SA’s geo-economic gamble lies in its growing tilt towards China and Russia in bilateral relations, even as its trade and foreign direct investment (FDI) remain dominated by Western partners. Does the shift away from traditional trading partners towards the Brics group make economic sense? The data suggests not.
Rising tensions with the US and policy uncertainty have already had an effect. SA exports to the US were down more than 20% year on year for each of the last three months. And this is before we can measure the full effect that tariff implementation will have.
Western trading partners represent about a third of SA exports and imports, while China is SA’s largest individual trading partner. China is a critical buyer of SA commodity exports, representing about 12% of the total, and produces almost a quarter of our imports of manufactured goods. Russia represents less than 0.5% of our trade.
Despite the attention the Brics group gets in our international relations, these countries have offered limited export and investment benefits. Together, the West accounts for more than 80% of SA’s inward investment, compared with only 5% from Brics countries.
SA’s political pivot has occurred against a backdrop of a multi-decade decline in the country’s role in global trade and capital markets. The country’s share of world merchandise trade has declined three-fold over 30 years, and inward FDI has fallen off a cliff over the past decade. In 2023 SA received just $1,750 of foreign investment per person, compared with about $2,700 in 2009, and that’s before accounting for inflation.
— SA’s political pivot has occurred against a backdrop of a multi-decade decline in the country’s role in global trade and capital markets.
The decline in investment returns in SA has also seen SA firms and households move their investments overseas. Ironically, the value of SA Inc’s foreign assets has soared on the back of strong relative investment returns (think of the performance of Naspers’ global internet investment business) and favourable valuation changes from exchange rate changes (rand depreciation boosting the value of foreign assets denominated in foreign currencies).
But this probably reflects a weakening of confidence in the SA economy. Since SA imports more than we export, this also raises concern about whether we will continue to finance our current account deficit as easily as we have over recent years.
Export intensity
Apart from decoupling from global trade, SA has experienced a decline in the economic complexity of our exports. Both the Harvard Growth Lab and the Observatory of Economic Complexity’s measures of export sophistication show that while fast-growing countries such as China’s export-based economy have become more diversified and technologically advanced over time, the opposite is true for SA.
It is worth zooming in on the automotive industry, as it receives a large share of the government’s industrial support. A recent SA Reserve Bank working paper by economists Guannan Miao and Fons Strik shows that SA’s automotive industry uses fewer inputs from foreign upstream industries than many of our peers.
SA’s “export intensity” (how much domestic value added is represented in final foreign consumption of goods or services) and “processing” (the quantity of imports used as intermediate inputs that are subsequently exported) are comparatively low. The paper shows that our automotive industry’s integration is lower than one would expect considering SA’s economic structure, resource endowments and industrial policies.
SA’s trade intensity is low compared with economies that have increased per capita income over recent decades: it is only a third of those of countries such as Malaysia or Vietnam. Trade intensity is important for productivity growth because trade exposes firms to competition and provides access to a wider variety of inputs, including new technologies. This promotes specialisation, helping firms to capitalise on our comparative advantages.
SA does play an important trade role in Africa. But this partly reflects the benefit of the Southern African Customs Union’s common tariff barriers. SA’s intra-African trade remains underdeveloped relative to its integration into the global economy. Regulatory and border frictions and the deterioration of our rail, road and port infrastructure have made things harder. Incredibly, SA port activity is still lower than pre-pandemic levels.
This also reflects deteriorating price competitiveness, driven in part by dramatic increases in municipal rates and tariffs and other administered prices and a collapse of government service delivery. Eskom’s standard tariffs have increased at almost 15% per year since 2008, compared with consumer price inflation of about 5.8% over this period.
Anti-growth regulations
Another important factor has been SA’s increasingly anti-growth regulatory frameworks. The number of laws in force in SA has more than doubled since the advent of democracy, raising compliance complexity and costs. SA is at the bottom of rankings of major developed and emerging markets for regulations that discourage business registration and growth, according to estimates by the Organisation for Economic Co-operation and Development (OECD). Outdated exchange control and investment regulations add sand to the wheels of every cross-border transaction.
Cross-border trade requires networks of quite large formal sector firms. There are several uniquely SA regulations that deter firms from growing. The race-based employment equity quotas that came into force this month create a strong disincentive for firms to grow beyond 50 people. Likewise, BEE regulations create incentives for firms to keep turnover under R10m to qualify for exemptions from BEE verification.
— SA’s weakening integration into the global economy and poor productivity performance threatens the country’s future prosperity.
Export-led economic growth requires that successful firms grow. China’s industrialisation and dramatic income growth were sparked by large export-orientated firms that established supply chain and logistics networks and enabled an ecosystem of smaller specialised firms to emerge and grow.
But as shown by a 2019 World Bank study and recent OECD research, SA’s economy is dominated by large but low output and employment growth companies, with little dynamism from small or medium sized firms. Despite high levels of concentration, with a small number of dominant firms, the correlation between concentration and profit margins is exceptionally low in SA, with many high-concentration industries experiencing low profit margins.
In part this reflects the long-term decline in net profit margins from a deterioration in the business environment and the outsize role of government-related corporations or capital-intensive recipients of state support. The consequence has been that SA is deindustrialising, despite the highest commodity prices in more than two generations. Manufacturing’s contribution to output has fallen by about a quarter since the early 1990s, while its share of employment has halved.
Over the long term, productivity is a key determinant of the welfare of country’s population. Trade has historically been one of the main drivers of productivity growth, with global integration supporting rising income per capita in fast-growing economies. SA’s weakening integration into the global economy and poor productivity performance threaten the country’s future prosperity.
SA’s geo-economic gamble and misguided industrial policies have not paid off, and increasingly put at risk vital economic links with its major investment partners and the African continent as a whole.
• Dr Steenkamp is CEO of Codera Analytics and a research fellow with the economics department at Stellenbosch University. Quass De Vos is an associate with Codera.
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