Understanding and Characterizing the Services Sector in South Africa
Understanding and Characterizing the Services Sector in South Africa
Abstract and Keywords
One core economic challenge facing a developing country is its ability to structurally transform in a manner that generates higher levels of economic growth and employment absorption in the long run. Whilst such a question has often led into a detailed analysis of the role of the secondary sector generally, and manufacturing in particular, this chapter considers the growth and employment potential of the services sector in South Africa. First, there are a set of high-productivity skill-intensive industries in finance, business, communication, and in some cases retail services, which offer export potential—primarily via investment into international markets. Second, there are simultaneously a number of low-productivity industries with lower skill requirements found in informal retail and temporary employment services (TES). Third, tourism offers the potential to be an export-orientated industry with relatively low skill requirements.
The rapid transformation of many of the East Asian economies, including China, has been driven by a process of secondary industry growth, within which the core lever has been the expansion in globally competitive manufacturing exports.1 Consequently, manufacturing is often seen as the key route to increasing national per capita income levels. However, recent evidence suggests that global demand for manufactured goods is declining, and economic conditions are less conducive to building a development path based on fast-growing manufacturing exports (Rodrik 2014). Thus, there is a distinct possibility—if these global demand trends in manufacturing continue—that manufacturing and manufacturing exports in particular, may play a less central role in shaping the economic growth trajectories of developing countries in the future. In this vein then, as the scope for manufacturing-led growth possibly wanes, closer examination should be given to the services sector as an engine of growth.
The South Asian experience is instructive here, and provides evidence that services can drive development. Indeed, the services sector has been a significant contributor to economic growth in South Asian economies such as India, Pakistan, the Maldives, Nepal and Sri Lanka. Approximately 60 per cent of (p.276) overall growth for the period 2000 to 2010 can be attributed to services in these countries (Noland, Park and Estrada 2012). There is evidence showing that this South Asian services-driven growth can be linked to rising labour productivity (Bosworth and Maertens 2009), job and wage growth (Ghani 2009), and poverty reduction (Ghani 2009) across the region. Ghani (2009) argues that, in addition to global technological advancements, the emergence of South Asia, and India in particular, as a leading services exporter, has been ascribed to a combination of effective market integration, the availability of skilled labour, and supportive institutions and infrastructure. A key question is whether a similar services-driven growth path can emerge in the South African context, particularly in the face of a declining manufacturing sector.
This chapter examines the potential of the services sector in South Africa to act as an engine of growth. We examine the growth potential of the services sector by considering, firstly, its export potential, and secondly, its employment potential. The former is concerned with the ability to generate growth-inducing economies of scale, thereby increasing foreign exchange earnings. The latter is concerned with the ability of the sector to generate jobs for a young and growing labour force in South Africa. It is important to note that the services economy is heterogeneous, and thus we place emphasis on the sub-sectors or industries that comprise the overall services economy.
The chapter is divided into four sections, including an introduction and conclusion. Section 2 examines the scale and composition of the services economy in South Africa. This section considers the GDP and employment contribution of the services economy and its respective sub-sectors. It reflects on the extent to which the services economy has driven structural transformation over the post-2000 period. Finally, this section provides a segmentation of the services economy according to the growth potential of the various sub-sectors. The third section considers the export potential of the services economy in more detail. This section starts by considering cross-border trade in services, specifically on the export side. This is followed by a discussion on foreign direct investment (FDI), and thus the commercial presence of South African firms in regional and international markets. Finally, focus is placed on the tourism industry in South Africa as a source of service-driven export growth with strong employment potential.
2. The Services Economy in South Africa
The South African economy is a de facto services-based economy. The sector accounted for 62 per cent of GDP in 2000, and its share of the economy has expanded to 69 per cent in 2014. In contrast, the key industrial sectors of mining and manufacturing have both experienced steady declines in their (p.277) share of GDP over the period. The former’s share of the economy declined from 13 per cent of GDP in 2000 to 8 per cent in 2014, while the latter declined from 16 to 14 per cent over the same period. Agriculture’s contribution to GDP has remained low and stable, hovering at around 3 per cent.
The services sector is comprised of a variety of heterogeneous sub-sectors or industries, which manifest in varying contributions to the broader economy. Ghani and Kharas (2009) delineate between modern and traditional services industries, arguing that the former is more dynamic, tradable, and thus able to act as an engine for growth. In the South African context, two traditional service industries, namely government services, and wholesale and retail trade, are the largest services sub-sectors, accounting for 17 and 15 per cent of GDP in 2014, respectively. The relative contribution of these traditional services industries has remained stagnant over the period 2000 to 2014. However, modern service industries have become increasingly important in the South African economy. The business, finance, and communications services industries have increased their combined share of GDP from 19 per cent of GDP in 2000, to 24 per cent in 2014—with this growth being most rapid in the financial services industry.
Ultimately then, the steady decline in the share of GDP accounted for by manufacturing, mining, and agriculture, together with the steady rise in the share of the services sector, re-asserts the notion that the South African economy is not only services-based, but that this structural feature of the economy has intensified over the last 15 years.
The services sector’s substantial contribution to GDP is matched by its contribution to employment. The tertiary sector accounted for 65 per cent of total employment in 2000. This rose to 74 per cent in 2014. The sector as a whole was in turn responsible for 119 per cent of employment growth over the period, thus counteracting employment losses in manufacturing and agriculture. The services sector has accounted for almost all of South Africa’s employment growth since 2000. Hence, while the primary sector experienced a decline in total employment, and secondary sector employment grew by 126,734 jobs, employment in the tertiary sector rose by over 3 million jobs.
The performance of the services sub-sectors provides further insight into the sector’s contribution to employment growth. Traditional services industries, namely, wholesale and retail trade, government services, and other CSP services (as well as modern business services), are the largest sources of employment in 2014. Business services displayed the strongest growth relative to other service sub-sectors in the economy, followed by transport and storage, and government services.
However, recognition of the strong employment growth in the business services sector needs to be tempered by the fact that a large share of employment in this sector is through the use by employers of temporary employment (p.278) services (TES) firms.2 TES employment refers to the practice of third-party companies providing workers to perform occupations such as cleaning, accounting or security services, to formal sector firms (Bhorat, Cassim and Yu 2016). Bhorat et al. (2016) find that TES employment as a percentage of business services employment has risen dramatically in the post-apartheid period. They estimate that approximately 61 per cent of business services employees were in TES employment in 2014.
The sizeable expansion of the wholesale and retail trade industry needs to be considered in relation to the high levels of informality associated with the industry (Cassim et al. 2016). The forced segregation policies of apartheid resulted in the development of large informal settlements, where vibrant retail markets developed. Estimates suggest that in 2003, informal retail outlets in townships accounted for 10 per cent of total retail trade in South Africa (Ligthelm 2008). Estimates derived from the Labour Market Dynamics Survey from Statistics South Africa (2014), show that approximately 41 per cent of employment in wholesale and retail trade services is informal sector employment.
In contrast to the services sector as a whole, manufacturing and agriculture account for a relatively small and declining share of employment. Over the 14-year period, close to a quarter of a million manufacturing jobs were shed. Agriculture experienced the largest decline in employment, with losses of over 700,000 jobs. Small gains in employment were experienced in mining, utilities, and construction.
The above, then, ultimately suggests that the historical importance of the primary sectors (namely agriculture and mining) has significantly waned in the post-apartheid South African economy. In addition, the poor output and employment performance of the manufacturing sector is manifest in the steady decline, bordering on de-industrialization, of the domestic economy. The upshot of the latter two trends has been a rapid growth in the job generating capacity of the services economy. This services employment growth in turn can be understood within the context of several underlying trends. Firstly, in the pursuit of regulatory avoidance, formal firms have increased the use of temporary employment services—thus increasing the share of workers categorized as ‘business service’ employees. Secondly, South Africa’s consumption-driven economic growth model has resulted in a rapid rise in the growth of retail employment. Thirdly, the poor employment generating capacity of the formal sector as a whole has witnessed a rapid rise in the (p.279) number of individuals working in various informal services sectors, especially in wholesale and retail trade. Finally, in constituting close to a quarter of all new jobs generated in South Africa since 2000, the public sector has become possibly the key generator of jobs in the economy—ensuring that much of the country’s first-order services employment is shaped by national and provincial government practices.
2.1. Structural Transformation and the Services Sector
Structural transformation involves the shift of resources from low-productivity activities towards high-productivity activities. Using a method of analysis in line with that applied by McMillan et al. (2014), we examine the extent to which services has played a role in structural transformation in South Africa over the period 2000–14. Figure 14.1 shows the correlation between the natural log of relative labour productivity and the change in total (p.280) employment by industry. The market size for each industry represents the industry’s share of total employment in 2014. The linear regression line indicates whether structural transformation has been growth inducing (positively sloped) or not (negatively sloped). Given that structural transformation is the shift of resources from low-productivity activities towards high-productivity activities, one would ideally want to see declining employment shares in low-productivity industries (bottom left quadrant) and rising employment shares in high-productivity industries (top right quadrant).
The positively sloped linear regression line points to, albeit weak, growth-inducing structural transformation. There is a shift in employment away from relatively low-productivity industries, such as agriculture, and catering and accommodation, towards relatively higher-productivity activities in business services, transportation services, and government services. The slope of the regression line is slightly positive and the estimated coefficient of the slope is not statistically significant, thus pointing to, at very best, a marginal growth-inducing structural transformation.
Based on Figure 14.1, one could argue that the structural transformation that has taken place has been services-led rather than manufacturing-led. Structural transformation following the East Asian model would depict manufacturing in the top right quadrant (i.e. growing employment in a high-productivity industry). In South Africa’s case, manufacturing appears in the top left quadrant, suggesting a shift of resources (labour) away from this high-productivity industry. One does observe that there has been a decline in the employment share in low-productivity industries, such as agriculture, and catering and accommodation services (bottom left quadrant). Concurrently, there has been a shift of resources toward relatively high-productivity industries in the services sector—in particular, transportation services, business services, and government services. This does point to services-led structural transformation over the period 2000–14. However, it is worth noting that there is no shift of resources toward the modern high-productivity communication and financial services industries.
We also see a shift of labour resources towards the relatively low-productivity wholesale and retail industry, which now comprises a substantial share of employment in South Africa. As mentioned above, the concern with this growth in wholesale and retail trade, as expressed by McMillan et al. (2014) regarding structural transformation in Africa and Latin America, is that a large share of it may be in low-productivity informal sector activities.
As in McMillan et al. (2014), we decomposed South Africa’s productivity growth. Productivity growth can be realized along two dimensions: Firstly, growth can occur within economic sectors through capital accumulation or technological change. Secondly, growth can occur as labour moves across sectors from low-productivity activities to high-productivity activities. (p.281) The decomposition of South Africa’s productivity growth over the period 2000–14 indicates that productivity growth within sectors grew by 1.7 per cent per annum, while productivity growth across sectors grew by 0.06 per cent per annum. Therefore, 97 per cent of the growth of productivity in South Africa took place within sectors. This suggests that there is a shift of resources within industries toward high-productivity firms.
There are also some cautionary tales regarding this services-led structural transformation. Firstly, it is evident that government services is a large and growing employer in South Africa. The economic sustainability of an expanding public sector is cause for concern. It is highly questionable of course, whether sustained long-term economic growth and development can be achieved via a growing public sector. Secondly, and as discussed in more detail in the previous section, the positive aspects of growth in the relatively high-productivity business services industry needs to be tempered by the fact that a large share of employment in this sector is through the use of TES providers. Therefore, one does need to exercise caution about the notion that growth in the South African economy is being driven by a high-productivity services sector, that will be a significant long-run job generator for the economy.
2.2. Segmentation of the Services Sector
To gain further insight into the services sector, we seek to understand the skills profile of these industries. This allows one to identify which sub-sectors can be identified as future growth drivers and sources of employment. It is also important to consider the skills profile of these various sub-sectors in relation to the endowment structure of the South African economy. For instance, the extent to which services industries are skill-intensive, may be a constraint on growth given the abundance of unskilled and semi-skilled labour in the South African labour market.
An analysis of the proportions of unskilled, semi-skilled and highly-skilled workers in each services sub-sector provides a clear delineation of the services economy. Unskilled workers are disproportionately located in traditional services industries, such as CSP services (20 per cent), catering and accommodation (18 per cent), transport and storage (17 per cent) and wholesale and retail trade (17 per cent). Conversely, the share of unskilled workers in modern services industries, such as business (5 per cent) and financial (6 per cent) services is relatively low. Semi-skilled workers are also well represented in traditional services industries, such as catering and accommodation (71 per cent), transport and storage (70 per cent), wholesale and retail trade (67 per cent), and government services (61 per cent). Modern services industries tend to be much more skill-intensive than traditional services industries. Highly-skilled workers are particularly prevalent in the business services (61 per cent), (p.282) finance (55 per cent), and communications (42 per cent). The lowest proportion of highly-skilled workers are in catering and accommodation (11 per cent), and transport and storage (13 per cent).
Along with occupational differentiation and scarcity in skills, earnings are accordingly differentiated. We detail in Bhorat et al. (2016), the importance of individual occupations in predicting average earnings in the labour market.
Bhorat et al. (2016) find that the earnings estimates across the various services sub-sectors suggest an interesting segmentation of the services sector of the South African economy. Firstly, individuals located in modern skill-intensive services industries, namely business, finance, and communication services, experience wage premiums. Secondly, a wage premium is also evident in government services, which Bhorat et al. (2015) argue is a result of strong public-sector unions that regularly secure above inflation wage increases for their members. Thirdly, there is evidence of negative earnings premia in services industries characterized by relatively lower skill requirements. These include the wholesale and retail trade industry (restricted to formal sector employees), the TES component of business services, and services workers in the informal sector. The lower skills requirements associated with these industries allow for easier entry into employment, but they are associated with lower levels of productivity and lower returns.
The preceding analysis concerning the segmentation of the services sector provides an analytical lens through which we can understand and characterize this sector in South Africa. Firstly, the high-wage premium sectors of modern business, finance, and communication services, serve as the potential platform for a growth and development strategy. However, for these modern service industries to continue to grow, the proportion of skilled labour must also grow. However, South Africa faces a skills shortage (Rasool and Botha 2011), which suggests growth in these industries may be constrained in the future. Secondly, while the public sector is skills-intensive, the wage premium offered to these workers suggests the formation of a new labour elite (Bhorat et al. 2015), which is both fiscally unsustainable, and not an optimal route to long-run economic growth. Thirdly, the informal sector—although small in South Africa in comparison to other developing countries (Kingdon and Knight 2004)—can act as a potential avenue for immediate job creation. Between 2000 and 2014, the informal non-agriculture sector grew from 1.8 million jobs to 2.4 million jobs—an increase of 600 000 jobs over fourteen years.3 The low barriers to entry for this sector—specifically, the low level of skills required—are particularly suited to a labour market such as South Africa, where there is a persistent skills shortage amidst an excess supply of (p.283) labour. Finally, as perhaps the source for a large numbers of jobs within the cohort of semi-skilled workers, the formal retail and communication services sectors—under specific conditions such as suitable export opportunities and competitive wages—do serve as a key opportunity for positive growth and employment opportunities for the South African economy.
Ideally then, the burden of job creation would fall on the relatively highly-skilled and high-productivity segment of the services sector. In the South African context, this can be broadly located within the financial and business services sectors together with communications, and the formal component of the retail services sector. However, South Africa’s current labour endowment is a constraint on the ability of these sectors to act as drivers of employment growth. This leads us to consider TES and the informal sectors that, despite being low-productivity sectors, may be a potential medium-run conduit for immediate forms of economic activity and income generation.
3. Export Potential of Service Industries
In order to generate sustained long-term economic growth, it is important that service industries exhibit export potential. This is crucial in the South African case, where the combination of relatively low global commodity prices and weak manufacturing sector export growth have lowered foreign exchange earnings. Services have traditionally been considered inputs into the production and trade of goods, or as outputs produced mainly for domestic consumption. Over the last two decades, however, globalization, coupled with advances in technology, have facilitated a rapid rise in the trade of services—driven largely by trade in modern services, such as business, finance, and communication services, as opposed to traditional services such as transport and travel (tourism) services (Mishra, Lundström, and Anand 2011). Services exports have thus become increasingly important not only as a source of export diversification and global competitiveness (Saez et al. 2014), but also as a key driver of economic growth (Mishra et al. 2011).
Given the large and growing role of domestic services in the South African economy, South Africa appears relatively well positioned to reap the growth benefits from the export of services. This section presents a discussion on the export potential evident across the services sector.
3.1. The Export of Services
In this section, we firstly examine broad trends in services exports using data from the South African Reserve Bank and the World Bank World Development Indicators. Both data sets report aggregate measures of services exports for the (p.284) period 1960–2014, where services exports for Modes 1, 2 and 4 are covered. Secondly, we examine the composition of services exports. This is aided by using the World Bank Trade in Services Database (TSD) that covers Modes 1 and 2 for the period 2005–10.
Trends in Services Exports
In terms of growth, services exports have outstripped goods exports in the post-1994 period. This is evident in Figure 14.2. Over the period 1994–2014, services exports have grown at more than double the pace of goods exports. Services exports grew at an average annualized rate of 6.7 per cent, while goods exports grew at 2.7 per cent per annum. This relatively rapid growth must also be considered in context of broader historical performance, where services exports declined steadily in the 1970s and stagnated in the 1980s. This was likely a result of economic sanctions, and the reversal of foreign capital flows, during the final years of apartheid, which appears to have had a disproportionately negative impact on services exports vis-à-vis goods exports (Levy, 1999). However, in the 1990s, South Africa’s reintroduction into the global economy, through trade liberalization and the removal of economic sanctions stimulated both goods and service trade (Edwards and Lawrence 2008).
(p.285) As a result of this relatively robust growth, services exports have increased in relative importance, albeit from a low base. Over the period 1994–2014, services exports as a share of total exports more than doubled from 8 to 17 per cent. Nevertheless, despite the growing relative share of total exports, the tradability of South Africa’s services sector remains low. Between 2000 and 2014, South Africa exported an average of only 7 per cent of services value added, despite services making up slightly over 60 per cent of GDP. When compared to peer countries on the continent and beyond, South Africa appears to be lagging behind. For instance, with services in Turkey making up a similar share of GDP, the average share of services exports in services value added was relatively higher, at 11.7 per cent.4 In Ethiopia, where services made up an average of only 42 per cent of GDP, the average share of services exports in services value added was 17.9 per cent.5
Therefore, the overall trend suggests that while recent growth in services exports has exceeded that of goods exports, services comprise a rather small portion of South Africa’s total exports. This is despite the services sector contributing the most value to the domestic economy. This outcome may be a reflection of several bottlenecks—including low skill levels in the labour force, trade protection in specific services industries (such as telecommunications), and lower productivity in the services sector—in comparison to other emerging markets such as India and China (Freytag 2011).
However, the composition of South Africa’s services exports may also be a factor determining its expansion. As Mishra et al. (2011) argue, the composition of services exports matters. In addition to increasing the volume of services exports, increasing the sophistication and quality of services exports is essential to unlocking sustained and rapid economic growth (Mishra et al. 2011).
Composition of Services Exports
Figure 14.3 shows the change in composition of South Africa’s services exports between 2005 and 2010. Travel and commercial services constitute the bulk of services exports over the period. However, the share of commercial services exports relative to travel services exports declined between 2008 and 2010. Specifically, in 2005, commercial services exports were valued at US$8,064 million compared to US$2,004 million for travel services exports. Yet by 2010, commercial services exports had declined to US$3,906 million, compared with travel services exports which increased to US$9,071 million. This (p.286) suggests that rather than a shift from traditional to modern services, South Africa’s services exports appear to have shifted in the opposite direction.
The rapid growth in travel services exports between 2008 and 2010 is likely a reflection of increased tourism in the run up to the 2010 FIFA Football World Cup. Historically though, South Africa has been a popular tourist destination on the continent given its diverse natural environment and culture, as well as its relatively well-developed infrastructure (Fourie 2011). The decline in commercial services export growth may be a reflection of several factors: The protection of domestic services industries such as telecommunications, which stifles innovation and motivation for international competitiveness; and a lack of sufficient skills in the labour force, which creates a constraint on expansion and also raises the cost of labour and ultimately the cost of services (Freytag 2011).
Further examination of the composition of commercial services exports, based on calculations from the Trade in Services Database (TSD) (World Bank 2016) provides a number of insights. Firstly, the share of high-productivity modern services exports related to finance (2 per cent), communications (2 per cent), and ICT (3 per cent) constitute a marginal share of commercial exports. This indicates that the current composition of South Africa’s services may not be sufficient to generate the levels of growth seen by its middle-income country peers, like India and China. However, given the sophistication of South Africa’s financial services sector, and its rapid expansion into the rest of the African continent (discussed below), it is likely that the TSD underestimates the value (p.287) of South Africa’s insurance and financial services exports.6 In particular, one of the country’s leading financial institutions—Standard Bank—was noted to have a presence in seventeen countries on the African continent in 2010, with several subsidiaries in other countries around the world.
Secondly, ‘other business services’ constitutes the largest portion of commercial services exports (87 per cent), and this is almost exclusively comprised of merchant and trade-related services, and miscellaneous business services. The implication being that South Africa’s services exports remain largely geared toward supporting the exports of goods. In 2010 these exports were made up of legal and accounting services, followed by research and development, architectural and engineering services, and services between related parties. Despite limited exports of high-technology services, further specialization within these businesses services exports, particularly in R&D and engineering services, can still yield considerable gains for economic growth.
An important data omission, however, is that South Africa’s services trade, particularly with African countries, is largely through FDI and therefore not captured in the TSD.7 South Africa has a large presence of banks and other financial institutions, as well as retail companies, such as clothing and Fast-Moving Consumer Good retailers, on the African continent. Therefore, without accounting for these operations, the value and sophistication of South Africa’s services exports, particularly in financial services, may be underestimated.
3.2. South African FDI: Dynamic Firms Entering Global and Regional Markets
There are a number of South African companies that have successfully entered the global market. The Forbes Global 2000 list of top companies in 2017 contains the following South African firms that are services orientated (ranking in brackets): Standard Bank Group (421), FirstRand (423), Naspers (655), Sanlam (838), MTN Group (1020), Shoprite Holdings (1,454), Remgro Limited (1,786), Bid Corp. (1829) and MMI Holdings (1,910). In addition, there are a number of South African companies that are listed in other countries, such as: Old Mutual (409), Steinhoff International (456) and Investec (1085). An investigation of outward bound FDI from South Africa, particularly that derived from service-orientated firms, allows for a more complete picture of the export potential of South African firms.
(p.288) South African companies have become bold in investing in new markets. In 2001, South African companies had assets worth US$17,751 million overseas, and this increased six-fold to US$111,780 million by 2012. This translates into an average annual growth rate of 16.6 per cent. This might also indicate the desire for South African companies to diversify their revenue streams, given saturation in the domestic market.
The regional composition of South African FDI outflows is depicted in Figure 14.4. It is evident that between 2001 and 2005, more than 90 per cent of FDI outflows were directed toward countries outside Africa and Asia. The bulk share of these outflows was directed toward developed economies, particularly in Europe. Many established South African companies have access to networks and capital in various European economies, hence the shift into Europe is not surprising.
However, this has not prevented many other corporates from entering into emerging markets in Africa and Asia, particularly from 2006 onward. The share of FDI into Asia has expanded from 2 per cent in 2001 to 21 per cent in 2012. This is evident in companies such as Naspers investing heavily in the Chinese technology company, Tencent, and Sanlam partnering with the Shriram Group to create a life insurance company in India. South African companies have increasingly turned to Africa. The proportion of FDI in (p.289) Africa tripled from 7 to 21 per cent over the period 2001–12. This indicates that an increasing number of South African companies see Africa as a key growth frontier.
In 2001, Southern Africa comprised 47 per cent of South African FDI in Africa, that rose to 73 per cent in 2002, and declined slightly to 69 per cent in 2003. However, that proportion declined rapidly to 29 per cent, in 2012. The big investments in Southern Africa in 2001–3 are a reflection of the proximity of these markets to South Africa. The relative decline since 2003 is not due to disinvestment from Southern African countries—absolute investment has increased by 12 times in Southern Africa—it is simply that other regions, particularly East Africa, have grown at a faster rate over the same period.
In 2001, 53 per cent of South African FDI in Africa was invested in East Africa. However, between 2002 and 2005, this dipped to a low of 26 per cent. In 2006, it increased substantially to 65 per cent, and in the last five years has stabilized at between 50 and 53 per cent. The majority of FDI in East Africa is due to investment in Mauritius, which accounts for 91 per cent of investment from South African firms. The attractiveness of Mauritius as an investment destination is due to political stability, a low corporate tax rate (15 per cent compared to 28 per cent in South Africa), and an abundance of professionals (Stones 2015).
Overall, South African companies have become increasingly globalized, primarily in order to increase revenue streams. This points to a dynamic set of South African firms that are able to successfully compete in the global marketplace.8
3.3. Tourism Energizes South Africa’s Economy
The services industries associated with high export potential, such as finance, communications and business services, are typically skill-intensive. These industries are at odds with South Africa’s endowment structure, which is characterized by an abundance of unskilled and semi-skilled labour. Thus, the employment potential of these modern services industries is curtailed by the scarcity of skills in the South African economy. As such, the question arises whether there is a source of export growth with labour demands better aligned to the composition of South Africa’s labour market. It could be argued that the answer may lie in tourism. This section considers the economic contribution and potential of tourism services.
(p.290) As the world has become more inter-connected, tourism has emerged as one of the pivotal service export sectors for many countries; and particularly developing countries. Tourism is an important driver of economic growth around the world, accounting for approximately 277 million jobs, and constituting some 10 per cent of global GDP in 2014 (Daly and Gereffi 2016). South Africa, with its multitude of cultural, historical, and scenic sites, has been well placed to take advantage of this rise in demand for tourism (Phiri 2016). South Africa has a well-developed tourism industry when compared with other African countries. In 2014, 9.5 million tourists visited South Africa—by far the biggest volume in Sub-Saharan Africa, and third only to Morocco (10 million) and Egypt (9.6 million) (UNWTO 2015). In terms of total tourism spend, Daly and Gereffi (2016) show South Africa to be the second largest tourism market in Africa, behind Egypt.
It is worth noting that measuring the economic contribution of tourism services to a country’s economy is difficult since industry data does not typically attempt to classify economic activities according to whether they are related to tourism. Statistics South Africa’s Tourism Satellite Accounts 2005–2012 and Tourism Satellite Accounts 2013–14 attempt to address this data shortcoming. The discussion in the remainder of this section draws on this data source.
Tourism services account for a fairly modest share of GDP, but have shown strong employment growth potential over the period 2004–14. Tourism services account for approximately 3 per cent of South Africa’s GDP, and this has remained constant over the period 2004–14. The sector’s contribution is in line with that of Agriculture. In terms of employment, tourism services account for approximately 4 per cent of total employment. In 2005, the number of jobs dependent on tourism was approximately 475,000. This rose to 680,000 in 2014, representing an annual average growth rate of 4 per cent. In contrast, aggregate employment grew at 3 per cent in the same period.
Tourism-reliant jobs are spread across a variety of industries, which are characterized by relatively lower skills requirements. Four industries—road passenger transport, food and beverage, retail and trade, and accommodation for visitors—are responsible for 83 per cent of tourism-related jobs. Interestingly, only the accommodation sector is heavily reliant on tourism, while the other three sectors have a moderate reliance on tourism.
The key challenges facing South Africa’s tourism industry relate to security and regulation. Although the probability of a terrorist attack in South Africa is low, common crimes against tourists such as theft and the perception that crime is pervasive, impacts negatively on the country’s brand image as a tourist destination of choice. As in any industry, regulation plays an important role. For example, in mid-2014, the Department of Home Affairs (p.291) introduced new visa regulations to reduce child trafficking (Oxford Business Group 2015). The regulations were onerous in that they required all children who were under the age of 18 and entering South Africa to have an unabridged birth certificate. In addition, for countries in which a visa is required to enter South Africa, parents had to appear in person during the application process to obtain the new biometric visa (Oxford Business Group 2015). It was estimated that the immediate impact of the regulations would see South Africa losing R4.1 billion in service exports and 9,300 tourism-related jobs (Oxford Business Group 2015). Furthermore, business bookings went down by between 40 and 70 per cent. This is indicative of the important impact regulation can play, both positive and negative, in influencing industry performance.
South African tourism is a key services sector, as its contribution to GDP and employment show. Although employment is somewhat volatile, it is a key contributor in three aspects. Firstly, the industry provides jobs for individuals across the skills distribution, and in many senses, is a key generator of unskilled employment, and possibly small, micro, and medium enterprise jobs. Secondly, tourism has a unique spatial component, where employment can be generated in economically under-developed, but pristine and tourist-friendly areas. Thirdly, the industry’s propensity to generate employment opportunities for women and youth indicates its ability to promote a more inclusive form of economic growth. In order to grow, however, challenges such as security and regulations must be addressed.
Employment and GDP shares show that the South African economy can de facto be classified as a services-based economy. However, a key issue is whether the services sector can act as an engine for growth, while also being a source of employment in a high labour surplus economy such as South Africa. A more detailed analysis of the services sector reveals an interesting segmentation of services industries, which has varying implications for the nature of economic growth and its possible impact on employment generation.
Firstly, we observe modern high-productivity export-orientated services industries, such as business, finance, and communication services. These industries are characterized by high levels of productivity, high skill requirements and corresponding wage premiums. Although the potential exists for these industries to serve as a node for long-run employment and growth expansion, they are constrained by the supply of an adequately skilled workforce. There is the possibility that growth of these industries may be accompanied by second round effects that impact positively on employment and (p.292) growth in less skill-intensive sectors. However, it could be argued further that, although these multiplier effects are likely to materialize, it will certainly not be sufficient to increase employment to the levels required by the extraordinarily high unemployment numbers found in South Africa.
Secondly, there has been significant employment growth in government services. Government services are, on average, characterized by relatively high-productivity activities, high skill intensity, and thus relatively high wage levels. The high wage levels are in part explained by strong public-sector unions. However, this industry cannot act as a driver of growth, given that a bloated public sector is not fiscally sustainable, and never a positive contributor to long-run economic development.
Thirdly, we observe a set of low productivity industries with relatively low skill requirements. These include the wholesale and retail industry (which is characterized by high levels of informality), the informal sector, and the TES component of business services. The lower skill requirements associated with these industries allow them to better absorb the abundance of inadequately skilled workers. There is a high productivity element to the wholesale and retail trade industry that exhibits export potential, with multi-national South African firms such as Shoprite and Steinhoff, which invest strongly in foreign markets, providing evidence of this.
There are two key elements to the export potential of the services sector. Firstly, modern commercial services, such as finance, communications, and ICT, do not show strong growth or presence in cross-border trade. However, the export potential of these industries is revealed by the strong presence of dynamic South African firms investing in both regional and international markets. The key constraint to firms within these typically skill-intensive industries is the supply of a suitably skilled workforce. Secondly, there is evidence of strong potential in tourism services. Tourism services account for shares of GDP and employment akin to agriculture, which while small, offer much in terms of export potential. Most importantly, industries falling under tourism are characterized by relatively low skill requirements, which points to an industry with export potential that is better aligned to South Africa’s labour market.
The services sector can contribute to a sectoral-based strategy for growth and employment. Focus however should not necessarily be placed on any single industry, but rather on a selection of different industries that allow for the realization of different economic policy objectives. High productivity skill-intensive industries, such as finance, communications, and business services, have export and thus growth potential, but their employment potential is constrained by the composition of the labour market. The public sector is not a driver of long-term growth and temporary employment services is not a viable employment strategy. Formal semi-skilled activities in transport, retail (p.293) and communications offer employment potential. Tourism is possibly best aligned as an industry with both growth and employment potential, given that it is driven by export growth, and the industry is a source of employment for less-skilled workers. It is worth noting that the informal sector, which is predominantly characterized by service activities, offers a possible avenue for employment creation that aligns to the composition of South Africa’s labour market. It is at the low-productivity end of the services sector, and thus does not offer long-term growth potential. However, the barriers to entry into the informal sector are low for the unemployed, and it is thus a critical economic channel for immediate forms of economic activity and income generation.
The services sector constitutes the majority share of GDP, and as such is a significant cog in South Africa’s economic engine. The question then, is whether South Africa can exploit the large existing share of GDP constituted by the services sectors—ranging from wholesale and retail, communication, to financial services and tourism across the entire product market, customer, productivity, and employment spectrum—in order to build a set of globally competitive services firms, which not only continue to create local employment, but also serve to provide the impetus for South Africa’s longer-run economic development trajectory.
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(1) The authors wish to acknowledge the contributions of Nomsa Kachingwe and Adrienne Lees, contributing authors on an earlier working paper on which this chapter is based.
(2) TES is classified as ‘Business Activities Not Elsewhere Classified’ in the survey data. We also observe that most of the workers tend to also be employed in services-type occupations (see Bhorat et al. 2016). Hence, these are not predominantly TES workers in the manufacturing sector, for example. We are thus confident that the services employment category for TES captures workers who are largely in services-based occupations (e.g. contract cleaning, security services).
(3) An individual is regarded as part of the informal sector if he or she is working for a business that is not registered for tax purposes.
(4) Authors’ calculation using World Development Indicators (2016).
(5) Authors’ calculation using World Development Indicators (2016).
(6) In addition, given that much of this expansion has been through the setting up of branches and local subsidiaries in other countries, this will not be captured in the TSD as it covers only services exports in Modes 1 and 2, which do include exports via a commercial presence (Mode 3).
(7) Mode 3, which measures FDI, is not captured in the SARB and World Development Indicators data sets.
(8) In the earlier working paper version of this chapter, we provide a case study analysis of two South African firms—Shoprite and Netcare—that have successfully entered developing and developed country markets.