We began in SA talking with a large farmer (Shoeman Farms) and the head of a gigantic agribusiness, Afgri, as well as our hosts from Kongskilde (with whom I am affiliated).
Observations from my notes, in no particular order:
- SA is growing relatively well by SSA standards, but still slowing:
The GDP figure for the (4th quarter 2012 2,1% q/q )
The seasonally adjusted real GDP at market prices for the fourth quarter of 2012 increased at an annualised rate of 2,1 per cent compared with an increase of 1,2 per cent during the third quarter of 2012.
The main contributors to the increase in economic activity in the fourth quarter of 2012 were the manufacturing industry (0,8 of a percentage point), finance, real estate and business services (0,6 of a percentage point) and general government services (contributing 0,4 of a percentage point). The mining and quarrying industry recorded a negative contribution of 0,5 of a percentage point, and the contributions by the electricity, gas and water industry and the construction industry were insignificant.
The seasonally adjusted real annualised value added by the primary, secondary and tertiary sectors recorded a decrease of 3,7 per cent, an increase of 3,6 per cent and an increase of 2,4 per cent respectively during the fourth quarter of 2012.
The unadjusted real GDP at market prices for the fourth quarter of 2012 increased by 2,5 per cent compared with the fourth quarter of 2011.
Real annual GDP increased by 2,5 per cent in 2012
First preliminary annual estimates of gross domestic product (GDP) are derived as the sum of the GDP for the four quarters of the specific year. These estimates indicate that the real annual GDP at market prices for 2012 increased by 2,5 per cent compared with 2011, when the real annual economic growth rate was 3,5 per cent. [More, remember the commas are decimal points]
- South Africans, not unlike Americans, seem to have a distorted picture of where national wealth is created. While they are convinced mining is their largest industry, it doesn't seem that way to me.
[Click to enlarge]
We thought the result was pretty revealing. It shows how mining and manufacturing have declined in their contribution to the economy, as has agriculture. And while we like to think that government profligacy has increased, in fact over the past 20 years government spending has declined. The growth areas are also instructive: financial services, communication and trade, and personal services. We are morphing into a services economy. Unfortunately that means the demand for skilled labour has only increased. Those segments of the economy in decline are exactly the ones most able to absorb unskilled labour. It makes even more of a tragedy of our education malaise. [More]
- Part of this skewed assumption may be perceptions of employment, especially of black Africans. The data too contradicts popular beliefs.
- The government is the major part of the problem. Strategies to unwind apartheid worked very inefficiently if at all since 1994. For example, requirements labor force composition must match national the population mix, means in order to hire one white engineer, a company must hire 8 black engineers - and as one engineer told us, there probably aren't that many in the whole country. Those educated black professionals who do exist, called black diamonds, are understandably hard to motivate, and have enormous leverage in the workplace. Until more black Africans can be educated to fill professional slots, the economy will be crippled.
- Land reform will continue to plague SA farmers. The fiasco of Zimbabwe looms in their thoughts, but there seem to be few work-arounds or fixes for the usually disastrous consequences of forcing white farmers out. Stories like the Zebediela Orange Farm are cautionary:
From 1918 to 1926, more than 565 000 citrus trees were planted on 2 260 ha of this estate’s land. For the twenty five years before the estate was sold to the South African government in 1974, it showed a profit of millions of rands every year. After the sale, Zebediela grew to become “the diamond of agricultural projects”. It was of such great national pride that the Reader’s Digest Illustrated Guide to Southern Africa wrote in 1978 that “nearly 400 million oranges are harvested each year from the groves of Zebediela, the world’s biggest citrus estate. The output is sufficient to provide one orange for every eight people on earth.“At the height of the season, about 15 000 cases of oranges leave Zebediela every day. The fruit comes from more than 565 000 trees irrigated by enough water to supply a city. The whole estate is highly mechanized and many of the most advanced handling techniques in world citrus production have originated from Zebediela. “The first fruit was picked in 1926 after W.H. Gilfillan and Isidore Schlesinger divided the two original farms into 1 200 plots of 2 hectares. A handsome brochure was produced at the time offering the plots at 67 pounds each, to be farmed as a profit-sharing operation.“The scheme proved particularly attractive to retired army officers and by 1921 most plots had been sold. In 1928, a branch railway to Naboomspruit was opened to carry the ever-growing harvest on the first stage of its journey to all parts of the world. In 1974, the South African government bought the Zebediela Estate.” After the ANC government came to power in 1994, the administration of Zebediela came under the control of the newly-formed Agricultural and Rural Development Corporation (ARDC), a government parastatal whose administration eventually ruined not only Zebediela but scores of other agricultural projects in the area. Before this takeover, Zebediela’s harvest was worth R30 million a year.It didn’t take long for the corruption, theft and maladministration to set in. By 2001, the estate was in ruins. The original 2 260 hectares planted had been reduced to 800 hectares. Because no fertilizers and pesticides were used, more than half the trees died as a result of the Department of Agriculture’s failure to grant funds for the survival of the project. Only ten per cent of yields could be marketed.A loss of R35 million in 2001 followed a loss of R30 million in 2000. According to press reports, the estate was “beyond recovery”.(1) Hundreds of thousands of cartons of oranges and lemons were not harvested, and workers were not paid. A lemon yield worth R8 million was left to rot because there was no money to pay staff. The fruit was in any event of inferior quality because it had not been properly looked after. Many of the fleet of 50 tractors collapsed into disrepair. Hundreds of employees were then retrenched.Managers with in some cases forty years experience were replaced with people who had no experience of farming. One new “manager” was previously a sewing instructor while another was until the previous year a student. The press was informed that not one of the new directors appointed to the Zebediela and its sister Lisbon estate could read a financial statement.(2)The death throes of the estate peaked at the end of March 2001 when ABSA bank stopped all credit and bounced a pension cheque of R56 million. Other estates in the area met with the same fate. [More from what strikes me as a very biased source, but the best summary I could find]
- A standard story is told of an black African family being awarded a farm and given a tractor and 50 cows by the government. The first year many other family members move to the farm. No production is attempted, the cattle are sold off for cash. Sometimes the tractor is kept for transportation, sometimes sold or broken or abandoned. The family reapplies for more government aid. I have no idea how typical this story is, but I heard a version of it at least three times from reasonable people. I assume there are some success stories, but not many.
- Government intervention has investors profoundly worried, especially about the mining sector.
What it’s about: Most obvious are new interventions in the mineral and exploration sectors (including new taxes, price setting, beneficiation requirements, export restrictions, uncertainty about licence conditions and significantly increased ministerial discretion via the Mineral and Petroleum Resources Amendment Bill), but there are comparable interventions across the economy, as indicated in the ANC’s Mangaung Resolution and in a range of proposed regulatory and legislative changes, including those relating to telecommunications, liquid fuels, the labour market, employment equity and Black Economic Empowerment (to name just a few).
My view: Since 1994, it has generally been the case that markets consistently overestimate the risk that the ANC and its government will take significantly populist policy measures. The best example of this was in July 2002, when exaggerated targets for black equity participation in the mining sector where leaked and R52b left the JSE resources sector in 72 hours – a buying opportunity of note. However, the traction Julius Malema was able to achieve with disaffected youth post-2009 and the implicit defection from the ANC and its allies in the platinum strikes last year have catapulted the ANC into something of a policy scrabble. While nationalisation is off the agenda, it has been replaced by a policy push that hopes to deploy private companies, through regulation and other forms of pressure, to achieve government (and party) targets of employment, revenue generation, service delivery to local communities and infrastructure build. Increases in the tax take look likely – it’s purely a question of ‘how much the market can bear’.
Government intervention, per se, is less the issue here but rather the confused, generalised and uncertain nature and intent of the interventions. If the interventions do not have the desired results (growth, employment and equality), the risk is that government does not reassess the wisdom of the intervention, but instead uses a heavier hand.
Financial markets: Policy uncertainty puts downward pressure on investment, employment and output in all sectors. In South Africa, these negative impacts will be felt most keenly by companies most exposed to government licencing and regulatory power, or most exposed to government’s political prioritisation. Resources, telecommunications and agriculture all fall into one, or both, of these categories. [More]
- An official at Afgri, a very large ag coop now privately owned, pointed to other countries as their focus for growth: Zambia, Ghana, and surprisingly, Zimbabwe ("Mugabe can't live forever"). They were trying to support SA and other immigrants by developing a support chain of supply and machinery dealers in those countries.
- I keep trying to make comparisons to how we could have evolved the plantation system of the South without the Civil War. While there are major differences, I know, the immensity of the problem of maintaining productivity while changing ownership seems nearly insurmountable. In short, while I do not like what is happening in SA to good farmers, I cannot escape the conclusion there may be no painless way to unwind what was an unsustainable apartheid system.
- SA makes you more accepting of the "Resource Curse" theory. In this case, the labor demand for mines has drawn blacks from all over southern Africa for migratory, and very strenuous work. The "open borders" policy enacted soon after 1994 allowed a flood of illegal immigrants primarily drawn to work the mines, but adding immensely to the government welfare costs. South Africans have coped remarkably well, adding enormous amounts of housing and building as much infrastructure as possible as fast as possible. But mine employment is dropping and the influx shows not sign of ending. It is a testament to the ingenuity and industry of SA citizens that their economy has continued to grow nonetheless.
- SA farm output is pretty variable depending on rains. Adding land redistribution to this challenge does not bode well, IMHO for future production stability.
- According the the Afgri official, the life expectancy for a white SA farmer is worse than a soldier in Afghanistan. They have lost about 10% of their farmers to violence since 1994. Hence the electrified/razor wire around all farms. To their credit, SA farmers downplay the problem or at least treat it very matter-of-factly. "We're not all carrying guns, or anything like that", one told me. To be fair, my grandson is now locked in his classroom in our tiny country school.
Enough for now.