Sim Tshabalala: South Africa in the fourth industrial revolution
Date: 06 October 2017 | Author: Business Leadership South Africa Category: Opinion
Our first order of business should be to reverse the decline in our economic competitiveness and in the quality of our governance, particularly as measured by policy certainty and by control of corruption. Ten years ago, South Africa was ranked 45th in the Global Competitiveness Index. This year we are 61st. In 2000, the Worldwide Governance Indicators ranked South Africa in the top quarter of countries for control of corruption. We have dropped 14 places since then, and now rank as just about average.
As lawyers say, res ipsa loquitur: These facts and their consequences speak for themselves. South Africans have been getting steadily poorer since 2014. Unemployment is at world-record levels: for every young person with a job, two are out of work. Statistics South Africa has just pointed out that this means that we are not benefiting from the demographic dividend that we should be generating from the energy and skills of our young people.
Corruption is not a “victimless crime”. It creates huge costs and inefficiencies by draining resources and opportunities out of the rest of the economy and redirecting them to benefit only the “connected”. As members of organisations like Business Leadership South Africa, and as citizens, it is our duty to defend our Constitution and to reject unethical and criminal behaviour wherever we find it in boardrooms, in government, and on the streets. We should do this both because it’s the right thing to do and because doing so will create jobs and growth.
We could create still more jobs if South Africa could achieve certainty about mineral rights and rural land ownership and if we could settle on serviceable modern ICT regulations. Yet more growth and jobs would be created by reforming the energy and transport sectors to make them more competitive so that we could get commodities to international markets, and attract tourists to South Africa, faster and more affordably.
But even once we have completed these reforms, we would still be a commodity-dependent middle-income country with high unemployment and very high inequality – yes, a much better South Africa, but not the South Africa we want and can become.
In order fully to achieve the aspirations of our Constitution and the National Development Plan, I believe we need to think differently and come to grips with the fact that the world is undergoing a fourth industrial revolution, driven by universal broadband, artificial intelligence and robotics. Many routine physical and clerical jobs for humans are at risk of being replaced by software or robots. In the past, countries might have been able to industrialise by keeping wages low. But no country will be able to keep their wages lower than a robot’s if it is committed to preserving workers’ rights and human dignity.
South Africa now needs to draw on strengths that we perhaps don’t always fully appreciate having and to use these strengths to explore the new opportunities created by the fourth industrial revolution.
For instance, we usually think ourselves as a country of mines, factories and farms– and of course that’s still largely true. But we are also a country of cities – and pretty impressive cities at that. Two-thirds of our output is produced in the nine metros, and each of our nine metros does several things really well. As World Bank research has shown, if each city could learn from the best practices in the others, they would all run more efficiently than the average city in the rich world. There is no reason why Durban and Johannesburg can’t be as efficient as Bloemfontein when it comes to getting electricity; there’s no reason why Cape Town can’t be as efficient as Ekurhuleni in registering businesses. In other words, just by learning from each other, we could become a country of world-class cities very quickly.
In fact, in some areas, our cities are already world-class. Cape Town today has many more active entrepreneurs than the average rich-world city. And both Cape Town and Johannesburg are internationally recognised as fintech hubs, which enables us to extend financial services affordably and safely to almost all adult South Africans, to invest in SMEs, and to compete successfully in the rest of Africa and the wider world.
It’s not a coincidence that South Africa has several excellent universities. I don’t think we always fully realise just how good they are: UCT and Wits are ranked among the top 1% of universities in the world in both the Times Higher Education and the QS world university rankings. Several others are also world-class.
Next, despite the fact that we’re a primary commodity exporter with a generally struggling manufacturing sector, we’re also surprisingly good at “medium-tech” production for export and we have a small – but growing – hi-tech sector. In total, medium and hi-tech exports now account for 54% of the value of our manufactured exports.
However, on average, and compared to the value of their sales, South African manufacturing firms spend seven times less than American companies on research and development (R&D). If you think that’s an unfair comparison because the US is so rich, then consider the fact that Kenya spends 30% more per head on R&D than we do.
Strangely enough, even over the increasingly difficult period from 2009 to 2014, the return on R&D in South Africa was around four times higher than in the United States, and eight times higher than in Taiwan. In other words, South African companies that aren’t investing in innovation are missing a valuable opportunity to increase their profits. Of course, this is partly because investors and managers lack confidence owing to the declining quality of our regulatory and business environments. (South Africa’s business environment has deteriorated by 2.3 basis points on the global Doing Business regulatory quality measure since 2010, and is now ranked 74th, down two places from 2016.)
Nevertheless, given the huge returns to R&D, persuading our companies to invest in research at our universities and to do more R&D in-house should be even easier than making our metros into world-class places to do business.
What does all this add up to? Simply this: South Africa could be on the verge of a new phase of rapid growth. Given the governance and competitiveness reforms I have mentioned, South Africa can be an increasingly efficient commodity exporter and an attractive tourism destination. Given cities that are willing to learn from each other and firms that are willing to invest in innovation, South Africa can also become a competitive medium- and hi-tech industrial exporter, particularly to the rest of Africa, and Africa’s knowledge and ICT hub.
The obvious – and very large – problem with South Africa’s previous periods of rapid growth is that the lion’s share of the benefits has gone to elites, leaving the vast majority of South Africans only slightly better off at best. Mass exclusion reduces demand and investor confidence and has a strong tendency to push governments into populist policies that are bad for growth. This time, therefore, we should do everything we can to ensure that growth will create decent jobs, useful skills, new enterprises, and a sense of fairness and social solidarity.
Of course, sceptics worry that growth driven by the fourth industrial revolution will be even more exclusionary than in the past. Won’t all the “jobs” go to robots? Won’t all the new wealth go to those with the most capital and the most valued scientific and engineering skills?
The first question is easier to handle. Yes, in the most advanced economies, some jobs will probably be permanently lost to robots. And in all economies – including South Africa – we will need to make sure that people who work in the “gig economy” as permanent freelancers are not exploited. But the “rise of robots” does not mean the end of human usefulness – any more than the steam engine or the telephone did. This is particularly true in a middle-income country like South Africa. Here, economic modelling shows that an increase in innovation would actually create a lot of jobs in almost every part of the economy, with particularly positive effects in mining, construction, and heavy and hi-tech manufacturing.
Two good examples of the way this works in South Africa have been identified by the World Bank: Carbon capture and storage, which could make our electricity much cleaner and create construction jobs; and Afta – a robot which uses smartphones to connect commuters and minibus taxi operators, making the daily commute more efficient for both drivers and passengers. In financial services, digitisation means that people in branches, call centres and back offices will do fewer very routine tasks and more interesting and fulfilling work helping customers, solving complex problems and assisting enterprises to grow and to create jobs. And financial services’ increased overall competitiveness will mean more demand – and therefore more income and jobs – throughout the economy.
The second question is harder. There is a real risk that the fourth industrial revolution will worsen inequality even further. We can’t afford to let this happen. At least to some extent, South Africa can choose what kind of companies and labour relations we want by setting minimum standards. However, it is still likely that more people are going to be permanent “gig” workers and so we may need to redesign the pensions and unemployment insurance systems to provide all workers with a safety net that works for them. Equally, if returns to capital (in the form of software, networks and robots) are going to rise faster than the returns to labour, then we should be debating ways to create broader ownership of capital.
Furthermore, I believe that an open-minded and evidence-based conversation about the social security system is called for. For instance, one interesting policy notion is whether a Basic Income Grant (BIG) for all citizens would be a good idea in South Africa, as technology and society evolve together over the next several decades. There may be a case for a BIG that would enable everyone to escape the worst poverty and to create the basic security and modest resources that allow people to look for a job or take an entrepreneurial risk. As Professor Guy Standing writes, “A sense of security is required in order to be rational, tolerant and compassionate” – and South Africa surely needs more of all three of these qualities. On the other hand, opponents of a BIG argue that it would be unaffordable, that it would entrench dependency, and that our focus should be on using our resources to promote faster growth, which would make a larger difference than a BIG. In my view, we should all be open to being persuaded by the evidence, either way.
Having said all this, the most complete and satisfactory answer to the second question is to improve our schools and technical education systems so that people are equipped with the skills they need to flourish in the digital age. Our primary and secondary schools are still far too weak; our technical and vocational colleges are too small and their curricula are out of date. And now we urgently need to provide life-long education in digital skills. I think that South African companies have a clear responsibility to provide life-long training opportunities both to our employees and to our communities.
In this area – once again – South Africa can draw on our strengths. The government provides a comprehensive set of public support programmes for entrepreneurship and innovation. According to the World Bank, these programmes are far better than those in most developing countries and bear comparison with those in the rich world. If we can do this so well, what is stopping us from encouraging more entrepreneurship in providing basic and vocational education, and from using digital technology far more widely in teaching and learning?
Business Leadership South Africa says in our Contract with South Africa that this must be a country that works for everyone. As I have argued here, this is not an impossible dream. With some fresh thinking and some co-operation, we can make it happen.
Published in Daily Maverick (6 October 2017)