The Economic Effects On South Africa Economics Essay

The extractive industry by its nature due to the graduated table of its operations, continuance, extraction methods, and location ; has important economic impact in host states, Saffer et Al ( 2009 ) . A big figure of resource rich states in Sub Saharan African ( SSA ) are presently sing lifting export grosss from the extractive sector, partially due to new found chances, immense demand from China and high universe market monetary values for mineral trade goods in the past old ages, Sturmer and Buchholz, ( 2009 ) . The inquiry that is being raised nevertheless, is whether this roar which has placed the extractive sector high on the development docket, has a positive economic development consequence. The ground for such pessimistic position is because, despite being resource rich, SSA states have great trouble change overing mineral wealth to economic development, even with high investing.

The purpose of this survey is to analyze the economic part a mature rich resource state ( production base ) like South Africa ‘s extractive industry plays host economic systems of developing resource rich states in the part. This is on the premiss that a production base ‘s extractive activities do act upon economic development and hence regional integrating The extractive industry in Sub Saharan Africa was chosen due to the important concentration of economic activities focused in the excavation sector in the part, which is in maintaining with Porter ( 1998 ) definition of ‘cluster of economic activity ‘ as a geographical country or spacial economic unit in which a peculiar resource is present ‘ .

Literature Review

With the planetary economic system being dynamic and progressively mutualist, deeper engagement in planetary market is frequently seen as important to economic development. Despite being resource rich and holding long pursued policies aimed at cut downing their dependence on the mineral sector, ( Radetzki, 1977 ) , Sub Saharan African ( SSA ) mineral economic systems have pig-headedly remained trade good dependant.

The reply being touted to cover with this economic unease, is resource based development and economic regional integrating, “ as it enables single states to get the better of the barriers of little size and hapless human and physical capital gift ‘ , Foroutan and Pritchett ( 1993 ) chronic to SSA. Economic regional integrating understood as the integrating of goods and markets through prejudiced trade agreements, has been the persistently pursued end by SSA states in the past three decennaries, Kuhnhardt ( 2008 ) . The desire for increased economic development is seen as chance, to travel out of primary trade goods, off from heavy trust in undiversified and vulnerable construction of exports that do non further economic growing.

For the intent of this survey, the term mineral economic system is used to denote a rich resource state. Harmonizing to Eggert ( 2001 ) , there is no universally accepted definition of mineral economic systems. Mineral economic systems have been defined utilizing trade-based definition of mineral dependance as 40 % or more of entire exports coming from minerals Auty ( 1999 ) and to Sacks and Warner ( 1999 ) , resource dependance is defined as resource exports as a per centum of gross domestic merchandise. Davis ( 1995 ) used a combination of both end product and trade informations to build a mineral dependance index.

It is nevertheless Eggert ‘s ( 2001 ) definition of mineral economic system, as one in which mineral exports represents 25 % or more of entire ware exports that this survey adopts. Based on mineral exports as a per centum portion of entire ware exports in 1999, Eggert found 9 mineral economic systems in sub-Saharan Africa, viz. Nigeria, Libya, Niger, Zambia, Egypt, Congo, Dem. Rep, Mauritania, South Africa and Senegal.

A big organic structure of literature shows that many developing states, a class most Sub SSA states autumn under, besides considered mineral economic systems but have great trouble in change overing mineral wealth to economic development despite high investing rates Bocoum ( 2000 ) . Extant surveies such as Sachs and Warner ( 1995 ) have demonstrated important differences in economic growing rates between resource rich and resource hapless states, happening without exclusion that resource-abundant states have stagnated in economic growing since the early 1970s and 1980s. One of the chief grounds attributed to hard in change overing mineral wealth to economic development is harmonizing to Hirschman ( 1961 ) , the cardinal premise that “ the natural resource sector has no “ production linkages ” while fabricating sector does, as fabrication sector shows outwardnesss while natural resource sector do non.

With more new mineral chances found in states such as Ghana and Uganda to advert but a few ; Sachs and Warner ‘s ( 1995 ) views that “ resource-poor economic systems frequently outperform resource rich economic systems in economic growing ” implies that merely engrafting capital-intensive mineral undertakings into immature economic systems, will falsify some of these economic systems in ways which were, economically and socially detrimental, Humphreys ( 2002 ) .

Analysis of composings of trade goods traded in SSA finds a bulk of the 54 trade good dependent developing states are found in part, Matringe ( 2006 ) . The European Union Trade Report ( 2004 ) puts export net incomes of over 20 % in SSA as being in less than three soft trade goods like primary agribusiness trade good, non renewable mineral resources, which constitute the majority of SSA export. This supports Bhatia ( 1999 ) sentiment that trade variegation by changing the merchandise composing of bing production towards higher value added merchandises is prerequisite for economic growing and development.

However many developing states do non hold the capacity to profit from production linkages and their challenge is to happen productive ways of tapping the big value-added which excavation can present. This can be achieved through the transmutation of the wealth created by mining into a diversified and self-supporting set of economic activities, Humphreys ( 2002 ) .

On the other manus the above averments refering mineral dependence in fact support Amin ‘s, ( 1974 ) dependence theory, that the ownership of capital, determined its consequence on the host mineral economic system and the premise that an economic system controlled by aliens would non develop organically, but would instead turn in a disarticulated mode, should proper schemes to command economic way non be implemented ( Beer 1999 ; Kentor, 1998 ) . Harmonizing to Mengistu and Adams ( 2007 ) disarticulated growing occurs because the multiplier consequence from demand in one sector in state likely its comparative advantage like a natural resource would make weak demand in another, thereby taking to stagnant growing in the development states.

In farther support of the above statements Yu ‘s theory of Advantage Integration, Yu and Rong ( 2009 ) states that investings from developed economic systems to developing economic systems should incorporate the measure or cost advantage of resources in a host developing states. Yu and Rong ( 2009 ) goes on farther to state, a inactive combination in host economic system peculiarly a developing state ‘s natural resources-related advantage to foreign capital, has no length of service, as foreign capital and engineering has been shown to flight in times of crisis and he footings this flight of “ FDI Advantage Clearing-Off ” .

To Yu and Rong ( 2009 ) inactive combinations, are likely to consequences in net incomes from capital and engineerings investings to flux to foreign houses and its proprietors, therefore the host developing economic systems do non profit from the investing and the engineering brought in. This should non deflect to the importance foreign direct investing into a part though, as surveies such as Blomstrom ( 1986 ) finds that sectors with a higher grade of foreign ownership exhibit faster productiveness growing. Yu and Rong advocates developing states to actively advance the accretion of advantages by acquiring “ ownership ” , as a agency of guaranting that they systematically accumulate their ain capital, engineering and direction know-how advantages through utilizing external advantages. The Advantage Integration model was developed by Yu to mensurate China ‘s miracle economic growing in East Asia Yu and Rong ( 2009 ) , and is relevant to this survey due to the part production bases ( Japan South Korea, Singapore, Hong Kong ) made ab initio to China ‘s economic development.

Metwally ( 1993 ) has shown correlativity in export led growing theoretical accounts in East Asiatic states ( South Korea, Singapore, Hong Kong ) , between regional integrating, exports and economic public presentation. Harmonizing to Young ( 1995 ) who investigated the instance of East Asia from the 1960s to early 1990s, found that the dramatic economic growing in Hong Kong, Singapore, South Korea and Taiwan originated in big portion from the reallocation of production procedure from the low productiveness agricultural sector to the high productiveness industrial sector, with Japan moving as accelerator for the part. This occurred as a consequence of natural procedure, through the hunt for competitory border by houses. The term production procedure consists of production of assorted intermediate goods ( parts and constituents ) and concluding assembly and has besides been referred to as “ production integrating ” , ( Jones and Kierzkowski 2000 ) . Meaning the production procedure is physically divided into different units that are united through systematic logistic agreement otherwise known as atomization in the literature of the international trade

A structural analysis of production procedure in intra-regional trade in East Asia showed that East Asiatic states have a high portion of intermediate trade. Further analysis to find regional trade in East Asia by category of merchandise, viz. finished, intermediate or natural stuff to find which category was driving the enlargement of intra-regional trade, showed that the proportion of intra-regional trade accounted for by intermediate goods increased quickly, lifting from 42 % in 1980 to 60 % in 2005, Ayivor ( 2010 ) . This confirmed that intermediate goods were driving intra-regional trade and the root of economic development in East Asia, was its ability to reapportion its production factors within its part, therefore distributing its comparative advantage.

This author argues that regional production integrating has been successfully used in East Asia, where the Factory Asia theoretical account is non designed as discussed above, but instead developed organically through the natural procedure of single house ‘s seeking higher productiveness utilizing regional production integrating. Hence big house activity was the accelerator for regional integrating in East Asia, as they sought to allow location, to accomplish higher productiveness. On could further reason that transnational houses are the decisive contributory histrions in the procedure. Multinational house activity is evidenced in SSA every bit good ; in 2006 Saffer et Al ( 2009 ) found that the top 10 out of the 230 excavation companies ‘ active in Sub-Saharan Africa controlled 35 per centum of planetary excavation and the inquiry would be how many of them are South African houses?

The immense difference between East Asia and SSA shows in that “ states abundant in labour and capital tended to export industries, and states abundant in natural resources tended to export natural stuffs ‘ , Davis ( 2009 ) . However the fact remains that East Asia has shown that regional production integrating is important to economic development as it promotes intra industry, trade specialisation and consequences in intra trade in among developing states, between them and developed states, Bhagwati and Srinivasan ( 1983 ) and Krueger ( 1990 ) .

This position is supported by North, ( 1955 ) statements that successful parts exploit their natural resource distributions and comparative advantages to bring forth goods with a lower chance cost to developed states see economic growing. On premiss Bhagwati and Srinivasan with contradictory sentiment to Filatotchev and Morrissay ( 2001 ) findings of serious deductions for trade of exports on marginalized economic systems, that if merchandises from developing states continue to be contract providers of trade goods, they remain marginalized from the planetary economic system as is the instance with SSA. One could state SSA states mineral economic systems with copiousness of mineral resources, with dependance on trade goods without the value attention deficit disorder and merchandise variegation, explain the resource expletive experienced in many of its economic systems.

Significance of the Research

The survey will look into a research job that will bring forth consequences that will non merely clarify this argument but will besides add to the bing scholarship on regional production integrating within mineral economic systems in Sub Sahara Africa. The premise is that non merely make production bases invest in the ‘basic ‘ export sector which is export-oriented and attracts ‘new ‘ gross into a part or state, but they besides invest into others sectors, which re-circulates such outgo through the domestic economic system. More significantly, this research worker has non been able to turn up any research survey that has considered the economic part of production base and its impact on regional production integrating in SSA.

Theoretical Framework and Methodology

Competiveness And Linkage Analysis Of Export Based Theory

Porter ( 1990 ) argues that productiveness is an of import result of fight and high fight in international trade is seen as to core increasing engagement in international trade through trade addition. International fight has been described by Aiginger, ( 2006 ) as the ability of the state to sell more merchandises in the international market while keeping and bettering existent income degree, criterion of life and public assistance domestically, clearly these are economic conditions most mineral economic systems in Sub Saharan Africa aspire for their economic systems.

To Yu and Rong ( 2009 ) nevertheless, economic development of many states can non be attributed entirely to a state ‘s ain resource gift entirely. The bookmans go on to state high quality and high velocity development can be achieved by expeditiously associating of incorporating advantages from all over the universe to the host economic system. Hence the author proposes for the intents of this survey that a production base within a part, be considered to constitutes, linkage consequence of “ integrating advantages ” . Meaning that production base provides or creates certain sorts of “ developmental factors ” , or economic factors which are good for recognizing high degree development schemes in host mineral economic system of a underdeveloped state. Yu and Rong ( 2009 ) specify the linkage consequence of incorporating advantages as ability to associating the possible ability of the developing economic system to more advantageous advanced economic system, that in enables the developing states to trip farther integrating.

With respects to advantageous advanced economic system, there are developing mineral economic systems in SSA that have become ‘mature ‘ , ( Auty 2006 ) , intending their “ economic systems have become sufficiently diversified into extra trade good exports, services and/or fabrication ” which act as production base for the part. The Witwatersrand part in South Africa is an illustration of where excavation has acted as the accelerator for the outgrowth of diversified economic part in South Africa, ( Auty 2006 ) where mineral export is no longer dominant. Harmonizing to Auty ( 2006 ) making adulthood is a last phase of five phase sequence of export based theory that explains the variegation of mono-product commodity-exporting parts.

With the above in head this research is concerned with the creative activity and development of production bases ‘ excavation investings in host mineral economic systems, which remain in the mineral export and its consequence on economic systems by take downing mean production costs and farther hike the host mineral economic systems ‘ fight. This survey uses a specific set of methodological tools from export base theory to understand the creative activity of webs of excavation production. Central to the apprehension of export based theory is the construct of ‘socio-economic linkages analysis ‘ , which is one of three chief tools for gestating and mensurating the impact of economic undertakings in a part and the other two, are identified as the economic multiplier and cost-benefit analysis Auty ( 2006 ) .

Linkage analysis tool which is rooted in export base theory besides known as the basic theory, was developed by ( Innes 1920, North 1955 and Watkins 1963 ) cited by Auty 2006. Export base theory is really relevant to an analysis of extractive industry, chiefly because export based theory was formulated to explicate the growing of diversified comfortable regional economic systems based upon the export of primary merchandises instead than upon industrialisation.

The export-base theoretical account is widely used in regional economic analysis and is a widely accepted economic theoretical account utilized by economic development practicians and regional economic policy analysts for regional growing Harris, et Al ( 1998 ) . The said theory emerged from international trade theory, where the usage of economic base theoretical accounts were sought to explicate a part ‘s growing through the scrutiny of its influxs and escapes ( North, 1955 ) . It has been good noted that linkage analysis provides more flexible and comprehensive attack, as it captures the kineticss of the economic impacts, by supplying an account for the development of the regional economic system Auty ( 2006 ) . This becomes of import because it besides suggests ways in which economic impacts can be rendered more good. The theory conceives the economic system as consisting two complementary sectors: the ‘basic ‘ sector is export-oriented and attracts ‘new ‘ gross into a part or state, whereas the ‘service ‘ sector re-circulates such outgo through the domestic economic system. The mechanism of the export base theoretical account can be described in footings of four chief sets of linkages or socio-economic stimulations, which harmonizing to Hirschman ( 1977 ) are:

Backward linkage ( the constitution of houses to supply inputs to the export trade good ) ;

Forward linkage ( the constitution of houses to treat the trade good prior to its export ) ;

Fiscal linkage ( the disbursement of authorities revenue enhancements levied on the trade good ) ;

Concluding demand linkage ( the activities set up in response to the local disbursement of rewards and net incomes by labor and the proprietors of capital ) .

There are five-stage sequences to variegation in the instance of excavation Watkins ( 1963 ) . The premise for this survey is that, the first phase when a excavation company from a production base identifies minerals within a host mineral economic system with possible comparative advantage and begins to export it, has been already achieved. It is the 2nd to concluding phase that are of importance for this survey and these phases are listed as follows:

The 2nd phase, which sees mineral production expand ensuing in investing staying largely within the mineral export. This yields both internal economic systems of graduated table and external economic systems by bettering substructure ( such as roads, electricity supply ) that lower mean production costs and farther hike the mineral ‘s fight, ( backward linkage ) .

Third phase productive linkages are triggered in the signifier of investing in local input supplies to the mine that replace hitherto imported inputs of machinery and trim parts ( backward links ) , and/or to set about processing prior to export, as with a refinery, smelter or fabricating works, ( frontward linkage ) .

In the 4th phase of the export base theoretical account, capital floods from the mineral sector into the non-export sector of the economic system to provide turning household demand every bit good as the demands of houses providing inputs to the mine, Fiscal linkage.

The part reaches its fifth and concluding ‘mature ‘ phase when the economic system has become sufficiently diversified into extra trade good exports, services and/or fabricating that the mineral export is no longer dominant.


Expecting that the mineral economic systems under the survey are most likely to hold weak establishments and hence deficiency of informations, gauging mineral dependance will be restricted to two ways viz. :

This survey will trust to a great extent on international-trade informations. Formative rating will hold to be determined how, the value, volume of trade way and its construction, influence pick of regional agreements in Sub Saharan Africa. The heterogeneousness of research aims built-in to this survey necessitates a flexible and comprehensive attack. Below, is the description of which information types this survey intends to garner and elaborate upon the methodological analysis for each assemblage and the theoretical relevancy.

Sampling will be conducted as follows:

( Domestic ) piecing a list of all South African companies known to run in mineral economic systems in SSA ( the mineral economic systems will be based on mineral exports as a per centum portion of entire ware exports in 2007 ) .

( Export ) Data on the export and authorities policies of mineral economic systems will be collected from the Ministry of Commerce. Finish states and export animal trainers would be identified correspondingly.

These studies will be of a intercrossed qualitative and quantitative nature, chiefly sociological in signifier, researching the motives and behaviour of histrions straight act uponing the demand for and consciousness of socionatural loanblends.

Research Questions and Aims

How so do we mensurate the economic effects of a production base like South Africa in the extractive industry of its host economic systems within the part? The intent of this survey is to reply the undermentioned inquiries:

What are the overall economic effects of a mature rich resource production base on a underdeveloped mineral economic system ‘s excavation and excavation value concatenation?

What is the overall impact of the production base on regional production integrating in the extractive industry?

Can the advantage integrating of production base to host mineral economic systems increase SSA ‘s fight and increase regional production integrating that can take to successful economic development flight?

This survey has the following specific aims:

( 1 ) To show a model capable of analysing the possible impact of a production base of mineral related activities on industry linkages and growing chances,

( 2 ) To use the methodological analysis to host mineral economic systems,

( 3 ) to place feasible mineral and energy activities for investing, and ( 4 ) to supply policy suggestions which can be employed in the excavation sector to increase domestic value-added and foreign export grosss through such investings.

The inquiry to be answered is the importance of a production base in a host economic system to exciting cardinal sectors including the export excavation activity, which have strong linkages with other sectors in order to excite economic growing within that part. The happening of production bases in the excavation bunch could assist find their capacity to increase the part ‘s intra-regional specialisation beyond resource industries.

The inquiries to be answered are:

Does the increased regional integrating due to production establish economic activity in a host mineral economic system alteration trade constructions in those economic systems and show marks of traveling it from its primary trade good dependence?

To accomplish this survey ‘s aims, the author will hold to:

Identify mineral economic systems in SSA ;

Qualify South Africa as mature resource rich state and why it can be identified as production base ;

investigate mineral exports relative to number this exports as a per centum portion of entire ware exports in a host mineral economic systems by production base ;

Determine whether South Africa or any other production bases in part has the necessary drift to trip regional production integrating in SSA, should be evidenced by if any, atomization of international trade in part viz. increase alteration trade constructions in SSA ;

Whether as a consequence of excavation activity in host mineral economic system, production base has linked ( or non linked ) with domestic economic activities through its investings in the host economic system ;

Determine the size of the mineral sector investings by a production base relation to other sectors which have strong linkages with other sectors and are able to excite economic growing in the host mineral economic system ;