To 2044 and beyond: Mining’s changing role in the economy

It remains the most developed.

The miraculously strong economic growth the continent experienced in the preceding 10 years, led by the diversification of economies away from a single commodity and the effects of the African Continental Free Trade Area (ACFTA), helped grow many struggling African countries.

After nine wasted years of stagnant growth, high unemployment and the burden of the twin deficit, South Africa adopted stringent reforms.

The most effective was the restructuring of the economy to one that was more inclusive.

Before reforms, the fastest-growing sector was the finance sector, which is a low labour-intensive industry that typically absorbs highly skilled labour.

To achieve sustainable economic growth, the highly labour-intensive sectors such as mining, manufacturing and agriculture had to be prioritised.

These sectors are tradeable sectors that benefited from the ACFTA. Over the years, trade with Europe declined as trade with the rest of the continent improved.

Key to restructuring the South African economy was the prioritisation of the high unemployment rate.

The socioeconomic costs of unemployment were threefold.

Firstly, unemployed South Africans represent lost economic output today.

Secondly, unemployed workers were not acquiring the necessary experience and skills that would contribute to their productivity in the future. This foregone future growth would have been costly.

Thirdly, unemployment leads to social ills that accompany a loss of hope. These social ills include crime, disengagement and a lack of investment in one’s future wellbeing.

The economy was in ICU, with economic growth having averaged at less than 2% between 2010 and 2019. The unemployment rate, at more than 27%, impeded any growth.

Economists track the relationship between jobs and growth using Okun’s law, which says that higher growth leads to lower unemployment.

Economic growth is good for job creation, but equally important for jobs is that growth must increase productive capacity of sectors that have the potential to absorb labour on a large scale.

The high unemployment and low growth rates were the result of the shrinkage of the tradeable sectors – manufacturing, mining and agriculture.

South Africa adopted export-oriented strategies that increased the relative profitability of producing tradeable goods.

This generated economic growth by pulling labour into productive activities.

Mining as a driver of economic growth is highly contested because it is often a dominant sector in many resource-rich countries, where it also often hinders the development of other activities.

However, adopting the right policies attracted investment that had previously declined significantly.

According to a report by Citibank, in the late 1980s, South Africa’s share of global mining was 40% with about 880 000 jobs linked to the sector. By 2014, it had declined to 4.5% with fewer than 500 000 jobs.

The mining sector plays a pivotal role in the industrialisation and economic transformation of resource-rich countries, stimulating inclusive and sustainable growth.

Beyond the profit motive, mining companies are looking for stability, security and certainty.

There is a symbiotic relationship between the mining and manufacturing sectors, and policies that encouraged manufacturing from what is mined and exporting finished goods helped both sectors.

The manufacturing sector had declined in terms of its contribution to both economic growth and employment.

The manufacturing sector accounted for about 20% of GDP in the 1990s. By 2019, the sector accounted for only 13% of GDP.

Similarly, the mining sector accounted for about 12% of GDP in 2001 to about 7% in 2019 – a decline of 33%.

Factors contributing to this decline include increases in labour costs, higher costs of electricity supply, high import costs and policy uncertainty.

The fourth industrial revolution changed the way sectors operated. It was characterised by technologies that integrated the physical, digital and biological spheres. It featured robotics, artificial intelligence, nanotechnology and the internet of things.

Labour graduated from low-skilled to more technologically advanced as machines replaced some jobs.

The consequences were not outright job losses, but, as with the third industrial revolution, workers moved to other areas. Mining was less extractive but more collaborative.

Mine workers had long complained about the moving goal posts of policy.

Policy uncertainty led to a loss of investment over the years, however, policy certainty brought back the much-needed investment.

Electricity supply stabilised after the completion of the Medupi and Kusile power stations, and the inclusion of renewable energy lowered the cost of electricity. But this came at a big cost as state-owned enterprises (SOEs) were causing government to haemorrhage money.

After tough negotiations with labour over the necessary right-sizing of SOEs, Eskom finally privatised power generation.

South Africa decided to breach the spending ceiling due to the reappropriation of funds that went towards rescuing some SOEs.

The country also embarked on an investment drive that was started by President Cyril Ramaphosa.

Investment was targeted to avoid creating costly white elephants. The agricultural sector saw the largest boom and, contrary to popular belief at the time, mechanisation did not lead to job losses. Instead, technology assisted with productivity. Basic education improved astronomically, and it led to the creation of small and medium-sized enterprises, which were previously neglected.

Much like in Switzerland, the majority of South Africans opted for apprenticeships instead of going to university.

Reforms are never easy and not everyone wins. The problem South Africa faced was high unemployment, especially among young people – 41% of South Africans between the ages of 14 and 34 were not being educated, employed or trained. This was a risk to the future growth of the economy. It was clear that this age group had to be prioritised.

Perhaps formal education for this group was not the answer, so many were trained and absorbed into the mining, manufacturing and agriculture sectors, and these sectors began to grow again.

Redirecting investments to the continent also boosted South Africa’s economy, as its historical trade partner, Europe, had experienced low growth for a long period.

This was affecting our export market, particularly our vehicle sector, which relied heavily on the German economy.

This article first appeared as part of Anglo American’s 25 Reasons to Believe project in partnership with City Press. For the full series of articles: https://www.news24.com/citypress/Special-Report/25_Reasons_to_Believe

The author started her career as an economist at Investec Asset Management in SA and London. She has also worked as an emerging markets economist at Barclays in London, as head of economic research for SA at Standard Bank and as the chief economist for SA at Renaissance Capital. Leoka has a PhD in economics from the University of London, an MSc in economics and economic history from the London School of Economics and an MA (with distinction) from the University of the Witwatersrand

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