An agenda for real economic transformation

The Covid-19 pandemic has exposed the SA economy’s weaknesses, and the levels of inequality, poverty and unemployment fuelled the recent unrest. However, it is not too late to pull back from the cliff edge if we act now.

In our new book Structural Transformation in SA: The Challenges of Inclusive Industrial Development in a Middle-Income Country (published by Oxford University Press, with open access online), we set out an agenda for a real transformation of the economy for sustained and sustainable prosperity, increased economic participation and social and economic resilience.

The book builds in large part on research conducted by the Industrial Development Think Tank at the University of Johannesburg (UJ). What is structural transformation and why is it important for SA? By “structural transformation” we refer to changing the composition of the economy towards activities that have the scope for sustained productivity growth.

Traditionally, this was understood as moving from agriculture to manufacturing. However, to move to a path of sustained economic growth and catching up with advanced economies we must invest in productive capabilities across sectors — including agriculture and services.

Manufacturing remains central to this because of its strong linkages, such as with engineering and design services, and affects direct and indirect employment creation. There are also multiplier effects associated with upgrading and higher incomes received by workers. Industrialisation-led development can be sustained if it is based on investment in research and skills to ensure innovation, technology transfers and productivity growth. 

The new global drivers of change — digital industrialisation, global value-chain consolidation and sustainability management — have opened a window of opportunity for structural transformation across middle-income countries such as SA. Leveraging this opportunity requires new thinking, building of supportive coalitions, and agile policy-making.

Addressing the ‘traps and gaps’ 

The broad evidence marshalled in the book shows that firms have struggled to build their productive capabilities, diversify their production activities and develop domestic linkages. Given this weakening industrial base, engagements with global value chains (GVCs) and the emerging technologies of the fourth industrial revolution have been limited and have generally not yet delivered the desired outcomes.

The book points to a set of “traps” and “gaps” that have to be avoided and overcome in acquiring advanced industrial capabilities for real structural transformation. Along with other middle-income countries, SA is largely trapped in low-value segments of GVCs and our firms have mostly been unable to upgrade to the innovation-intensive, higher-value activities. The country has largely failed to leverage GVC participation for upgrading technologically, for building stronger linkages within the economy and creating good employment.

Avoiding the “technology trap” of competing with standardised technologies based on lower costs of production and wages requires bridging two key gaps. The first is deploying digital technologies to integrate production within and across firms in chains and clusters, to achieve a stepwise change in co-ordination efficiency.

The second is investing in skills and closing the digital skills gap. A key part of this is through combining design software, additive manufacturing (3D printing) and advances in materials science. These advances can reduce the time involved in creating new designs and in customisation.

SA has some of the institutions and policy measures to address these challenges. However, a lack of coherence — especially between skills development and industrial policy — has left firms having to “privatise” training initiatives which should instead be building a shared skills base.

The traps and gaps compound each other and have negative transversal effects across firms. A “new deal” coalition to address them needs to be overarching to reverse the fragmentation of the state under former president Jacob Zuma. It needs to be entrepreneurial, to move beyond incumbent privileges and recognise the huge potential in green industries.

Effecting real structural transformation

So what interventions and strategies should be prioritised for real structural transformation? First, there needs to be an inclusive opening up of the economy that confronts concentration so that competition rewards creativity and innovation and sustains dynamism. Competition and empowerment requires opening up the economy, notably to black business challenger firms.

Second, the strategies must embody long-term investment in capabilities, embracing the changes already under way, rather than short-term, sticking-plaster solutions. Creating a broad digital skills base is the most obvious of these. Some of our current research at UJ is surveying the range of skills needed across businesses to support such a strategy.

Third, the focus needs to be on building a regional industrial ecosystem in Southern Africa, which leverages the strengths and opportunities across countries. Many firms already operate regionally. With a regional focus, a larger and stronger economic base can be built on and more opportunities realised, including in energy, water use and land. SA will rise or fall in step with the region, not separately from its neighbours.

Fourth, a green new deal must respond to the climate crisis. This requires both ingenuity and collective action. Time is short and the change of direction needs to be sharp. Southern Africa is a “hotspot” on the planet, with temperatures due to rise at double the global average. SA is heavily dependent on fossil fuel energy. However, the opportunities for growth are also immense. There is great potential for low-cost renewable energy and expanding agricultural production in countries with abundant water to the north of SA. The know-how and investments to realise this potential will create jobs, growth and healthier communities.

The knowledge and resources exist to unlock the potential if we collectively commit to really “building back better”.

• Andreoni is associate professor of industrial economics at the Institute for Innovation & Public Purpose, University College London. Mondliwa is a research associate at the Centre for Competition, Regulation & Economic Development, University of Johannesburg, and senior managing consultant at Berkeley Research Group. Roberts is professor of economics at the University of Johannesburg. Tregenna is DSI/NRF SA research chair in industrial development and professor of economics at the University of Johannesburg.