Image courtesy RV
In a McKinsey Global Institute Report on South Africa from 2015, advanced manufacturing is named as the country’s top opportunity. The report’s estimate is that advanced manufacturing alone could add 540 billion rand to GDP and 1.5 million jobs by 2030. To me, this begs another question: do they have the infrastructure and capacity for this? In the same report, McKinsey argued they do have the capacity and that they are committed to capacity expansion through infrastructure spending. In fact, they showed that their infrastructure is double Mexico’s (4.9% vs 2.5% of GDP).
As a final take-a-way from the report, the reports creators contended that, “South Africa has a good environment for business compared to its peers”. It’s key peers based on the report, as well as many key factors on the Competitiveness Index, are Indonesia and Mexico. Mostly, Indonesia. So, which of the two is the better investment?
At this point, South Africa performs better than Indonesia (not to mention Mexico) on a handful of metrics that are important to FDI, and especially investment in manufacturing. Based on data from the World Economic Forum’s Global Competitiveness Index, the two countries are relatively similar in respect to their ‘enabling environments’, but South Africa edges out Indonesia on infrastructure (64th vs 71st). Infrastructure is critical to effective manufacturing, and it’s one of the reasons China’s Guangdong region has been the world’s factory. Considering that South Africa and Indonesia are both a long distance from most large export markets, it’s important that their railroads, roads, and ports are conducive to smooth transportation. South Africa is better setup in these regards. In fact, the country has the 11th most airports and 13th most railway in the world. Interestingly, South Africa also maintains a strong lead in a head to head comparison of labor markets, at 55th vs. 82nd. Most importantly from an investor perspective, the financial system of South Africa is better than Indonesia’s. It is among the best in the world, at 18th, meanwhile Indonesia’s ranks at 52nd. Correspondingly, the value of publicly traded shares in South Africa are the 16th most in the world.
Additionally, I believe the effects of climate change will have a slightly worse effect on Indonesia, and it’s future economic capability, than on South Africa. Indonesia is made of 18,000 islands, many of which are inhabited and disappearing. Furthermore, even Jakarta faces critical challenges, including that it’s sinking. While climate change may exacerbate droughts and water issues in South Africa, with good governance, their issues can be more easily solved than Indonesia’s. Furthermore, a look at both countries exports (see the images below from MIT’s Export Atlas) reveals more endangerment to Indonesia and easier opportunities to capitalize on for South Africa.
Both countries are decently diversified for emerging markets, but both continue to rely a lot on resource exports. Indonesia’s big carbon industry may soon be in danger, as the world shifts away from carbon emissions, which even Indonesia is committed to, via the Paris Agreement.
Furthermore, as the effects of this shift take place, the demand for green technology and battery-powered automotive’s will continue to grow. 6.6% of South Africa’s exports are already cars. They may well be situated for international auto manufacturers to take advantage of low wages, a large labor supply, and solid infrastructure to expand the industry. Outside of the auto industry, South Africa has a handful of other export types that involved more complex manufacturing, such as centrifuges. The country has a solid base to build on.
Overall, South Africa appears ready to grow over the next ten years. While Indonesia offers great opportunity as well, South Africa’s infrastructure, labor market, and financial system are more attractive. Moreover, South Africa’s characteristics orient it to take advantage increasing manufacturing opportunities. Furthermore, by involving a higher percentage of its population in its economy, especially through the engine of manufacturing, it can activate another aspect of the Cobb-Douglas equation other than capital stock, which the South African Reserve Bank shows has driven most of the country’s TFP since 2001. Increases in labor can not only help the specific type of investments I am recommending, but they can also further a virtuous cycle of development in South Africa.