How South Africa Works: And Must Do Better

By Jeffrey Herbst and Greg Mills

The overwhelming challenge that South Africa faces, and has to date failed to address, is unemployment, which falls especially on African youths who were promised a better future after 1994. If the current unemployment challenge is not addressed, it will be impossible to sustainably lift many millions of people out of poverty. How South Africa Works reviews the country’s major economic achievements over the past two decades.

Through numerous interviews with politicians, business leaders and analysts, it examines the challenges and opportunities across key productive sectors – including agriculture, manufacturing, services, and mining – illustrative of the policy challenges that leaders face. It scrutinises the social grant and education systems to understand if South Africa has established mechanisms for people not only to escape destitution but be ready to be employed, and identifies steps that some of South Africa’s most notable entrepreneurs have taken to build world-class enterprises. Recognising the essential challenge to cultivate more employers to employ people, How South Africa Works concludes by offering an agenda and active steps for greater competitiveness for government, business and labour.

• Language: English
• Publisher: Pan Macmillan South Africa
• Release date: Jul 1, 2015
• ISBN: 9781770104099

Jeffrey Herbst

Jeffrey Herbst is an American political scientist, a former president of Colgate University, and currently president and CEO of the Newseum in Washington DC. He has written extensively on political and international affairs in Africa.

Book preview

‘Are the economic imperatives for employment and growth reconcilable with those for transformation and redress? What are the tough choices confronting a developing economy to lift itself out of poverty into a globally competitive player? Read more from Herbst and Mills to find out the answers.’

— SIPHO PITYANA, Chairperson, AngloGold Ashanti

‘South Africa 20 years after transition is a complex and multidimensional country. Competing alliances and juxtapositions have changed the dynamics of the new South Africa. How South Africa Works helps to understand the evolving paradigm and provides potential solutions. It is a welcome and unemotional addition to the debate – a worthwhile read!’

— GARETH ACKERMAN, Chairperson, Pick n Pay

‘As we enter the third decade of our democracy, the disjuncture between South Africa’s potential and its performance has never been as stark. How South Africa Works is an urgent call to all South African leaders to revisit yesterday’s assumptions and to abandon the politics, policies and practices that are stifling growth and with it, for millions, the hope of a better tomorrow.’

— MARK LAMBERTI, Group CEO, Imperial Holdings Limited

‘South Africa is a complicated place. Held back by its history, it is challenged to break out of a motionless present to build a brighter future for the generation still to be born. This is an enormous task that all South Africans must debate and embrace. How South Africa Works is a courageous and timely contribution to that debate and needed course of action.’

— MOE SHAIK, Development Bank of South Africa

‘The great strength of this book is that the analysis is supported by a wealth of in-depth interviews: Herbst and Mills illustrate how South Africa could work so much better if its considerable human potential were to be liberated by economic reform.’

— MIKE SPICER, Wesgro

‘Jeffrey Herbst and Greg Mills present intriguing findings about how South African businesses are squaring up to local and global challenges, putting a vivid, human face to South African entrepreneurship. Their proposals provoke much-needed debate on how to improve South Africa’s economic performance.’

— KENNETH CREAMER, economist, University of the Witwatersrand

‘Jeffrey Herbst and Greg Mills have written an exceptionally timely book. Notwithstanding the country’s significant political and economic advances, high rates of unemployment threaten those gains and, indeed, the freshly woven social fabric of the Rainbow Nation itself. The volume meticulously examines this crisis and thoughtfully engages virtually everyone in a position to either contribute to its resolution, or obstruct that progress. Even those who will find themselves disagreeing with the remedies prescribed in How South Africa Works will nevertheless need to grapple with the comprehensive case made by the authors.’

— J. PETER PHAM, Director, Africa Center, Atlantic Council, and Editor-in-Chief, Journal of the Middle East and Africa

‘A brilliant book that lays out the problems and solutions for the South African economy with clarity.’

— RAY HARTLEY, Editor, Rand Daily Mail

‘Jeffrey Herbst and Greg Mills succinctly argue in How South Africa Works that economic decline is not inevitable and that South Africa can compete on the world stage. This book is a must-read for those concerned about South’s Africa economic future and how it may develop.’

— ALEX VINES OBE, Head, Africa Programme, Chatham House, London

HOW

SOUTH AFRICA

WORKS

HOW

SOUTH AFRICA

WORKS

And Must Do Better

Jeffrey Herbst and Greg Mills

MACMILLAN

First published in 2015

by Pan Macmillan South Africa

Private Bag X19, Northlands

Johannesburg, 2116

www.panmacmillan.co.za

ISBN 978-1-77010-408-2

eBook ISBN 978-1-77010-409-9

© Jeffrey Herbst and Greg Mills 2015

All rights reserved. No part of this publication may be reproduced, stored in or introduced into a retrieval system, or transmitted, in any form, or by any means (electronic, mechanical, photocopying, recording or otherwise) without the prior written permission of the publisher. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages.

Editing by Sally Hines

Proofreading by Sean Fraser

Indexing by Ethné Clarke

Design and typesetting by Triple M Design, Johannesburg

Cover design by K4

Front cover and back cover, far right, photographs courtesy of Toyota South Africa; all other photographs courtesy of Greg Mills

South Africa’s economy has enormous potential. But to realise this, we need the efforts and leadership of all. This cannot just come from one person. All of us occupying positions of leadership have responsibility to put the interests of tomorrow ahead of today.

— LESETJA KGANYAGO, Governor of the South African Reserve Bank

Contents

Forewords by Nicky Oppenheimer and Johnny Clegg

About the Authors

Abbreviations

IntroductionA Post-Heroic Future

Chapter 1South Africa’s Development Story

Chapter 2Expectations of a New Country

Chapter 3Agriculture: More than Land

Chapter 4Selling Forever? The Services Sector

Chapter 5The Manufacturing Basics

Chapter 6Mining: A Trail of Crumbs and Riches

Chapter 7The Social Wage and Education: From ‘All-Pay’ to a Paid Job?

Chapter 8A Bridge to the Future?

ConclusionA Pivot from Confrontation to Competitiveness

Notes

Index

Acknowledgements

‘This is How it Works’

Foreword

Nicky Oppenheimer

Countries should never waste a crisis. Moments of great urgency provide opportunities to usher in reforms that otherwise might be too politically unpalatable.

To have a good crisis, however, governments first need to recognise the problem. In South Africa’s case, our rates of economic and employment growth have been too low to meet the aspirations of our citizenry, particularly the burgeoning numbers of young people, where unemployment runs at almost 70 per cent. While we are still a young country, other nations have done more over two decades than we have accomplished since the transition to non-racial rule in 1994.

The reason for low growth is that we have too little public and private investment in the economy, nearer 20 per cent of gross domestic product compared to over 30 per cent for much of Asia and nearly 80 per cent in the case of China. This is a reflection of both a lack of opportunity and a shortage of confidence. Business craves stability and policy predictability, but too many variables are constantly introduced in this milieu for its comfort. Moreover, the rates of return do not justify the risk for many, reflecting, too, our relative uncompetitiveness, the difficulty of doing business, especially for smaller companies, and overall lack of productivity. If we are to develop our economy and create jobs on the scale required, we need to attract businesses that can invest anywhere in the world, and not just in what lies beneath our soil.

A little panic can be a good thing; it is a call to action and does not allow the option of doing nothing because the question is too difficult. A little panic will stimulate a sense of urgency for government to change direction. As this book points out, South Africa has had no shortage of plans for development. It is the political will and leadership, at every level, in business, government and labour, that has been lacking. The history of successful global reform tells us that to take advantage of a crisis, leaders also have to act toughly, not sparing their own privileged constituencies.

We have to conquer the legacy and mistrust of South Africa’s divided past to go forward. With the depth of engineering talent and financial resources we have available, for example, we should easily be able to resolve the electricity crisis, the record of chronic disappointment in education and the poor performance of many government agencies. However, these actions require a national and not an intrinsically narrow, political response. It requires acknowledging failures of governance and delivery, and acting on them. It demands breaking the stand-off between government, labour and business, which fuels misperception, isolationism and poor performance.

If we are to grow South Africa’s economy and to live up to our promises to our future generations, we need to set priorities and act on them. In this, there is no room for ‘them’ or ‘us’, only ‘all of us’.

I am proud that this study by members of The Brenthurst Foundation shows exactly how South Africa can work better. It illustrates that there are a great many South Africans who are poised to make significant innovations and investments that could change the fundamental trajectory of the economy. Many countries lack the basic entrepreneurial talent that resides in South Africa. The task now is to create a political and economic milieu that will encourage new investment and thereby address the fundamental issue of employment.

Foreword

Johnny Clegg

As someone who lived through the struggle for a free, democratic, non-racial and non-sexist South Africa in the 1970s, 1980s and early 1990s, I am wary of prophets of doom, and have a long view of history. In 1994, South Africa beat the predictions of a ‘race war’, ‘economic collapse’, and ‘tribal and ethnic cleansing’. We found a way to negotiate ourselves to a new start, a fresh promise of an all-inclusive South Africa, and laid the constitutional foundations for this.

All things considered, we have done reasonably well over the past 21 years. The post-1994 period has been framed by the immense historical weight and consequences of both segregation during British colonial rule and then apartheid, and the terrible damage this wrought on the majority of South Africa’s people.

Since 1994, we have seen the provision of three million homes, pot-able water and health clinics in rural areas, the widespread electrification of townships, the development of local and national infrastructure, the introduction of free health care, the opening of schooling and tertiary education for all, and the creation of an efficient and capable taxation system among many other achievements. Although not without their challenges, these accomplishments should be lauded, reminding us of the scale of the inherited challenge and offering a sense of progress.

However, like all societies undergoing fundamental transformation, South Africa has reached a point where the policy solutions developed over the last two decades are finding less traction and are even in some cases retarding progress and undermining the ability of the economy to deliver the dividend that our new democracy promised. We have entered a treacherous period of rising inequality, entrenched levels of poverty and structural unemployment.

Many of our economic woes derive from the almost impossible task of trying to rectify the racially structured economic imbalances that were created by the previous political system. Various interventions were attempted that were designed to redistribute wealth as quickly and widespread as possible as the majority of South Africans cried out for distributive justice. This is well and good if the economy is at the same time growing and creating the wealth to sustain such a radical economic realignment. Unaccompanied by growth, redistribution sets South Africa up for failure.

A more equitable South African economy depends principally not on redistributing the existing cake, but expanding it at a fast pace, and on job creation. This demands competing on a global stage, requiring all of: education, skills, leadership and a supportive environment, from labour agreements and predictable policy to reliable energy and efficient infrastructure. Although the right to industrial action is an important part of the negotiating process in any normal society, and an essential aspect of the functioning of a market economy, countries with an unrelenting focus on economic development do not have five-month-long strikes such as South Africa has experienced in the mining industry.

Jeffrey Herbst and Greg Mills illustrate how we have gone from an apartheid society divided by race to one where individual futures are determined by access to jobs. Higher rates of economic growth, which, in turn, depend on increased volumes of local and foreign investment, will make the tragic legacy of the past much easier to transform.

So far South Africa’s growth record lags when compared to the first 21 years of independence of other newly democratic nations.

To achieve higher rates of growth and inclusion, the authors illustrate that South Africa should not hesitate in following an agenda for competitiveness, requiring all three parties to more closely co-operate: business, government and labour.

South Africa already has one critical component waiting to burst through – entrepreneurship. It only has to be given the opportunity to flourish. The benchmark for success should not only be in the way we plan but also in the way we implement our policies and the number of new small- and medium-sized enterprises that establish themselves, and in the volume of investment flows and jobs created.

In their extensive survey of a range of businesses far and wide across the country, big and small, Herbst and Mills spell out clearly the importance of practical actions to productivity, from regimes for skills creation on the one hand to allowing parastatals to fail on the other hand. This requires tough choices, and owning our problems and their solutions.

As I write, the rand has hit 12.63 to the US dollar, a 13-year low. The country is gripped by power outages due to bad planning, skill shortage and supply chain abuse at the state-owned electricity utility Eskom and the unfortunate choices in the practice of cadre deployment in the selection of executives and board members across all parastatals. The wider social framework is characterised by an increase in crime, a bloated civil service, municipalities that have become numbed by the thousands of service delivery protests countrywide, and the near-collapse of health services in certain provinces.

Cadre deployment and corruption not only impinge on the efficient functioning of the state, but erode that most precious of all commodities: confidence, and the general morale of the ordinary citizens and their faith in their country.

Official statistics put unemployment at a conservative level of 26 per cent. But there is a more persistent, human face to these circumstances. The traffic intersections in Johannesburg, among many other cities and towns, are now begging sites for unemployed youth, signalling also their minimal stake in the future.

I have faith that we can resolve these shortcomings and pull ourselves out of this dark moment in our development and political history. With strong doses of critical self-reflection, political will and openness to new ways of thinking, South Africans should easily overcome many of the self-imposed obstacles we have laid on the road in front of us. This challenge will either kill us or make us stronger, and hopefully we will look back in 10 years and be proud of our versatility, entrepreneurship and will to win.

There is, therefore, an imperative for a debate, a national conversation, to be developed around how South Africa really works and why it is struggling to meet the expectations of its people. This book is a timely and vivid demonstration that the need for dialogue in South Africa did not end with the transition from apartheid to democracy 21 years ago. We have to do better.

Everyone interested in South Africa’s future should read Herbst and Mills on How South Africa Works.

About the Authors

Jeffrey Herbst is President of Colgate University, a leading liberal arts college in the United States. Holding a PhD from Yale University, previously he was Provost at Miami University. Dr Herbst started his career as a professor of politics and international affairs at Princeton University where he taught for 18 years. He is the author of States and Power in Africa: Comparative Lessons in Authority and Control (Princeton University Press) and several other books and articles. He has also taught at the University of Zimbabwe, the University of Ghana, the University of Cape Town and the University of the Western Cape. He has advised governments and international organisations, and regularly travels to Africa to conduct research, write and teach. A member of the Council on Foreign Relations, he has served on the Advisory Board of The Brenthurst Foundation since its inception in 2005.

Greg Mills directs the Johannesburg-based Brenthurst Foundation, and is the author of the best-selling books Why Africa is Poor: And What Africans Can Do about It (Penguin, 2010) and, with Jeffrey Herbst, Africa’s Third Liberation (Penguin, 2012). In 2008 he was deployed as Strategy Adviser to the president of Rwanda, has directed advisory groups in Malawi, Mozambique and Afghanistan, and has worked for governments in Liberia, Lesotho, Kenya, Zambia and Zimbabwe. He holds a PhD from Lancaster University and an Honours degree in African Studies from the University of Cape Town. A member of Chatham House, and on the Advisory Board of the Royal United Services Institute, in 2013 he was appointed to the African Development Bank’s High-Level Panel on Fragile States. His most recent book, Why States Recover: Changing Walking Societies into Winning Nations – From Afghanistan to Zimbabwe (Picador Africa and C. Hurst and Co.) was launched in July 2014.

Abbreviations

Introduction

A Post-Heroic Future

‘N elson Mandela is dead. Long live the struggle,’ might have read the epitaph to the first 20 years of non-racial democracy in South Africa. While the end of apartheid in April 1994 brought about political rights for the excluded black majority, their economic enfranchisement over the subsequent two decades has proven to be exceptionally difficult.

The fundamental claim of this book is that the overwhelming challenge that South Africa faces, and has to date failed to address, is unemployment. The current unemployment statistics are appalling and fall especially on young African youths who were promised a better future in 1994. As the premier of KwaZulu-Natal, Senzo Mchunu, put it to us, ‘The pain in our stomachs is the rate of unemployment, the pain of poverty, the pain of the gap between the rural and urban areas, the pain of underdevelopment.’¹ This challenge, he said, ‘is threatening our future’.

If the unemployment crisis is not addressed, it will be impossible to lift many millions of people out of poverty. Especially in light of the Arab Spring – fuelled in good part by youths who believed that they had no future – the stability of South Africa cannot be assured given compounding issues of insecurity, unemployment and lack of investment. The prospects of the African National Congress (ANC) will also be challenged if it cannot deliver jobs to the ‘born-free’ generation. Equally, the ANC’s trade union partner, the Congress of South African Trade Unions (COSATU), with an ageing cohort of members, requires economic and employment growth to refresh their membership.

Government has long recognised the need to create jobs. President Nelson Mandela said at the opening of Parliament in 1996, ‘Despite the welcome rate of growth, very few jobs have been created. In fact, against the backdrop of new entrants into the job market, there has been a shrinkage of opportunities.’² Yet, two decades on, the crisis remains. This situation has made many business and other leaders we have spoken to ‘nervous’ about South Africa’s direction of change and growth, especially when compared to the positive changes elsewhere in sub-Saharan Africa. Yet, as we will demonstrate throughout this book, many firms have succeeded in becoming competitive and generating jobs despite all the barriers to commerce in today’s South Africa. However, much more could be done if business’ and government’s interests and actions were better aligned.

Two decades and five ‘new’ strategic economic plans into its democratic transition, South Africa does not have the luxury of too many more chances.

We also do not believe that South Africa can solve the unemployment problem solely through redistribution. The most dramatic redistributive steps that South Africa has taken are Broad-Based Black Economic Empowerment (BBBEE) and the social grant. BBBEE, like its predecessor, Black Economic Empowerment (BEE), has succeeded in creating a small class of African business people who have wealth on the same order of magnitude as very rich whites – 10 per cent of the Top 100 companies on the Johannesburg Stock Exchange are held directly by black investors largely through BEE schemes³ – but it has had, as will be shown, no perceptible impact on unemployment. As a project of elite transformation, BEE has been successful, but it is, as will be discussed below, more a burden for employers than a transformative agent for the unemployed. The social grant has been a great success in keeping an increasing number of people out of absolute poverty, but it pays far less than the salaries of even those with unskilled jobs. Simply put, South Africa is not sufficiently rich to redistribute enough resources to address unemployment. It must expand the economic pie and increase the number of jobs if the poorest are to benefit.

Black and white cats

As we have observed throughout the course of this study, constraints on growth and business cut across racial boundaries in South Africa. Equally their success will ensure job creation across the economy – or as Deng Xiaoping famously observed: ‘It doesn’t matter whether a cat is black or white, so long as it catches mice.’⁴

This retrospective of the experience of the first 20 years of the ‘new’ South Africa began with Mandela’s death in December 2013 given how the statesman had personally come to symbolise both the struggle against institutionalised racism and the promise of South African democracy. We have deliberately chosen to write this book after the spasm of remembrance because there is little need to produce another report card on how South Africa has done, but rather to understand the choices it faces in what could be called, especially after the passing of Mandela, the ‘post-heroic’ future.

The book also differs from many other retrospectives in that it digs deep into South Africa’s economic workings through extensive interviews with a broad spectrum of business managers, government leaders, unionists, entrepreneurs, taxi drivers and farmers, among many others. The country’s future is being built daily on the shop floor, on the farm, down in the mine and in corporate boardrooms where South Africans are making millions of uncoordinated decisions that cumulatively will determine the country’s future. These decisions are made in contexts that are established by major policy documents, but also by how legislation and regulation are understood and executed by officials at every level of government. Sometimes, the results are far different than imagined by government or apparent from simply reading the national newspapers. This book