In this essay, Terence Creamer reflects on the factors that have shaped South Africa’s real-economy sectors of manufacturing, mining and agriculture over the past 30 years and considers ways to end the economy’s persistent underperformance.

In a speech that disrupted the ‘Rainbow Nation’ narrative, which played an important unifying role at the highly uncertain start of South Africa’s transition from apartheid to democracy, but which also failed to reflect the realities of entrenched race-based poverty and inequality, then Deputy President Thabo Mbeki defined South Africa as a country of “two nations”.

Opening a 1998 Parliamentary debate on ‘National Unity and Reconciliation’, Mbeki questioned whether South Africa was making progress in achieving the objective of nation building. Mbeki’s vision was for a “common nationhood which would result from the abolition of disparities in the quality of life among South Africans based on the racial, gender and geographic inequalities we all inherited from the past”.

While acknowledging that the polite and reassuring response would be “yes”, Mbeki insisted that the honest, albeit discomfiting, answer was “no”, and then unforgettably declared that “South Africa is a country of two nations”: one white and relatively prosperous; and a second and larger nation being black and poor, living under conditions of grossly underdeveloped economic, physical, educational, communication and other infrastructure.

The abolition of the apartheid legacy, he concluded, would require sustained effort over a considerable period of time, dismissing as self-serving arguments suggesting that “four or five years are long enough to remove from our national life the inheritance of a country of two nations which is as old as the arrival of European colonists in our country, almost 350 years ago”.

Now, 30 years into South Africa’s democracy, the socioeconomic realities and disparities sketched by Mbeki sadly largely persist, somewhat masked by the partial yet highly uneven achievements of policies such as affirmative action and black economic empowerment; policies that have not always been fairly applied, leading to deep mistrust and anger in some sectors of society, as well as a flight of skills from certain key institutions.

In the economy overall, a gulf also remains between the formal and informal economies. The former being sophisticated yet too small and concentrated to make a proper dent in South Africa’s extreme official unemployment rate of over 32%. It is also subjected to a raft of legislation and regulation that has increased since 1994, some of which has slowed investment and has had a negative impact on growth and development. The informal sector, meanwhile, operates largely outside of these constraints and continues to play an important role in supporting livelihoods. But it is smaller and less vibrant than is the case in several peer countries and is prone to turf wars that, at times, turn violent and xenophobic.

In the formal sector it’s also a tale of two realities. The financial and services sectors have grown substantially since 1994, while many sectors in the real economy have been on the decline, especially the manufacturing sector, whose relative contribution to gross domestic product has shrunk massively, from over 20% in the 1990s to about 12% currently. While the construction sector, which plays a key supportive role across a range of productive sectors, has been all but decimated. Only one large integrated construction company, WBHO, is still listed on the JSE, with the others having either exited the general construction market, or having closed or entered business rescue.

Real Economy Pressure

Measuring progress in the real economic sectors through the prism of Mbeki’s aspirational vision for a society and economy that reduces disparities reveals serious underperformance over the past three decades. This, despite general societal and policy consensus over the period that their growth and development were crucial for stimulating the enterprise and job creation required to help tackle poverty and create the conditions for addressing extreme inequality.

While manufacturing, mining and agriculture have had periods of strength, particularly ahead of the 2008–09 Global Financial Crisis, and during commodity super cycles, they have not played the developmental role envisaged in successive government plans, be it the Reconstruction and Development Programme, the Growth, Employment, and Redistribution policy, or the prevailing National Development Plan.

Pressure on these sectors over the period has come from a combination of external and internal factors.

External factors played a significant role as the South African economy transitioned from being a ‘laarger economy’ under apartheid, to a more open economy during the democratic era. Export-oriented firms, particularly in the mining and agricultural sectors, have embraced the trade opportunities that have accompanied globalisation generally, as well as the specific trade deals that South Africa has concluded since 1994, opening certain markets in Europe, China and the US, among others.

Some businesses and industries, especially those built behind the protective barriers of the apartheid-era economy that implemented policies of import substitution as a way of building domestic industry as well as navigating sanctions, could not survive the period of globalisation and liberalisation that coincided with South Africa’s economic reintegration. As has been the case with many economies around the world during the era of globalisation, the reduction of protection and the lack of trade-rule enforcement posed existential threats to many firms and industries, particularly when domestic demand waned following the Global Economic Crisis. More recently, the Covid lockdowns and the energy crunch that followed Russia’s 2022 invasion of Ukraine rocked many parts of the real economy.

Own Goals

For much of the past decade and a half, however, negative domestic factors have begun to place devastating constraints on the country’s growth and development. Own goals include a sustained period of State capture at key State-owned companies and public institutions, which left them broke and broken; an electricity crisis that has persisted and intensified over a 15-plus year period; a logistics crisis that has raised the cost of business significantly, as firms shifted from rail to road and to alternative ports; an emerging water crisis; and a chronic crime and corruption crisis that has sapped confidence and curtailed investment.

There is little question that the electricity crisis has been South Africa’s biggest own goal, completely undermining any prospect of investment in the real economy, let alone using the productive sectors to dislodge “racial, gender and geographic inequalities”. The frequency and intensity of loadshedding, which made its first shock appearance in 2007, ramped up from 2018 to 2023 following a period of extreme State capture at Eskom, and remains a daily threat to normal business operations.

In parallel, tariffs have surged, turning electricity – once seen as a competitive advantage for attracting energy-intensive industry, including large aluminium smelters – into a comparative disadvantage from both a pricing and security of supply perspective. Besides costing the economy billions in foregone production and business activity, sapping investor and consumer confidence and crimping potential growth, the crisis at Eskom has also undermined the fiscus directly, with the National Treasury having had to bail out the utility on several occasions, most recently through the R254-billion debt relief package of 2023. In addition, the failure to seize the opportunity to lead a just energy transition and restructure the industry to facilitate large-scale renewables investment as technology costs fell has not only left a supply deficit of about 6 000 MW and an inadequately sized and spatially distributed grid, but also the most carbon-intensive electricity globally at a time when trade partners are moving to impose tariffs on carbon- intensive products.

Not far behind in its deleterious impact, although less visible to most South Africans, is the vertiginous weakening of freight logistics group Transnet, whose performance also collapsed following the State-capture era and the Covid lockdowns. Transnet Freight Rail’s volumes slumped to 149-million tons last year, having been at 226-million prior to Covid, and volumes are likely to recover only modestly this year, while chronic inefficiencies across the port system have added significant costs and resulted in lost revenue.

Businesses are now fearing the worst when it comes to water security, with many towns already disrupted frequently and with large cities also experiencing outages.

In addition to the weaking of the country’s network industries, there have also been sector-specific domestic issues that have had anti-growth consequences across mining, agriculture and manufacturing.

While legislative changes and the Mining Charter made transformation strides in deracialising ownership, boardrooms and management teams, corporate activity focused primarily on redistributive activities rather than future resource opportunities. As a result, there has been serious underinvestment in exploration, without which there can be no pipeline of new productive projects. Thus, the industry has been largely in harvest mode for decades despite there being significant untapped resources, including of minerals that will be in demand as the world transitions from fossil fuels to renewables, electric vehicles and green hydrogen.

Whether there would have been a greater focus on growth had government disallowed the mining majors from shifting their domiciles from Johannesburg to London is unclear but, contrary to the arguments of the proponents, having access to lower-cost capital in London has not resulted in higher levels of investment in South Africa. Exploration has also been seriously stymied by administrative corruption and mismanagement at the mining department, with glacial progress on implementing a fit-for-purpose mining cadastre. In parallel, violent protests and strikes, including the horrific Marikana massacre in 2012, as well as mafia-style attacks on mining sites and executives, have further undermined confidence and investment.

In agriculture, meanwhile, many myths and misperceptions litter the divisive land reform debate. Further, the slow pace and mismanagement of redistributive efforts, coupled with corruption and high levels of violent crime, have weighed heavily on a sector that could have played a far larger role in both employment creation and rural development. Confidence was further dented by the “quiet diplomacy” that followed violent land invasions in neighbouring Zimbabwe, as well as rhetoric-heavy debates about land expropriation without compensation.

In the manufacturing sector, an inverse relationship has seemingly developed between policy interventions and actual production and investment. Government’s initial hands-off approach to industrial policy, with the automotive industry being a notable exception, resulted in many firms exiting manufacturing as the cold winds of trade competition blew over firms that previously benefited from protection. Amid evidence of premature deindustrialisation, government then started to intervene, initially through the Industrial Policy Action Plan and more recently through several sector-based masterplans. In theory, such social compacting should bear fruit, but there are few signs of deindustrialisation being halted. Even in those sectors, such as steel, where masterplans have been broadly embraced, downstream fabricators are struggling to fend off intense import competition, with the processes involved to secure protection even against dumping being so protracted as to be close to useless. Meanwhile, South Africa’s upstream producer, which is often accused of uncompetitive behaviour itself, is also struggling to survive, signalling that more of its production facilities may need to be shut. Here, some key policy decisions are actively undermining a business model that is already on shaky ground because of logistics and electricity disruptions and the difficulties in adjusting to tightening environmental legislation.

Recovery Plan?

Turning around this dismal reality requires political will, policy foresight, and ongoing reform, no matter the outcome of South Africa’s May 29 poll. Unless the reforms that are belatedly under way in electricity and freight logistics are implemented with diligence and alacrity, the prospects are truly slim for reigniting investment in construction, manufacturing, mining and agriculture at a scale supportive of tackling South Africa’s unemployment challenge and socioeconomic backlogs.

It is also possible to turn necessity into virtue by aligning reforms with a much-needed growth strategy. In the energy sector, for instance, one of the pillars of that growth strategy could be to build a new industrial complex calibrated to the energy transition. Through adopting an energy policy that places rapid decarbonisation at its centre, the industrial opportunities will not only become obvious but tantalising.

South Africa’s own domestic demand for wind, solar photovoltaic and battery storage components will be of such a scale as to almost guarantee domestic manufacturing, albeit with some initial policy support. Likewise, for the components used in transmission and distribution grids.

The production profile of a renewables-led system will be such that savvy industrialists will then seek to take advantage of the cheap or even free electricity that will be available at certain times of the day. This could make the cost of electric vehicle ownership so compelling that the domestic market will develop exponentially, hopefully while also sustaining the export markets that the established original- equipment manufacturers have so diligently nurtured over decades.

That new profile will be supportive of an ‘electrification of almost everything’ that can be decarbonised directly, from lighting and heating to mobility. With added foresight, investment will also lay the basis for indirect electrification, through the construction of an electrolyser fleet to produce green hydrogen, which South Africa can use domestically in its hard-to-abate sectors and trade internationally in the form of derivatives, such as green ammonia, sustainable aviation fuels and green direct reduced iron. South Africa’s combination of sun, wind and land means that the country has an in-built comparative advantage to produce renewable electricity, and thus green hydrogen, more cheaply than those countries that lack these natural attributes.

Similarly, domestic mining production could be progressively realigned to the energy transition such that the output and jobs lost in coal can be, at least partially, absorbed into the mining and processing of critical minerals and metals.

Such an energy-industrial complex could deliver not only new manufacturing enterprises but also jobs in new activities that are less vulnerable to the carbon tariffs that seem likely to be increasingly imposed by a number of South Africa’s key trading partners.

Parallel industrial strategies could arguably be pursued in the freight logistics and water sectors, where competitive businesses could not only meet local demand, but eventually start taking advantage of the opportunities that are poised to arise in the rest of the continent, where several countries are growing apace and where a number of countries are aligning their growth fortunes to the critical minerals demand emerging internationally. Here the African Continental Free Trade Area Agreement could truly come into its own.

Such a turnaround presupposes that South Africa’s polity avoids any populist fiscal or political responses that would have the effect of derailing the required reform agenda. A turnaround for the South African economy is also dependent on an adherence to the rule of law, a steady improvement in governance including at the State-owned enterprises, a municipal service delivery recovery, and visible successes in the ongoing battle against corruption and crime. Only then will the conditions be created for the real economy to begin playing its rightful role in building the “common nationhood” that would close the chapter on Mbeki’s “two nations”.