Exploring Unbalanced Growth in South Africa: Understanding the Sectoral Structure of the South African Economy

This paper explores the reasons for the unbalanced growth structure of South Africa. While a number of emerging markets show a high proportion of value added and employment being generated by the service sector, South Africa is one of very few such economies that also show a strong decline in manufacturing. In this paper we begin by an extensive presentation of the evidence that details the structural changes in the economy that have led to this unusual economic structure. In what follows we provide an explanation of the observed changes that rests of four distinct structural forces in the economy. First, on the supply-side of the economy, we confirm the well-known fact of differential total factor productivity (TFP) growth across sectors. Combined with a price elasticity of demand that is below unity, this leads to a prediction of labour shedding in sectors that have high TFP growth, and labour absorption in sectors with low TFP growth. Second, on the demand-side of the economy, economic sectors also face a differential income elasticity of demand, with “old” sectors such as agriculture and mining falling below unity, “new” sectors particularly in services reporting elasticities above unity. With income growth, this leads to a restructuring of demand from primary and secondary sectors to the tertiary sectors of the economy. Finally, we also consider the structural implications of inefficiencies in the labour and output markets of the economy. Pricing of labour, the rate of return on employment, and the pricing power of producers in output markets are all considered. The combination of the supplyside, the demand-side, and the factor market forces allow for a successful four category typology of sectors. Type 1 sectors are high TFP growth, labour shedding, with output growth moderated by low income elasticity of demand. Examples are Manufacturing and Construction. Type 2 sectors are low TFP and output growth, but with labour absorption moderated by low rates of return on the cost of employing labour. Examples are Agriculture and Mining. Type 3 sectors are high TFP growth, labour shedding, and output growth accelerated by high income elasticity of demand. Examples are the Utilities, Trade and Communications sectors. Type 4 sectors are low TFP growth, labour absorbing, with output growth accelerated by high income elasticity of demand. Examples are provided by the Finance sectors.