In the two decades since South Africans united to transform their political landscape and usher in a new democracy, the country has made remarkable progress. It has nearly doubled its GDP in real terms, lifting millions of people out of poverty and into the middle class, and expanding access to services. Yet the country remains beset by high levels of unemployment, and in recent years its growth has fallen well behind the rest of sub-Saharan Africa.
Given the country’s vibrant public life and dynamic business sector, South Africa has no shortage of ideas, but a tone of pessimism is growing as many worry that the economy is stuck in a low-growth trap.The analysis, set out in the MGI report, suggests that there are grounds for greater optimism – and that South Africa is well-positioned to accelerate growth and job creation, and take major steps towards eradicating poverty.
The report focuses on five opportunities that, if prioritised by government and business, could add $87 billion (R1 trillion) to annual GDP by 2030 and create 3,4 million new jobs. The “Big Five” – selected from a much longer list of opportunities – are: creating a globally competitive hub in advanced manufacturing; making infrastructure investment more productive to enable growth across the economy; harnessing natural gas for power generation and industrial development; boosting exports of services to the rest of Africa and the world; and unlocking South Africa’s full agricultural production and processing potential.
Opportunities
South Africa has a strong, productive, internationally competitive agriculture sector. The agricultural value chain, including both production and processing, employed approximately 1,1 million people and contributed a combined $13 billion (R150 billion) to GDP in 2014, representing nearly 5% of total GDP.
The sector has proven its ability to market and sell its produce in Europe and other major markets, and through fast-growing retail chains across Africa. It still has potential for significant further growth. The rest of Africa, together with Asia, offers strongly growing markets for future agricultural exports, particularly of products in which South Africa already leads, including fruits and beverages.
The MGI report estimates that South Africa can grow agriculture’s contribution to GDP by $14 billion (R163 billion) by 2030 and create up to 490 000 jobs over the same period. But capturing this potential will require an integrated national agriculture plan focused on unlocking major gains in production and expanding processing capacity to move up the value chain.
A key element of this will need to be continued focus on improving the productivity and crop yield of South Africa’s successful medium- and large-scale commercial farming sector. Commercial farms, which account for almost 90% of the country’s cultivated farmland, should invest in cutting-edge technology and farming techniques to raise the productivity of crops such as maize and sugarcane, where South Africa’s yields currently lag behind those of competing countries.
Smallholder farmers will need support to form co-operatives for better market access and to transition to higher-value crops to strengthen their financial viability.
To support higher production goals, the government must clarify land rights, consider models for farm consolidation, strengthen irrigation and water management, and assess opportunities to bring additional unused land into production.
Export growth
Africa, with its rapidly growing consumer markets, is increasingly important as an export destination. Its share of South Africa’s processed food exports grew from 15% in 2003 to 49% in 2013. The recently announced Tripartite Free Trade Area will open up more opportunities to grow SA agricultural exports by creating a $1,2 trillion (R13,8 trillion) integrated market (in 2013 GDP) across 26 countries. In these, the MGI expects the number of households with annual income above $14 000 (about R160 000 at 2015 exchange rates) to double within the next 10 years.
The Asia-Pacific region, although it accounts for a relatively small part of SA agricultural exports, is expected to see its agricultural imports grow by 3,8% per year to 2030 as its consumer class is expanding rapidly. It, too, offers major opportunities for SA exporters. Given the burgeoning overall demand from these markets, South Africa has the opportunity to grow most categories of raw and processed exports by a substantial percentage.
The MGI conducted an analysis to determine whether this growth would be achievable and, if so, for which products. The study estimated the expected demand for individual categories of products and tested it against the potential to increase agricultural production in each category. The potential to increase production was informed by benchmarking the output of representative crop types in South Africa against 28 climatically comparable producing countries. The analysis included a range of crops and products: maize, wheat, sugarcane, apples, grapes, oranges, tomatoes, strawberries, cow’s milk, beef and chicken.
In this exercise, the range of improvement varied dramatically by crop type. For example, South Africa is already the top producer of oranges in the set of countries it was benchmarked against. In grapes, it has the potential to increase yield by 74%. The benchmarked yield improvement potential for maize is even greater, at 92% to 126%.
For each product category, the MGI developed both a low case, under which total growth in exports was most certain, and a high case, which would demand significant changes in agricultural technology or would require South Africa to process farm products from neighbouring countries.
This exercise made it clear that, in either case, South Africa’s biggest export opportunities lie in fruit, beverages and animal products. It also pointed to a significant shift towards processed foods in the country’s agricultural exports, from 60% of the sector’s total exports in 2012 to an expected 70% in 2030. This evolution is in line with the development cycle observed in other countries as agriculture becomes a smaller share of GDP.
Exports of processed foods will benefit from the strong presence of SA retailers across Africa, as the continent’s shift from informal to formal retailers continues.
These include Shoprite with 280 corporate outlets throughout the rest of Africa; Woolworths, present in 11 African countries in addition to South Africa; and Spar, active in several countries in the Southern African Development Community region. These retailers are likely to sell SA processed foods in the markets they expand into.
Smallholders
Smallholders and subsistence farmers farm 10% to 13% of available agricultural land in South Africa. About 40% of this is under cultivation by smallholders whose farm sizes range from 5ha to 20ha, of which nearly four-fifths is used as an additional source of food for the household. By raising the productivity of these smallholdings and helping farmers gain access to markets, South Africa can support many rural households in making farming a commercially viable concern that sells crops and employs workers.
The report estimates that South Africa has the potential to boost the productivity of its smallholdings by switching to high-value crops and using improved inputs. By supporting smallholders to switch to high-value crops, the sector’s contribution to GDP could increase by $2,3 billion (R27 billion) and an additional 121 000 jobs could be created. Improving inputs for smallholders could increase GDP by $122 million (R1,4 billion) and create 6 000 jobs.
Switching to higher-value crops would not only improve the sustainability of smallholdings but create jobs. In the Eastern Cape, KwaZulu-Natal and Limpopo, the report found that the most promising products for farms at this scale are in horticulture, particularly berries, strawberries and tomatoes. Other opportunities include eggs, ultra-high temperature milk and beef, while some consolidation of smallholdings into larger farms of about 30ha each would make avocado, litchi and mango attractive.
Agro-processing
In 2014, South Africa’s agro-processing industry contributed $6,8 billion (R78 billion) to GDP and employed 362 000 people. Exports of processed products amounted to $4,8 billion (R55 billion), or 6% of total exports in 2013. From 2004 to 2014, processing grew at 1,9% per year while from 2008 to 2014, employment grew by 57 000 despite a contraction in employment in the manufacturing sector.
South Africa has a strong processing industry, with products including grain milling, consumer food products, frozen and tinned food, sugar, starch, chicken products and animal feeds. Some players are even branching out into providing financial services or owning operations in other African countries.
The greatest export growth opportunities are in fruit, beverages and animal products, but to pursue additional growth in some of these categories it may be necessary to expand supply chains to neighbouring countries. The report estimates that growth in agro-processing industries could add an additional $11 billion (R124 billion) to GDP through exports and create 314 000 jobs by 2030.
The country’s agricultural sector has many successes to build on as well as powerful advantages in serving fast-growing markets in Africa and Asia. Much work lies ahead, however. If South Africa is to unlock the full potential of its agricultural value chain, both the private sector and government must take concerted action to improve productivity, expand access to new markets, build skills and grow the agro-processing industry. With a clear vision and robust long-term strategy in place, the rewards will be substantial.
Source: This is an edited excerpt from the McKinsey Global Institute report titled: SA’s Big Five: Bold Priorities for Inclusive Growth
