Greater competitiveness and regional integration critical for South Africa’s growth and opportunity
Greater export competitiveness and deeper regional integration could help propel South Africa towards faster-growing exports, allowing it to achieve higher, more inclusive, job-intensive growth as laid out in the country’s National Development Plan (NDP) 2030, according to the South Africa Economic Update released on 4 February 2014.
“Helping South Africa achieve its export potential is essential for rapid job creation, high growth, and more opportunity, especially for young people.” said Asad Alam, World Bank Country Director for South Africa. “We hope this report provides concrete evidence to help shape the country’s ongoing debate on its economic and development future.”
The South Africa Economic Update 5 assesses South Africa’s economic prospects in the context of the global economic environment and prospects. The Special Focus Section on Export Competitiveness examines the performance of South African exports over 2001-12 relative to peers in other emerging markets and analyzes the challenges.
Recent Economic Developments
The report forecasts real gross domestic product (GDP) growth in South Africa to recover to 2.7% in 2014, from the estimated 1.9% in 2013 and to reach 3.4% in 2015. However, it will remain well below the average 5.4% projected for Sub-Saharan Africa for 2014-2016.
“The medium-term outlook is that growth will improve gradually, but that this recovery will be more subdued than previously forecast,” said World Bank Lead Economist Catriona Purfield. “The under the baseline forecast the recovery in growth is expected to be led by strengthening exports, as the recovery in high income economies gains pace and export capacity expands. As such, the forecast is subject to potential downside risks from developments in international markets as well as regional and domestic issues.”
Special Focus on Export Competitiveness
South Africa has identified exports sector as an engine for higher, more inclusive and job intensive growth with the NDP, aiming for export volume growth of 6% a year in order to achieve an annual increase in real GDP growth of about 5.5%. This Economic Update shows that despite successes in some areas, South Africa will need to greatly improve its export performance to meet these targets.
The report examines the facts behind South Africa’s export performance by some 20,000 companies during the 2001-2012 period, stripping out the impact of the large minerals sector, looking at services and comparing performance with emerging market peers.
The report shows that South African exports are falling short of their potential as they are increasingly concentrated and losing dynamism. They also continue to be focused on capital intensive goods, which contribute less to job creation.
The report argues that while trading in products that are technologically sophisticated and highly capital-intensive has positive implications for competitiveness, it also means that the dominant export companies are failing to tap into South Africa’s large pool of low-skilled labor, thus failing to create enough jobs to make the export sector a major direct contributor to employment growth and poverty reduction.
“A key development in South Africa’s export pattern is the emergence of Sub-Saharan Africa as the main destination for South Africa’s non-mineral exports,” said Thomas Farole, World Bank Senior Economist. “While this has generated market opportunities for newer and smaller exporters, so far these exports have remained somewhat smaller and shorter-lived than exports to other markets.”
The report identifies three opportunities to help ignite export growth: greater competition among firms in South Africa, resolving infrastructure bottlenecks and cutting logistic costs, and deeper regional integration in goods and services.
By promoting competition in the domestic market South Africa would boost productivity and efficiency and enable entry to new more productive firms, which would place downward pressure on high markups, the report states. This would lower input costs and tip incentives in favor of exporting by reducing excess returns in domestic markets.
Resolving infrastructure bottlenecks and cutting logistic costs present a second opportunity to support export growth. Cutting the charges exporters incur for the use of ports, rail and telecommunications would promote competitiveness and benefit small and medium-size exporters and nontraditional export sectors.
Thirdly, promoting deeper regional integration in goods and services within Africa would generate the right conditions for the emergence of ‘Factory Southern Africa’, a regional value chain of production that could feed into global production networks. South Africa could play a central role in such a chain, leveraging the scale of the regional market, exploiting sources of comparative advantage across Africa to reduce its production costs, and providing other countries in the region a platform for reaching global markets.
Progress on all three fronts would help catapult South Africa toward faster-growing exports, allowing it to realize the higher, more inclusive, job-intensive growth articulated in the NDP.