GRACELIN BASKARAN: Long-term perspective needed to turn mining boom into sustainable growth

SA is experiencing a mining boom, but translating this into sustainable growth requires intentionality and a long-term development perspective.

The boom has been strong. In 2020, though there was a 15.5% reduction in platinum group metal (PGM) production, the value of PGM sales rose 40% due to a surge in commodity prices, a trend that continued into 2021. From January 2020 to May 2021 rhodium prices rose 323% and palladium prices 44.5%. It is no surprise that rhodium accounted for 53% of total PGM exports during the second quarter of 2021. Production and sales have now exceeded prepandemic levels.

The surge in commodity prices and rising global demand for key clean energy metals — particularly rhodium, palladium, platinum and chromium — has benefited the SA economy tremendously. The Reserve Bank has noted a sharp increase in corporate income tax receipts thanks to the mining sector.

But windfalls have not always stimulated the structural reforms required to boost long-term growth. The last PGM boom began in 2006 and lasted until 2011. Platinum prices reached a high of $2,300/oz in 2008 before commencing a decline in 2011 and reaching a low of $816/oz in 2015. GDP growth followed a similar trend. Except for a dip in 2009, GDP growth rates ranged between 3.3% and 5.6% during the 2006-2011 period. Since 2014 GDP growth has not exceeded 1.8%.

What can SA do to ensure we can use the current mining windfall to support long-term growth? We need to invest in productivity gains through carefully designed measures to strengthen human capital. This can come through improving the quality of basic and secondary education, digital literacy and adult education. Active policy to improve education is critical to improve labour market outcomes. Poor education has become a driver of inequality. Investments in human capital can facilitate improved employment outcomes and growth beyond the boom period.

Building fiscal buffers and breaking away from the procyclicality of spending resource wealth is imperative for fiscal sustainability. Notably, increasing public sector wages is not part of this. SA has been hit by a range of shocks in recent years, from crippling droughts that led to two national states of disaster in three years, to cyclones and the devastating effects of the Covid-19 pandemic. Having the liquidity buffer to support households and businesses during these shocks has become critical given that climatic shocks will continue to increase in severity and frequency.

We thus need to use the current windfall to upgrade economic activities to higher-productivity sectors, particularly manufacturing.

We need to rethink how the boom can enable SA to transition to a higher growth path in the long term. No country other than exceptionally oil-rich countries such as Qatar and Kuwait, or small financial havens such as Liechtenstein and Monaco, have been able to improve living standards substantially and sustainably without developing a strong manufacturing sector.

Since 1990 SA’s manufacturing sector has contracted linearly from 21.6% of the economy in 1990 to 11.5% in 2019. We thus need to use the current windfall to upgrade economic activities to higher-productivity sectors, particularly manufacturing. The sector is able to absorb large amounts of labour, offers formal jobs with stable incomes and benefits, and is subject to labour laws and enforceable minimum wages — a large improvement from a sizeable informal sector and dismal unemployment rate.

Using its resource windfalls SA needs to take a more proactive role in integrating itself into the clean energy transition by building renewable energy technology. Chromium, of which SA holds 72% of the world’s endowments, is particularly useful for concentrated solar power, electric vehicles and battery storage. PGMs, of which SA holds 80% of the world’s platinum and 40% of the world’s palladium, are required in large amounts for hydrogen fuel cell technology. Manganese, of which SA has one of the world’s largest endowments, is used in onshore and offshore wind as well as electric vehicles. There is huge untapped potential to develop these value chains.

Unexpected turns

These lessons can be adopted by countries across Sub-Saharan Africa, many of which are seeing windfalls. During the most recent commodities boom resource-rich countries experienced average annual growth rates of 5.6% compared with 4.4% for non-resource rich countries. During the “bust” phase growth rates fell to 2.6% and 3% respectively.

The additional revenue generated by the mining sector is well timed given the substantial fiscal resources used to respond to the pandemic. However, using the windfalls for more than social grants is critical to transition SA to a higher growth trajectory, build human capital, create jobs, reduce inequality and move towards fiscal sustainability after the resource boom. Unexpected turns such as the pandemic have showed us how important thinking about the future is.

• Dr Baskaran (@gracebaskaran), a development economist, is a bye-fellow in economics at the University of Cambridge.