BLAME THE UNIONS: How South Africa Blew Its Spot As The Continent's Most Promising Economy

south african miner

Photo: AP Photo/Themba Hadebe

South Africa, which emerged from apartheid as one of the most exciting economic stories on the African continent, has lately descended into crisis.Strikes are debilitating the country’s mining sector, which is a large employer and a key producer of South African exports.

At the same time, unemployment remains staggeringly high – about 1 in 4 people in South Africa are without jobs.

Part of this is due to capital-intensive industries like mining, which increasingly use more machines at the expense of manpower, are rising in importance in South Africa, and demand for skilled laborers far outweighs that for unskilled workers.

Another key contributor, however, has been South Africa’s labour union structure. NBER economists explained in a research paper examining South African unemployment:

One could imagine that the presence of so many unionized workers might drive up wages faster than productivity growth, thereby exacerbating unemployment. This is especially a problem because collective agreements reached by bargaining councils in South Africa can be extended to all workers and to all firms in an industry, even if they were not parties to the negotiations (see Bendix, 2003). Bargaining council agreements cover about 25 per cent of formal sector employees (Godfrey, Maree and Theron., 2006).

Wages have been outpacing labour productivity in South Africa for years. Now, a new round of collective bargaining agreements has brought the imbalances to a head and have thrown the South African economy into crisis.

South Africa has an unemployment crisis – the official unemployment rate stands at 24.9 per cent

The country also has one of the lowest labour force participation rates in the OECD

At the heart of this unemployment crisis is the wage dynamic – wages have grown faster than labour productivity in recent years, which reduces demand for workers

And labour productivity has contributed very little to GDP growth in South Africa, compared to other countries

Powerful unions in South Africa control wage bargaining in a very centralized process, unlike in other emerging market countries, and are partly responsible for the wage-productivity divergence

And mining is one of the most unionized sectors in South Africa

As a result, mining wages have outpaced productivity advances in the sector in recent years

This has contributed to increasing unemployment in the mining sector, which is a more capital-intensive industry than most

The South African mining strikes in 2012 took off with the Lonmin strike. 49 people have been killed during violent clashes between the police and strikers.

Source: ABC News

At the heart of the protest were wages. Miners wanted their wages more than tripled to 12,500 rand ($1,428) a month, from 4,000 rand (about $457).

Source: Daily Maverick

Mining is crucial to South Africa's economy and employs 500,000 people, and contributes between 5-8 per cent of GDP.

Women are also known to work in South Africa's mines.

In Q2 2012, South Africa's GDP expanded 3.2 per cent and mining and quarrying played a huge role in this growth, gaining 31 per cent.

Concerns of nationalization, along with repeated strikes are risks to the country's mining sector.

The slowdown in China and the recession in Europe is also impacting South African miners.

The slowdown in the external environment also trickles down to South African consumers. This is worrisome since personal consumption accounts for nearly two-thirds of South African GDP.

Higher commodity prices could hurt real wages and tighten consumer demand in South Africa.

But South Africa has one of the lowest dependency ratios among emerging markets which bodes well for its economy.

And in the wake of a recent credit rating downgrade, BofA economists say the worst is over for now

BofA Merrill Lynch economist Matthew Sharratt wrote in a recent note to clients, after S&P downgraded South Africa:

The key risk to S. Africa's rating going forward remains the institutional capacity of the S. African government to manage the structural challenges. We believe that a likely dissipation of mining sector strikes in coming weeks combined with and a probable confirmation that mining nationalisation is not official ANC policy at the December conference, will likely see S. Africa's sovereign ratings trough at the BBB level in our view, albeit still on a negative watch. We do not anticipate any further ratings reviews until early next year, at the earliest.

Now look at the life of India's illegal coal miners...

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.