South Africa's agricultural product space : diversifying for growth and employment
Idsardi, Ernst Former
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South Africa’s sluggish economic growth and limited structural transformation are at the core of the country’s high levels of unemployment and poverty. Why some countries are able to grow and others not has been the subject of much academic debate, with recent literature throwing fresh light on the phenomenon by exploring the relationship between growth and a country’s productive structure. It is argued that countries’ heterogeneous productive structures stem from differences in entrenched capabilities and know-how in producing and marketing a very specific set of products. Investigating and comparing what countries actually produce and how this supports economic development yield valuable insights into why countries differ and what their transformation priorities should be. In this study a new analytical approach is adopted to determine the potential growth paths of South Africa’s broader agricultural sector, the so-called agro-complex. Comprising 1 456 primary and processed products as well as production inputs within the food, feed and fibre segments, this broad sector makes an important contribution to economic development through its direct and indirect linkages with other economic sectors as well as its relatively high labour absorption rate. The wide-ranging economic challenges that South Africa faces have clearly gripped the country’s agro-complex. A growing dependency on imports of higher value, processed food has led to deteriorating terms of trade, while limited innovation and diversification in agricultural exports (coupled with a high proportion of re-exports) is seriously constraining the positive impact that the agro-complex could have on the country’s growth rate. In this study, the productive structure of the agro-complex is analysed through the application of the ‘product space’ framework. This methodology investigates the relatedness between products as reflected in the conditional probability of a product being exported in tandem with another product, considering all global trade flows. The proximity value, the measurement of relatedness, between all 1 456 products is used to arrive at the structure and visible evidence of an agricultural product space network. This structure allows potential diversification pathways to be analysed. Research has shown that a country’s diversification process involves moves along pathways to nearby - and thus related – ‘new’ products, which simplifies the redeployment of existing productive capabilities and knowledge. These pathways are identified according to three strategic values, namely structural transformation, market potential and employment creation. The potential for structural transformation is determined by using a product-level measure of complexity, with higher level complexity (i.e. upgrading) going to the core of structural transformation. The potential market demand is determined by examining the prospects for import substitution; producing re-exported products locally; producing new, high-potential export products; and diversifying into new markets with existing export products (with the latter two categories evident in the results of a Decision Support Model (DSM)). Finally, the potential for employment creation is analysed in the light of labour and human capital intensities at product level. The study found that South Africa’s position in the agricultural product space is relatively dispersed. This position is characterised by a proportionally high level of core competencies within the primary agricultural cluster and a limited amount of vertical linkages. Furthermore the analyses showed that, especially the products for which South Africa has developed a significant high level of specialisation such as plums and wines are located in the sparser, less promising, parts of the agricultural product space. Notwithstanding, a total of 60 realistic diversification opportunities are within “reach” from the countries core competencies in the agro-complex. The analysis on structural transformation established that the level of product complexity within the agro-complex is more important for economic development than product diversity per se. It was revealed that South Africa only ranked 69th globally with regards to the complexity of its agro-complex. It was determined that upgrading within the forestry and agro-processing of food clusters hold the most potential for improving this position. The investigation into the potential for diversification driven by market potential revealed fore mostly that the potential for substituting imports as well as re-exports with local production is limited. The market prospects for exporting “new” products and expanding the export destinations of existing products within the agro-complex is much more favourable. It was estimated that most employment creation could be derived from diversification within the primary agricultural cluster although its number of opportunities are limited. Diversification within both the primary agricultural and agro-processing of food clusters was found the have to most favourable prospects for developing the level of human capital within the agro-complex. Based on all three strategic values, the most promising diversification opportunities are located within the forestry cluster. The range of realistic opportunities within the five clusters of the agro-complex form the core for developing product-level diversification strategies. This will ultimately strengthen the position of the agro-complex and boost South Africa’s growth path for the next decade. Hence, the main contribution of this study includes the determination of the structure of South Africa’s agro-complex from a product perspective and its implications for potential growth and development.