Modern Mining June 2024

COLUMNIST

Dutch Disease and what to do about it in South Africa By Dr Ross Harvey, director of research and programmes at Good Governance Africa (GGA)

L ate last year, a colleague – Pranish Desai – and I published a peer-reviewed journal article trying to identify whether southern Africa was afflicted by a phenomenon now known as “premature deindustrialisation”. A Harvard scholar, Dani Rodrik, had identified a pattern in developing countries of manufacturing decline sooner than their industrialised counterparts, and at lower levels of income. In other words, developing economies were transitioning into low-value services before having utilised the manufacturing bandwagon to build a prosperous, broad-based economy. This is obviously concerning, as manufacturing has been the tradi tional channel through which to absorb labour and build a sustainable middle class empowered to hold its political and business elites to account. African countries are increasingly afflicted by growing youth unemployment and, given that Africa will be the only fertility-positive continent on the planet by about 2050, we are concerned about future employment prospects for young people. In our paper, we did indeed find econometric evidence for premature deindustrialisation in south ern Africa. “We find that there is good reason to believe that the SADC group of countries is emerg ing as a region where deindustrialisation in both employment and output terms is growing more distinct.” In our regressions – a statistically rigorous way of determining a potential causal relationship between two variables – we found that “a reliance on oil and mineral rents is negatively correlated with industrial employment and manufacturing out put”, which suggests Dutch Disease. “This could be curbing industrialisation prospects in many oil and mineral reliant countries in both SADC and Africa as a whole”. Dutch Disease was originally identified in the Netherlands, where growing oil wealth was strangely correlated with manufacturing decline. Economists typically posit that the disease works as follows: The sale of a raw commodity increases the demand for that country’s currency, which then appreciates as a result. However, such appreciation renders the country’s manufacturing exports rela tively more expensive in global terms, undermining their competitiveness. Concomitantly, the extrac tive industry sectors draw resources away from manufacturing sectors (especially during commodity price booms), which further impairs industrial com petitiveness. There have been many wrong-headed attempts to address this phenomenon, many based on poor diagnoses or a naïve presumption about the

actual causal mechanisms behind the disease. This is like treating cancer with TB medication. It won’t work. So, we set out to establish whether in fact there was good evidence for Dutch Disease in South Africa. If so, what are its likely causal pathways or patterns, and what can practicably be done to address them? In a forthcoming paper, colleagues and I at Good Governance Africa show that there is actually good statistical evidence to suggest that Dutch Disease is afflicting South Africa. When we interact a South Africa dummy with mineral rents (to tease out country-specific effects in our sample of comparator countries), we find a strong negative effect on manufacturing output that is significant at a 90% confidence level. We also see a negative impact on industrial employment (as a share of over all employment) but no statistical significance there.

Dr Ross Harvey, director of research and programmes at GGA.

South Africa needs an industrialisation strategy.

There is econometric evidence for premature deindustrialisation in southern Africa.

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