SOUTH AFRICA ITALY SUMMIT 014

SOUTH AFRICA ITALY SUMMIT 014 SOUTH AFRICA AND ITALY RELATIONS IN THE CURRENT GEOPOLITICAL AND ECONOMIC SCENARIO PROFESSOR MTHULI NCUBE BLAVATNIK SCHOOL OF GOVERNMENT UNIVERSITY OF OXFORD OCTOBER 2, 2014 CAPE TOWN

GLOBAL CONTEXTS FUTURE SOUTH AFRICA ITALY TRADE WITHIN THE GLOBAL TRADING SYSTEM WILL BE SHAPED BY ECONOMIC, POLITICAL AND SOCIAL FACTORS INCLUDING TECHNOLOGICAL INNOVATION, CONSUMPTION PATTERNS AND DEMOGRAPHIC CHANGE. TRADE AND INVESTMENT TRANSFORMATION BETWEEN THE TWO COUNTRIES WILL BE MANIFESTED IN THE WIDER GEOGRAPHICAL PARTICIPATION IN TRADE AND THE RISE OF INTERNATIONAL SUPPLY CHAIN PRODUCTION

SOCIO-ECONOMIC CONTEXT: ITALY SLOW RECOVERY FROM RECESSION ITALY S SLOW GROWTH IMPLIES THAT UNEMPLOYMENT IS EXPECTED TO REMAIN HIGH UNTIL THE END OF 2015. UNEMPLOYMENT REACHED 12.6% IN JULY 2014 2.4 PERCENTAGE POINTS ABOVE THE EU AVERAGE. YOUTH BEAR THE BRUNT OF THE SLUGGISHNESS OF THE LABOR MARKET ITALY IS LAGGING BEHIND OECD MEDIAN IN TERMS OF JOB QUALITY. NEED TO TACKLE STRUCTURAL WEAKNESSES TO SECURE A RECOVERY AND UNLEASH ITALY S GROWTH POTENTIAL. EXTERNAL RISKS ARISE ALSO FROM GEOPOLITICAL TENSIONS.

SOCIO-ECONOMIC CONTEXT: SA HIGH UNEMPLOYMENT AND INEQUALITY DEEP INEQUALITIES BY CLASS, WITHIN WORKPLACES, AND BY ETHNICITY CONSTRAINED LOCAL MARKETS (POOR CAN T AFFORD TO BUY MUCH AND RICH PREFER IMPORTS) WORKPLACE CONFLICT IN MINING SECTOR GAP BETWEEN BUSINESS AND STATE MINING SECTOR STILL IMPORTANT BUT NOT CREATING ENOUGH JOBS ONLY A FEW MINING-BASED ECONOMIES HAVE SHIFTED TO MANUFACTURING AS THE LEAD EXPORT OR EMPLOYMENT SECTOR IN THE PAST 50 YEARS

GROWTH IN PRODUCTION GROWTH NOT THE SOLE DETERMINANT OF EMPLOYMENT, BUT OBVIOUSLY A FACTOR 6.0% 5.0% 1993 to 2008 2008 to 2013 MANUFACTURING PRODUCTION GREW STRONGLY UNTIL 2008 SINCE THEN, GROWTH HAS DECLINED SHARPLY EVEN AS OTHER SECTORS HAVE DONE FAIRLY WELL 4.0% 3.0% 2.0% 1.0% GENERALLY, CORE PRODUCTIVE SECTORS HAVE NOT DONE AS WELL AS THE REST OF THE ECONOMY SINCE 1994 MANUFACTURING SHARE IN TOTAL VALUE ADDED HAS FALLEN FROM 19% OF THE GDP IN 2003 TO 10% TODAY 0.0% -1.0% Agriculture Mining Manufacturing Utilities, construction, logistics Trade Services GDP

GROWTH WITHIN MANUFACTURING 2008 to 2012 1993 to 2008 Other BY SUBSECTOR, GROWTH FROM 2008 ALSO PROBLEMATIC IN COMMODITY BASED INDUSTRIES UNFORTUNATELY SECTORS ARE RELATIVELY HIGHLY AGGREGATED Transport equipment Electrical and electronic equipment Metals and machinery Non-metallic mineral products Chemicals Wood/paper/publishing Clothing and textiles Food, beverages, tobacco -4.0% -2.0% 0.0% 2.0% 4.0% 6.0%

AGRICULTURE: THE BIG GAP IN 2013, AGRICULTURE ACCOUNTED FOR JUST 5% OF TOTAL EMPLOYMENT IN SOUTH AFRICA, WHILE OVER A THIRD OF THE POPULATION WAS CLASSED AS RURAL. SEVENTH LARGEST GAP OF THE 135 COUNTRIES REPORTING THE RELEVANT INFORMATION IN THE WDI % rural population % of employment in agriculture 60% 50% 52% 51% 48% 40% 38% 38% 37% IN MARCH 2014, 90% OF RURAL POPULATION LIVED IN FORMER SO- 30% 31% CALLED HOMELANDS WHERE ONLY 26% OF WORKING-AGE PEOPLE WERE 20% EMPLOYED SOME 13% OF PEOPLE IN THE FORMER 10% 15% 15% SO-CALLED HOMELANDS HAD ACCESS TO LAND, BUT 80% SPENT LESS THAN SEVEN HOURS A WEEK DOING FARM WORK 0% World Middle Income 5% South Africa Brazil (2011) China

BROAD SECTOR MIX OF SA EXPORTS VARIES WIDELY DEPENDING ON DESTINATION Commodity exports feature strongly in countries such as China and Japan, whilst Europe, USA and Africa are important destinations for SA s manufactured exports. South Africa's exports to selected countries/regions in 2013 (% share of exports) Broad sector World (Total exports) USA European Union Japan China Africa Rest of World Agriculture 4.9 1.6 8.7 5.1 2.1 3.7 5.2 Mining 43.0 27.7 33.1 64.6 76.6 3.4 56.7 Manufacturing 52.1 70.7 58.2 30.3 21.3 92.9 38.2 Total exports 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Source: IDC, compiled from SARS data

1 A HIGHLY CONCENTRATED EXPORT BASKET Sector % share Sector % share Sector % share Motor vehicles, parts and accessories 2 Platinum 10.5 Source: SARS, IDC calculations 20.4 Iron ore 46.6 Non-electrical machinery 14.2 Non-ferrous metal ores (excl. gold & PGMs) 18.3 Note: Items in red refer to mining Motor vehicles, parts and accessories 3 Agriculture 8.7 Basic iron and steel products 8.9 Processed food 9.6 4 Basic iron and steel products 8.1 Coal mining 8.6 Other chemical products 7.7 5 Coal mining 7.2 Platinum 2.9 Basic iron and steel products 7.3 6 Non-ferrous metal ores (excl. gold & PGMs) Major exports to select regions/countries in 2013 (% share of exports) European Union China Africa 7 Iron ore 5.7 6.2 Other manufacturing 2.4 Industrial chemicals 6.6 Motor vehicles, parts and accessories 8 Other manufacturing 5.0 Agriculture 2.1 2.2 Petroleum and petroleum products Metal products, excl. machinery 9 Beverages 3.5 Paper and paper products 2.0 Electrical machinery 4.1 10 Other mining 3.4 Non-ferrous metal products 1.8 Agriculture 3.6 11 Industrial chemicals 3.3 Industrial chemicals 1.5 Paper and paper products 2.2 12 Non-ferrous metal products 3.0 Processed food 0.8 Coal mining 2.0 Cumulative % of above 85.0 Cumulative % of above 98.2 Cumulative % of above 80.6 11.5 6.0 5.7

South Africa Major Trading Partners - Share of imports by country in total imports Iran (Islamic Republic of): 3.75 United Kingdom: 4.02 Italy: 2.71 Nigeria: 3.13 China: 14.26 India: 4.04 Saudi Arabia: 4.46 Germany: 10.71 Japan: 4.75 United States: 7.99 Source: Merchandise trade matrix, imports and exports of total all products, annual, 1995-2011 http://southafrica.opendataforafrica.org/uxqhmgf/south-africa-exports-major-trade-partners

South Africa Major Trading Partners - Share of exports by country in total exports China: 18.79 Others: 36.27 United States: 9.12 Belgium: 2.43 Zimbabwe: 2.44 Korea: 2.82 Netherlands: 3.00 UK: 4.05 India: 6.32 Japan: 8.02 Germany: 6.75 Source: Merchandise trade matrix, imports and exports of total all products, annual, 1995-2011 http://southafrica.opendataforafrica.org/uxqhmgf/south-africa-exports-major-trade-partners

SOUTH AFRICAN TRADE WITH ITALY Export Import Section Section jan-dec 13 jan-july 14 jan-dec 13 jan-july 14 Description 1 Live animals R 533,923,542 R 428,172,136 R 86,115,058 R 50,231,440 2 Vegetables R 554,514,357 R 431,857,042 R 187,019,068 R 112,699,156 3 Animal or R 5,104,733 R 2,546,286 R 99,660,594 R 65,459,946 vegetable fats 4 Prepared R 294,292,450 R 40,143,378 R 1,237,937,325 R 603,235,383 foodstuffs 5 Mineral R 3,481,637,833 R 1,779,845,832 R 1,608,337,098 R 1,289,072,416 Products 6 Chemicals R 222,201,424 R 108,350,707 R 2,803,474,364 R 1,778,891,678 7 Plastics & R 190,021,379 R 211,288,620 R 1,136,987,365 R 698,316,159 Rubber 8 Raw hides & R 1,018,348,159 R 562,543,039 R 159,064,188 R 85,862,842 leather 9 Wood R 4,500,623 R 3,869,016 R 41,589,497 R 14,622,871 Products 10 Wood pulp & R 170,758,376 R 109,251,628 R 507,964,437 R 346,220,724 paper 11 Textiles R 507,205,819 R 352,918,686 R 391,966,052 R 267,425,427 12 Footwear R 5,435,416 R 5,325,660 R 456,058,328 R 246,267,099 13 Stone & R 38,072,284 R 25,873,577 R 540,120,719 R 377,439,287 Glass 14 Precious R 216,040,968 R 180,676,380 R 205,394,656 R 119,816,519 Metal 15 Products Iron R 2,359,639,623 R 1,929,149,850 R 1,489,984,683 R 817,706,733 & Steel 16 Machinery R 255,383,484 R 101,340,602 R 10,645,748,142 R 5,806,291,552 17 Vehicles R 361,833,788 R 187,729,848 R 2,530,986,285 R 1,135,702,460 aircraft & vessels 18 Photographic R 26,458,964 R 13,792,873 R 837,280,239 R 416,096,694 & medical equipment 20 Toys & Sport R 2,836,921 R 4,056,090 R 411,544,149 R 237,795,113 apparel 21 Works of art R 209,181,223 R 59,066,491 R 8,981,006 R 195,149,012 22 Other R 5,016,086 R 2,560,413 R 80,499,324 R 45,736,156 unclassified goods 23 Equipment Components R 587,659,473 R 319,184,425 Total R 10,462,407,452 R 6,540,358,154 R 26,054,372,050 R 15,029,223,092 SOURCE: : www.sars.gov.za

MINING AND MANUFACTURING IN SA S GDP: 1994 AND 2013 The manufacturing sector s contribution to SA GDP declined sharply from 20.9% in 1994 to 11.6% by 2013, whilst the mining sector s share increased from 7.3% to 9.2%. Sectoral composition of the South African economy in 1994 General government 16.2% Community, social & personal services 5.3% Finance, insurance, real estate & business services 16.0% Transport, storage & communication 8.7% Agriculture, forestry & fishing 4.6% Mining & quarrying 7.3% Wholesale & retail trade, catering & accommodation 14.2% Manufacturing 20.9% Electricity, gas & water 3.6% Construction 3.1% Sectoral composition of the South African economy in 2013 Community, social & personal services 6.0% Finance, insurance, real estate & business services 21.5% General government 17.1% Agriculture, forestry & fishing 2.4% Transport, storage & communication 8.9% Mining & quarrying 9.2% Manufacturing 11.6% Electricity, gas & water 3.0% Construction 3.7% Wholesale & retail trade, catering & accommodation 16.6% Source: IDC, compiledfrom SARB data Note: Sector share according to GDP at basic prices (current prices) Source: IDC, compiledfrom SARB data Note: Sector share according to GDP at basic prices (current prices)

2. INDUSTRIAL POLICY AND INCLUSIVE GROWTH IN SA CHARACTERISED BY EMPLOYMENT CREATION AND RISING INCOMES THROUGH RAPID INCREASE IN EXPORT OF MANUFACTURES, ESPECIALLY CLOTHING (INITIALLY) AND THEN EQUIPMENT AND CARS

SOUTH AFRICA AND GLOBAL VALUE CHAINS SOUTH AFRICA IS AN IMPORTANT HUB IN THE GLOBAL MINING VALUE CHAIN. A REGIONAL ASSEMBLY HUB IN THE GLOBAL AUTOMOTIVE VALUE CHAIN. A KEY PLAYER IN THE REGIONAL FINANCE AND RETAIL VALUE CHAINS. REGIONAL VALUE CHAINS OFFER IMPORTANT OPPORTUNITIES TO CREATE VALUE IN KEY INDUSTRIES, BOOST EMPLOYMENT OPPORTUNITIES, AND IMPROVE ECONOMIC GROWTH.. GLOBAL VALUE CHAIN-RELATED ACTIVITIES ARE IGNORED IN SOUTH AFRICA S INNOVATION POLICIES AND THERE IS LESS RESEARCH AND DECLINING LINKS BETWEEN FIRMS AND SCIENCE COUNCILS. SOUTH AFRICA WOULD STAND TO BENEFIT FROM THE DIVERSIFICATION PROMOTED BY LINKAGES AND SPILLOVERS BETWEEN INDUSTRIES. IN ORDER TO INCREASE THE DEPTH OF VALUE CHAINS, MEASURES THAT TARGET SKILLS DEVELOPMENT, EXPANSION OF TECHNOLOGICAL CAPABILITIES AND ACCESS TO CAPITAL ARE ESSENTIAL.

INVESTMENT IN INNOVATIONS ADVANCED MANUFACTURING TECHNOLOGIES CLEAN VEHICLES BIO-BASED TECHNOLOGIES KEY ENABLING TECHNOLOGIES SMART GRIDS SUSTAINABLE CONSTRUCTION

PROVIDE BUSINESS FRIENDLY ENVIRONMENT POTENTIAL FOR CLUSTERS AND SMART SPECIALIZATION. MINING HOUSES ARE CLUSTERED AROUND JOHANNESBURG AND SUPPLY INDUSTRIES AROUND EAST RAND. GROWTH FRIENDLY PUBLIC ADMINISTRATION. SOUTH AFRICA WAS RANKED 3RD OUT OF 148 COUNTRIES IN TERMS OF FINANCIAL MARKET DEVELOPMENT BY THE 2013/14 GLOBAL COMPETIVENESS REPORT. SOUTH AFRICA S REGULATORY CLIMATE IS REGARDED AS ONE OF THE MOST CONDUCIVE TO BUSINESS IN AFRICA AND THE COUNTRY RANKED 41ST OUT OF 189 COUNTRIES IN THE WORLD BANK REPORT DOING BUSINESS 2014. THE 2013/14 GLOBAL COMPETITIVENESS REPORT RANKED SOUTH AFRICA 45TH OUT OF 148 COUNTRIES IN TERMS OF THE INTENSITY OF LOCAL COMPETITION, AND 8TH FOR THE EFFECTIVENESS OF ITS ANTI-MONOPOLY POLICY.

IMPLICATIONS WHAT WE CAN TAKE FROM TRADITIONAL INDUSTRIAL STRATEGIES: MANUFACTURING IS CRITICAL TO LONG-RUN GROWTH AND DEVELOPMENT (ALTHOUGH MAY NOT BE KEY SOURCE OF EMPLOYMENT) NEED A STRATEGIC STATE INTERVENTION THAT CAN TAKE THE RISKS ASSOCIATED WITH THINKING AHEAD OF THE MARKET (I.E. ACCEPT COST OF SOME FAILURES) BUT ALSO MINIMISES THOSE RISKS THROUGH EXPERTISE AND RESPONSIVENESS NEED A STRATEGIC APPROACH TO BUSINESS THAT BUILDS TRUST KEY IS REALISTIC VISION, CONSISTENCY AND ACCOUNTABILITY, AND FOCUS ON LONG-RUN PROFITS

WHAT NEEDS REFLECTION GIVEN NEW GLOBAL CONDITIONS, MANUFACTURING BY ITSELF IS UNLIKELY TO SCALE UP ENOUGH TO SOLVE SOUTH AFRICA'S UNEMPLOYMENT CHALLENGE RATHER LOOK AT HOW MAXIMISE EMPLOYMENT MULTIPLIERS (UPSTREAM, DOWNSTREAM, KEYNESIAN, FISCAL AND TECHNOLOGICAL IN PARTICULAR) IN OTHER WORDS, WE NEED TO LOOK AT HOW MANUFACTURING AFFECTS OTHER SECTORS DIRECTLY AND INDIRECTLY SUPPORT FOR AGRARIAN TRANSFORMATION AND RURAL DEVELOPMENT AND FOR AFRICAN REGIONAL DEVELOPMENT ARE CRITICAL IN THIS CONTEXT, ALTHOUGH NOT SUFFICIENT NEED TO SUPPLEMENT EXPORT DEMAND HOW GENERATE NEW KINDS OF DOMESTIC AND REGIONAL DEMAND? MEANS GOING BEYOND IMPORT SUBSTITUTION, THROUGH SUPPORT FOR PRODUCTION OF WAGE GOODS AND INPUTS THAT SUPPORT EMPLOYMENT CREATION AND IMPROVE LIVING STANDARDS HOW CAN WE HELP EXPAND REGIONAL MARKETS? (INFRASTRUCTURE, REGULATION AND MARKETING BUT ALSO MUTUALLY BENEFICIAL VALUE CHAINS) FINALLY, HOW CAN STATE POLICIES SUPPORT BROADER OWNERSHIP AND MORE EQUITABLE WORKPLACES?