South Africa
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ANDILE NTINGI: No-one can be industrial giant without constant access to power

Not that long ago Germany was hoisted up by a throng of admirers as an example of a successful industrial exporter worthy of emulation. SA was among the admirers, aspiring to replicate Germany’s formula of success in generating wealth and employment by exporting high-value manufactured goods to global markets.

Many economists who have studied Germany marvel at its education system, which is renowned for churning out the highly trained artisans, technicians and engineers that give German manufacturers, mostly family-owned SMEs, a competitive edge in export markets.

Economists also highlighted Germany’s ability to keep inflation and interest rates low, maintain stable industrial relations and build world-class infrastructure as remarkable economic attributes that helped Germany become the world’s second largest exporter and the wealthiest country in Europe.   

While SA has attempted to craft an industrial policy that mimics Germany and East Asian tigers like China and South Korea, it has struggled to grow its manufacturing sector and reverse a process of deindustrialisation that began after the government liberalised the economy two decades ago, exposing it to international competition.   

By now, our manufacturing sector should have adjusted to international competition, but it has not been able to reclaim lost ground, condemning SA to be mainly an exporter of raw minerals instead of an exporter of finished manufactured goods.

Our country’s inability to develop a globally competitive manufacturing sector is also being constrained by our inability to generate sufficient electricity to meet demand, along with inefficient logistics and transport infrastructure, which chokes exports, causing the country to miss out on fully exploiting commodity market booms.

In the early 2000s SA had the status of being recognised as one of the world’s few suppliers of cheap and reliable electricity. But due to underinvestment in energy generation and distribution capacity the country started experiencing frequent blackouts from about 2008. These have worsened steadily with no end in sight, leaving businesses and households without electricity for eight to 12 hours a day.

The power shortages have had a negative effect on productivity and kept the SA economy stagnant for over a decade, with the average annual growth rate barely averaging 1%, nowhere near good enough to make a dent on unemployment.

According to the expanded definition of unemployment that includes discouraged job seekers, unemployment in SA stood at 42.1% in the second quarter of this year, meaning 11.1-million people are out of work. 

The prolonged economic stagnation is also having a negative effect on government’s finances, to the point where it is now under pressure to make deep cuts in spending or increase taxes to keep afloat and meet its debt obligations.

Of late, Germany is also learning the hard way that lack of access to cheap energy is catastrophic for any modern industrial economy. Germany is now being branded the “Sick man of Europe” by international media after it slid into recession due to losing access to cheap Russian gas imports.

German retail sales, exports and industrial production have all declined after energy prices soared across Europe due to the Russia-Ukraine war. In response to rising inflation, European monetary authorities have hiked interest rates.   

The energy crisis facing Europe worsened following explosions a year ago that severed and rendered inoperable three of Nord Stream’s four underwater pipelines, which transported natural gas via the Baltic Sea from Russia to Germany and its Western European neighbours.    

Germany has been dependent on Russian natural gas supplies since the 1970s, and prior to the Russia-Ukraine conflict Russian gas accounted for 65% of all Germany’s gas imports.

The access to cheap Russian gas was one of the factors that enabled the German economy to be competitive compared with China and the US. At the same time, it allowed Germany to phase out coal and nuclear energy while integrating renewables into its electricity grid.

Interestingly, Germany, and other European countries such as Netherlands, Denmark, France and Italy, have gone back to burning coal to generate electricity to offset the loss of Russian gas and a ban on Russian coal imports. These countries have turned to SA and other coal producers to plug the hole left by the loss of Russian commodities. 

The energy crisis faced by Germany and SA is an important case study for countries that aspire to industrialise. The lesson is that no country can ever become an industrial giant without access to an affordable and uninterrupted power supply. 

The ongoing electricity constraints could result in SA missing out on taking advantage of the benefits of trade deals the country has with its trading partners. SA has a free-trade agreement with the EU and our exporters enjoy import duty free preferential access to the US market for more than 1,800 products thanks to the African Growth & Opportunity Act (Agoa).

SA exporters also have access to the African Continental Free Trade Area (AfCFTA), the world’s largest free trade area, which has removed trade tariffs on 88.3% of 5,000 goods traded in Africa. SA is also a member of the newly expanded Brics+ bloc of emerging markets. The enlargement of Brics has given SA an opportunity to expand its trade links with more countries in the Middle East, East Asia and South America. 

To fully exploit new export market opportunities SA will have to address its energy crisis and transport logistics constraints. This means boosting power generation to ensure industries are supplied with cheap and reliable electricity. It also makes it imperative that we fix our railway lines and ports to ensure goods are transported efficiently across our logistics network from factories, mines and farms to customers.

In addition, the government must carry out necessary economic reforms to reduce the cost of doing business, especially cutting red tape. This will also make SA more attractive to investors. We must get our act together to avoid missing out on existing trade opportunities and becoming the “Sick man of Africa”.

• Ntingi is founder of GetBiz.