance to the expansion of
job-creating tradeables.
The promotion of non-tradeables such as housing construction and public works has long been a
part of a Keynesian employment programme. Generally, these are recommendations that are
meant to kick-start the economy. In fact, this was a central part of the initial RDP programme:
the aim was to create many jobs directly through construction, while useful assets are provided
that help the unemployed to access economic opportunities. This was a view put forward by
MERG, with an emphasis on housing and social sector assets. Housing in particular was seen to
stimulate construction, and provide an essential asset to households, that could be used as the
basis for other small business development. Hence, this strategy concentrates on the potential
crowding-in of public investment, particularly in conjunction with some small business support
measures (Bond 2000, MERG 1993).
The reliance on public works as a central strategy has serious limitations. First, unless a
construction boom can be sustained, the jobs offer short term relief only. In this way, the
emphasis on public works assumes that the problem in SA is primarily cyclical and that these
infrastructure projects will generate demand for goods and services, getting an upward cycle of
activity going. In fact, the supply constraints are quite severe so that construction booms tend not
to set in motion spread effects10. While the provision of housing and assets to poor households
could assist in promoting much informal activity, it would not generate a forward propulsion of
the economy. Bond (2000) quotes a study by Eskom showing that one small business is created
for every 100 electricity connections, albeit usually in retail trade. In addition, it was envisaged
that access to housing would increase demand for appliances: yet, the expected demand for white
goods does not arise, as household poverty has been underestimated.
Dramatic social and economic dislocation, weak community care for children, the aged, the
disabled and HIV/AIDS sufferers, and a dearth of basic services in waste collection, health and
welfare amongst others, characterise the South African situation. It is therefore easy to justify the
expansion of community goods and services. The expanded provision of community services
9 It is worth noting that Mauritius had a dual strategy toward the development of its clothing sector: it offered high
protection for domestic producers, whilst at the same time attracting foreign firms into EPZs. Ultimately, these 2
grouping do seem to have come together so that local firms are now substantial exporters (Jhamna 2000).
10 See a forthcoming review of the Spatial Development Initiatives, DBSA, 2001.
provides long-term jobs and also contributes to human capital development and social
cohesion11.
In a middle-income minerals economy, demand for labour absorbing low productivity industries
can be sourced from:
• domestic consumer demand from income earners in higher productivity sectors (so the larger,
the better).
• foreign demand for skilled traded services that have a large complement of lower skill
workers.
• sustained increase in income by very poor households, where calorie intake levels are low
and the propensity to consume is high
• government demand for goods and services, using fiscal transfers and procurement systems
• More research is required to identify the potential for developing these sectors, but some
preliminary thinking would point to a number of key areas:
• The provision of community care for dependents to free women for participation in labour
markets and to improve social cohesion and general welfare.
• Generating commercial demand for waste such as alien vegetation and municipal rubbish:
the idea is to support recycling projects and networks of small waste collectors.
• The redistribution of land and the provision of basic extension support could dramatically
improve productivity and incomes. The promotion of agro-processing itself would lead to
increased demand in agriculture. Given the low levels of nutrition, it is possible that greater
domestic circulation could result in a virtuous cycle.
• Fiscal incentives to construction firms to adopt extremely labour intensive methods, thereby
generating
5. Conclusion
This paper is meant to form the basis of a research project to investigate the causes of, and policy
solutions to the unemployment problem in South Africa. It is not surprising that SA has not
dramatically expanded employment opportunities on the back of export expansion, supported by
a much improved macroeconomic environment. SA is a ‘minerals economy’, with a small and
slow growing local and regional market, a weak skills base and severe structural distortions. It is
a middle-income economy, with a human development profile that more resembles a less
developed country. So, most foreign investment is attracted to the minerals base or government-
led opportunities, with limited spread effects.
Hence, some argue that policy should emphasize labour intensive, and not high value-added,
exports. While SA has been successful at expanding its base of manufactured exports, this has
not had an impact on employment. While not being export pessimistic, this paper argues that it
11 Kitson et al.(1997, 1997a) model the cost of such a strategy in the UK to create 1 million jobs: such a study could
be emulated in South Africa. These service jobs could result from public sector procurement and do not necessarily
entail the expansion of the public service.
is unlikely that a middle-income economy characterised by low skills would successfully
generate very large numbers of net new employment through low productivity exports. SA has
experienced a large proportionate increase in manufactured exports12. This trade is important, but
has not led to net new job creation.
Yet, these industries do play an important role in the job creation potential of a middle income
minerals economy. While they may not directly result in substantial job creation, they can
underpin the demand and incomes that will support the low productivity activities. The mass
expansion of low productivity non-tradeables relies on the expansion of the high value exports,
due to the latter’s contribution to stabilising the business cycle, forex earnings, national income
and indirect income that is spent on non-tradeables by higher earning workers and professionals.
In addition, the transfer of resources between tradeable and non-tradeables, particularly through
fiscal channels would need to be the subject of a ‘Social Contract”. Government and the public
may have to accept the increasing transfer of funds from high productivity, high income sectors
to low productivity, low income activities, as they do in developed countries such as Japan, the
US and Europe.
In a situation of lower levels of unemployment, basic incomes could be supported by intra-
household transfers and welfare or social security transfers. In the US, it has been argued that
tight labour markets are the result of demand generated by high productivity industries for
(market-generated) low productivity services (Galbraith et al. 2000). But the rate of
unemployment and the gap to be filled was much smaller than in SA. At the same time,
governments in the EU, Japan and the US do generously support and protect their farmers. What
are the comparable sectors in SA, that may be less than efficient, that raise productivity simply
by generating some socially useful goods or services from presently unproductive labour?
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Contact details
Dr. Miriam Altman
Graduate School of Public and Development Management
University of the Witwatersrand
altmanm@mweb.co.za
