IMF’s Rallying Cry For South Africa Overlooks An Imminent Threat

South Africa was once at the forefront of Africa’s ‘lion economies’. The results since then have underwhelmed with weak growth, several years of near-recession, and stagflation. Now, according to an IMF report released in late July, the country’s new administration must focus on remedying the ‘structural bottlenecks’ in its economy, or face continued problems with growth deceleration, unemployment, and greater income inequality.

The report specifically identified ‘labor market rigidities, insufficient competition in product markets, corruption, and policy uncertainty’ as the main barriers to South Africa’s economic success in the short to medium-term. The IMF report also struck a tone of cautious optimism, however, by praising the new administration’s approach to ‘combating “state capture” and promoting jobs and growth’. However, the IMF’s conviction that reforming South Africa’s regulatory environment and tackling corruption will be an adequate remedy to the country’s current economic woes overlooks the impending crisis of widespread job automation that looms over this particular African economy.

Research published just this year by Accenture Consulting suggests that ‘35% of all jobs in South Africa – almost 5.7 million in number – are currently at risk of total automation by 2025’. These findings could spell disaster unless the country’s political and business leaders are willing to take an honest look at the current state of affairs.

Human Impact Of Robotic Automation

South Africa has historically been a largely resource-based economy. In the early 1980s, 28% of its GDP was derived from mining and agriculture. More recently, however, most of the nation’s growth, and much of its (albeit limited) non-resource exports, come from sectors such as manufacturing, financial services, and ICT which collectively make up more than 35% of the economy. Like other middle-income emerging markets, South Africa cannot compete purely on labor arbitrage since cheaper jurisdictions abound elsewhere in Sub-Saharan Africa and Asia. Instead, these growth sectors are already relatively capital-intensive and employ mid-skilled talent. Although South Africa has among the highest unemployment rates in the emerging world, it still suffers from wage inflation because of the lack of qualified workers to fill the roles.

Manufacturing is one of the industries that is most under threat from the first wave of automation. Multinationals, which currently locate jobs in South Africa, are expected to seize the cost-saving opportunities provided by automation and move their operations to countries with the capacity to host factories that harness advanced robotics. South Africa, as it stands, is not one such country.

Whereas most factory jobs are currently low to mid-skilled positions, once processes are further mechanized, the demand will be for high-skilled managerial and technical staff whose job will be to oversee and coordinate the functioning of the machines. Due to the government’s failure to channel the fruits of economic growth into the country’s lackluster educational and R&D institutions, South Africa lacks sufficient high-skilled labor and technological infrastructure to be a manufacturing hub of the future.

As a result, job automation may hit middle-income jobs the hardest, but not replace them with better ones. Instead, displaced workers will face the prospect of lower-paid service jobs or no job at all, reinforcing negative trends that have already been gathering steam in the country. In the fallout, South Africa stands to see its productivity growth stagnate, levels of unemployment rise even further, inequality rise and consumer demand dry up.

Getting Ready For Robots

Up until now, corruption and complacency among the country’s ruling elite have dovetailed to give rise to faulty labor policy and to preclude adequate investment in R&D and educational institutions. The new government, led by Cyril Ramaphosa, must break away from this track record of poor economic stewardship in order to ensure a sustainable future for the country’s economy.

Currently, South Africa’s overall readiness for job automation is ranked 22^nd in an index of 25 OECD countries published by the Economist Intelligence Unit. Turning things around depends upon greater investment in education, skills training, innovation and R&D as well as the country’s digital infrastructure. Government and business need to collaborate directly with schools and universities to improve access to higher education in STEM subjects as well as the softer skills for young people. Re-skilling for mature workers is also required on a mass scale. According to Accenture, doubling the rate of skills training alone would bring down job losses from 35% to 15% by 2025.

“There has been a positive trend of late towards removing bureaucratic impediments to innovation and entrepreneurialism, both of which are vital in developing high-value jobs in advanced sectors.”

However, the government still plans to spend too little on research into automation despite pledging to double its total R&D budget by 2020. The South African government should instead look to follow the lead of Estonia in deploying its admittedly scarce resources. Estonia is the only emerging market worldwide with an effective, state-led approach to automation. It already spends 1.5% of GDP on R&D in comparison to South Africa’s lowly figure of 0.72%, investing selectively in advanced technology platforms such as X-Road – a secure data exchange built by the state and now used by businesses for B2B data transfer. Commercial firms should not wait, however, for the state to take the lead on this issue.

If Ramaphosa’s government is as inert as his predecessor’s, the commercial sector should act independently to prepare for an automated future. Without any action, however, South Africa would likely be exposed to the underperformance of local assets, rising debt burdens, and pressure on the currency.

An Emerging Problem For Middle-Income Markets

The rough waters ahead for South Africa are by no means unique. Estimates from a growing body of analysis from sources such as the EIU and McKinsey Global Institute all converge on a prediction that 30-50% of work in the manufacturing and services sectors will be automated within a generation. Middle-income countries are generally the most at risk because they are neither shielded by low labor costs, nor the framework for innovation and labor skills development needed to catapult displaced workers into higher-value sectors.

A typical response such as labor reforms, tailored free-trade agreements, and a more business-friendly environment will help incrementally. But every emerging nation must have a strategy to invest in its people and in innovation to gain a foothold in the industries of the future. This is the only way to assure ample well-paid jobs for future generations. Institutions such as the IMF would be well-advised to put in place development imperatives that address the real threat of job automation at the center of their policy recommendations for individual countries.

Photo: Mike Theiler /Reuters