Shifting the growth path to achieve employment intensive growth in South Africa

Abstract

‘Employment intensive growth’ has become a centrepiece of government policy and implies that at any given level of growth, the economy needs to become more labour absorbing. State intervention (or the lack of it) is examined in two areas that are important for employment – agriculture and manufacturing. In the case of agriculture, it is argued that declining and ineffective state support has accelerated the rationalisation of commercial agriculture and failed to regenerate agriculture in the former Bantustans. With regard to the manufacturing sector, we argue that since 1994 the government has set a multiplicity of objectives but, de facto, there has been a surprising level of continuity in the overly generous assistance for heavy, capital-intensive industry. This paper argues that the negative impact of previous ‘distortions’ requires much more than a levelling of the playing field via market-based reforms. Pro-employment policies have to be placed at the centre of the policy agenda.

Keywords:

• employment intensive growth
• unemployment
• agriculture
• manufacturing
• capital intensity
• labour intensity

1. Introduction

It is generally accepted that without advances on the employment front, there is little prospect of a sustainable reduction in poverty and inequality in South Africa. The unemployment rate, narrowly defined, is exceptionally high at 25% (StatsSA, 2013) and even the more optimistic projections show that very large scale unemployment will remain an issue even under rapid growth scenarios. Recent policy statements have placed a major new emphasis on an ‘employment intensive’ growth path. These include the 2010–13 Budgets, the Department of Trade and Industry's (2010) Industrial Policy Action Plan, the Department of Economic Development's (RSA, 2010) New Growth Path Strategy and, most recently, the National Planning Commission's (2011) National Development Plan. But these approaches are not very explicit about how growth could become more employment intensive; in other words, how a given quantum of economic expansion could generate more employment than has hitherto been the case. The objective of this article therefore is to focus on the growth path of the economy. The starting point is that while more rapid economic expansion is an important objective, at any given level of growth the economy needs to become more labour absorbing.

Raising the employment intensity of output could be achieved in two main ways. Firstly, existing economic activities could become more labour intensive or, secondly, there could be a shift in the composition of output to relatively labour-intensive sectors. The first shift may occur as a result of a change in relative factor prices or a change in firm (and farm) size, with more small firms (and farms) and a larger informal sector. The second could be achieved via more rapid growth in labour-intensive as opposed to capital-intensive sectors (e.g. agriculture relative to manufacturing) or sub-sectors (e.g. garments relative to steel, or plastic products relative to basic chemicals).

This is the point made in the New Growth Path document (Department of Economic Development, 2011), which indicates the growth rates required to achieve the target of five million new jobs by 2020 under various employment intensity scenarios. Estimates of the employment intensity of growth in South Africa vary depending on the time frame. For instance, the employment intensity of gross domestic product (GDP) growth was 0.8 from 1996 to the second quarter of 2010 but only 0.5 from 2001 to the second quarter of 2010 (Department of Economic Development, 2011). With an employment intensity of 0.8, a GDP growth rate of just over 4% will be sufficient to create 500,000 employment opportunities per year, while an employment intensity of 0.5 would require GDP growth in excess of 7% per annum to achieve the equivalent increase in employment (Department of Economic Development, 2011:24).

The fact that ‘not everyone will find jobs at Coega and in industry’ was recently pointed out by National Planning Minister Trevor Manuel, who argued that an Eastern Cape programme to develop land and agriculture will deliver more employment than heavy industry.² Coega is the site of the Eastern Cape's huge new industrial development zone and port facility. This expensive but underutilised infrastructure provides a sobering counterpoint to the lack of progress in agricultural and rural development in a province with the highest level of poverty and unemployment in the country.

In the following sections we examine two sectoral policies that have impacted South Africa's growth path in a manner which has been negative for employment growth. Section 2 examines agriculture, a labour-intensive sector, which is strongly associated with pro-poor growth. State support for this sector has declined dramatically and contributed to declining employment. Section 3 considers the manufacturing sector, where it is argued that de facto industrial policy support has been biased towards capital-intensive, heavy industry and as a result has also limited employment expansion. The paper concludes with an argument for more explicitly employment centred policies.

2. Agriculture: The impact of declining support in a labour-intensive sector

In most middle-income developing countries, agriculture generally accounts for a small and declining share of output. But its share of employment is frequently three or more times larger than its share of output, and its importance to the welfare of low-income groups is further heightened by the fact that poverty is disproportionately a rural phenomenon. It is also clear that public investment in infrastructure and other forms of support is far more important in agriculture than in most other sectors (Mellor, 1999; Chang, 2009).

Valdes & Foster (2010) find that agriculture's contribution to raising incomes of the poorest groups is more than two and a half times that of other sectors. The multipliers in agriculture are also extremely high because of the association with labour-intensive, non-farm employment. This pro-poor impact is not restricted to low-income countries. For instance, Anriquez & Stamoulis (2007) refer to empirical evidence suggesting that agricultural growth is pro-poor in both poor countries such as India and also middle-income countries such as South Africa via the effect of agriculture on unskilled labour markets.

But while agriculture and rural development more generally are well recognised in pro-poor and pro-employment strategies, it is less clear how this maps to South Africa's particular context. Firstly, the agricultural sector is relatively small in South Africa compared with other middle-income countries and employs relatively few people (Black et al., 2013). Secondly, the vast bulk of agricultural production and formal employment is accounted for by large-scale, commercial agriculture. On equity grounds, it is difficult to make a case for stronger support even though large sections of the sector are in financial difficulties, partly due to the reduction in previously lavish assistance levels. Thirdly, while poverty is concentrated in rural areas, particularly the former reserves, the historical underdevelopment of these areas limits their existing and potential employment capacity without very substantial investment; and the provision of such investment is further hampered by the weakness of rural administrative structures.

Agriculture is the most labour intensive of the broad economic sectors, and Pollin et al. (2006:63), using South African data, make the crucial point that it also has very strong employment multipliers. The employment multiplier measures the total number of formal jobs resulting from producing R1 million of output and, according to Pollin et al. (2006:63), for agriculture is 53% higher than the next highest sector (apparel and textiles). Both upstream and downstream linkages are stronger for agriculture than for any other major sector (Pollin et al., 2006:67). Furthermore, these strong employment effects are understated because the data measure formal-sector employment only and are therefore based on commercial, mainly large-scale, agriculture. The employment effects and linkages are likely to be even greater in small-scale agriculture that relies less on mechanisation.

It would appear self-evident, given the concentration of poverty and underemployment in rural areas, that agricultural growth and associated rural development would reduce poverty. But as Mellor (1999) has indicated with regard to the international evidence, this impact is much weaker when the initial distribution of assets is very unequal, as is the case in South Africa. Commercial (white) agriculture pre 1994 received generous support. This is no longer the case and clearly the political influence of commercial farmers is now much weaker. Channelling support to this sector would have a positive, albeit limited, impact on rural poverty. The effect would be felt mainly through raising employment, with a smaller impact on wages, given the slackness in the labour market in a context of high unemployment. It is, however, still highly probable that this would be significantly more pro-poor than supporting urban and industrial development, which will tend first to benefit enterprises operating in these sectors and second a smaller class of better paid workers. If state support could be effectively channelled to supporting viable land reform and small-scale agriculture, this is likely to be much more effective as a pro-poor strategy.

2.1 The evolution of agricultural support policy

Fundamental to the understanding of South Africa's agricultural dilemma is the set of land and agricultural policies that led to the emergence of large-scale, white-owned commercial agriculture alongside a dislocated, black, small-scale farming sector earning extremely low incomes. Colonial policies of land expropriation were formalised in the Land Act of 1913 and the concomitant destruction of the emerging black peasantry has been extensively documented by Bundy (1972) and others. Under apartheid there was further dispossession and the relocation of millions to the Bantustans, which comprised the poorest and most underdeveloped regions of the country.

The white-owned farming areas were organised on a large-scale, capital-intensive basis, and this sector received generous support over a long period. This support included measures to stabilise prices and restrict imports, concessionary interest rates, subsidies for fuel, rail transport and fertiliser as well as extensive irrigation and soil conservation support. In the late 1960s, one estimate is that state aid to white farmers accounted for about 20% of their net farm income.³

In the reserves there was a very different picture. Resettlement policies and forced removals increased overcrowding. Subsistence farmers lacked land, resources and infrastructure and output declined. Agricultural income as a share of household income declined to very low levels as these areas became ever more dependent on remittances by migrant workers and, later, social grants.

2.2 The liberalisation of agriculture

The commercial agricultural sector has been through a major process of liberalisation, which started in the 1980s and gathered pace during the 1990s. This included deregulation of marketing and the liberalisation of pervasive price controls as well as the partial removal of the favourable tax treatment of agriculture. In the 1990s there were further reforms to marketing policy in the form of the Marketing of Agricultural Products Act of 1996, which brought the sector much more in line with international price influences (Tregurtha et al., 2010). Quotas, specific duties and price controls were phased down and for the most part abolished by 1995.

The net effect is that South African agriculture went from being highly protected prior to 1994 to levels of support that by 2000 were amongst the lowest in the world (Vink & Hall, 2010). Support has declined further since then. According to the OECD (2011), producer support in South Africa as a share of gross farm receipts has declined from approximately 15% in 1995 to 2% in 2010. Moreover, this decline has been much steeper than the average decline in OECD support levels, which in any event remained very high at about 17% in 2010. Producer support levels are now even lower than in Brazil, one of the world's largest agricultural exporters. Support levels in Brazil have in fact increased over the period.

Total support estimates⁴ as a percentage of GDP for OECD countries and major developing country agricultural producers are indicated in Table 1. With the exception of Australia and New Zealand, for the period 2008–10 South Africa had the lowest support with levels far lower than in major middle-income agricultural producers such as Turkey, China, Ukraine and Russia. It is important to note that the expenditure on land reform, the aim of which is primarily redistributive, is included in the estimates of support above. This effectively further reduces government support to agriculture when comparing it internationally.

Table 1: Total support estimate by country, 1995–97 and 2008–10 (% of GDP)

Country	1995–97	2008–2010
South Africa	1.0	0.3
China	1.5	2.3
Brazil	0.2	0.5
Russia	2.6	1.6
Turkey	4.4	3.2
Korea	4.9	2.2
New Zealand	0.3	0.2

Source: Derived from OECD (2011).

2.3 Infrastructure and extension services

Agriculture depends heavily on the provision of public goods. This includes feeder roads and other means of transport, electricity and, most importantly, irrigation. In the former reserves, severe backlogs remain and in some cases have got worse. Programmes such as the Community Based Public Works Programme, the Consolidated Municipal Infrastructure Programme and the Poverty Relief and Infrastructure Investment Fund have had limited effect (Machete, 2004). In addition, investments in irrigation schemes have been poorly maintained.

Extension services have historically taken completely different forms in commercial and former Bantustan areas. In the former, extension services were undertaken by relatively small numbers of well-qualified staff that provided a focused service to a relatively homogeneous clientele. In the latter, large numbers of less qualified staff were required to serve a comparatively large and diverse client base that included subsistence, emerging and commercial black farmers. Since 1994, agricultural extension in South Africa has undergone a radical change from its above-mentioned dualistic roots to a single amalgamated service that now focuses nearly exclusively on previously disadvantaged small-scale farmers (Duvel, 2004). However, agricultural extension capacity varies greatly among provinces, due to the legacy of the above-mentioned ‘two-track extension system’ (Jacobs, 2003:18). Direct government expenditure on extension in 1998 was approximately R515 million, roughly 2.4% of agricultural GDP. This increased to 2.7% of agricultural GDP by 2002, which is high by international standards (Vink & van Rooyen, 2009:26). But while direct government spending on extension services shows an increasing trend, the effectiveness of this spending has been questioned by a number of analysts.⁵

2.4 Agricultural research and development

Research is another public good, which is crucial to agricultural development. According to Vink & van Rooyen (2009:28), agricultural research and development investment as a percentage of agricultural GDP increased from 2.6% to 3.0% in the period 1993–2000 – a level well above international norms of 0.5% for developing countries and 2.4% for developed countries. However, state funding of agricultural research has declined in recent years, and the capacity to deliver efficient research output has been hampered by the loss of large numbers of staff. The institutions responsible for research and development have been in a continual state of flux. According to Liebenberg (2012), provincial funding for agricultural research declined and even virtually ceased in the case of the Eastern Cape.

2.5 Agricultural finance

Agricultural production is heavily dependent on the availability of finance for start-up inputs such as seed and fertilisers in addition to fixed capital investment (Jacobs, 2003). The Land Bank has historically been central in providing finance to commercial agriculture. While commercial agriculture was well catered for, the position of small holders, mainly in the former reserves, has been much more problematic. After the closure or collapse of parastatals established in the former Bantustans, the Land Bank was tasked with supplying services. By 2003 it reported a rapid increase in advances, with R2 billion being advanced to 15 000 black farmers as well as assistance to 130 000 microenterprises (Machete, 2004). Finance for small-scale farmers is also supplied by the Micro-agricultural Finance Initiative of South Africa. There are minimal data on the availability of credit and debt levels among small-scale farmers but there is some evidence to show that farmers who borrowed from financial institutions achieved much better yields and higher income than those that did not (Spio cited in OECD, 2006:55).

2.6. Land reform

A significant and growing portion of the overall support to agriculture has been devoted to land reform but it is important to remember that this is taking place in a context of declining support to agriculture, which is placing substantial pressures even on established commercial farmers. The impact of land reform has been limited with the amount of actual land being transferred not coming close to meeting targets. By 2007, less than 4% of commercial agricultural land had been transferred. New owners have received little support and as a result, in many cases, output has fallen dramatically.

One important recipient of support has been commercialising small and medium-scale black farmers including beneficiaries of land reform (Hall & Aliber, 2010). The government has invested increasing resources to support this group. The Land Redistribution for Agricultural Development, the Comprehensive Agricultural Support Programme and AgriBEE are policy measures that have been set in place to achieve these goals. The period since 2001 has seen farmer support firstly rise steadily up to 2004, after which it increased very rapidly (Dziwaki et al., 2010). However, it still accounts for a relatively small share of the annual budget. Hall & Aliber (2010:3) estimated that at the time there were 200 000 commercially oriented smallholder farmers. If the government fails to provide the fiscal support to these farmers, it is highly unlikely that they will be successful in this competitive and unpredictable sector.

With inappropriate and sometimes inadequate support to emerging black farmers, irrespective of the fact that the Comprehensive Agricultural Support Programme receives the lion's share of provincial budgets, it is not surprising that land reform achievements still fall short of their ambitious targets. Direct government investment in land reform also seems to be waning and funding declined in real terms from 2007/08 to 2010/11 (Hall, 2011). The lack of clear direction in the Department of Land Reform and Rural Development's Green Paper on Rural Development and Agrarian Transformation does not bode well for the process of making a meaningful contribution to poverty reduction in the near future.

2.7 The impact on trade, production and employment

The OECD's (2006:4) Agriculture Policy Review argues that South Africa's wide-ranging reforms have created a good base for development. It is certainly true that South African agriculture is increasingly integrated with world markets; for instance, during 2000–05 it exported nearly one-third of output. This was a significant increase on the share of just over 20% exported during the sanctions years from 1980 to 1994 but no higher than the share of output exported from 1970 to 1979 (Sandrey et al., 2011:15). However, South African agricultural exports as a share of world exports have declined from 0.53% from 1986 to 1994 to 0.50% for the period 2006–08. This was in sharp contrast to many middle-income developing countries such as Brazil, Argentina, Mexico, China and Thailand (Sender, 2012:105). In the meantime, imports have increased very sharply. Agricultural imports as a share of agricultural output increased from 6.8% in 1975–79 to 13.6% in 1990–94 and 26.2% in 2006–08 (Sandrey et al., 2011:15). Imports in this latter period almost reached parity with exports while in 1975–79 they were only 20% of exports. Growing imports have been a contributory factor to stagnating gross farm income from the late 1980s until the early 2000s, when a depreciating currency led to growing incomes.

Over the period as a whole there has been a decline in investment both in terms of fixed improvements and machinery and equipment. The real value of capital assets on commercial farms declined nearly every year from 1980 until the early 2000s (Sandrey et al., 2011:12). Further evidence of the pressure on commercial agriculture is evident in the rapid rate of farm consolidation that is taking place with the number of farms declining from 58 000 in 1993 to 40 000 in 2007 (Liebenberg, 2012; Anseeuw, 2013).

Agricultural output in the former reserves is very limited and has declined, with only 2% of households deriving their principal form of income from agriculture (Wilson, 2009:20). There is also evidence that, particularly in the Eastern Cape, in spite of overcrowding, increasing amounts of land are underutilised. Wilson (2009) cites a number of explanations that have been put forward to explain this, including outmigration by able-bodied younger people, especially those with better access to land in the rural areas, the rising cost of farm inputs, an increase in rural crime and lawlessness and changing social attitudes.

In spite of agriculture's small and declining share of output, it remains an important source of employment, with about 10% of total employment of 11.5 million comprising formal agricultural workers (Herault & Thurlow, 2009). However, estimates of farm employment vary widely particularly with respect to informal-sector agriculture. At the turn of the century, according to the OECD (2006:51), there were approximately 240 000 small-scale farmers providing a livelihood for more than a million family members together with occasional employment of a further 500 000. A further three million people lived in communal farming households receiving some income from subsistence production. The OECD (2006:51) cites evidence from the PROVIDE project that, according to a broad definition, agricultural households numbered as many as 2.7 million supporting 14 million people. On a narrower definition, agricultural households numbered 0.8 million supporting 3.3 million people. Hall & Aliber (2010) estimate that there are 200 000 commercially oriented small-holder farmers and 2.5 million households involved in agriculture, primarily for subsistence purposes. Drawing on the National Income Dynamics Study Wave 1, May & Carter (2009:8) estimate much lower figures – 1.26 million individuals involved in agriculture – and cite StatsSA data based on their 2000 Labour Force Survey, which reported 1 508 000 workers involved in subsistence agriculture.

It is, however, clear that agriculture has been shedding labour at a rapid rate. According to Makgetla (2010), the number of farm workers and labour tenants on commercial farms declined by almost two million from 1984 to 1994. Commercial agriculture has continued to reduce employment at a rapid rate and the number of formal farm workers dropped from 1.18 million to 762 000 between 1990 and 2010 (Liebenberg, 2012). The causes of this are manifold. In part, it is a result of the normal trend for agriculture to decline in importance. This trend was given impetus by the liberalisation of the sector and the reduction of subsidies. Mechanisation also played a role. Prior to 1994, commercial agriculture was heavily subsidised. Low interest rates and tax concessions for machinery contributed to the overcapitalisation of agriculture in spite of the existence of large supplies of unskilled labour (OECD, 2006:51). According to the OECD (2006), the removal of these subsidies led to an increase in casual but not permanent employment. Sub-sectoral shifts in output have also played a role. There has also been a shift to much greater use of skilled labour. For instance, the number of professional and technical staff employed in agriculture increased by 150% from 1970 to 1995. Farm workers were also evicted from commercial farms as a pre-emptive response to legislative reforms designed to provide them with greater security on the farms on which they were employed.

We have tried to show that, in spite of its small and declining economic size, agriculture has an important role to play in an employment-intensive growth strategy in terms of generating unskilled and semi-skilled jobs, self-employment for small-scale farmers as well as supporting rural livelihoods. The sector, especially small-scale agriculture, is labour intensive and local linkages generated can be critical in generating non-farm employment in rural areas.

But agriculture is South Africa's Cinderella sector. It receives limited attention and limited budget. While there has been a significant real increase in state expenditure on agriculture since 1996, this is insignificant compared with the steep decline in other (previously lavish) forms of support, especially producer support. While commercial agricultural output has grown at a moderate pace since 1994, employment has fallen sharply. The position in the former reserves has been worse. Output, always small, has stagnated or declined. Allocations to address the problem of chronic underinvestment in small-scale agriculture have increased but remain far too limited. Implementation of policy initiatives and budget support in areas such as infrastructure, extension services and research and development for small-scale farmers has been poor. This is particularly problematic given the importance of public goods, especially for small-scale agricultural development.

It can be argued that in South Africa since 1990, developments in agriculture and rural development more generally have contributed to rather than ameliorated South Africa's chronic unemployment problem in three ways. Firstly, there have been significant employment losses in formal agriculture. Secondly, the potential impact in terms of income generation and livelihood support in land reform has not been realised because of the slow pace of land redistribution but also because of its limited effectiveness. Thirdly, while there has been some improvement in infrastructure provision in the former reserves, the reconstruction of these areas is far from being achieved.

3. Industrial development and the bias in favour of heavy industry

We turn now to consider industrial development and industrial policy. While manufacturing is a not a major source of employment expansion in most middle-income countries, the poor performance of the sector is a significant contributor to South Africa's employment problem.

At the time of the transition to democracy there was intense debate about the nature of the problem of slow industrial expansion as well as of the policies needed to address this (Hirsch, 2005). World Bank analysts characterised the South African economy as a protected and distorted economy of the Latin American type, resulting from apartheid policies compounding an import substituting industrialisation strategy (Levy, 1992; Fallon & Pereira da Silva, 1994).

The analysis of the problem put forward by the influential Industrial Strategy Project was not that dissimilar, although their prescriptions focused more on ‘supply-side’ support and industrial policy interventions (Joffe et al., 1995). The Industrial Strategy Project was also highly critical of the high degree of concentration and resultant lack of competition in many industrial sectors. Fine & Rustomjee (1996) offered a somewhat different perspective, arguing that the dominance of the large-scale mineral-based industry that comprised South Africa's ‘minerals energy complex’ should be the starting point for an understanding of industrial development and appropriate industrial policy.

The Industrial Strategy Project and World Bank interpretations prevailed in terms of stated policy, although, in practice, policy sought to promote a multiplicity of objectives, with international competiveness as a central theme. While objectives included support for non-mineral based sub-sectors and higher value-added activities, it was understood that mineral-based manufacturing would remain important and should be supported by further beneficiation (Hirsch, 2005:124).

Trade liberalisation was also an important element. Some liberalisation had already taken place by the early 1990s. After 1994 the liberalisation programme involved removing the remaining quantitative restrictions, simplifying the tariff schedule and a significant reduction in average tariff rates. The impact was to reduce effective rates of protection substantially, from a weighted average of 35% on manufactured goods in 1984 to 12.9% in 2000 and then to 9.5% in 2006 (Edwards & Lawrence, 2008).

A range of measures were also introduced to encourage investment, technological improvements and exports, and to support small firms. These included sector-specific adjustment programmes, investment incentives, ‘supply-side’ incentive programmes, subsidised infrastructure, support measures for skills development and technology, special loan facilities and support programmes for small firms (Black & Roberts, 2009).

The government's concerns about international competitiveness were re-focused on enhancing capabilities in ‘knowledge-intensive’ activities and advanced technology, with the release in 2002 of the National Research and Development Strategy, the Integrated Manufacturing Strategy and the Advanced Manufacturing Technology Strategy (Department of Science and Technology, 2002; DTI, 2002). These were followed in 2007 by the National Industrial Policy Framework (DTI, 2007) and the Industrial Policy Action Plan (DTI, 2010), which has introduced an ambitious agenda of policy interventions to stimulate a wide array of priority sectors and activities.

There has therefore been no shortage of industrial policy interventions and new programmes, but the net impact is far from clear. Together with trade liberalisation, it was expected that these measures would counteract the previous government's support for large-scale, capital-intensive industries and the legacy of poor productivity, and would facilitate the development of non-traditional manufactured exports (Joffe et al., 1995; Hanival & Hirsch, 1998). However, this has only happened to a very limited degree. While the stated objective of policy has been to encourage higher value-added manufacturing, labour-intensive activities and smaller firms, in practice the weight of support has continued to be focused on larger scale, capital-intensive firms and sub-sectors. It is therefore not surprising that a striking feature of manufacturing development since the early 1990s has been a rapid increase in manufacturing capital intensity (see Figure 1), in part due to the poor performance of labour-intensive sectors in relation to the relatively rapid expansion of capital-intensive sectors. So while manufactured exports have grown, they have not led to the expected jobs bonanza. It turned out that South Africa's ‘revealed’ comparative advantage was, somewhat paradoxically, in relatively capital-intensive products (e.g. steel, ferro-alloys and basic chemicals) and not in relatively labour-intensive products.

Figure 1: Ratio of formal employment to gross value added for South African manufacturing, 1970–2011

3.1 Comparative advantage – three distortions

Assuming no large-scale state intervention, the (tradable) sectors that are likely to expand most rapidly will be those with a growing comparative advantage. But comparative advantage is obviously not simply a matter of initial endowments, it develops over time and is shaped, in part, by government policy, including industrial policy. It is generally argued that industrial policy is concerned with promoting structural change and improving economy-wide efficiency. This is usually interpreted to mean moving up the technological ladder, for example via the promotion of diversification into non-traditional or high technology sectors.

But the nature of industrial policy must depend on context and the South African context is one of massive structural unemployment. Unemployed human resources on this scale represent the most glaring ‘inefficiency’ afflicting the South African economy (Black & Hasson, 2012). It follows that if industrial policy is concerned with promoting economy-wide efficiency, it has to be centrally concerned with the trajectory of South Africa's growth path, which in turn means the promotion of employment-intensive growth. Improved productivity is another central objective of industrial policy. This is usually construed to refer to labour productivity; that is, the productivity of workers employed in manufacturing. But in the South African context this is a less appropriate indicator as it measures the productivity of our most overabundant factor: unskilled and semi-skilled labour. The point is that, intuitively, it should be much easier (require less capital resources) to raise the productivity of an unemployed worker from zero to a low number than to achieve an equivalent productivity gain in, say, a car assembly plant, where labour productivity is already relatively high (Black & Hasson, 2012). In practical terms this means it would make sense to encourage the spread of scarce capital to mobilise underutilised labour rather than its concentration in sectors, firms and factories where the productivity (of employed labour) is already relatively high. These kinds of choices are not simply the domain of labour market policy, but lie at the heart of industrial policy.

One could easily conclude that South Africa's revealed comparative advantage indicates that we cannot compete in more labour-demanding sectors. This would obviously have very negative employment implications and is problematic because our revealed comparative advantage has been fundamentally distorted in three main ways.

Firstly, the historical, systematic undermining of black education has limited the supply of skills and therefore hugely raised costs for manufacturing. Since 1994, what can generously be described as the ‘false start’ in the rehabilitation of black education and artisanal training has continued to militate against competitiveness in more labour-demanding sectors. A striking feature of the labour market in South Africa is not so much that wages of production workers are higher than competitors (although in many cases they are), but the exorbitant costs of managers and skilled staff. Based on detailed international survey data in manufacturing and some service sectors, a 2007 World Bank study found that unskilled workers in South Africa earned slightly less than in Poland but somewhat more than in Brazil (Clarke et al., 2007). However, managers' wages were two-and-a-half and three times higher than in Poland and Brazil respectively, and wages of professional and skilled employees in South Africa were also much higher than in the other two countries. A benchmarking study of the Thai and South African automotive industries came to similar conclusions with very sharp disparities in skilled categories (Barnes et al., 2009).

Secondly, the market power of large upstream producers in sectors such as steel and chemicals has profoundly disadvantaged more labour-intensive downstream production (Roberts & Rustomjee, 2009). Downstream development in these sectors has been hindered by the market power of large, upstream producers such as Iscor (now Arcelor-Mittal) and Sasol. The lack of competition has enabled them to use import parity pricing, meaning that local fabricators of metal and plastic products have derived no advantage from low domestic production costs of key inputs such as steel, aluminium and basic chemicals.

The third distortion has been that, while the rapid development of heavy industry partly reflects South Africa's rich mineral endowment, it has benefited enormously from very substantial direct and indirect state support. The growth of resource-based manufacturing sectors has been on the back of cheap (coal-based) energy and government support. For example, aluminium production is based entirely on low-priced electricity to process imported bauxite. Cheap electricity has been a function not just of abundant coal resources, but also the extraordinary electricity pricing policy. Heavy overinvestment in electricity capacity in the 1970s and early 1980s by Eskom led the government to set extremely low tariffs to attract huge investments in a series of metal processing plants. And with capacity running out, agreements were still being reached in 2007 with Alcan for an aluminium smelter at Coega, reportedly at an electricity price around US$0.02/kiloWatt hour or R0.14, compared with average prices of R0.18 for other industrial users and R0.45 for households (Black & Roberts, 2009). In addition, the smelter investment was in line for multibillion rand investment and tax allowances before the severe constraints on South Africa's generation capacity led to the project's cancellation in late 2009. This R21 billion greenfield investment would have employed just 800 people, with the output expected to be almost entirely exported in primary form.

There has been public outrage at the disclosure of Eskom's preferential pricing arrangements with other large, energy-intensive industries, such as BHP Billiton's aluminium smelters. Such deals are now being reviewed in the light of changing economic circumstances. However, the long history of artificially low electricity prices has led the economy to its current predicament: where electricity supply is inadequate and prices are rising sharply as Eskom battles to fund massive expansion in new capacity.

While the clearly stated objective of industrial policy is to restructure the economy to promote growth and jobs, some of the very substantial support programmes provided by government have reinforced rather than altered the industrial development path. An accelerated depreciation allowance under the 37E incentive was given to major resource-based projects in the 1990s such as Columbus Stainless Steel and Saldanha Steel. The Strategic Industrial Projects programme provided tax relief equivalent to R7.7 billion from 2002 to 2005 for large capital-intensive projects, mostly in sectors such as steel, ferro-alloys, aluminium and basic chemicals (Black & Roberts, 2009).

Another related DTI initiative has been the funding of mega projects (defined as more than R1 billion) and industrial development zones. State support for such projects is multifaceted, including infrastructure support, industrial subsidies, cheap land and water as well as preferential electricity tariffs (Black & Hasson, 2012). These developments have generally been aimed at large-scale capital-intensive and energy-intensive projects such as Saldanha Steel. The Coega Industrial Development Zone in the Eastern Cape is perhaps the most controversial because of its huge scale and underutilised capacity.

Further direct state support for heavy industry has been provided by the state-owned Industrial Development Corporation, which plays an important role in influencing economic growth in accordance with government's strategic objectives. The Industrial Development Corporation supports firms by providing equity finance and loans, frequently at concessional rates. Historically, it has funded large-scale mineral beneficiation projects and has been closely associated with the parastatals as well as with the large private-sector conglomerates. The Industrial Development Corporation has only more recently increased the emphasis on labour-intensive sectors such as tourism, agriculture and smaller scale enterprises (Black & Hasson, 2012).

So South Africa's ‘revealed comparative advantage’ in heavy industry is, in part, the outcome of its distorted pattern of development. Powerful interests have coalesced around this capital and energy-intensive growth path. Naturally these interests are opposed to any reduction in this support. While industrial policy has sought to shift industrial development onto a different trajectory, this has proved extraordinarily difficult and has met with limited success. The ongoing bias in favour of heavy industry has been damaging, not only for employment but also for growth.

The structural paradox of high unemployment, an apparent lack of competitiveness in labour-intensive sectors and a capital-intensive export profile has created a conundrum for industrial policy. Should policy encourage sectors that display revealed comparative advantage or attempt to create new areas of comparative advantage by encouraging higher valued-added activities? Or is it possible to compete more effectively in more labour-demanding activities? This conundrum partly explains the DTI's adoption of a multiplicity of potentially contradictory policy objectives in support of beneficiation, the ‘knowledge economy’ and labour-absorbing growth (Black & Hasson, 2012).

While industrial policy is sometimes narrowly defined as a set of selective interventions to promote industrial upgrading, a broader conception – improving economy-wide efficiency – is more appropriate. In the South African context of large-scale structural unemployment, this leads in turn to a focus on employment. The question of incentives is crucial. Incentives include the whole panoply of prices, taxes, tariffs, subsidies and regulations that face market participants. Industrial support frequently takes the form of investment allowances and subsidies. The Sector Education and Training Authority funding for training, on the other hand, is derived from a tax on the payroll and in fact constitutes a transfer from smaller, labour-intensive firms to larger more capital-intensive firms. So one key question is whether the incentive structure can be re-shaped to facilitate employment creation much more strongly.

Objectives such as technological upgrading and promoting the knowledge economy can and should be supported and may be complementary to labour-absorbing growth in some ways. But in the end they constitute a limited development strategy in the South African context because a large section of the labour force is not equipped with the skills to be employed in these sectors. It can also be argued that higher employment and growth in labour-demanding activities is the best way of encouraging upgrading because income growth at the low end of the income distribution is likely to be the most effective way of improving educational outcomes and therefore creating a decent platform for vocational and tertiary education.

4. Conclusion: Towards employment intensive growth

A persistent and even rising level of unemployment is perhaps the greatest failing of South Africa's democratic transition. It has stymied efforts to reduce poverty, slowed growth and contributed to poor educational and health outcomes. Increasingly, it poses a threat to social stability.

This paper has argued for employment-centred policies. Employment-intensive growth implies that either particular sectors of the economy become more employment intensive; or that there is a shift in the sectoral composition of the economy towards more employment-intensive sectors. In turn this suggests that sectors which have high employment multipliers should receive more support and that subsidies to capital-intensive sectors should be reduced. We are not claiming that agriculture offers a solution to South Africa's employment problem or that South Africa can compete with low-wage countries in ultra-labour-intensive manufacturing. But the reality is that the bulk of our unemployed labour is unskilled or semi-skilled and can most easily be absorbed into labour-intensive activities. As Business Day has commented, ‘we need to create jobs for the workforce we have, not the workforce we wish we had’ (cited in Black et al., 2013:18).

This could take many forms – greater support for agriculture is one. Commercial farming is being squeezed between the hammer of international competition and the anvil of rising wages. Small-scale agriculture has to compete in this milieu and suffers from a lack of dedicated and effective public-sector support. In the manufacturing sector, placing employment at the centre of industrial policy means support for small firms and training, particularly at a basic level and an examination of the regulatory environment. It also means providing appropriate infrastructure and investments to improve competitive capabilities in more labour-demanding activities. It does not necessarily mean that wages should be driven down, although policy-makers do need to address labour market rigidities in certain areas. Incentives should subsidise labour and training rather than capital investment, electricity and infrastructure for capital-intensive firms. This kind of support will lower unit labour costs, increase the productivity of both capital and labour and encourage more labour-demanding investment. Rapid growth in unskilled and semi-skilled jobs will in time lead to a tightening of the labour market and provides the only route to a sustainable rise in wages across these sectors.

This does not mean protecting and subsidising unsustainable labour-intensive activities, but it does require active intervention that goes beyond a ‘levelling’ of the playing field. The historical destruction of peasant farming, generous (but now much reduced) support for large-scale, commercial agriculture, the skills deficit and apartheid era industrial policy support for heavy industry have created conditions inimical to labour-intensive employment in agriculture and light manufacturing. The challenge for South African economic and social policy, therefore, is to tilt the playing field towards labour-absorbing growth in order to mobilise the huge potential of an underemployed and poorly skilled workforce.

Notes

²See ‘Farms key to the creation of jobs’, The Herald, 29 May 2012, p. 1.

³Commission of Inquiry into Agriculture (1972) cited in Feinstein (2005:198).

⁴The total support estimate is a measure of the total value of all transfers from consumers to producers resulting from agricultural policies, net of linked budgetary receipts. The estimate includes price support, subsidies and budgetary transfers for instance via support for research and development, extension services and infrastructure.

⁵See, for example, Hall & Aliber (2010), Duvel (2004) and Jacobs (2003).