SOUTH AFRICA’S BIG FIVE: BOLD PRIORITIES FOR INCLUSIVE GROWTH SEPTEMBER 2015 In the 25 years since its founding, the McKinsey Global Institute (MGI) has sought to develop a deeper understanding of the evolving global economy. As the business and economics research arm of McKinsey & Company, MGI aims to provide leaders in the commercial, public, and social sectors with the facts and insights on which to base management and policy decisions. MGI research combines the disciplines of economics and management, employing the analytical tools of economics with the insights of business leaders. Our “micro-to-macro” methodology examines microeconomic industry trends to better understand the broad macroeconomic forces affecting business strategy and public policy. MGI’s in-depth reports have covered more than 20 countries and 30 industries. 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The partners of McKinsey & Company fund MGI’s research; it is not commissioned by any business, government, or other institution. For further information about MGI and to download reports, please visit www.mckinsey.com/mgi. MCKINSEY & COMPANY IN AFRICA McKinsey opened its first African office in Johannesburg in 1995, soon after South Africa’s new democracy brought Nelson Mandela to power. Across Africa, McKinsey is playing an active role in the continent’s economic rebirth, making a difference to both individual clients and whole countries. We have more than 300 consultants working across the continent. From our offices in Johannesburg, Lagos, Luanda, Addis Ababa, Morocco and Nairobi, we have completed more than 2,200 engagements over the past 20 years—in more than 40 countries, including South Africa, Nigeria, Morocco, Angola, Tunisia, Tanzania, Kenya, Zambia, Gabon, Namibia, Ethiopia, Ghana, Cote d’Ivoire, Togo, and Senegal. For more information, please visit www.mckinsey.com/insights/middle_east_and_africa. Copyright © McKinsey & Company 2015 SOUTH AFRICA’S BIG FIVE: BOLD PRIORITIES FOR INCLUSIVE GROWTH SEPTEMBER 2015 Acha Leke | Johannesburg David Fine | Johannesburg Richard Dobbs | London Nomfanelo Magwentshu | Johannesburg Susan Lund | Washington, DC Christine Wu | Johannesburg Paul Jacobson | Johannesburg PREFACE In the two decades since South Africans worked together to transform their political landscape and usher in a new democracy, the country has made remarkable progress, nearly doubling its GDP in real terms, lifting millions of people out of poverty and into the middle class, and greatly expanding access to services. Yet South Africa 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. Our analysis, set out in this report, suggests that there are grounds for much greater optimism—and that South Africa is well positioned to accelerate growth and job creation and take major steps towards eradicating poverty. The report focusses on five opportunities that, if prioritised by government and business, could add one trillion rand ($87 billion) to annual GDP by 2030 and create 3.4 million new jobs.1 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. The big five are mutually reinforcing, and their successful implementation will benefit many other sectors of the economy. All of them depend on two critical enablers, though: building South Africa’s skilled labour force through a dramatic expansion of vocational training, and forging a true development partnership between government and business. This project builds on a body of previous McKinsey Global Institute (MGI) research on the potential of African economies. Recent publications in this series include Lions on the move: The progress and potential of African economies; Nigeria’s renewal: Delivering inclusive growth in Africa’s largest economy; Africa at work: Job creation and inclusive growth; and Lions go digital: The Internet’s transformative potential in Africa. Research for this report was led by MGI principal Susan Lund and MGI director Richard Dobbs, along with McKinsey directors David Fine and Acha Leke, and principals Nomfanelo Magwentshu and Christine Wu. The project team was managed by Paul Jacobson and included Agnes Allotey, Jonathan Haenen, Eduardo Doryan Jara, Nomfundo Magudulela, Jonathan Reader, Karin Remmelzwaal, and Bontle Senne. Thanks go to Janet Bush, Colin Douglas, and Lisa Renaud for editorial support, and to other members of the MGI communications and operations team—including Tim Beacom, Marisa Carder, Matt Cooke, Deadra Henderson, Marlynie Moodley, Julie Philpot, and Margo Shimasaki—for their contributions. We also extend thanks to our MGI and McKinsey colleagues around the world who contributed their expertise, analysis, and support, including Ziyad Cassim, Ryan McCullough, Jan Mischke, Carlos Molina, Xolile Msimanga, Rob Palter, Moira Pierce, Sree Ramaswamy, Jaana Remes, Janine Schuter, and Vivien Singer. We are grateful to the academic, policy, and industry experts and advisers whose insights enriched the report: Sir Paul Collier, CBE, Co-Director, Centre for the Study of African Economies and Professor of Economics and Public Policy at the Blavatnik School of 1 At an estimated 2015 average exchange rate of 11.52 rand per dollar. Government, Oxford University; Rudolf Gouws, former Chief Economist of Rand Merchant Bank; and Neil Morrison, an external adviser to McKinsey & Company, Johannesburg. We are also grateful to a number of individuals from the private and public sectors for being willing to be interviewed and for offering their opinions and insights in frank discussions. We thank Dr. Iraj Abedian, Chief Executive, Pan-African Capital Holdings; Martin Ackermann, Director, Scavenger Manufacturing; Dr. Rob Adam, Director Designate, Square Kilometre Array, South Africa; Adrienne Bird, Deputy Director-General for Special Projects, Department of Higher Education and Training; Carl Bothma, Thermal Process Manager, The Combustion Group; Graham Braby, Divisional Chief Executive, Grindrod Terminals; Helen Brown, Head Office, Strategy & Research, merSETA; Anati Canca, Managing Director, Malangana Innovation Advisory; Dr. Anja du Plessis, project leader of the Water Conservation and Management Focus Group, UNISA; Sean Flanagan, construction industry consultant; Lungisa Fuzile, Director-General, National Treasury; Enoch Godongwana, in his private capacity on the economy; Patrick Gordon, Head of Marketing & Communications, BPeSA Western Cape; Prish Govender, Programme Director, Group Capital Division, Eskom; Robert Houdet, Executive Director (recently retired), National Association of Automotive Component and Allied Manufacturers; Professor David Kaplan, Professor of Economics at the University of Cape Town; Michael Katz, Chairman of ENSafrica and Honorary Professor at the University of the Witwatersrand; Rob LeBlanc, Chief Operating Officer, Awethu; Dr. Litha Magingxa, Group Executive, Agri- Economics and Capacity Development, Agricultural Research Council; Evelyn Mahlaba, Regional Director Africa, Tourism South Africa; Neva Makgetla, in her private capacity on the economy; Dan Marokane, in his private capacity on infrastructure; Aldo Mayer, Director: Global Manufacturing and Engineering, Bell Equipment; Margaret Meagher, Grace Kalisha, and their colleagues at African Leadership Academy; Lynette Milne, PICC Technical Task Team Coordinator at Economic Development; Dr. Phil Mjwara, Director- General Science and Technology; Kuben Naidoo, Deputy Governor, South African Reserve Bank; Jeff Nemeth, President and CEO at Ford Motor Company of sub-Saharan Africa; Tshepo Ntsimane, General Manager, Infrastructure Finance, Development Bank of Southern Africa; Stephen Okelo-Odongo, in his private capacity on manufacturing; Kishan Pillay, Director, Primary Minerals, Department of Trade and Industry; Gareth Pritchard, Chief Executive Officer, BPeSA Western Cape; Neil Rankin, Associate Professor, Department of Economics, Stellenbosch University; Monale Ratsoma, Head of Economic Policy, National Treasury;