Measures to promote the transformation of the economy, for example black economic empowerment, affirmative action and stricter labour legislation, have been accepted as imperative for stability and offset in business models, in spite of the fact that they have increased the cost of doing business.
A third distinct phenomenon over the past 20 years has been the shift in the relative importance of various economic sectors and the underlying reasons for this. It shows, for example, the difference new industries can make, with the cellphone industry contributing to an increase in the transport and communication sector’s contribution to GDP from 6,7% in 1993 to 10,1% in 2012.
It also shows the importance of competitiveness: The financial, property and business services sector, which has time and again been rated highly in global competitiveness comparisons, increased its share from 17,2% in 1993 to 24% in 2012. This is also the sector that has possibly benefited most from technological development and has been least disrupted by labour unrest. The negative side of the financial sector’s good performance is that it is partly based on a sharp rise in debt levels, especially as far as households are concerned, which is not repeatable.
These trends also emphasise the finiteness of natural resources, with the mining sector’s contribution to GDP declining from 11% to 5,5%. The contribution of the manufacturing sector, which along with mining was hardest hit by labour instability and infrastructure bottlenecks, has also decreased: in 1993 it was 19% compared with 17,2% in 2012. If the stabilising influence of food and liquor production is ruled out, the picture is much worse.
The above graph shows how the South African economy lost momentum over the past five years. This trend is certainly worrying, especially if one considers that the decade-long continued improvement in South Africa’s terms of trade has come to an end and is moving in the opposite direction. It is therefore not surprising that the government, judging by its pronouncements, is becoming concerned about the low growth and employment figures.
The risk is that it could resort to counterproductive action in an attempt to improve the growth rate, for example extending the role of government enterprises or interfering in die allocation of capital. To my mind the expectation that a social pact between the government, business sector and unions is the answer, is overoptimistic as it is based on a poor understanding of the drivers of private investment.
Although sound relations between the parties concerned will naturally have a positive effect on the business climate, this is not how businesses decide whether or not to expand their operations. Economic growth is not achieved by agreement, but by creating favourable conditions for it to occur. This is clearly illustrated by the lack of success of the Growth and Development Conference held in 2002.
The acceptance of the profit motive as the most powerful incentive for private economic activity holds the key. It will be much better for the state to align its developmental objectives with the private sector’s natural pursuit of higher profits than to expect businesses to put the profit motive aside for the sake of social objectives.