Johan Fourie's blog

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Game changers for the South African economy

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GamechangerMcKinsey & Company recently published a report entitled ‘Game changers: Five opportunities for US growth and renewal’ in which they highlight five industries which they believe will drive US growth over the next decade. The five are: shale gas, trade competitiveness in knowledge-intensive goods, big-data analytics, investment in infrastructure, and a more effective system of talent development. The report attracted a lot of media attention and also received the support of notable US economists, including Laura Tyson at Berkeley, a candidate to replace Fed boss Ben Bernanke.

Shale gas

I think the report has some relevance for South Africa too.  South Africa, according to this list, has the 8th most technically-recoverable shale gas reserves in the world. I know there is some debate about the environmental impact of fracking – and this is certainly no space to debate that. (An overview of the debate is available here.) But it is difficult to deny that shale gas offers very real benefits for the economy. South Africa has about half the recoverable shale gas reserves of the US. According to McKinsey, shale gas alone could add $690 billion a year to US GDP and 1.7 million jobs by 2020. Even if we only add a tenth of that figure, we will increase our GDP by around 20%. And jobs: recent figures show that the narrow unemployment rate is now 25.6% (which translates to about 4.7 million jobless South Africans). The need for job creation has never been more obvious.

Not only does South Africa have rich shale reserves, but we have the skills to exploit it. South Africa’s mining sector is one of the best developed in the world, with the deep gold mines of the Witwatersrand necessitating the early adoption of capital- and knowledge-intensive technologies. With other reserves in decline (and the concomitant labour unrest), what better time to retrain our chemical engineers and mining technicians to take advantage of the massive potential shale gas offers?

Growth in the shale gas sector will not only add to production and reduce unemployment, but cheaper oil will stimulate many other sectors of the economy where oil is a major production input, including agriculture and manufacturing. Here’s Tyson: “Growth in shale energy will mean more investment, production, and jobs in the energy sector itself. Lower gas prices will boost manufacturing production, particularly in downstream industries like petrochemicals and primary metals that use natural gas as fuel and feedstock.” The exploitation of shale gas meant that the US stopped importing oil. In contrast, oil is currently (by far) South Africa’s largest imported product; in 2012, we imported R220 billion of oil and it’s been increasing by 8% since 2008, much faster than GDP. Exploiting shale gas would reduce our need for foreign reserves, reduce input costs for agriculture and manufacturing, and stimulate the creation of jobs across the economy.

Infrastructure

Cheap oil will also reduce construction costs for infrastructure, which McKinsey lists as another growth sector of the future. South Africa has an ambitious infrastructure investment programme too, notably in electricity, road and rail transport, and port efficiency. While the 2010 World Cup was a catalyst for many investment programmes, some of the investment was more successful (the airports, the Gautrain) than others (several stadiums). The focus now is on building the productive engine. Reliable electricity, as well as lower transport costs (in terms of fees, but also reliability and speed), is certainly necessary if our economy is to thrive.

But more can be done: the most important infrastructure of the future will arguably be broadband connectivity. While progress is being made, especially in metropolitan South Africa (and in towns like Stellenbosch), progress is much to slow in rural areas. Fortunately, the private sector can make a meaningful contribution here: Microsoft has launched a pilot project in the rural Limpopo province that aims to deliver high-speed and affordable broadband to local communities using so-called “white spaces” technology. Such initiatives are to be commended, but, perhaps with the support of the various layers of government, should become the rule rather than the exception.

Our transport connections to the rest of Africa also remain weak. Exporting goods to Zambia, for example, requires a delay of up to a week at border posts. There is still no bridge over the mighty Zambezi between Botswana and Zambia which inhibits any trade in perishable products. If South African firms are to take advantage of the growth of African consumers, then connecting the continent should be a key concern of policy-makers.

Big-data

Big-data is not only a geeky catchphrase, it’s driving some of the most remarkable revolutions in productivity. McKinsey estimates that efficiency gains from big-data can result in an increase of 1.7% of US GDP, mostly through productivity gains in the retail, health and government sectors. All three sectors are large sectors in the South African economy.

Our retail chains (Shoprite and Pick ‘n Pay, for example) are expanding into the rest of Africa at rapid speed and will need to innovate to stay ahead of the rising interest from foreign retailers, including Wal-mart, who recently purchased Massmart, a South African group. Innovations in big-data analytics can offer exactly that: the interaction of payment systems and mobile technology, for example, could significantly lower transaction costs, which is why the major international payment companies – Visa and Mastercard – are increasingly looking at Africa as a laboratory for innovation. The rise of mobile networks across Africa opens new possibilities for big-data analysts. One such local technology, Mxit, the social network developed in Stellenbosch, now has more than 50 million registered members, sending on average more than 500 thousand messages per day. Pondering Panda, a research firm, use these members to undertake surveys for marketers and political analysts.

South Africa’s private health care is of the highest quality in the world, which is why South Africa’s Medi-Clinic could buy the largest private hospital group in Switzerland as well as hold a controlling share in Emirates Healthcare, a private healthcare group in the United Arab Emirates. But private healthcare companies have access to large quantities of confidential patient information, information that will be increasingly difficult to manage, protect and analyse. Similarly, all governments have access to vast amounts of personal information. Advances in computing and programming can transform this sea of data into insights that create operational efficiencies. It is clear that big-data analysts will be highly sought-after in the future South African job market.

Talent development and knowledge-intensive industries

While South Africa’s primary and secondary education system struggles to escape its poor performance, less emphasis has been put on the excellent performance of South Africa’s universities. According to this measure, seven of the top ten universities are in South Africa (the top four are South Africa, and for some unknown reason the University of Pretoria has been excluded from the list. In my opinion, it should be number 4). Two African universities – the University of Cape Town and the University of Stellenbosch – has recently made the The Times Higher Education ranking as two of the top 500 universities in the world. This excellence means that South Africa increasingly draws the best and brightest students from across the continent, much like American Ivy League institutions draws the best and brightest from across the globe. Moreover, studying in South Africa is also significantly less expensive than in Europe, the US or Japan, and because English is the lingua franca at most universities, students from outside Africa increasingly opt to study in South Africa.

This is perhaps the most important resource South Africa should exploit. We need to recognize the contribution of these immigrant scholars, and make it easy for them to visit, and easier for them to stay here. There is a perception that they steal South African jobs; on the contrary, it’s educated folk like these who create jobs through innovation and entrepreneurial activity. The US is a great example: Sergei Brin, one of the Google founders, was an immigrant from Russia, and a South African, Elon Musk, started PayPal, Tesla Motors, SpaceX, and is now working on a high speed rail between San Francisco and Los Angeles known only as the Hyperloop. (He will release more details about this on the 12th of August). The McKinsey report acknowledges that talent development should be done with a long-term view: while this sector will make the smallest contribution in 2020 of the five game-changing sectors listed, it could “achieve a dramatic ‘lift-off’ effect by 2030, adding as much as $1.7 trillion to annual GDP”. That’s four times South Africa’s current GDP. The active recruitment of the continent’s best talent – Africa’s own Sergei Brin or Elon Musk – to settle in South Africa is therefore a potential game-changing policy that will, in the long-run, lead to significant gains for the South African economy.

Just do it, Mr and Mrs Policy-maker.

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5 Responses

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  1. Very incisive piece, Johan. Your piece again highlights how in the midst of all the structural challenges and developmental problems that South Africa has, there is a lot of potential that we as a nation could exploit and thrive off of.

    P.S: you mention that SA has well developed mining skills from the mining of the Witwatersrand Gold Reef but you omit to mention an institution that has played a key role in that development (and is also ranked highly in the Times Higher Education Rankings). That is the University of the Witwatersrand in Johannesburg.

    Mbekezeli

    October 3, 2013 at 21:43

    • Of course, Mbekezeli, I should have mentioned the role of Wits’ School of Mining Engineering and their historical role in the development of South Africa’s mining expertise. Thanks.

      Johan Fourie

      October 8, 2013 at 04:21

  2. […] the global market, boosting exports of high-tech, knowledge-intensive goods (see my earlier post on Game Changers); and, c) inspire the next generation of South African physicists, engineers, innovators and […]

  3. Sorry, forgot to include my details.
    Name Jay Carson
    Email: drjaycarson@gmail.com

    Jay Carson

    August 6, 2013 at 20:54

  4. Johan, You say unemplyment is 26.4%
    Please comment on the following rough figures and very crude methodology.

    Given (Official inhabitants – SA POPn 51 Mil):
    20 Mil <- Age 19
    5 Mil Age 20-24
    18 Mil Age 25-54
    3 Mil Age 55-65
    4 Mil Age 60+

    Statements:
    1. SA needs to find at least 1 million jobs each year for the next 20 years !
    2. 'Unemployment' is 40%

    Rationale for Statements:
    a) 20 Mil. official people in SA are under age of 19
    Therefore, each year for the next 19 years 1 Mil people will enter the job market (or study market)
    Let us assume that those entering the study market are replaced by those leaving the study
    market
    b) Let us ignore the 60+s and say that only half the 55-65 are employed and the other half 'retired'.
    c) If the taxpayer base is say 5 Mil and we have say "5 Mil" in Higher Education we then have
    +- 20 Mill 'unemployed' out of a possible working population of 25 Mil.
    Let us further say that 10 MIl work in the unofficial market. Then we have 10 Mil unemployed out of a possible working population of 25 Mil

    My "Behavioural Economics' is about 35 years old (I am not an economist) therefore I hope you may find my calculations incorrect.

    Regards
    Jay

    Jay Carson

    August 6, 2013 at 17:53


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