Employment promotion in a minerals economy

There is a sense of mystery and frustration that the SA economy has not grown as much as expected nor generated employment in the 1990s. GEAR incorrectly assumed that growth would be premised on foreign direct investment, which was meant to spur new value-adding industries and related clusters. It is not surprising that this did not occur. The SA economy can be characterized as a minerals economy, with a small market and low skill levels. Hence, most foreign investment is attracted to resource extraction, basic beneficiation or government-generated opportunities. There are many indications that SA suffers from the 'resource curse'. The dominance of basic minerals and metals in SA's export profile contributes to business cycle volatility, making it difficult for more employment-generating domestic market-oriented firms to expand. How can a resource-based economy shift its competitive advantage so that the composition of its domestic production and export profile reflect a higher value added? Why and how is this relevant to employment generation? Some authors argue that the promotion of higher value-added, higher productivity tradeables is inappropriate in a labour surplus economy. This paper argues that a sustainable industrial strategy in SA must rely on the development of a core of higher productivity or higher value industries: these industries are reflective of SA's cost structure and would support a dynamic or virtuous development cycle. It is the incomes and demand from these industries that support employment multipliers in the low productivity, job-creating industries. In a context of extremely high household dependency ratios and low wage elasticities, it is argued that the incomes from the high productivity core would have a more important impact on household welfare, and direct and indirect employment generation, than would a strategy that relies on a core of low wage, low productivity industries. Job creation is more likely to be found in the promotion of low productivity non-tradeables and non-traded goods and services, but the expansion of these activities will rely on the stable generation of incomes and foreign exchange from higher value tradeables. Domestically, this (or any) strategy relies on improved coordination of 'markets'. It is argued that the main supply constraints in South Africa lie in under-developed and poorly coordinated contingent markets, namely for labour and finance: this is not simply a problem related to price flexibility, but rather to the orientation of embedded institutions. In this context, an 'equilibrium' could be achieved at relatively low levels of employment. To unblock these supply constraints, and promote an integrated industry strategy, a number of policy levers are identified. In addition to improving the general investment environment, the movement from the minerals base will require a targeted technology policy and the use of 'second-best' policy tools where government leverages-in new forms of investment and behaviour. Low-productivity mass employment is supported by these incomes through indirect demand and intra-household and fiscal transfers. A social contract is formed, where it is implicitly or explicitly agreed that fiscal transfers will be made to protect or generate large numbers of low-productivity jobs in non-tradable goods and services. Copyright © 2001 John Wiley & Sons, Ltd.