Late last year, a colleague and I published a peer-reviewed journal article trying to identify whether southern Africa was afflicted by “premature deindustrialisation”. Harvard economist Dani Rodrik (2016) identified this pattern of manufacturing decline in developing countries historically sooner than their industrialised counterparts, and at lower levels of per capita income.
In other words, developing economies were transitioning into low-value services before utilising the manufacturing bandwagon to build a prosperous economy. This is obviously concerning, as manufacturing has been the traditional channel through which to absorb labour and build a sustainable middle class empowered to hold its political and business elites to account.
African countries are increasingly afflicted by growing youth unemployment. Given that Africa will be the only fertility-positive continent on the planet by about 2050, we are concerned about future employment prospects for young people.
A worker from Gold Fields South Africa checks the condition of a vehicle in the South Deep gold mine in Westonaria, Gauteng. Photo: LUCA SOLA/AFP
In our 2023 paper, we found econometric evidence for premature deindustrialisation in southern Africa: “…there is good reason to believe that the SADC group of countries is emerging as a region where deindustrialisation in both employment and output terms is growing more distinct.”
In our regressions, a statistically rigorous way of determining a potential causal relationship between two variables, we found that “a reliance on oil and mineral rents is negatively correlated with industrial employment and manufacturing output”, which suggests Dutch Disease. Dutch Disease was originally identified in the Netherlands, where growing oil wealth was strangely correlated with manufacturing decline. In southern Africa, Dutch Disease “could be curbing industrialisation prospects in many oil and mineral-reliant countries”.
Economists typically posit that the disease works as follows: The sale of a raw commodity increases the demand for that country’s currency, which then appreciates as a result. However, such appreciation renders the country’s manufacturing exports relatively more expensive in global terms, undermining their competitiveness. It can also generate unearned income for the ruling class. Concomitantly, extractive industries may draw resources away from manufacturing sectors (especially during commodity price booms), which further impairs industrial competitiveness.
There have been many wrong-headed attempts to address this phenomenon, often based on poor diagnoses or a naïve presumption about the actual causal mechanisms behind the disease. This is like treating cancer with TB medication. It won’t work.
So, we set out to establish whether, in fact, there was good evidence for Dutch Disease in South Africa. If so, what are its likely causal pathways or patterns, and what can practicably be done to address them? In a forthcoming paper, colleagues and I at Good Governance Africa show that there is (sadly) good statistical evidence to suggest that Dutch Disease is afflicting South Africa.
When we interact a South Africa dummy with mineral rents (to ascertain country-specific effects in our sample of comparable countries), we find a strong negative effect on manufacturing output that is significant at a 90% confidence level. We also see a negative impact on industrial employment (as a share of overall employment) but no statistical significance (meaning that the relationship could be explained by other factors).
Critics of models like the ones we’ve run suggest that it’s impossible to isolate and specify the impact of a country’s mineral rents in such a small sample of countries. However, this is why we ran the model with data from 1996 onwards and controlled for other factors that the economic literature suggests could also play a role in mediating the relationship.
After controlling for institutional quality—typically the strongest explanatory factor in ascertaining why resource endowments can cause underdevelopment—we found that the effects still held. What we think is going on here is that South Africa’s mineral rents (despite a paralysed mining industry clearly in crisis) have partially undermined the country’s institutional quality. This, in turn, has had a negative effect on manufacturing competitiveness by undermining the country’s overall investment attractiveness.
Another possibility is that the electricity crisis, starting in 2008 and climaxing in 2023 (or may still yet peak after the May 29 elections) may be the primary factor explaining manufacturing decline. However, when we controlled for declining electricity consumption in the sample, the overall efficacy of the model deteriorated, probably because the electricity effect was already being picked up in other factors we had controlled for.
Another option is that globalisation has undermined South African manufacturing attractiveness – labour is cheaper elsewhere, and skills and electricity availability are stronger. We haven’t controlled for that in the modelling, so of course it remains an option. But all countries in the sample would have been affected by that, so we still can’t dismiss what we’re seeing – mineral rents seem to be driving down manufacturing output in South Africa specifically when compared with other countries similarly dependent on mineral rents.
So, what can we do about it? Two things, which are, in turn, dependent on two prerequisites. First, we need an industrialisation strategy that begins – perhaps ironically – by strengthening the attractiveness of investment in the mining industry. We need more money to flow into exploration and production expansion.
Second, we must ensure that a growing mining industry is integrally connected to green industrialisation that will generate broad-based development. This must serve as the foundation for a much more diversified economy. However, we must not fall into the trap of thinking that downstream beneficiation is our silver bullet – it’s more important to build up a set of industries initially connected to mining but that can be sustained long thereafter.
For any of this to happen, we need two other prerequisites to be in place. First is improved political governance – electoral system reform, alongside parliamentary rule reform, to ensure greater accountability for our often-unaccountable politicians and government officials. This goes hand-in-glove with the robust strengthening of key institutions such as the Hawks and the National Prosecuting Authority to deepen deterrence effects to prevent corruption.
The second is improved fiscal transparency. South Africa should join the Extractive Industries Transparency Initiative, and it must expedite getting off the Financial Action Task Force’s grey list. The longer we stay on that list, the more expensive it is for us to service our debt and the less likely we are to attract investment.
Dutch Disease is a real hindrance to our growth as a country. As with many other obstacles to growth, the answer is better governance and high-quality institutions. Better governance will not be achieved, however, unless citizens are also empowered to hold governing politicians and officials to account. This starts at the ballot box, but it cannot end there.
This article first appeared in Mail & Guardian.
- For all our election-related material and information on holding governments to account, see the Good Governance Africa “Election Tracker.”
Dr Ross Harvey is a natural resource economist and policy analyst, and he has been dealing with governance issues in various forms across this sector since 2007. He has a PhD in economics from the University of Cape Town, and his thesis research focused on the political economy of oil and institutional development in Angola and Nigeria. While completing his PhD, Ross worked as a senior researcher on extractive industries and wildlife governance at the South African Institute of International Affairs (SAIIA), and in May 2019 became an independent conservation consultant. Ross’s task at GGA is to establish a non-renewable natural resources project (extractive industries) to ensure that the industry becomes genuinely sustainable and contributes to Africa achieving the Sustainable Development Goals (SDGs). Ross was appointed Director of Research and Programmes at GGA in May 2020.
