PROVINCE OF KWAZULU-NATAL

Provincial-Economic Review and Outlook

2016/2017

KwaZulu-Natal Provincial Government

ISBN: ISBN No. 1-920041-10-9

To obtain further copies of this document, please contact: Provincial Treasury 5th Floor Treasury House 145 Chief Albert Luthuli Road 3201 P.O. Box 3613 Pietermaritzburg 3200 Tel: +27 (0) 33 – 897 4444 Fax: +27 (0) 33 – 897 4580

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Table of Contents Executive Summary Chapter 1: Introduction……………………………………………………………………...............1 Chapter 2: Economic Review and Outlook………………………………………………………. 3

2.1 Introduction………………………………………………………………….............. 3 2.2 Global economic review and outlook……...………………………………………. 3 2.3 National economic outlook…………………………………………………………. 5 2.4 Kwazulu-Natal economic review and outlook…………………………………..... 7 2.5 International trade.............................................................................................. 8 2.5.1 Current account of the balance of payments…………………………………... 9 2.5.2 International commodity prices………………………………………………….. 10 2.5.3 KwaZulu-Natal exports……………………………………………………………. 11 2.5.4 KwaZulu-Natal imports……………………………………………………………. 11 2.6 Inflation.............................................................................................................. 12 2.7 Travel and tourism............................................................................................. 14 2.7.1 World travel and tourism contribution to GDP and employment..................... 14 2.7.2 South African travel and tourism.................................................................... 15 2.7.3 KwaZulu-Natal travel and tourism...................................................................16

Chapter 3: Kwazulu-Natal Sector Analysis……………………….....………………………….. 19

3.1 Introduction........................................................................................................ 19 3.2 Overview and outlook of the provincial sector analysis..................................... 19 3.3 Primary sector................................................................................................... 20 3.3.1 Primary sector contribution to GDP................................................................ 20 3.3.2 Agriculture...................................................................................................... 21 3.3.3 Mining industry............................................................................................... 26 3.4 Secondary sector............................................................................................... 27 3.4.1 Overview of manufacturing............................................................................. 27 3.4.2 Construction…………………………………………………................. ………... 31 3.4.3 Electricity………………………………………………………………….............. 32 3.5 Tertiary sector................................................................................................... 32 3.5.1 Tertiary subsectors................................………………………………………… 33 3.5.2 Tertiary sector contribution to employment….......................………............... 33 3.5.3 Trade sector…………………...………………………………………………...... 34 3.5.4 Finance…………………………………………………………………………….. 36 3.5.5 Community services…………………....………………………………………… 39

Chapter 4: Labour Dynamics in KZN...................................................................................... 41

4.1 Introduction........................................................................................................ 41 4.2 Employment…………………………………………………………………………. 41 4.2.1 Employment by sector……………………………………………………………. 43 4.3 Labour absorption rate...................................................................................... 44 4.4 Labour force participation rate........................................................................... 44 4.5 Unemployment………………………………………………………………………. 45 4.6 Labour remuneration and productivity…………………………………………….. 46

Chapter 5: Public Capital Stock and Economic Growth – KwaZulu-Natal Case Study......47 5.1 Introduction…………………………………………………………………………… 47

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5.2 Literature review…………………………………………….………………………. 47 5.3 Methodology…………………………………………………………………………. 50 5.3.1 Constructing a net fixed capital stock series for the provincial government…50 5.3.2 Provincial fixed capital stock and provincial economic performance………… 51 5.4 Results……………………………………………………………………………….. 52 5.5 Summary and conclusions…………………………………………………………. 53 Appendix............................................................................................................................................. 55 References.......................................................................................................................................... 56

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List of Tables Table 2.1: World economic growth estimates and projections, 2013 to 2017…………………. 4 Table 2.2: Balance on current account (R billion, seasonally adjusted and annualised) in

2016………………………………………………………………………………………. 9 Table 2.3: South African exports by provinces in 2005 and 2015……………………………… 11 Table 2.4: Percentage share of South African imports by provinces in 2005 and 2015……… 12 Table 2.5: South African main indices of consumer price index (CPI) in all urban areas,

September 2016………………………………………………………………………… 13 Table 2.6: Contribution of travel and tourism towards GDP and employment from

2010 to 2016 and 2026 forecast……………………………………………………….. 16 Table 2.7: Contribution of tourism towards GDP and employment……………………………... 18 Table 3.1: Sector contribution to the provincial real GDP (percentages),

1996 to 2018……………………………………………………………………………… 19 Table 3.2: Number of agricultural households by provinces in 2011 and 2016……………….. 22 Table 3.3: Average annual growth rate of the primary sector in KZN from 2011 to 2018……. 23 Table 3.4: Dam levels in KZN for 2015 and selected months as at 26 September 2016……. 24 Table 3.5: White and yellow maize production by provinces, 2014 to 2016…………………… 25 Table 3.6: KZN tertiary subsectors’ contribution, 2010 to 2015…………………………………. 33 Table 3.7: Retail trade sales at constant prices (R million), 2016………………………………. 35 Table 4.1: Characteristics of labour force in SA, 2015:Q2 to 2016:Q2…………………………. 42 Table 4.2: Characteristics of labour force in KZN, 2015:Q2 to 2016:Q2………………………. 43 Table 5.1: OLS regression results………………………………………………………………….. 52 List of Figures Figure 2.1: GDP growth rate: South Africa, 2013:Q3 to 2016:Q2.............................................. 6 Figure 2.2: KZN provincial GDP by district municipalities (percentages), 2015.........................7 Figure 2.3: Economic growth rate in KZN, 2013:Q1 to 2017..................................................... 8 Figure 2.4: Real percentage change in selected commodity prices from 2010 to 2016 (US dollar indices: 2010 = 100)………………………………………………………… 10 Figure 2.5: Inflation rate (percentages) in SA by provinces, September 2016.......................... 12 Figure 2.6: Annual trips to each province by domestic tourists, 2013 to 2015………………… 17 Figure 3.1: Primary sector contribution to SA’s GDP growth from 2014: Q1 to 2016: Q2 (constant 2010 prices, seasonally adjusted and annualised)………………………. 21 Figure 3.2: KZN’s industries share of manufacturing contribution (percentages), 2015............ 27 Figure 3.3: Gross value added by automotive industry to the KZN economy, 2004 to 2015… 29 Figure 3.4: Average annual growth rate in the KZN’s automotive industry, 2005 to 2015......... 29 Figure 3.5: Average annual growth rate in the KZN’s metal industry, 2004 to 2015..................31 Figure 3.6: Average annual growth rate in the KZN’s construction industry, 2004 to 2015....... 31 Figure 3.7: Electricity sector trends in SA and KZN, 2005 to 2015……………………………… 32 Figure 3.8: KZN’s trade subsectors in 2014 and 2015……………………………………………. 34 Figure 3.9: Finance sector contribution to GDP by provinces in 2006, 2011 and 2015............. 37 Figure 3.10: KZN’s finance sector GVA at constant 2010 prices and growth rates, 2003 to

2015……………………………………………………………………………………….. 38 Figure 3.11: Finance subsectors contributions, 2006 and 2015…………………………………… 39 Figure 3.12: Community services subsectors contributions in 2015………………………………. 40

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Figure 4.1: Employment by sector (percentages) in KZN, 2006, 2011 and 2015……………… 43 Figure 4.2: Unemployment by provinces in 2016………………………………………………….. 45 Figure 4.3: Labour productivity and remuneration in KZN, 2007 to 2015.................................. 46 List of Acronyms ADF Augmented Dickey-Fuller AIC Akaike Information Criterion CPI Consumer Price Index EC Eastern Cape EME Emerging Market Economies EU European Union FIFA Federation International Football Association FS Free State GDP Gross domestic product GDP-R Regional gross domestic product GFCF Gross Fixed Capital Formation GP Gauteng Province GVA Gross Value Added IDZ Industrial Development Zone IMF International Monetary Fund KZN KwaZulu-Natal LP Limpopo Province MDGs Millennium Development Goals MP Mpumalanga Province MPC Monetary Policy Committee MTEF Medium Term Expenditure Framework NAAMSA National Association of Automobile Manufacturers of South Africa NC Northern Cape NDP National Development Plan NPC National Planning Commission NW North West OECD Organisation for Economic Co-operation and Development OLS Ordinary Least Squares PGDP Provincial Growth Development Plan PIM Perpetual Inventory Method PMI Purchasing Managers’ Index PPI Producer Price Index QES Quarterly Employment Survey QLFS Quarterly Labour Force Survey R&I Rating and Investment Information SA South Africa SACU Southern African Custom Unions SADC Southern African Development Community SARB South African Reserve Bank SAT South African Tourism SBC Schwarz Bayesian Criterion SLS Stage Least Squares S&P Standard and Poor Stats SA Statistics of South Africa SSA Sub-Saharan Africa

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T&T Travel and Tourism UK United Kingdom UNESCO United Nations Educational, Scientific and Cultural Organization US United States USA United States of America VAR Vector Autoregressive WEO World Economic Outlook WC Western Cape WTO World Trade Organisation WTT World Travel and Tourism WTTC World Travel and Tourism Council

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Executive Summary

This publication highlights the economic conditions in KwaZulu-Natal (KZN), thereby starting by focussing on the

global trends down to national and provincial levels. The publication can be used by business people and other

stakeholders who have an interest in doing business with the province of KZN. The document comprises of five

chapters, where chapter one is the introduction, chapter two focuses on the economic review and outlook globally,

nationally (South Africa) as well as provincially (KZN). Chapter three provides the analysis of sectors in KZN while

chapter four focuses on labour dynamics. Chapter five focuses on a KZN case study on public capital stock and

economic growth.

Chapter 2 provides an overview and outlook of the economic conditions on global, national and provincial scale.

Emphasis is placed on the analysis of indicators such as the Gross Domestic Product (GDP) and international trade;

where the current account, commodity prices, and exports and imports are discussed. The chapter examines world

economic growth estimates and projections from 2013 to 2017, and analyses South Africa’s (SA’s) position amongst

other global regions; advanced economies, emerging market economies and sub-Saharan Africa.

The international trade section discusses the current account of the balance of payments, as well as commodity

prices of gold, iron ore, platinum and coal which did not perform well in the international market. This can be

attributed to reduced demand, global over-supply, retrenchment in the mining sector and closure of mines. Exports

and imports are discussed on a provincial scale comparing KZN with other provinces. Inflation is also discussed

under this chapter, highlighting indexes that contribute to the Consumer Price Index (CPI) with a particular mention of

food, tobacco, and household contents and services inflation.

The chapter further shows the contribution made by the tourism industry in the world, country and the province. It

shows the strategic importance of tourism in the creation of job opportunities, and its contribution to GDP and

employment, where it illustrates that the industry is one of the major contributors to global, national and provincial

GDP. Tourism contributed above 9.8 per cent to the global GDP in 2015. Over the same year, the industry

contributed 9.4 per cent in SA. In respect of employment, the industry has contributed 3 per cent in 2015 and this is

projected to increase to 3.8 per cent in 2026.

Tourism in the province is also discussed under contribution to GDP and employment. Domestic tourism is alluded

to, with mention across all provinces, through annual trips to each province by domestic tourists for 2013, 2014 and

2015. The main sources of domestic tourists in KZN are from Gauteng. Tourism’s contribution to the GDP of KZN in

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2015 was estimated at R35.1 billion (or 3 per cent of GDP). This category contributed to employment in the province

with 232 112 people employed in 2015.

Chapter three of the publication analyses the performance of the strategic sectors in the province. The primary,

secondary and tertiary sectors are discussed in detail. An analysis of their contribution to GDP has been conducted

for the period 1996 to 2015, and the outlook for the period 2016 to 2018 is provided. The growth rates of these

sectors have also been discussed. In addition, a comparison of agricultural households in KZN and those of other

provinces in the country has been deliberated from 2011 to 2015, with a forecast from 2016 to 2018. Considering the

prevailing drought conditions in the province, and in the country, a discussion on the dam levels in the province is

provided. Agricultural production in the province comparing 2014, 2015 and 2016 is also examined, followed by an

overview of the mining sector.

The secondary sector comprises of manufacturing, construction and electricity. An overview of the manufacturing

sector is provided; with an in-depth analysis of the automotive metals subsectors examining its gross value added

(GVA) to the KZN’s GDP and its annual growth rate between 2004 and 2015. An overview of the construction and

electricity sectors as well as average annual growth rates has also been provided.

The tertiary sector is comprised of 4 subsectors namely trade, transport, finance, and community services. This

section provides a discussion on all the subsectors and their contribution to the GDP and employment in the

province. Under the trade sector, the retail industry is discussed and an overview of motor trade sales is provided. It

is evident from the analysis that there in increase in demand for used vehicles as compared to new vehicles due to

low affordability.

The finance sector, which includes banking, saving, investment and debt, and equity financing, forms an integral part

of the economic system. In this section, the finance sector contribution to GDP in 2006, 2011 and 2015 is discussed.

This also includes the province’s finance sector, GVA and growth rates from 2003 to 2015. The community services

(government spending on the community e.g. housing, education, health, social welfare etc.) section discusses the

dominant spending of the provincial budget on education, health and social work.

Chapter four discusses labour and its dynamics where employment is discussed in different categories.

Characteristics of the labour force from quarter two 2015 to quarter two 2016 are discussed in detail. It further

discusses employed, unemployed, and not economically active population, as well as the unemployment rate. Labour

absorption and labour force participation rates are also discussed. The chapter further alludes to employment by

sector in the province in 2006, 2011 and 2015. Sectors that dominate employment are trade, community service,

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finance and manufacturing. It further explains unemployment across the nine provinces in 2016, where KZN is

ranked sixth out of the ninth provinces. Labour remuneration and productivity is discussed at provincial level from

2007 to 2015, where productivity is far below the labour remuneration level.

Chapter five provides a case study of KZN which examines the relationship between public capital stock and

economic growth. The case study seeks to examine the relationship between public capital stock and economic

growth in KZN using various econometric techniques such as Vector Autoregressive models (VAR) and co-

integration. It thus seeks to prove the theoretical argument that public capital stock has a positive relationship with

economic growth. The Explicit growth model is used to assess the empirical contribution of provincial infrastructure

accumulation (fixed capital stock) to provincial growth.

Due to limitations with regards to proper data from provincial capital stock a new dataset is constructed using certain

statistical transformation based on the Perpetual Inventory Method (PIM) method. The empirical results support the

argument of a long run equilibrium relationship between provincial capital stock and provincial GDP. It further

suggests that the long run causality or effect fades over time, albeit slowly. However, the nature and statistical

significance of the long run equilibrium relationship is ambiguous at best. On the other hand, some evidence of a

short run equilibrium relationship was observed. The results showed that, there seems to be some causality between

provincial capital stock and provincial GDP in the short run. This is not surprising given that provincial public

investment projects take some years to complete.

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Chapter 1: Introduction

The Provincial Economic Review and Outlook (PERO) is published in the third quarter of each financial year, when

the Medium Term Expenditure Framework (MTEF) is being tabled. It is during this period, when the preliminary

2017/18 budget is being prepared. The information in the PERO directly influences the budget allocations as it

provides economic information, such as the level of economic growth at both national and provincial levels.

The province of KwaZulu-Natal (KZN) has a diverse economic culture, made up of both rural and urban. It performs

in all economic spheres, most notably in agriculture (with the province housing Packard-Hullett and Illovo Sugar; the

two largest sugar producers in the country), tourism (boosted by the geographical setting of the province, ranging

from the Drakensburg Mountains, the Midlands Meander, and the Indian Ocean on the East Coast), manufacturing,

mining, trade, construction, finance and community services to name a few.

In line with the above, the province hosts a number of international events that bring people from around the world.

These events include three major marathons, namely the Dusi Canoe, the Comrades and the Mandela Marathons. It

also hosts the largest horticultural show (The Garden Show) in the Southern Hemisphere, which brings horticulturists

from around the country and the world to compete in various gardening categories.

The City of Durban hosts a number of events which bring people from around the country and the world. These

include Mr. Price Professional Surf contest, Moses Mabhida Stadium which hosts a number of sporting events and

uShaka Marine World which allows people to enjoy water rides, an aquarium, restaurants and curio shops. Dube

Tradeport is one of the largest Spatial Economic Zone (SEZ) in the Southern Hemisphere. It is the only facility in

Africa combining an international airport, dedicated cargo terminal, warehousing, offices, retail, hotels and

agriculture.

The fact that KZN is the second largest contributor to the economy of the country, after Gauteng, proves that the

province plays a significant role in South Africa’s (SA’s) economy. The major role-players which have a direct effect

on the growth of the economy in KZN are discussed in this publication.

Along with the rest of the country, KZN has suffered greatly from the drought, which has had a direct negative effect

on its economy. The drought which started in 2015 continues, resulting in the loss of livestock and reduction in crop

production which causes the province to increase its agricultural imports. The increase in imports affects the

country’s reserves, which in turn results in a current account deficit.

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The Rand has continuously depreciating as compared to other currencies, thus results in imports becoming

expensive. Contrary, the weaker Rand allows for greater exports, with a number of South African products becoming

cheaper in international markets. Furthermore, a weaker Rand promotes tourism, as foreigners are able to buy more

with less.

The publication comprises of five chapters, where chapter two focuses on the economic review and outlook globally,

nationally (SA) as well as provincially (KZN). Chapter three provides the analysis of sectors in KZN while chapter four

focuses on labour dynamics. The final chapter focuses on a KZN case study on public capital stock and economic

growth.

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Chapter 2: Economic Review and Outlook

2.1 Introduction

The International Monetary Fund (IMF, 2016) and the Organisation of Economic Corporation and Development

(OECD, 2016) maintain that global economic growth will remain subdued between 2016 and 2017. According to the

IMF (2016), this ailing economic performance began in 2015, following detrimental effects caused by economic

transitions such as slowdown in Chinese economic activity, lower commodity prices and monetary policy tightening

cycle in the United States (US). The global economy is however, expected to continue to be sluggish in 2015 despite

slow improvement observed in commodity prices, (IMF, 2016) and OECD (2016).

These weaker economic conditions are relatively intense in most advanced economies as caused by the vote of

United Kingdom (UK) to leave the European Union (EU) commonly referred to as the Brexit, and negative

performance by major commodity producers. Although this is anticipated to also affect the emerging market

economies (EME), but there are certain regions such as India, where substantial growth is projected. Thus, the IMF

(2016) projects that output growth in most economies would pick up significantly in 2017.

As an open economy South Africa (SA) tends to be affected indirectly by these global economic conditions; it thus

become important that a comprehensive analysis of global economic review and outlook be provided as to reflect a

clear picture about external factors influencing domestic economic performance. Consequently, this chapter although

aims to provide the Economic Review and Outlook of the province of KwaZulu-Natal (KZN), it begins with an outline

of the global and national economic review and outlook, before providing extensive analysis of the provincial

economic review. This is subsequently followed by discussion of the international trade, inflation and tourism.

2.2 Global economic review and outlook

Table 2.1 presents the global economic growth estimates and projections by the IMF, from 2013 to 2017. The global

economic performance is expected to remain subdued at 3.1 per cent in 2016, before picking up slightly to 3.4 per

cent in 2017. The projected recovery in 2017 is expected to be driven by emerging markets and developing

economies, as economic conditions to these regions begin to normalise (IMF, 2016).

Similar to the subdued global economic outlook, major advanced economies are projected to record a slow growth

rate of 1.6 per cent in 2016, before elevating slightly to 1.8 per cent in 2017. The projected subdued outlook could be

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attributed to different common forces, including the legacy of the global financial crisis such as high debts, financial

sector vulnerabilities and low investment (IMF, 2016).

Table 2.1: World economic growth estimates and projections, 2013 to 2017

Source: IMF, 2016

Output growth in the US is projected to deteriorate by 0.8 percentage point to 1.6 per cent in 2016 compared to 2.4

per cent recorded in 2015. This, according to the IMF (2016), emanates from a prolonged inventory correction cycle

and weak business investment; which thus compelled a downward revision of the outlook. The US economy is

however, expected to pick up to 2.2 per cent in 2017.

The euro area will sustain its recovery trajectory with a slow pace of 1.7 per cent in 2016 compared to 1.5 per cent in

2015. This follows weak investor confidence emanating from uncertainty caused by the Brexit. Nonetheless, factors

such as low oil prices, modest fiscal expansion and easy monetary policy are expected to pose substantial stimulus

to output growth (IMF, 2016).

In Japan, output growth is expected to remain subdued at 0.5 per cent in 2016, before accelerating slightly to 0.6 per

cent in 2017. According to the IMF (2016), this could be attributed to the newly implemented growth-enhancement

strategies such as supplementary budget and monetary easing, which are expected to boost private consumption

and thus offsetting some drag caused by uncertainty.

Economic output in Russia contracted enormously by 3.7 per cent in 2015. This is however, expected to improve

slightly to minus 0.8 per cent in 2016 before approaching positive growth rate of 1.1 per cent in 2017. The IMF (2016)

stresses that the projected improved economic performance would induce some trade related economic issues such

2013 2014 2015 2016 2017 2016 2017

World 3.2 3.4 3.1 3.1 3.4 2.4 2.8

Advanced Economies 1.1 1.8 1.9 1.6 1.8 1.7 1.9

United States of America 1.5 2.4 2.4 1.6 2.2 1.9 2.2

Euro Area -0.3 0.9 1.5 1.7 1.5 1.6 1.6

Japan 1.6 0 0.5 0.5 0.6 0.5 0.5

Emerging countries 5.0 4.6 4.0 4.2 4.6 3.5 4.4

Russia 1.3 0.6 -3.7 -0.8 1.1 -1.2 1.4

China 7.7 7.3 6.9 6.6 6.2 6.7 6.5

India 6.9 7.3 7.3 7.6 7.6 7.6 7.7

Brazil 2.9 0.1 -3.8 -3.3 0.5 -4.0 -0.2

Sub-Saharan Africa 5.4 5.0 3.5 1.4 2.9 2.5 3.9

South Africa 2.2 1.5 1.3 0.1 0.8 0.6 1.1

EstimatesProjections

IMF World Bank

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oil importers. The global funder further maintains that, growth outlook for 2017 remains subdued due to long-standing

structural bottlenecks and impact of sanctions on productivity and investment.

In China, economic growth is anticipated to deteriorate by 0.3 percentage point from 6.9 per cent that was reported in

2015 to 6.6 per cent in 2016, and further slow to 6.2 per cent in 2017 (table 2.1). Although the Chinese economy is

expected to rebalance from investment and consumption, it should also be noted that escalating nonfinancial debt

and misallocation of funds would pose a shadow in the economy (IMF, 2016).

In India, economic growth is expected to expand at a faster pace from 7.3 per cent in 2015 to 7.6 per cent in 2016;

henceforth, this rate will remain modest and sustained throughout the entire forecasting period up to 2017. The IMF

(2016) maintains that, the faster economic growth in India could be attributed to many factors, including large terms

of trade gains and positive policy actions.

Economic performance in Brazil contracted by 3.8 per cent in 2015, and the country is expected to record another

negative growth rate of 3.3 per cent in 2016. It is however projected to improve moderately to a positive growth path

of 0.5 per cent in 2017. However, as correctly pointed out by the IMF (2016) improving consumer and business

confidence appears to have bottomed out. This is further confirmed by the firmer gross domestic product (GDP),

which contracted in the first quarter of 2016, which was milder than anticipated and has bolstered growth prospects.

GDP growth in sub-Saharan Africa is expected continue to be sluggish in 2016, thereby reporting 1.4 per cent which

is relatively lower than 3.5 per cent of 2015. The prevailing slowdown is primarily forced by challenging

macroeconomic conditions in its largest economies, which are adjusting to lower commodity revenues. Although slow

growth is anticipated in 2016, small rebound in commodity prices and continuous policy implementation would

effectively enable growth to pick up to 2.9 per cent in 2017 (IMF, 2016 & table 2.1).

2.3 National economic review and outlook

Akin to most emerging market economies, output growth in South Africa (SA) continues to slow down. The South

African Reserve Bank (SARB)1 expects the national economy to record a 0.4 per cent growth rate in 2016, slightly

above zero percent projected in July. This is slightly higher than 0.1 percent expected by the IMF, but less than 0.8

per cent projected by the National Treasury. The key drivers of this lacklustre economic performance are lower

1 SARB, (2016): Statement of the Monetary Policy Committee, Issued by Lesetja Kganyago, Governor of the South African Reserve Bank, Available online, www.resbank.co.za, accessed on the 22 September 2016.

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export prices, elevated policy uncertainty, and tighter monetary and fiscal policy (IMF 2016c). However, growth is

expected to gain momentum and improve slightly to an average of 0.8 per cent in 2017 as the commodity and

drought shocks dissipate, and power supply improves.

Figure 2.1 shows that economic performance of the country has improved sluggishly, since the contraction of 1.3 per

cent in the second quarter of 2015. The moderate recovery in two consecutive quarters towards the end of 2015 was

inherently insufficient to generate employment opportunities required to reduce high levels of poverty in the country.

The economy of the country suffered another shocking contraction of 1.2 per cent in the first quarter of 2016, quarter

to quarter, seasonally adjusted and annualised (figure 2.1). As data from Stats SA (2016b) indicate, poor

performance of certain economic sectors had detrimental effects to the economy, this emanated from contraction

reported by different industries such as mining and quarrying, transport, storage and communications, and

agriculture, forest and fishing industries.

Figure 2.1: GDP growth rate: South Africa, 2013:Q3 to 2016:Q2

Source: www.tradingeconomics .com, 2016 and Stats SA, 2016

Encouragingly, most industries picked up in the second quarter of 2016 and thus contributed substantial positive

growth rates towards total GDP. Consequently, GDP in the second quarter of 2016 is estimated to have increased to

3.3 per cent. Among the contributory factors to this robust, but insufficient growth are different industries such as

manufacturing, which increased by 8.1 per cent. The mining and quarrying and finance also increased by 11.8 per

cent and 2.9 per cent respectively.

-2

-1

0

1

2

3

4

5

2013 q3 2013 q4 2014 q1 2014 q2 2014 q3 2014 q4 2015 q1 2015 q2 2015 q3 2015 q4 2016 q1 2016: q2

0.7

3.8

-0.6

0.6

2.1

4.1

1.3

-1.3

0.7 0.6

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3.3

%

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2.4 KwaZulu-Natal economic review and outlook

KZN is among the key economic players in the South African economy in terms of provincial contribution towards

GDP of the country. In 2015 the province was the second largest economy in the country with approximately

R487.9 billion real GDP-R, thus constituting 16.0 per cent of the national GDP. This was after Gauteng at 35.3 per

cent, but above Western Cape with 13.8 per cent (appendix 2.1).

Figure 2.2: KZN provincial GDP by district municipalities (percentages), 2015

Source: Global Insight, 2016

EThekwini Metropolitan Municipality contributes immensely on the economy of the province with a constitution of an

estimated 57.9 per cent to the provincial GDP and thus making the metro to be the main economic hub in KZN. This

is followed by uMgungundlovu and King Cetshwayo at 10.4 per cent and 7.7 per cent respectively. Despite the

massive contribution by the aforementioned district municipalities, there are certain districts which show incapability

with regards to GDP contribution, due to the lack of effective economic activities in their geographic areas. Among

those district municipalities are Umzinyathi, Harry Gwala and Umkhanyakude which recorded the least contributions

of 1.8 per cent, 2.1 per cent and 2.4 per cent in 2015 respectively (figure.2.3).

Similar to the global and national trends, the provincial economy contracted by 0.4 percent in the first quarter of 2016,

compared to a paucity of seasonally adjusted and annualised quarterly growth rate of 0.1 per cent recorded in the

fourth quarter of 2015. Akin to the national projections, the provincial economic outlook is in a subdued trajectory but

expected to grow at 0.6 per cent and 1.2 per cent in 2016 and 2017 respectively (figure 2.3). These growth rates are,

Ugu , 4.0uMgungundlovu , 10.4

Uthukela , 3.6

Umzinyathi , 1.8

Amajuba , 3.4

Zululand , 2.9

Umkhanyakude , 2.4

King Cetshwayo , 7.7

iLembe , 3.8

Harry Gwala , 2.1

Ethekwini, 57.9

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however, below the targeted 5 per cent required to achieve job creation as outlined in both the National Development

Plan (NDP) and the Provincial Growth and Development Plan (PGDP, 2014).

Figure 2.3: Economic growth rate in KZN, 2013:Q1 to 2017

Source: KZN Treasury Economic Model, 2016 and Global Insight, 2016

2.5 International trade

International trade has become a fundamental tool to fuel economic growth in most countries including SA. This was

firstly argued by classical economists Adam Smith and David Ricardo who explicitly advocated that a country could

benefit from specialising and exporting more of a commodity or service in which it possess comparative advantage

over its trading partners. Consequently, SA made significant progress towards improving international trade since the

adoption of trade liberalisation in 1995; this includes participating in different trade organizations such as the World

Trade Organisation (WTO). The country has also diversified and reinforced relationship with other regions by

engaging in regional trade agreements and trade blocs such as the Southern African Customs Union (SACU) and

Southern African Development Community (SADC). These trade blocs facilitate more efficiently all forms of trade

especially flow of goods between partner countries. Furthermore, the country has developed strong partnership with

various nations such as China, USA and Germany which currently constitute key trading partners of the country

(WTO, 2015).

Despite the remarkable progress the country has made with regards to international trade, it however remains with a

huge challenge of reducing the current account deficit. This requires extreme production of exportable goods and

competitiveness of domestic exports so as to ensure that exports exceed imports and thus shrink the deficit.

However, due to the exchange rate volatility which is the key factor that determines trade patterns in international

markets, it might be difficult to achieve a low current account deficit as it has been the case for SA and KZN in the

past few years. It therefore becomes imperative that policy makers continue to establish and reinforce sound

0.7

4.7

0.8

4.5

1.3

1.0

2.1

3.7

2.5

-2.4

0.7

0.1

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0.6

1.2

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0

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5

6

2013: Q1 2013: Q2 2013: Q3 2013: Q4 2014: Q1 2014: Q2 2014: Q3 2014: Q4 2015: Q1 2015: Q2 2015: Q3 2015: Q4 2016: Q1 2016 2017

Outlook

9

corrective measures aimed at enhancing international trade in an economy. This should encompass measures

directed at promoting export incentive schemes so as to narrow the current account deficit.

This section therefore provides a rigorous analysis of international trade with reference to exports, imports,

percentage share of South African exports by provinces as well as exports as a percentage of GDP-R. International

trade is among factors that make KZN a key contributor to SA’s economy. This is by no surprise given that the

province is home to the busiest and largest port of Durban and Richard’s bay. This section thus predominantly

concentrates on KZN which is the second largest contributor to the economy of the country; it further reports on

national issues related to international trade.

2.5.1 Current account of the balance of payments

Table 2.2 provides the balance of payments on current account in 2015 and the first and second quarters of 2016. It

can be observed from the table that the South African current account recently improved from a deficit reported in

2015 which averaged at R34 billion to a surplus of R33 billion in the second quarter of 2016. The South African

Reserve Bank (SARB, 2016) states that among the contributory factors to this substantial improvement in the current

account was the lagged effect of the depreciation of the South African rand, the increase in global demand for

domestically produced goods and weak growth in domestic demand which led to a decline in merchandise import

volumes. The dollar price of a basket of South African produced non-gold commodities increased by 7 per cent in the

second quarter of 2016. The improvement in the trade balance coupled with the marginally smaller deficit on the

services, income and current transfer account significantly narrowed the deficit on the current account as a

percentage of GDP to -3.1 per cent in the second quarter of 2016 from -5.3 per cent realised in the first quarter of the

same year.

Table 2.2: Balance on current account (R billion, seasonally adjusted and annualised) in 2016

Source: SARB Quarterly Bulletin, September 2016

1st Qtr 2nd Qtr 3rd Qtr 4th Qtr 1st Qtr 2nd Qtr

Merchandise Exports 940 984 984 988 974 1005 1097

Net Gold exports 63 71 65 72 68 52 55

Merchandise imports -1070 -1050 -1082 -1101 -1076 -1105 -1118

Trade balance -68 5 -34 -41 -34 -48 33

Net service, income and current

transfer payments-134 -128 -148 -150 -140 -174 -168

Balance on current account -202 -123 -182 -191 -174 -221 -134

As a percentage of GDP -5.1 -3.1 -4.5 -4.6 -4.3 -5.3 -3.1

2015Year

2016

10

2.5.2 International commodity prices

Figure 2.4 shows international commodity prices from 2010 to August 2016 for gold, iron ore, platinum and coal. All

these commodities have declined notably since 2011. The drop in the commodity prices continued in 2015, owing to

reduced demand from China and a global oversupply of many commodities. The pace of job-shedding in the mining

sector accelerated in the third quarter of 2015, particularly in the non-gold mining sector which was affected by

retrenchments in the platinum-mining sector as well as the closure and downscaling of some coal and chrome mines.

Employment levels in the gold-mining sector decreased only marginally in the third quarter of 2015, having remained

unchanged in the previous quarter.

However, after nearly six years of decline in commodity prices, they have recently rebounded somewhat albeit from

low levels. This provided some relief to commodity-exporting countries including SA, alongside the widespread

depreciation of currencies which helped to buffer the impact of subdued international demand for commodities.

Nevertheless, commodity-exporting economies like Nigeria and Angola continue to face headwinds, which impacted

on economic growth and external and fiscal balances. Commodity price instability has a negative impact on

economic growth, countries' financial resources, and income distribution, and may lead to increased poverty (IMF,

2016).

Figure 2.4: Real percentage change in selected commodity prices from 2010 to 2016 (US dollar indices: 2010 = 100)

Source: World Bank, 2016 and Author’s own calculations

-50

-40

-30

-20

-10

0

10

20

30

2010-2011 2011-2012 2012-2013 2013-2014 2014-2015 Jun-16 Jul-16 Aug-16

Gold ($/troy oz) Iron Ore ($/dmtu) Platinum ($/troy oz) Coal ($/mt)

11

2.5.3 KwaZulu-Natal exports

Table 2.3 shows the value of exports in SA by provinces for the year 2005 and 2015. Although exports in of KZN

have been trending behind that of the Gauteng province (GP), it has increased more than doubled to an estimated

R122.8 billion recorded in 2015 from an estimated R46.6 billion in 2005. This is a contribution of 18.9 per cent as a

proportion of GDP as compared to 47.7 per cent recorded by the GP in 2015. This constitutes 11.8 per cent of South

African exports which is second after Gauteng (64.3 per cent). It has to be noted that given the comparative

advantage of the province of KZN with regard to having the largest and busiest ports as indicated above, the

province has a potential of increasing its exports even further2.

Table 2.3: South African exports by provinces in 2005 and 2015

Source: Global Insight, 2016

2.5.4 KwaZulu-Natal imports

Table 2.4 depicts the value of imports and percentage share of South African imports by provinces in 2005 and 2015.

KZN imported an estimated value of R125.8 billion worth of goods in 2015 which grew by 159.2 per cent from imports

realised in 2005 (R48.5 billion). As expected the GP was the largest importer with an estimated value of R680.9

billion in 2015 which was 63.3 per cent of South African imports. In contrast the province of KZN (11.7 per cent of

South African imports) had the third largest imports after Gauteng and the WC (18.3 per cent of South African

imports). The least contributor of all provinces was Limpopo with a mere 0.1 per cent of South African imports.

2 It must be noted that some of the commodities are produced from other provinces yet exported in KZN via the ports of Durban and Richards Bay

Exports (R1000)

% Share of

South African

exports

Exports as % of

GDP Exports (R1000)

% Share of

South African

exports

Exports as % of

GDP

South Africa 358 360 999 21.9 1 041 437 998 25.9

Western Cape 38 806 452 10.8 16.3 121 899 156 11.7 22.2

Eastern Cape 25 425 535 7.1 20.2 47 207 000 4.5 15.4

Northern Cape 8 633 758 2.4 25.6 12 065 041 1.2 14.6

Free State 4 250 210 1.2 5.0 9 619 768 0.9 4.9

KwaZulu-Natal 46 631 330 13.0 17.2 122 837 717 11.8 18.9

North-West 15 355 363 4.3 16.2 23 716 878 2.3 10.0

Gauteng 209 105 796 58.4 36.3 669 857 780 64.3 47.7

Mpumalanga 6 335 419 1.8 5.9 18 553 703 1.8 6.2

Limpopo 3 817 139 1.1 3.5 15 680 956 1.5 5.5

2005 2015

12

Table 2.4: Percentage share of South African imports by provinces in 2005 and 2015

Source: Global Insight, 2016

2.6 Inflation

Inflation is one of the critical indicators that affect the economic performance of a country. It adversely affects

consumers’ disposable income which in turn results in shrinking the purchasing power. This as a result, has

detrimental effects on a country’s economic performance in terms of GDP. The consumer price index (CPI) is used

as a proxy for measuring the level of inflation in a country. Therefore the Monetary Policy Committee (MPC) of the

SARB carefully monitors the inflation trends both globally and nationally and then applies appropriate monetary policy

interventions with regard to the repurchase rate to cushion the rate of inflation.

Figure 2.5: Inflation rate (percentages) in SA by provinces, September 2016

Source: Stats SA, September 2016

The SARB (2016b) expects inflation to only return to a targeted range in 2017 following its continuous movement

above the upper limit since early this year. The Bank has projected inflation to peak at 6.7 per cent in the final quarter

Imports (R000)% Share of South African

imports Imports (R000)

% Share of South African

imports

South Africa 360 361 997 1 075 891 997

Western Cape 70 090 458 19.45 196 850 027 18.30

Eastern Cape 26 749 560 7.42 54 068 186 5.03

Northern Cape 1 442 204 0.40 1 354 682 0.13

Free State 2 030 429 0.56 4 324 601 0.40

KwaZulu-Natal 48 510 334 13.46 125 757 938 11.69

North-West 1 669 063 0.46 5 652 685 0.53

Gauteng 206 897 002 57.41 680 903 034 63.29

Mpumalanga 1 946 969 0.54 5 944 179 0.55

Limpopo 1 025 979 0.28 1 036 666 0.10

2005 2015

0

1

2

3

4

5

6

7

8

9

WC EC NC FS KZN NW GP MP LP

5.9

7.5

5.1

7.26.8

6.2 6.16.5

8.3

13

of 2016. Therefore, it is anticipated that inflation would average at 6.4 per cent this year, before improving to within

the target range at 5.8 per cent in 2017. The downward revisions, according the SARB (2016b) are due in part to

lower administered price inflation and less depreciated exchange rate assumptions.

Although the national headline inflation rate had reverted back to the target limit of 3 to 6 per cent in August, but it

was short-lived as it has again breached the upper band in September 2016. According to Stats SA (2016a),

headline inflation rate in the country has disturbingly accelerated to 6.1 per cent in September up from 5.9 per cent in

August 2016.

Similar to national headline inflation, all provinces except for the Northern Cape (NC) (5.1 per cent) and the WC (5.9)

have their rates beyond the target upper band. The province of KZN, at 6.8 per cent was among the provinces that

recorded the highest inflation rate, such as Limpopo, Eastern Cape (EC) and the Free State (FS) at 8.3 per cent, 7.6

per cent and 7.2 per cent respectively. The average inflation rate was recorded at 6.1 per cent, 6.2 per cent and 6.6

per cent in Gauteng, North West (NW) and Mpumalanga respectively (Stats SA (2016a).

Table 2.5: South African main indices of consumer price index (CPI) in all urban areas, September 2016

Source: Stats SA, September 2016

Table 2.5 shows the South African main indices of CPI in all urban areas in September 2016. It can be observed from

the table that food prices in September remained constant at 11.6 per cent that was recorded in August. According to

Stats SA (2016a), the main drivers of aggregate food prices were fruits, sugar, sweets and desserts, at 25.0 per cent

and 21.4 per cent respectively. Bread & cereals, and oils & fats also had a significant contribution at 16.6 per cent

and 15.5 per cent respectively.

As such food prices pose a considerable pressure on headline inflation; this is however no surprise given the severe

drought and weaker exchange rate rand. Drought has affected agricultural productions severely which necessitates

Weighting Monthly Yearly

Food 14.20 0.1 11.6

Non-alcoholic beverages 1.21 0.6 9.2

Alcoholic beverages 3.95 0.1 5.2

Tobacco 1.48 0 4.9

Clothing and footwear 4.07 0.6 5.3

Housing utilities 24.52 0.5 5.4

Household contents and services 4.79 0.4 4

health 1.46 0.0 5

Transport 16.43 -0.1 3.5

Communication 2.63 0.0 -0.2

Recreation and culture 4.09 0.1 6.9

Education 2.95 0.0 4.6

Restuarents and hotels 3.50 0.5 6.7

miscellaneous goods and services 14.72 0.2 7.2

14

importation of primary products and intermediate goods required to produce food. As indicated in in chapter two

(section 2.5 of this publication), imports are expensive following the weakness of the domestic currency against other

currencies. Therefore, accelerating food prices could be attributed to supply shocks which are not demand driven.

Food price recorded the highest level of inflation at 11.6 per cent in September 2016. This was followed by Non-

alcoholic beverages and miscellaneous goods and services at 9.2 per cent and 7.2 per cent respectively.

2.7 Travel and tourism

Tourism has become an important economic industry in most countries over the world. This emanates from its

enormous contribution towards the GDP, employment and investment in these countries. In this publication the focus

is on the contribution of this industry towards GDP under all categories such as direct, indirect and induced

contributions. Direct contribution includes accommodation, transportation, entertainment and attraction involved in

travel and tourism. This also involves service industries such as those that provide accommodation, food and

beverages, retail and trade, transportation and cultural sport and recreation. Sources of spending are also part of the

direct contribution and these include residents’ domestic travel and tourism spending, businesses’ domestic travel

spending, visitor sports and individual and government travel and tourism spending. Indirect contribution comes from

travel and tourism investment spending and the impact of the purchases from suppliers. Induced spending includes

food and beverages, recreation, clothing, housing and household goods. All of the expenditures contribute towards

the total GDP and employment3. The contribution of tourism to GDP is discussed at a global, national and provincial

(KZN) levels.

2.7.1 World travel and tourism contribution to GDP and employment

According to World Travel and Tourism Council (WTTC, 2015), travel and tourism (T&T) has contributed a sizeable

amount to the GDP and employment of the world. In 2015 this industry contributed $7.2 trillion towards the global

GDP (9.8 per cent). The growth in this industry in 2015 was at 3.1 per cent, and projected to increase at 3.3 per cent

in 2016, 4 per cent increase in a decade to 2026. There is a positive correlation between growth in tourism and

employment. The industry has secured 284 million jobs in the world, which means that one out of eleven jobs is

created by T&T industry. In 2015 alone 2.5 million direct jobs were created, and that takes the number of direct jobs 3 The direct contribution of Travel & Tourism to GDP reflects the ‘internal’ spending on Travel &Tourism (total spending within a particular country on Travel & Tourism by residents and non-residents for business and leisure purposes) as visitors, such as cultural 9e.g. museums) or recreational (e.g. national parks). The direct contribution of Travel & Tourism to GDP is calculated to be consistent with the output, as expressed in National Accounting, of tourism-characteristic sectors such as hotels, airlines, airports, travel agents and leisure and recreation services that deal directly with tourists, the direct contribution of Travel & tourism to GDP is calculated from total internal spending by ‘netting out’ the purchases made by the different tourism industries, this measure is consistent with the definition of Tourism GDP, specified in the 3008 Tourism Satellite Account: Recommended Methodological Frameworks (TSA: RMF 2000)

15

to 108 million. In total, 7.2 million jobs were created in 2015 including direct, indirect and induced jobs. This led to a

growth of 2.6 per cent in employment in the year under review, while growth in the GDP was 3.1 per cent as

indicated above.

Although growth in tourism is experienced in most countries of the world, it however plunged in other countries due to

negative events such as terrorism. It is interesting that among the top 5 countries that experience high growth in the

industry, sub Saharan- Africa are among them and make up the fifth in the world at 3.3 per cent. The strongest

growth is in South East Asia at 7.9 per cent, followed by South Asia at 7.4 per cent.

2.7.2 South African travel and tourism

It is encouraging that SA, as part of the Group of 20 countries (G20), is among the predicted fastest growing

countries in tourism in a decade time (2026). Amongst the G20 countries that are seen to be the fastest growing in a

decade are China, Mexico, India and Indonesia. Although United States of America (USA) is seen as higher than

China in tourism growth World Travel and Tourism (WTT, 2016) predicts that in a decade, China will overtake USA

and become among the top four markets together within the USA, Germany and the UK.

South African tourism contribution to GDP

T&T has been a positive consistent contributor to SA’s GDP for the past five years. The direct contribution of T&T in

2015 has been R118.6 billion (3.0 per cent) of GDP and it is projected to rise by 3.9 per cent in 2016. The latter

figures only show direct contribution in the tourism industry. The total contribution to GDP has more than doubled of

the above at R375.5 billion (9.4 per cent) in 2015 and is expected to rise by 3.0 per cent in 2016 and escalate to 3.7

per cent per annum to R555.1 billion (10.6 per cent) in 2026 (table 2.6).

One of the major challenges facing SA is high unemployment rate. According to the latest unemployment figures,

during the second quarter of 2016 the official unemployment rate was at 26.7 per cent. This is higher compared to

most of the developed countries and therefore requires diversifying employment creation to other sectors including

T&T. According to WTT SA, tourism industry generated 703 000 jobs in 2015 (4.5 per cent of total employment) and

it is expected that in 2016 this number will reach 729 400 (4.5 per cent of total employment). The above-mentioned

jobs include employment by hotels, travel agents, airlines and other passenger transportation services, activities of

the restaurants and leisure industries that are supported by tourists.

It is estimated that by 2026 the industry will account for 1 million jobs which is an increase of 3.2 per cent per annum.

The above figures are generated through direct employment only, but if indirect and induced are included the total

16

employment generated in 2015 was approximately 1.5 million and is expected to be 1.6 million in 2016 (9.8 per cent

of total employment). Table 2.6 shows the contribution of travel and tourism towards both GDP and employment.

Table 2.6: Contribution of travel and tourism towards GDP and employment from 2010 to 2016 and 2026 forecast

Source: WTTSA, 2016

2.7.3 KwaZulu-Natal travel and tourism

KZN as a province hosts some of the most popular tourists’ attractions in SA. The spectacular Drakensberg

Mountains provide not only fantastic scenery, but also tourists can enjoy hiking, water rafting, a number of hotels and

bed and breakfasts (B&Bs), and many more activities. The golden beaches of the Indian Ocean with its warm

current, runs from the south to the north coast and has a number of areas with shark nets, making water sports safe.

Tourists can partake of number of water sports including surfing, body boarding and swimming.

Ushaka Marine World is a venue where tourists can enjoy Zulu culture, water world, an aquarium, restaurants and

shopping. The northern part of the province is home to both private and public game reserves such as the luxurious

Phinda Private Game Reserve and the KZN Wildlife Hluhluwe Game Reserve, where tourists can spot the Big Five

(leopard, lion, elephant, buffalo and rhino). The area also hosts the world heritage site of iSimangaliso wetlands

which has been declared by the United Nations Educational, Scientific and Cultural Organisation (UNESCO) as being

one of the Worlds Heritage sites.

The Oribi Gorge, in the south of the province is a must see, with spectacular views, scenery, and a number of

sporting activities, such as rock climbing, abseiling and “the wild swing”. The province is embraced with important

101.8 103.5 111.4 113.6 118.6 118.6 123.3 178.3

2.9% 1.7% 7.6% 2.0% 4.5% 0.0% 3.9% 3.8%

319.6 319.9 346.3 360.9 372.6 375.5 386.8 555.1

-1.2% 0.1% 8.2% 4.2% 3.2% 0.8% 3.0% 3.7%

575.6 625.2 660.7 654.3 686.7 702.8 729.6 1001.1

1.5% 8.6% 5.7% -1.0% 4.9% 2.3% 3.8% 3.2%

1306.9 1335.7 1435.8 1449.4 1508.9 1554.2 1557.1 2260.4

-4.6% 2.2% 7.5% 0.9% 4.1% 3.0% 0.2% 3.8%

Direct contribution to Employment

South Africa 2010 2011 2012 2015 2016 2026F

Direct contribution to GDP

Total contribution

3013 2014

Total contribution to Employment

17

historic battles such as the Anglo-Boer War, the Battle of Isandlwana (between AmaZulu and the British), and the

Battle of Blood River. Tourists can visit the “Battlefields” in Dundee with guided tours.

KwaZulu-Natal tourism contribution to GDP

According to the South African Tourism (SAT) 2015, the provinces of KZN and Limpopo were considered as being in

the top market for domestic tourism and having the highest share of intra-provincial travel. Figure 2.6 shows the

annual trips to each province by domestic tourism for 2013, 2014 and 2015.

Figure 2.6: Annual trips to each province by domestic tourists, 2013 to 2015

Source: Annual Tourism Report, 2015

KZN is estimated to have had 5.3 million trips by domestic visitors in 2014 with the average spend per trip being

R979 which constitutes an average total spending value of R5.2 billion. The main source of these tourists is from

Gauteng and KZN (KZN Tourism, 2015). There is a decline in trips to the province of KZN in 2015 compared to 2014

but it remains one of the top three provinces domestically visited. The visitation to the province brings business to

KZN because these tourists do not spend only on accommodation and transport, but they also spend on shopping,

nightlife, social, visiting natural attractions, business, going to beaches, watching wildlife, going for adventures and so

on. These are some of the activities tourists undertake during their visit and engaged in direct spending. Table 2.7

shows the contribution of tourism toward GDP and employment.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

GP LP KZN EC WC NW MP FS NC

10.82.9

5.4

1.4

2.4

0.1

1.4

0.3

0.5

10

5.1

4.3

3.1

1.4

1.8

1.2

0.8

0.3

8.54.7

3.62.6

1.61.2

1.1 0.60.3

2013 2014 2015

Trip

s (

mill

ions

)

18

Table 2.7: Contribution of tourism towards GDP and employment

Source SAT, 2015

Tourism contribution in the province of KZN is of strategic importance especially because it boosts provincial

employment and GDP. In 2015, tourism’s direct contribution towards GDP is estimated at R17.6 billion and the total

contribution is estimated at R35.1 billion compared to national at R357 billion. The contribution is estimated at a

percentage of 3.4 and 9.4 respectively during the same year.

The sector also contributes significantly to employment in the province as well as the country. According to SAT

(2015) tourism contributed 1.498 million to the number of employed during 2015 nationally while 232 112 people

were employed in the industry in KZN during the same year. SA experienced the highest growth in tourism in 2015

(6.6 per cent) when compared with the growth on the continent (2 per cent) and the world (4.7 per cent). The

province of KZN did not perform well during the same year as it experienced negative growth of 0.5 per cent.

In conclusion, Travel and tourism contributes significantly towards employment creation and GDP of the world in

most of the developed and developing countries. The highest growth is noticed in developing countries where it

assists in reducing poverty. It is encouraging that SA has realised the importance of tourism and as a result, it has

policies such as the National Tourism Sector Strategy that talks to the tourism industry.

World Africa South Africa KZN

Direct Contribution to GDP US$2.4tr US$83bl R113.4bn R17.6bn

Total Contribution to GDP US$7.6tr US$197bn 357bn R35.1bn

GDP Contribution % 9.8 8.1 9.4 3

Number of Direct Employment 105ml 8.9ml 679 500 105 322

Total Employed 277ml 20ml 1.498ml 232 112

Growth % in Tourism 4.7 2 6.6 -0.5

Direct Spend US$1 245bn US$36bn R64.2bn R3.8bn

19

Chapter 3: Kwazulu-Natal Sector Analysis

3.1 Introduction

The structure of an economy is divided into three unique sectors namely: primary, secondary and tertiary sectors.

Inherently, economic performance should be driven mainly by the primary and the secondary sector for export and

job creation purposes. However, as demonstrated in this chapter, the economies of both the country and KwaZulu-

Natal (KZN) are to a large extent driven by the services or tertiary sector. This observation is also pertinent across

the provinces in South Africa (SA). In KZN, the tertiary sector contributes more than 62.1 per cent of the total

provincial GDP-R in real terms.

This chapter therefore provides a detailed analysis of the three sectors and their respective industries. The chapter

starts by focussing on both the agricultural and mining which are the main sectors within the primary economic

sector. This is followed by the manufacturing, construction and electricity industries in the secondary sector. The final

section of this chapter provides an in depth analysis of the tertiary sector thereby focusing on trade, transport, finance

and community services.

3.2 Overview and outlook of the provincial sector analysis

As indicated in section 2.4 of this publication, the total value of real GDP generated by KZN amounted to

R487.9 billion in 2015. Akin to the national and other provinces across the country, the economy of KZN is mainly

driven by the tertiary sector with 62.1 per cent. As shown in table 3.1, the tertiary sector has sustained slight increase

over the years from 1996 to 2015. This sector accelerated from the lowest 55.2 per cent in 1996 up to 62.1 per cent

Table 3.1: Sector contribution to the provincial real GDP (percentages), 1996 to 2018

Source: Global Insight, 2016

1996 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Primary sector 9.8 5.7 6.0 5.9 5.9 6.1 6.1 6.2 6.5 6.2 6.1 6.2 6.2

Agriculture 4.9 3.7 4.2 4.1 4.1 4.3 4.3 4.4 4.6 4.4 4.3 4.3 4.3

Mining 4.9 2.0 1.8 1.7 1.8 1.8 1.7 1.8 1.9 1.8 1.8 1.9 1.9

Secondary sector 25.2 25.3 25.0 23.6 23.9 23.6 23.5 23.3 23.0 22.8 22.7 22.7 22.7

Manufacturing 18.6 18.8 18.6 16.9 17.3 17.2 17.1 16.9 16.5 16.3 16.4 16.4 16.4

Electricity 3.3 2.8 2.5 2.5 2.4 2.4 2.3 2.3 2.2 2.1 2.1 2.1 2.0

Construction 3.4 3.6 3.9 4.3 4.2 4.1 4.1 4.2 4.3 4.3 4.3 4.3 4.3

Tertiary sector 55.2 59.9 60.1 61.7 61.1 61.3 61.5 61.6 61.7 62.1 62.3 62.2 62.2

Trade 11.8 14.0 13.7 13.9 14.1 14.2 14.4 14.2 14.1 14.1 14.0 13.8 13.7

Transport 8.6 11.1 11.1 11.3 11.1 11.1 11.1 11.2 11.3 11.4 11.4 11.4 11.5

Finance 12.5 15.9 16.2 16.7 16.3 16.4 16.3 16.3 16.3 16.6 16.8 16.9 17.1

Community services 22.4 18.9 19.1 19.8 19.6 19.6 19.7 19.8 20.0 20.0 20.2 20.1 19.9

Estimates Projections

20

in 2015. On the contrary, contributions by both the primary and secondary sectors have plummeted over the same

period, with value added deteriorating from 9.8 per cent to 6.2 per cent and 25.2 per cent to 22.8 per cent

respectively. Both sectors are projected to contribute approximately the same contributions in 2016 to 2018 (table

3.1).

3.3 Primary sector

The primary sector comprises of agriculture and mining subsectors. These subsectors rely upon one another to

prosper, but they share similar needs for infrastructure, land, water and labour. Agriculture depends on mined

minerals such as phosphates to fertilise the soil. Conversely, mining needs agricultural products to feed the industry’s

workforce. As pointed out by Aragon and Rud (2012) the costs and benefits of the mining activity are usually

unevenly distributed. The benefits such as the creation of jobs and an increase in fiscal revenue often accrue to

urban dwellers and to the central government. In contrast, most of the costs are borne by local populations in the

form of displaced settlements, increased pollution and poorer health. In addition mining is associated with reduction

in agricultural output and productivity and consequently increases poverty. There is a significant risk that agriculture

will be the most badly impacted by Dutch disease4. Although there are compliance regulations with regard to actual

mining and restoration when its lifespan has come to an end, however, in various cases if not all, complete

restoration and making sure that the community in proximity are not are affected may be impossible.

3.3.1 Primary sector contribution to GDP

It has been indicated in the previous section that economic growth increased at 3.3 per cent in the second quarter of

2016 from a contraction of 1.2 per cent in the first quarter of the same year. Real production in the primary sector

increased in the second quarter of 2016, following the sustained contractions since the second quarter of 2015 as

reflected in figure 3.1 showing individual contribution to GDP of agriculture and mining subsectors. As correctly

pointed out by the South African Reserve Bank (SARB, 2016) the real value added by the mining subsector

rebounded as platinum production rose substantially alongside more modest increases in manganese ore, iron ore

and coal output. In contrast, agricultural production inched lower to record a sixth consecutive quarter of contraction

as the drought left its scars on most field crops. In livestock farming real value added was supported by drought-

induced culling. The primary sector is the lowest contributor to KZN’s GDP at 6.2 per cent in 2015 after the

secondary (22.8 per cent) and the tertiary (62.1 per cent) sectors. It is projected to maintain the same contribution in

2016, 2017 and 2018.

4 Dutch disease is the apparent causal relationship between the increase in the economic development of a specific sector for example natural resources and a decline in other sectors

21

Figure 3.1: Primary sector contribution to SA's GDP growth from 2014: Q1 to 2016: Q2 (constant 2010 prices, seasonally adjusted and annualised)

Source: Stats SA, 2016

3.3.2 Agriculture

Overview of the agricultural subsector

The dualistic nature of agriculture in SA and KZN implies that it encompasses the subsistence agricultural sector and

commercial farming which is still a challenge. Although government is intervening through its programmes in

unleashing agricultural potential in KZN as one of the goals in the Provincial Growth and Development Plan (PGDP)

but there is still more to be done. The province embarked on the communal estates programme which is an

improvement on the programme of crop massification and mechanisation.

The agriculture, forestry and fisheries sectors are important to SA’s socio-economic environment. In KZN agriculture

is based on a wide variety of crops; horticulture, forestry as well as animal husbandry. Field crops such as sugarcane

and maize are scattered from the southern border of KZN to its northern border. Maize is the most widely grown crop

in the country. Horticulture sub-tropical fruits mainly bananas are produced in Port Shepstone and Port Edward. The

Hluhluwe region of KZN produces pineapples.

The primary commercial forest area in South Africa (SA) is found in KZN with the two largest forest owners, Sappi

and Mondi. The forestry subsector is one of the strategic economic sectors in SA with a significant contribution

towards economic growth and job creation. The ILembe district municipality identified the essential oils and herbs

industry as a means of connecting poor rural hinterlands with the wealthy coastal strips of KZN. Dairy farming based

in Dundee has the largest Jersey stud in the country.

5 5.8

10.48.8

-11.3

-20.4

-11.8

-6.7 -6.5

-0.8

-22.4

-2.6

4.2

14.812.7

-7.8

-10.5

1.4

-18.1

11.8

-25

-20

-15

-10

-5

0

5

10

15

20

2014Q1 2014Q2 2014Q3 2014Q4 2015Q1 2015Q2 2015Q3 2015Q4 2016Q1 2016Q2

Agriculture, forestry & fishing Mining

22

The Highveld and Midlands areas of KZN are the main beef production areas. Sheep farming is concentrated in the

drier areas of the province along the Drakensberg, Vryheid and Southern KZN. The pig farming is mainly within the

Estcourt, Mooi River and Dalton areas. In SA there are two genetic breeds of chicken that lay eggs for the

commercial markets, Lohmann and Hyline. Both breeds are imported. Rainbow is the largest chicken producer and

marketer in SA (KZN Top business, 2014).

Given all the farming subsectors, water shortage remains a challenge currently facing the agricultural subsector

which poses a threat to food security. This is a result of climate change causing drought and leaving dams way below

full capacity. It is essential to react quickly to such disasters by providing short, medium to long term solutions. This

can be done by providing water tankers, immediately responding to leaking pipes, making sure that rivers are not

contaminated, encouraging individuals and companies to save water, building boreholes, provide massive rollout of

rain harvesting initiatives as a source of water and in the long term consider water desalination.

Agricultural households in KZN

According to Stats SA Community Survey (2016) the combined agricultural households of KZN, EC and LP comprise

of approximately 60.9 per cent in 2016 which is slightly below 61.9 per cent recorded in 2011. All the provinces

recorded a decline in the number of agricultural households between 2011 and 2016. KZN had the highest

percentage decline at 25.2 per cent followed by the Free State (21.7 per cent), North West (21.6 per cent) and the

Western Cape at 18.2 per cent. In absolute numbers KZN, EC and LP had the highest number of decline in

agricultural households in SA. KZN contributed a significant decline of 6.3 per cent followed by the EC at 3.5 per cent

and the LP at 2.8 per cent (table 3.2). The decline in agricultural households emanates from among other factors

urbanisation, a reduction in subsistence farming as well as commercial farmers being too reliant on the fresh produce

market.

Table 3.2: Number of agricultural households by provinces in 2011 and 2016

Source: Stats SA, 2016

2011% share of SA

households 2016

% share of SA

households % Change Difference % Contribution

South Africa 2879633 100 2329043 100 -19.1 -550590 -19.1

Western Cape 84574 2.9 69152 3.0 -18.2 -15422 -0.5

Eastern Cape 596573 20.7 495042 21.3 -17 -101531 -3.5

Northern Cape 55150 1.9 48798 2.1 -11.5 -6352 -0.2

Free State 201286 7.0 157510 6.8 -21.7 -43776 -1.5

KwaZulu Natal 717006 24.9 536225 23.0 -25.2 -180781 -6.3

North West 214049 7.4 167780 7.2 -21.6 -46269 -1.6

Gauteng 279110 9.7 242594 10.4 -13.1 -36516 -1.3

Mpumalanga 263391 9.1 225282 9.7 -14.5 -38109 -1.3

Limpopo 468494 16.3 386660 16.6 -17.5 -81834 -2.8

Agricultural households

23

It is therefore not surprising that the percentage annual growth rate of the agricultural sector was 37.8 per cent in

2011, thereafter diminished significantly to 7.2 per cent in 2012. Nevertheless an increase in 2013 and 2014 was

realised at 14.2 per cent and 20 per cent respectively. It has however realised major contraction of 14 per cent in

2015 due to the effect of drought which has engulfed the province and the country.

Table 3.3: Average annual growth rate of the primary sector in KZN from 2011 to 2018

Source: Global Insight, 2016

Dam levels in KZN

Table 3.4 shows the dam levels and storage capacity in 2015 and selected months of 2016. The dam levels in SA

and KZN are disturbingly low even with water restrictions in place across most of the country. KZN had a percentage

dam level of 61.3 per cent in 2015 with storage capacity of 2 862 in million cubic meters. This has been declining

enormously since the beginning of 2016 from 52.7 per cent (storage capacity of 2 459 million cubic metres) in

January 2016 to 42.8 per cent in September 2016 with less than half storage capacity. The dwindling water supply

has a serious effect for consumption purposes as well as crop and animal production.

The good rain experienced in July 2016 did not have significant impact on the dam level as it was absorbed into

parched ground and consequently with no or little run-off into the dam through the river feeder system. This is a clear

indication that the province is in a severe drought crisis. Although building of dams can assist in the long run, if there

is inadequate rainfall the problem will still persist. Rain is a natural supply factor which the country and the province

cannot control but can influence the demand for water.

Estimates

2011 2012 2013 2014 2015 2016 2017 2018

PRIMARY SECTOR 43.7% 6.2% 46.4% 62.9% -5.8% 6.6% 14.9% 16.9%

AGRICULTURE SECTOR 37.8% 7.2% 14.2% 20.0% -14.0% -3.4% 3.6% 4.8%

Agriculture and hunting 11.0% 2.7% 5.3% 9.5% -4.6% -0.7% 1.1% 1.5%

Forestry and logging 6.6% 1.1% -0.7% 4.6% -5.6% -1.6% 1.2% 1.6%

Fishing, operation of fish farms 20.3% 3.4% 9.6% 5.8% -3.8% -1.1% 1.3% 1.7%

MINING SECTOR 5.9% -1.0% 32.2% 42.9% 8.3% 10.1% 11.4% 12.1%

Mining of coal and lignite -7.1% 3.1% -3.8% 2.3% 0.1% 1.4% 4.5% 6.5%

Mining of gold and uranium ore 3.3% -6.3% 13.2% 15.1% 3.9% 8.9% -2.4% -0.1%

Mining of metal ores 9.6% 2.0% 13.9% 16.1% -1.2% -0.7% 5.1% 1.8%

Other mining and quarrying 0.0% 0.1% 8.9% 9.3% 5.4% 0.4% 4.1% 3.8%

Actual Forecast

24

Table 3.4: Dam levels in KZN for 2015 and selected months as at 26 September 2016

Source: KZN Department of Agriculture & Rural Development, Department of Water and Sanitation, 2016

Agricultural production in KZN

Agricultural output depends to a large extent on climatic conditions which are exogenous as they are a natural

occurrence. The effect of drought on the agricultural output in the country and KZN is quite severe. This has been

reflected in the significant decline in crop production. Table 3.5 presents production data for the white and yellow

maize production and shows that two components have been declining from 2014 to 2016. It is estimated that SA will

produce 7.2 million tons of both white and yellow maize in 2016, which is almost half of the production realised in

2014. Although KZN is not a significant producer of maize in the country like the Free State (FS), Mpumalanga and

the North West (NW), it has also realised a decline in production from 559.1 thousand tons in 2014 to 477 thousand

tons in 2016. The decline in production will create spill-over effects on the output produced from intermediate goods

such as breakfast cereals, chicken feed and maize meal. Maize is one of the primary food items for most households,

especially African households, therefore a decrease in maize production which lead to higher prices for maize related

products will undoubtedly have a negative impact on the average households. Further, a decline in maize production

will force the country to import maize and maize related products to meet local demand. The importation of maize

products also has a negative effect on the current account balance.

Name of the Dam Name of the RiverFull Storage

Capacity in Mm3Jan-16 Apr-16 Aug-16

Week to

23/09/2016Year 2015

Albert Falls Mgeni 288.2 39.37 34.51 26.86 24.9 51

Craigie Burn Mnyamvubu 22.5 52.64 63.95 52.5 52.3 83.9

Driel Barrage Tugela 8.7 98.37 97.03 95 100.3 103.6

Goedertrouw Mhlatuze 301.3 30.07 22.04 18.7 17.3 37.3

Hazelmere Mdloti 17.7 32.65 44.07 53.7 63 29.3

Hluhluwe Hluhluwe 25.9 23.52 16.49 19.3 17.9 34.2

Inanda Mgeni 237.5 81.44 79.25 65.98 64.2 88.1

Klipfontein Wit Mfolozi 18.1 19.94 23.27 13.7 12.4 34.3

Mearns Mooi river 5.2 65.29 30.3 42.59 45.7 54.1

Midmar Mgeni 235.5 48.06 45.78 45.67 46.7 58

Nagle Mgeni 23.3 83.23 85.21 68.4 68.5 80.7

Ntshingwayo Ngagane 194.6 53.75 56.38 48 44.5 66.7

Pongolapoort Phongolo 2267.1 50.13 45.38 40.2 38.2 54.4

Spioenkop Tugela 270.7 55.59 69.4 56.7 51.8 68.4

Spring Grove Mooi river 139.3 74.61 84.86 56.07 48.2 95.3

Wagendrift Boesmans 55.9 70.32 100.18 97.2 100 94.3

Woodstock Tugela 373.3 64.01 88.54 74.4 67 85.5

Zaaihoek Slang 184.7 61.7 56.75 50.3 47.1 73.6

4669.5 2459 2458 2118 1999 2862

100 52.7 52.6 45.4 42.8 61.3

Total capacity in million cubic meters

Percentage

25

Table 3.5: White and yellow maize production by provinces, 2014 to 2016

Source: Department of Agriculture, Forestry and Fisheries, 2016

The shortage of agricultural produce as a result of drought poses a threat to food security and consequently leads to

food price inflation. The knock-on effect of crop failure can also be seen in the population migration from rural areas

into the cities as they do not harvest enough from subsistence farming. The rural communities tend to migrate to

cities and urban areas in search of jobs, unfortunately the cities are not growing fast enough, and this leads to the

movement of poverty from rural to urban areas.

The people who are highly affected are those residing in rural areas, specifically African women who engage in

subsistence farming for the survival of their households. Their farming is based on their knowledge transferred from

generations to generations, without using modern ways of farming. In most instances this category of subsistence

farmers lack skills, capacity, training, seeds and implements, and most importantly do not have the financial capacity

to mitigate the impact of drought. The other dimension of the decline in the agricultural sector manifests itself in that

emerging and commercial farmers lay-off workers due to the farms becoming unprofitable, leading to farm closures,

and increasing indebtedness in the agricultural sector.

Intervention in reviving the agricultural sector is essential for food security globally, nationally and in KZN. This can

be done by providing resources to enable people to use land to produce harvests for consumption and the market.

The resources that need to be made available include seeds, land, water tankers, boreholes as well as necessary

machinery which can assist during production and harvesting. People need to be capacitated with regard to proper

ways of planting crops and taking care of their livestock. In addition, people need to be taught business skills so that

they can run farming activities like a business to ensure that they are profitable. The idea behind this is to move them

from the infancy stage to a level whereby they can run their businesses independently and be sustainable to such an

White

(tons)

Yellow

(tons)Total (tons)

White

(tons)

Yellow

(tons)Total (tons)

White

(tons)

Yellow

(tons)Total (tons)

South Africa 7 710 000 6 540 000 14 250 000 4 735 000 5 220 000 9 955 000 3 097 225 4 063 700 7 160 925

Western Cape 4 500 28 500 33 000 4 050 34 200 38 250 5 000 40 000 45 000

Northern Cape 25 300 638 400 663 700 35 000 644 000 679 000 34 875 665 000 699 875

Free State 3 759 500 2 487 750 6 247 250 2 236 000 1 708 500 3 944 500 1 072 500 976 500 2 049 000

Eastern Cape 13 750 97 600 111 350 15 600 84 000 99 600 9 000 58 800 67 800

KwaZulu Natal 266 600 292 500 559 100 224 000 283 500 507 500 193 800 283 200 477 000

Mpumalanga 907 200 1 875 000 2 782 200 824 000 1 605 300 2 429 300 672 000 1 452 000 2 124 000

Limpopo 183 000 124 000 307 000 156 750 124 000 280 750 173 250 129 800 303 050

Gauteng 357 150 291 250 648 400 193 600 292 500 486 100 205 800 218 400 424 200

North West 2 193 000 705 000 2 898 000 1 046 000 444 000 1 490 000 731 000 240 000 971 000

2014 2015 2016

26

extent that they can be able to compete with commercial farmers in the long run. Although the changing climatic

conditions cannot be predetermined as it is exogenous, it is essential to be proactive in responding to unexpected

eventualities.

3.3.3 Mining industry

Overview of the mining industry

The mining industry includes the extracting and beneficiation of minerals occurring naturally, including solids, liquids

and crude petroleum and gases. It also includes underground and surface mining and quarrying, and the operation of

oil and gas wells and all supplemental activities for dressing and beneficiation for ores and other crude materials. The

NDP identifies mining and quarrying as an important sub-sector of the South African economy. It states that this sub-

sector should be supported by a stable regulatory environment, reliable rail transport, a dependable electricity supply,

and by research into new mining methods and additional uses for minerals (National Development Plan, 2012).

The province of KZN is not a major contributor to the mining industry. With reference to table 3.1 it can be seen that

the mining sector in KZN contributes less than 2 per cent to the provincial GDP. As expected, the contribution of this

sector is expected to remain below 2 per cent for 2016 and 2017.

KZN’s resources consist mainly of sand and most mining operations are in those commodities. Ilmenite, rutile and

zircon are mined on a large scale for their titanium and zirconium contents from Aeolian beach dunes in the northern

areas of KZN. Large ore reserves are held by Richards Bay Minerals (RBM), a leading producer of the heavy

minerals, which mines the 17 kilometres (KMs) stretch of land along 2 KMs strip of coastline north of Richards Bay

(the City of uMhlathuze). RBM meets about a quarter of the world’s demands for these products, generating billions

of rands in foreign currency. The region is rich in other minerals such as aluminium, anthracite and calcitic marbles

(KZN Top Business, 2014).

In the northern interior district of Newcastle-Vryheid and in the Nongoma area, the coal consists mainly of anthracite.

Much of the anthracite is railed to the coal terminal at Richards Bay, from where it is exported. Richards Bay Coal

Terminal is the world’s largest coal exporting terminal. The water challenge is not an isolated problem facing the

agriculture sector solely the mining subsector is also affected. It is therefore of utmost importance for this sector like

any others to efficiently and responsibly use water. Water conservation and water demand management should be

one of the priorities for this sector whilst not compromising production as this is one of the important sectors in the

South African economy. For example, the mining and quarrying subsector contributed -0.5 of a percentage points on

the recent contraction in real GDP by 1.3 per cent in the second quarter of 2015 (Stats SA, 2015).

27

3.4 Secondary sector

The secondary sector comprises of manufacturing, construction and electricity. The manufacturing industry remains

the largest contributor to the sector in terms of employment and GDP both at national and provincial level, followed

by the construction and electricity industries. As observed in table 3.1, the contribution by this sector to the economy

of the province had been steadily deteriorating over the period 1996 to 2015, especially manufacturing and electricity

industries. The construction subsector has been maintaining approximately the same percentage contribution over

the years. This section therefore discusses the contribution by the secondary sector to the economy of KZN.

3.4.1 Overview of manufacturing

SA is endowed with a well-developed and established manufacturing sector which has shown solidity and potential to

compete lucratively in the international arena. This sector is also a stimulant for growth in activities of other sectors

such as services. It plays a pivotal role in employment creation and national economic empowerment. Numerous

prospects lie in this sector, which present opportunities to immensely accelerate the country’s growth and

development as enshrined in the 2030 NDP.

Figure 3.2: KZN’s industries share of manufacturing contribution (percentages), 2015

Source: Global Insight, 2016

Section 3.2 of this publication reveals that the secondary sector contributed 22.8 per cent towards provincial GDP in

real terms in 2015. This is however projected to drop slightly and remain constant at 2.7 per cent in both 2016 and

2017. Manufacturing was the third largest contributing industry in the economy of the province at 16.3 per cent in

0.0 5.0 10.0 15.0 20.0 25.0 30.0

Food, beverages and tobacco products

Textiles, clothing and leather goods

Wood and wood products

Fuel, petroleum, chemical and rubber products

Other non-metallic mineral products

Metal products, machinery and household appliances

Electrical machinery and apparatus

Electronic, sound/vision, medical & other appliances

Transport equipment

Furniture and other items NEC and recycling

25.3

6.3

11.1

22.9

2.5

13.6

2.3

1.2

9.1

5.8

28

2015 and is projected to rise slightly to 16.4 per cent in 2016 (table 3.1). However, the stark decline in the sector’s

contribution to the economy of the province over the period 1996 to 2015, coupled with a move towards new

technologies and value-adding within the global manufacturing sector highlights the urgent need for the province to

stimulate growth within this labour-absorptive sector.

Figure 3.2 shows that the most significant industries in the manufacturing sector in 2015 were food, beverages and

tobacco products at 25.3per cent; this was closely followed by fuel, petroleum, chemical & rubber products at 22.9

per cent. The metal production, machinery & household appliances and wood &wood products also had significant

contribution at 13.6 per cent and 11.1 per cent respectively.

Automotive

The automotive sub industry5 is one of the key sectors in the economy of the country in terms of generating foreign

investment. According to the report compiled by the Automotive Industry Export Council (AIEC, 2015), this sector

contributed 7.5 per cent to the country’s GDP in 2015. As such, it could be counted among the largest contributors to

manufacturing output. The industry provides a platform for forming business relationships with many of the major

multinationals car assembly and manufacturers such as BMW, Toyota, Ford and Volkswagen.

These multinationals corporations make use of SA as an investment destination, which is strategically positioned to

allow them access to other markets in the sub-Saharan African (SSA) region. In addition, compared to the advanced

economies, SA has a competitive advantage in terms of sound macroeconomic policies, which have effects on the

current pervasive lower interest rates, which reduces the cost of operating in the country.

The National Association of Automotive Manufacturers of South Africa (NAAMSA6) highlighted that employment in

the automotive industry plummeted moderately by 0.5 per cent in the first quarter of 2016. Furthermore, NAAMSA’s

sales report indicates that total vehicle sales declined by 10.6 per cent in June this year compared to June 2015. The

industry recorded an aggregate of 44 939 vehicle sales for June 2016, as opposed to 50 250 vehicles sold in June

last year, a decline of 11.9 per cent.

5 The automotive sub industry is made up of passenger cars & light trucks; medium & heavy duty trucks; trailers; car parts and

accessories. 6 See the industry’s quarterly review of business quarterly report, by NAAMSA, available online from http://www.naamsa.co. za/papers/20161stquarter/NAAMSA%20QUARTERLY%20REVIEW%20%20-%20%201ST% 20QUARTER%202016.pdf, accessed on 19 July 2016.

29

Figure 3.3: Gross value added by automotive industry to the KZN economy, 2004 to 2015

Source: Global Insight, 2016

Figure 3.3 presents the value added by the automotive industry towards the provincial real GDP for the period 2004

to 2015. As clearly depicted in the figure, the value added by the industry maintained an upward trend from 2004 to

2008. The industry realised a short-lived decline between 2008 and 2009 as a result of the recession, and thereafter

it steadily improved from R6.3 billion in 2009 to R7.6 billion in 2015.

Figure 3.4: Average annual growth rate in the KZN’s automotive industry, 2004 to 2015

Source: Global Insight, 2016

Figure 3.4 shows the growth rate in the automotive sub-industry over the period 2004 to 2015. It can be observed

from the figure that 2009 global financial crises significantly affected the sub-industry as it contracted by 12.1 per

cent. This however, emphasise that performance of this industry is vulnerable to global economic cycles. Despite this

contraction, stemming from international factors such as weak demand by trade partners, the industry managed to

0

1000000

2000000

3000000

4000000

5000000

6000000

7000000

8000000

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

5 33

2 82

1

6 12

2 50

9

6 66

6 18

7

7 08

0 04

2

7 16

5 64

8

6 29

6 72

0

6 75

2 97

9

7 14

6 12

0

7 30

6 26

1

7 19

8 28

8

7 26

2 62

7

7 57

4 93

17.0%

14.8%

8.9%

6.2%

1.2%

-12.1%

7.2%5.8%

2.2%

-1.5%

0.9%

4.3%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

30

reflect substantial growth in consecutive years such as 2005, in which it recorded a highest rate of 14.8 per cent. The

upturn from the recession of 2009 was a turning point for this sector as it significantly improved by 7.2 per cent in

2010 and thereafter increased at a diminishing rate until 2012. In 2015 this sector grew by 4.3 per cent which is an

improvement from a contraction of 1.5 per cent realised in 2013.

Metals

The metals sub-industry is one of the well-developed industries in SA, as such, it represents close to a third of the

country's manufacturing. Inherently, it is endowed with natural resources and a supportive infrastructure. The industry

comprises of basic iron ore & steel, basic non-ferrous metals and metal products7. The core functions of this industry

include the shaping of metals and the performance of metal finalising operations. Firms which operate within this

industry deal with plating and coating using ferrous and nonferrous metal products (KZN Provincial Treasury, 2015).

The provincial treasury further maintains that in SA, the industry is active in the production of metal slabs, railway

track bars, wire and plates using mostly aluminium. On the other hand, the iron and steel basic industries involve the

manufacture of primary iron and steel products from smelting to semi-finished stages. Hence, metals contribute to

different products produced by various industries such as mining, construction and automotive as they utilize them as

inputs and thus add value to their products.

The primary steel products and semi-finished products include billets, blooms, slabs, forgings, reinforcing bars,

railway track material, wire rod, seamless tubes and plates. Among others, Iscor is South Africa's largest steel

producer. There are however many sub-industry players which include Scaw Metals, Cape Gate, Columbus Stainless

Steel, Highveld Steel and Vanadium and Cisco. The key metals industry firms in KZN include Safal Steel in Cato

Manor which supplies metal coated steel coils; and Newcastle Works, a plant by Arcelor Mittal which employs

approximately 1850 employees and produces about 1.6 million tons of finished metal products. Others include

McDonald Holdings, BHP Billiton, Hulamin and Assmang (KZN Provincial Treasury, 2015).

As demonstrated in figure 3.5, prior to the 2009 global recession, the metals industry enjoyed a sustainable robust

growth rate. It subsequently elevated by 7.1 per cent and 7.6 per cent in 2006 and 2007 respectively. This was

followed by a sharp and severe contraction that was observed in 2009, which to a large extent was due to the

magnitude of the global recession. Despite the contraction in 2009, it recovered fairly in consecutive years post

global financial crises, however, it contracted again in 2014 and 2015 by 2.0 per cent and 3.7 per cent respectively.

7 See the manufacturing in South Africa, available online: http://www.southafrica.info, accessed on 20 July 2016.

31

Figure 3.5: Average annual growth rate in the KZN’s metal industry, 2004 to 2015

Source: Global Insight, 2016

3.4.2 Construction

Despite infrastructure developments taking place across the country which include building of schools, hospitals,

bridges and roads, the construction industry remains one of the least contributing industries to the economy and

employment creation in SA, and KZN in particular. As observed in table 3.1 (section 3.2 above), construction shows a

stable contribution below 4.5 per cent by this industry to provincial GDP. Stats SA (2016) indicates that this industry

contributed zero per cent to national quarterly GDP in the second quarter of 2016. In terms of average annual growth,

the industry has been increasing at a decreasing rate since 2008, thereby not being able to properly recover to the

growth levels achieved in the build-up to the 2010 Federation of International Football Association (FIFA) World Cup.

It can be observed from the figure that provincial construction industry only reported a robust growth of 15.1 per cent

in 2007 and decelerating aftermath up to the lowest 0.5 per cent in 2011. Although it has picked up moderately in

subsequent years, it remains greatly low compared to the growth rates achieved in the period prior to 2009 (figure

3.6).

Figure 3.6: Average annual growth rate in the KZN’s construction industry, 2004 to 2015

Source: Global Insight, 2016

5.1%4.0%

7.1% 7.6%

3.9%

-21.8%

4.3%

8.1%

0.1%

3.4%

-2.0%

-3.7%

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

9.4%

13.6%

7.6%

15.1%

10.1%9.5%

1.7%

0.5%

2.8%

5.3%

3.9%

1.3%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

32

3.4.3 Electricity

Figure 3.7 portrays the growth rates on the electricity sector in SA and KZN for the period spanning from 2005 to

2015. It can be realised from the figure that the industry’s performance has been moderately stagnant both nationally

and in KZN. However, in both national and provincial, the industry accelerated from negative growth rates of 0.7 per

cent and 3.2 per cent to a robust 49.1 per cent and 53.9 per cent in 2005 and 2009 respectively.

Figure 3.7: Electricity sector trends in SA and KZN, 2005 to 2015

Source: Global Insight, 2016

Notwithstanding the fact that most productive operations in various industries depend on electricity, this sluggish

performance by the electricity industry has affected the overall economic output, not only for the province but for the

country as a whole. Moreover, Stats SA (2016) asserts that this industry contracted by 1.8 per cent in the second

quarter of this year, thereby contributing zero per cent to national aggregate output (GDP). This shows lacklustre

performance of this industry which to large extent affects average contribution to GDP by the secondary sector.

3.5 Tertiary sector

The tertiary sector comprises of four sub-sectors which includes trade, transport, finance and community services.

Similar to other provinces across the country, the economy of KZN depends vastly on the tertiary sector; the labour

market is not an exception. This can be observed from table 3.1 of this publication which shows that the tertiary

sector had been the largest contributor to provincial GDP compared to the primary and secondary sectors over the

period from 1996 to 2015. Furthermore, figure 4.1 and table 3.7 of this publication also reveal that community

services, trade and finance subsectors contribute enormously towards provincial employment. However, in order to

address the challenges of the province and SA, the manufacturing sector should be adding more to the economy and

-0.7

4.12.5

21.0

49.1

30.429.7

22.2

9.77.7

4.1

-3.2

0.7 -0.3

15.2

53.9

27.6

50.8

22.4

8.2

4.5 5.2

-10.0

0.0

10.0

20.0

30.0

40.0

50.0

60.0

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

South Africa KwaZulu-Natal

33

employment. This section provides a comprehensive analysis of the tertiary sector which aims to reflect on the

contribution of the respective sub-sectors to employment and the economy in particular.

3.5.1 Tertiary subsectors

Table 3.6 demonstrates KZN’s subsector contribution to KZN tertiary sector for 2010 to 2015 period. Community

services has been the largest contributor towards the province’s tertiary sector as it contributed an average of 32 per

cent from 2010 to 2015.

Table 3.6: KZN tertiary subsectors’ contribution, 2010 to 2015

Source: Global Insight, 2016

This phenomenon is not sustainable as the role of government is to create an environment for other sectors to

contribute to the economy. The finance sector was the second largest contributor to the tertiary sector at an average

rate of 26 per cent over the period under consideration. It is followed by trade and transport subsectors at an average

of 22 per cent and 18 per cent respectively.

3.5.2 Tertiary sector contribution to employment

The country is faced with a triple challenge of higher unemployment; poverty as well as high income inequality.

According to the SARB (2016), the number of unemployed jobseekers has further increased from 2015 to the first

quarter of 2016, causing an increase in the official unemployment rate to 26.7 per cent, from 26.4 per cent recorded

in 2015. According to Stats SA (2016), the official unemployment rate in KZN was 22.6 per cent in the second quarter

2010 2011 2012 2013 2014 2015

Trade Sector 23.0 23.2 23.4 23.1 22.9 22.7

Wholesale and commission trade 7.0 7.0 7.1 7.1 7.0 7.1

Retail trade and repairs of goods 11.2 11.3 11.3 11.1 11.1 11.1

Sale and repairs of motor vehicles, sale of fuel 3.4 3.7 3.8 3.7 3.6 3.4

Hotels and restaurants 1.4 1.3 1.2 1.2 1.2 1.2

Transport Sector 18.2 18.1 18.0 18.1 18.3 18.3

Land and Water transport 12.4 12.3 12.2 12.3 12.4 12.4

Air transport and transport supporting activities 2.5 2.5 2.5 2.5 2.5 2.5

Post and telecommunication 3.3 3.3 3.3 3.3 3.4 3.4

Finance Sector 26.7 26.7 26.5 26.5 26.4 26.8

Finance and Insurance 11.6 12.0 12.0 12.2 12.1 12.4

Real estate activities 7.9 7.7 7.5 7.4 7.4 7.4

Other business activities 7.2 7.1 7.0 6.9 6.9 7.0

Community Services 32.1 32.0 32.1 32.2 32.4 32.2

Public administration and defence activities 6.2 6.0 5.9 5.9 6.0 5.8

Education 12.5 12.7 12.7 12.8 12.7 12.6

Health and social work 8.9 9.1 9.3 9.3 9.2 9.4

Other service activities 4.4 4.3 4.2 4.3 4.4 4.5

TERTIARY SECTOR 100.0 100.0 100.0 100.0 100.0 100.0

34

of 2016 which is slightly lower than 23.1 per cent recorded in the first quarter of the same year. The highest category

of the unemployed is made up of youth. This is disturbing given that the youth population (15 to 34) in KZN

comprises approximately 36.6 per cent of the provincial population as per Stats SA (2016). This poses a severe

challenge both to the economy, which seems unable to absorb the younger generation, and to policy makers who

then have to come up with effective strategies aimed at empowering youth and making them employable, and job

creators.

3.5.3 Trade sector

Trade subsector comprises of four components namely; wholesale and commission trade, retail trade, sale and

repairs of motor vehicles as well as hotels and restaurants. According to Stats SA (2016) the commercial sector

made a positive contribution towards GDP growth, adding 0.2 percentage points to overall growth in GDP in the

second quarter of 2016. This was bolstered by an increase in the wholesale trade. Retail trade is one of the largest

contributors towards trade subsector growth. Growth of this subsector is normally higher during the festive season

where people are visiting other provinces thus spending more.

Hotels and restaurants growth is highly dependent on tourism. Stats SA (2016) states that most people visit SA for

different reasons such as holidays, business as well as studying opportunities. It further attests that 97.2 per cent of

tourists from Africa came from the SADC countries. A massive 97.0 per cent of tourists from the SADC countries

were on holiday, business persons constituted 5.1 per cent of tourists from 'other' African countries. Students made

up 4.2 per cent of tourists from 'other' African countries compared with 0.7 per cent from the SADC countries.

Figure 3.8: KZN’s trade subsectors in 2014 and 2015

Source: Global Insight, 2016

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

Wholesale and commissiontrade

Retail trade and repairs ofgoods

Sale and repairs of motorvehicles, sale of fuel

Hotels and restaurants

29.7

49.2

15.9

5.3

30.2

49.6

14.9

5.2

2014 2 015

35

Figure 3.8 demonstrates the KZN trade subsectors contribution to gross value added (GVA) by region in 2014 and

2015. The retail trade and repairs of goods has been the highest contributor as compared to other sub-sectors for

both years. It is not surprising that this subsector contributes the highest given the mushrooming of malls in the

townships and households debts to disposable income which is currently at 75 per cent. In 2014 it contributed 49.2

per cent and slightly improved to 49.6 per cent in 2015. Hotels and restaurants were the least contributors at 5.3 per

cent and 5.2 per cent respectively.

Retail industry analysis

A massive growth has been shown over the years by retail industry especially in SA .This growth depends highly on

factors such as strong economic growth, low interest rates (availability of credit) and low inflation. Higher GDP gives

individuals possible financial stability through employment. However, evidence has shown that an increase in GDP

cannot always translate to job creation as has been experienced by SA in the past. It has been indicated in this

publication that inflation has surpassed the target band, hence affecting retail industry due to reduction in disposable

income. The increase in the cost of living emanating from food prices, fuel cost, higher electricity price as well as

strict credit regulations have affected the contribution by this sector.

Table 3.7 illustrates the retail trade sales by type of retailer. General dealers have recorded more sales than any

other type of retailer, where 24 441 sales were recorded in January 2016. Moreover, in May 25 633 was recorded

which shows a massive growth in this retailer type within five months. Textiles, clothing, footwear and leather goods

were the second largest contributor to retail sales with 13 650 in May 2016. The Household furniture, appliance and

equipment have been recording the lowest sales in the period under review. This is not surprising as most of the

furniture retail stores have closed down not only in KZN but country-wide.

Table 3.7 Retail trade sales at constant prices (R million), 2016

Source: Global Insight, 2016

Type of Retailer Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16

General dealers 24 441 24 915 26 060 22 740 25 633 25 345

Food,beverages and tobacco in specialised stores 4 814 4 547 4 857 4 955 4 760 4 908

Pharmaceuticals and medical goods, cosmetics and toiletries 4 422 4 129 4 343 4 678 4 378 4 378

Textiles, clothing, footwear and leather goods 12 316 11 585 11 132 13 237 13 650 11 730

Household furniture, appliances and equipment 3 002 2 942 2 937 2 985 2 899 2 857

Hardware, paint and glass 4 171 4 820 4 483 4 576 4 952 4 620

All other retailers 8 543 7 845 8 075 7 731 8 055 7 277

Total 60 709 60 783 61 887 60 902 64 327 61 115

36

Motor trade sales overview

The demand for vehicles is determined by number of factors which include among others higher economic growth,

consumer confidence, employment, interest rates, fuel prices, business fluctuations as well as availability of finance.

According to Stats SA (2016), new vehicle sales decreased by 7.7 per cent (41 115 to 37 963) for the three months

period (June to August 2015) compared to the same period in 2016. In contrast, data indicates that people are opting

for used cars as the sales increased by 9.4 per cent from 26 890 to 29 417 in the same period. The major

contributing factor to the increase in demand for used vehicles as opposed to new vehicles is low affordability for new

vehicles due to high cost of living as well significant increases in the prices of new vehicles.

3.5.4 Finance

The finance sector is disaggregated into three subsectors, namely finance & insurance, real estate activities and

other business activities. Finance and insurance comprises establishments primarily engaged in financial

transactions (transactions involving the creation, liquidation, or change in ownership of financial assets) and/or in

facilitating financial transactions. The real estate activities sub-sector consists of establishments engaged in property

owning and letting, real estate development, estate agency activities, rent collection, appraisals and valuations and

subletting of fixed property.

The financial services sector forms an integral part of the economic system. The sector’s main service offerings

include debt and equity financing which is linked to starting a business. It also involves banking, savings and

investment for future consumption and unforeseen circumstances. This sector therefore has the ability to catalyse

economic activity, thereby bolstering GDP. According to Liang (2006), the development of the financial sector can

play an important role in economic growth through increased productivity and lower transaction costs.

In the advent of the financial crisis in 2008/2009, the financial sector (with specific emphasis on the need for its

reform) has become the subject of much global debate. According to Hewett (2012), the financial crisis resulted in a

reduction in the levels of access to credit extended to individuals, to businesses and to government. Consequently,

economies experienced a depression in consumer spending which in turn stifled economic growth, suppressed

employment levels, and threatened government’s agenda of fostering sustainable development.

Although a distinct relationship has been drawn between finance sector development and economic growth,

questions arise on the effect of credit extension to households on reducing poverty and inequality in a developing

economy such as SA. Considering that SA is marred by low skill levels and resultant high unemployment of 26.6 per

37

cent8, questions need to be raised regarding the ability of SA debtors to make repayments, and the effect the latter

have on the disposable income.

The finance sector has remained stable in terms of its percentage contribution to GDP per province since 2006

(figure 3.19). Marginal variances were witnessed across all 9 provinces with increase occurring only in the GP, while

on the other hand KZN and the WC experiencing a fluctuating trend in subsequent years. The Gauteng province

maintains an upward territory in its percentage contribution to GDP during the period, it elevated from 40.0 per cent in

2006 to 43.3 per cent and 43.9 per cent in 2011 and 2015 respectively.

Figure 3.9: Finance sector contribution to GDP by provinces in 2006, 2011 and 2015

Source: Global Insight, 2016

Conversely, the percentage contribution to GDP by KZN dwindled slightly from 14.0 per cent in 2006 to 13 .4 per cent

in 2011, before picking up to 14.2 per cent in 2015. In the Western Cape percentage contribution to GDP deteriorated

constantly from 20.0 per cent to 18.2 per cent and 17.7 per cent respectively. As indicated in section 2.4 of this

publication, the provinces that have the highest GDP contribution in the country are GP, WC and KZN. These

provinces also have the highest finance sector contributions (figure 3.9).

The finance sector in KZN contributed R81.1bn in 2015; a whopping 75.2 percentage increase from the R47.4bn

generated in 2003. The sector grew consistently year-on-year between 2003 and 2015, hence producing positive

growth rates of 1.6 per cent and 1.2 per cent in the post recessionary years of 2009 and 2010 respectively. Despite

this display of resilience, this sector has not been able to regain its pre-crisis growth rates in the region of 7 per cent.

8 According to Stats SA’s Quarterly Labour Force Survey Q2 of 2016

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

140.0%

WC EC NC FS KZN NW GP MP LP

20.3%7.3%

1.4%

4.2%

14.0%

3.5% 40.0% 3.9% 5.2%

18.2%

7.0%

1.3% 3.8% 13.4%3.5%

43.4%

4.1%5.2%

17.7%

7.2%

1.0%

3.6% 14.2%3.8%

43.9%

3.9%4.6%

2006 2011 2015

38

Between 2014 and 2015, this sector grew by only 2.9 per cent compared to 2.2 per cent between 2013 and 2014

(figure 3.10).

Figure 3.10: KZN’s finance sector GVA at constant 2010 prices and growth rates, 2003 to 2015

Source: Global Insight, 2016

The finance sector has been the most resilient sector in the period under review, this follows substantial contribution

by respective subsectors such as finance and insurance which is the largest contributor, followed by real estate and

other business activities. The finance and insurance subsector has been stable throughout the period under review

as it improved its contribution from 41 per cent in 2006 to 46 per cent in 2015. It thus surpassed real estate activities

which are estimated to have reported 28 per cent in 2015 deteriorating from 32 per cent in 2006. It further outplayed

other business activities which has elevated slightly to 27 per cent in 2015 from 26 per cent in 2006. In the period

prior to 2006 such as 2002, the real estates were contributing substantially above finance and insurance. Therefore it

can be realised that finance and insurance has been improving in subsequent years until 2006 where it eventually

exceeded the real estates. This change can most likely be attributed to more insurance cover being sought by

consumers to mitigate the increased risk posed on them by climate change; which has increased incidences of

damage to property caused by hail storms, drought and fire (figure 3.11).

47 37

5 083

50 80

5 391

56 20

0 652

60 50

0 627

64 92

9 112

68 71

9 030

69 84

9 973

70 71

2 750

73 76

5 725

75 28

8 540

77 14

6 790

78 83

6 288

81 09

1 902

5.6%

7.2%

10.6%

7.7%7.3%

5.8%

1.6%1.2%

4.3%

2.1%

2.5%

2.2%

2.9%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

0

10000000

20000000

30000000

40000000

50000000

60000000

70000000

80000000

90000000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Finance Finance growth

39

Figure 3.11: Finance subsectors contributions, 2006 and 2015

Source: Global Insight, 2016

3.5.5 Community services

Development, which Todaro and Smith (2011) describe as being a process which improves quality of life, elevates

self-esteem and extends freedom to people, is a necessary condition for the economic and political stability of a

region. Development in the South African economy is driven by the community services sector, which oversees the

provision of services which are directed at human needs such as health and social work, education, administration

and defence amongst others.

According to the National Planning Commission (NPC) (2011), promoting health and wellness is critical to preventing

and managing lifestyle diseases, particularly the major non-communicable diseases among the poor, such as heart

disease, high blood cholesterol and diabetes. These diseases are likely to be a major threat over the next 20 to 30

years. One major goal of the national and provincial health departments is to reduce the disease burden to

manageable levels, and human capacity is a key input in attaining this objective. Managers, doctors, nurses and

community health workers therefore need to be appropriately trained and managed, produced in adequate numbers,

and deployed where they are most needed.

Human capital plays a pivotal role in achieving sustainable economic growth. As different growth theories suggest,

the role of human capital is a significant input to the growth process. The concept of human capital in economic

literature is defined broadly by including education, health, training, migration, and other investments that enhance an

individual's productivity. The level of influence between education and the economy can be measured by an

0

10

20

30

40

50

60

70

80

90

Finance and Insurance Real estate activities Other business activities

4132

27

46

28

26

2006 2015

40

examination of whether the income of the average people is increasing as a result of education attainment. According

to Berger and Fisher (2013) this can happen as a result of an increase in productivity, with a consequent increase in

payments to employees and a resultant increase in economic activity. It is every government’s motive to ensure an

equitable distribution of income for productivity and growth through the formulation and implementation of policies

that promote full employment.

Figure 3.12: Community services subsectors contributions in 2015

Source: Global Insight, 2016

Figure 3.12 indicates that contribution by education to KZN sector GVA amounts to 39 per cent in 2015. Moreover,

health and social work contributed 29 per cent towards the sector’s GVA in the same year. This is due to the high

staff complement which is needed to carry out the duties as well as functions that are involved directly impacting

human lives to effect positive change.

Public administration and defence activities

18%

Education39%

Health and social work29%

Other service activities14%

41

Chapter 4: Labour Dynamics in KZN

4.1 Introduction

According to the National Development Plan (NDP, 2012), for the South African economy to be able to create

sustainable jobs it will have to be more inclusive, more dynamic and should allow growth dividends to be shared

equally among the citizens. It is further stated that by 2030, the economy should be close to full employment, equip

people with the skills they need, ensure that ownership of production is more diverse and able to grow rapidly, in

addition to that provide the resources to pay for investment in human and physical capital.

Stats SA (2016b) maintains that employment gains were recorded between 2015 and 2016 where 86 000 jobs were

created in both formal sector and private households. However, unemployment rate has been on the rise. According

to Stats SA, this is due to the fact that there has been an increase in the number of new job seekers, mostly

graduates. This chapter therefore focuses on the labour market analysis in KZN. It starts by providing a brief review

of the employment trend in SA, which is followed by the employment by sectors in KZN. Further, this chapter

presents an analysis of the labour participation and labour absorption rates. The chapter concludes by presenting a

review of unemployment rate and labour productivity in KZN.

4.2 Employment

According to Stats SA (2016) total labour force consists of all economically active people of the working age

population irrespective of whether they are currently employed or not. The OECD (2016) points out that working age

population comprises of people aged between 15 and 65.

Table 4.1 provides a review of the South African labour force characteristics from quarter two of 2015 to the second

quarter of 2016. The number of people employed decreased substantially by 355 000 from 16 million recorded in the

final calendar quarter of 2015 to 15.7 million recorded in the first quarter of 2016. The total number of people

employed within the country declined by 129 000 from an estimated 15 7 million recorded in the first quarter of 2016

to approximately 15.5 million in the second quarter of the same year. Hence, the national rate of employment has

decelerated by 0.8 percent from the second quarter of 2015 to the second quarter of 2016.

Although significant attempts to address different forms of inequalities among the citizens has been continuously

initiated by the government, but a huge gap exists among races in terms of employment within the country (Stats SA,

42

2016). This is evident from statistical release of the Quarterly Labour Force Survey (QLFS) which reflects that Whites

and Indian or Asian population groups predominantly get employed in high skilled occupations relative to African and

Coloureds population groups.

This could however be attributed to shortage of tertiary qualifications to most of young people among the African and

Coloured population groups. Stats SA (2016) further highlights that White and Asian population groups comprise the

largest proportion of people employed who have tertiary qualifications. Conversely, half of employed African and

Coloureds have an educational level less than matric. The share of Whites and Asians employed in the second

quarter of this year who had tertiary qualifications was 47.5 per cent and 28.7 per cent respectively. In contrast

African and Coloured employed who have tertiary qualifications was 15.9 per cent and 14.1 per cent respectively.

Table 4.1: Characteristics of labour force in SA, 2015:Q2 to 2016:Q2

Source: Stats SA, 2016

Table 4.2 presents characteristics of the labour force in KZN from the second quarter of 2015 to quarter two of 2016.

The total labour force in the province has deteriorated markedly by 2.1 per cent from approximately 3.3 million in

quarter one of 2015 to 3.2 million the second quarter of 2016. Following the national trend, the total number of people

employed in the province plummeted by 1.4 percent over the same period. As the labour force comprises of both

employed and unemployed which decreased with substantial rates, it can be observed from the table that non-

economically active population has increased in the period under review. This reveals that the province will

experience a high dependency on government transfers.

South Africa

Population 15-64 yrs 35 955 36 114 36 272 36 431 36 591 160 636 0.4 1.8

Labour force 20 887 21 246 21 211 21 398 21 179 -219 292 -1.0 1.4

Employed 15 657 15 828 16 018 15 675 15 545 -129 -112 -0.8 -0.7

Unemployed 5 230 5 418 5 193 5 723 5 634 -90 403 -1.6 7.7

Not economically active 15 068 14 867 15 061 15 033 15 412 379 344 2.5 2.3

Rates (%)

Unemployment rate 25.0 25.5 24.5 26.7 26.6 -0.1 1.6

Employed/ population rate (Absorption) 43.5 43.8 44.2 43.0 42.5 -0.5 -1.0

Labour force participation rate 58.1 58.8 58.5 58.7 57.9 -0.8 -0.2

Qtr-to-qtr

change

year-on-year

changeApr-Jun 2015 Jul-Sep 2015 Oct-Dec 2015

PercentageThousand

Qtr-to-qtr

change

Year-on-Year

changeApr-Jun 2016Jan-Mar 2016

43

Table 4.2: Characteristics of labour force in KZN, 2015:Q2 to 2016:Q2

Source: Stats SA, 2016

4.2.1 Employment by sector

Stats SA (2016) reveals a decline of 67 000 (-0.7 per cent) in formal employment from 9.285 million in quarter one of

2016 to 9 218 000 in the second quarter of the same year. The total employment however, improved significantly in

June 2016 (9.218 million) compared to 9.188 million observed during the same period last year. According to Stats

SA (2016) the decline in total employment as recorded in the second quarter of this year was largely driven by poor

contribution posed by certain industries to total national employment such as community services at -1.8 per cent (-

48 000), manufacturing at -0.6 per cent (-7 000), transport at -1.5 per cent (-7 000). Conversely, the construction and

electricity was the only industries which reported positive figures at 1.0 per cent and zero per cent respectively. This

calls for a need for policy makers to establish measures to address problems which caused a decline in employment.

Figure 4.1: Employment by sector (percentages) in KZN, 2006, 2011 and 2015

Source: Global Insight (2016)

KZN

Population 15-64 yrs 6 690 6 715 6 739 6 764 6 789 25 99 0.4 1.5

Labour force 3 209 3 237 3 181 3 272 3 204 -67 -5.0 -2.1 -0.1

Employed 2 556 2 573 2 529 2 515 2 479 -36 -77 -1.4 -3.0

Unemployed 653 664 652 757 726 -31 72 -4.1 11.1

Not economically active 3 481 3 478 3 558 3 493 3 585 92 104 2.6 3.0

Rates (%)

Unemployment rate 20.4 20.5 20.5 23.1 22.6 -0.5 2.2

Employed/ population rate (Absorption) 38.2 38.3 37.5 37.2 36.5 -0.7 -1.7

Labour force participation rate 48.0 48.2 47.2 48.4 47.2 -1.2 -0.8

Thousand Percentage

Qtr-to-qtr

changeYear-on-Year

change

Qtr-to-qtr

change

year-on-year

changeApr-Jun 2016Apr-Jun 2015 Jul-Sep 2015 Jan-Mar 2016Oct-Dec 2015

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

10.3 0.4 15.2 0.46.0

22.5

5.512.7

17.89.2

4.50.4

14.1

0.48.3

21.9

6.8

14.1

20.5

9.1

4.9

0.4

12.5

0.5

9.1

21.6

6.3

12.6

23.4

8.8

2006 2011 2015

44

The province experience similar trends to those of SA with regards to employment by industries as discussed above.

Most economic industries reveal a decline in terms of contribution towards total provincial employment including the

agricultural industry, which is supposed to be the largest employer in the province given its comparative advantage in

agricultural productions. This is not surprising as the country experienced drought which negatively affected the

agricultural industry in the province. Despite poor contribution by sectors such as mining, electricity and agriculture at

0.4 per cent, 0.5 per cent and 4.9 per cent in 2015 respectively, other industries recorded significant rates in terms of

employment over the period. Among the largest contributors are the trade and community services sectors at 21.6

per cent and 23.4 per cent in 2015 respectively. The community services improved by 2.9 percentage points from

20.5 per cent in 2011 to 23.4 per cent in 2015, whilst the trade industry plummeted slightly by 0.3 percentage points

from 21.9 per cent in 2011 to 21.6 per cent in 2015. Hence, the labour market of the province depended largely on

government services in terms of employment during the period under review.

4.3 Labour absorption rate

The labour absorption rate measures the proportion of the working-age population that is employed. Table 4.1 shows

that the labour absorption rate in SA was 42.5 per cent9 at the end of the second quarter 2016, which was slightly

lower than the 43.0 per cent recorded at the end of the first quarter 2015, but still below the NDP target of 61 per cent

by 2030. The labour force participation rate was 57.9 per cent at the end of the second quarter 2016, which is lower

than 58.7 per cent recorded at the end of the first quarter 2016. In the second quarter of 2016, the labour absorption

rate in KZN was 36.5 per cent, which was slightly lower than 37.2 per cent recorded in the first quarter of 2016 (table

4.2).

4.4 Labour force participation rate

The labour force participation rate (LFPR)10 provides an indication of the relative size of the supply of labour available

to engage in the production of goods and services for a specified period (ILO KILM, 2013). Table 4.1 evinces that,

with the estimated working age population of 36.6 million in the second quarter of 2016, the national labour force

recorded 21.2 million. This resulted to the LFPR of 57.9 per cent. The working age population increased marginally

by 0.4 per cent while the labour force decreased by 1.0 percent from the first to the second quarter of 2016. Although

there was an increase in the labour force, there was also an increase of 3.8 per cent for the number of discouraged

work-seekers from 2.4 million to 2.5 million.

9 Labour absorption rate = employed ÷ population; = (15 545 ÷ 36 591) Χ 100 = 42.5 per cent. 10 The labour force participation rate (LFPR) is a measure of the proportion of a region’s working-age population that engages actively in the labour market, either by working or looking for work. It is calculated as follows: Economic Active Population (EAP) ÷ Population

45

As evident in table 4.2, KZN followed the same positive trajectory, with the total labour force declining from 3.27

million in the first quarter of 2016 to 3.20 million estimated in the second quarter of the same year. This as a result

led to a decline in the LFPR from 43.5 per cent to 40.8 per cent for the period under review.

4.5 Unemployment

SA continues to battle the high rate of unemployment, specifically structural unemployment that has been holding its

labour force to ransom for decades. This structural unemployment finds its genesis in the low quality of education

offered to the populace and the relatively low skills levels possessed by those in the labour force. Although real

investment in education has increased over the years, the quality of the output in terms of skills, suggest that the

quality of education offered, has either been compromised, or the education sector is producing skills that do not

match the requirements of the employers. Due to education being a competency which is administered at a national

level, the weaknesses inherent in the national system filter down to provincial level; thereby making provinces

susceptible to the same problems.

Figure 4.2: Unemployment by provinces in 2016

Source: Stats SA, 2016

The official unemployment rate in KZN currently stands at 22.6 per cent, which is slightly lower than South African

rate which was recorded at 26.6 per cent in the second of 2016. Although the rate of unemployment is still high in

KZN, but it is better than other provinces like Gauteng, Mpumalanga and Free State as they recorded an official

unemployment rate of 29.5 per cent, 28.8 per cent and 32.2 per cent respectively. Contrary, the expanded rate of

0

10

20

30

40

50

60

70

80

SA WC EC NC FS KZN NW GP MP LP

26.622.2

28.6 27.4 32.222.6 27.3 29.5 28.8

20.6

36.4

24.6

43.8

39.8 38.139.7 42.6 33.0

41.0

38.6

Official unemployment rate Expanded unemployment rate

46

unemployment increased to 39.7 per cent from 36.3 per cent in the first quarter of 2016 to the first quarter of 2016,

which is 3.4 percentage points increase.

4.6 Labour remuneration and productivity

According to Lunenburg (2011), people join organisations with expectations about their needs, motivations, and past

experiences. These influence how individuals react to the organisation. He further states that people want different

things from the organisation (for example; good salary, job security, advancement and challenge). The

instrumentality theory suggests that the employee satisfaction is based on the job satisfaction. This theory also

suggests that pay satisfaction is the component that has effects job satisfaction. It is therefore important for

managers to use different kinds of motivators for different kinds of people to enhance productivity.

High levels of productivity should be rewarded by higher remuneration. Therefore, the lines in figure 4.3 should move

close together, and in a similar pattern to reflect this. However, it is evident from this figure that this is not the case.

For a considerable number of years remuneration levels in KZN have been consistently high when compared to the

levels of productivity. The gap between these two variables was widest for all the period under review. Although the

gap is was still wide between these two variables, but productivity levels did however gain momentum in 2010,

presumably in the build up to the soccer World Cup and in the wake of the economic slump. The remuneration level

was 9.3 per cent in 2010 and the productivity was 3.3 per cent.

Figure 4.3: Labour remuneration and productivity in KZN, 2007 to 2015

Source: Global Insight, 2015

6.3

4.0

-1.3

3.33.8

2.6 2.3 2.5

0.9

14.4

16.3

7.5

9.3

10.7

9.29.8

8.8 8.7

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

2007 2008 2009 2010 2011 2012 2013 2014 2015

Productivity Remuneration

47

Chapter 5: Public Capital Stock and Economic Growth – KwaZulu-

Natal Case Study11

5.1 Introduction

There has been a long debate on the effects of infrastructure on regional growth and economic performance. During

the 1970s and 1980s, the United States (US) had experienced a dramatic slowdown in national productivity growth.

Yet public infrastructure was seldom mentioned as a major factor in this slowdown. Mostly, the studies were focused

on energy prices, social and economic regulation, and low levels of capital accumulation. Only later, with discussions

of economic decline during this period, would there be associations with declining public infrastructure investment.

Researchers then paid considerable attention to the possible effects of public infrastructure on state as well as

national productivity.

This study seeks to examine the empirical contribution of provincial fixed capital stock to provincial growth using an

explicit model of economic growth. It thus introduces provincial infrastructure capital into a neoclassical model of

economic growth (Cobb Douglas production function) in a fashion symmetric to private and national government

capital accumulation, and examines the empirical implications. Therefore, it makes a dual contribution in two different

ways: Firstly, it constructs a new dataset of total provincial public capital stock. A particularly novel feature of the

dataset is that the provincial public capital stock is adjusted for depreciation. Secondly, following the literature on the

public capital-growth nexus, the study investigates the effect of total provincial public capital stock on provincial

economic growth.

5.2 Literature review

According to Gupta, et al (2011) sizable research has been conducted to measure the productivity of public capital.

Most studies are based on the production function approach, cost or profit function with the public capital stock added

as an additional input factor. On the contrary, others employ the Vector Autoregressive Model (VAR) approach, which

imposes few restrictions to address the problems raised by production function and behavioural approaches. This

follows the argument in the literature that public capital has two ways in which it forms an element in the production

function. Firstly, its stock may enter the production function directly, as a third input. Secondly, its stock may influence

multifactor productivity and thereby production in an indirect way. Therefore, it depends on the functional form of the

11 The views expressed in this chapter are those of the author and do not necessarily represent those of the KZN Provincial Treasury. A detailed version of this chapter will be available on request.

48

production function to identify existence of both effects. However, the impact of public capital cannot be disentangled

in empirical work as it yields similar equations (De Haan, et al, 2007).

Aschauer (in Nannan and Jianing, 2012) set the stage for subsequent discussion and much controversy by laying out

the case for the importance of infrastructure to the quality of life, the environment, and private economic activity.

Although the study focuses on the impact of infrastructure on economic activity, but it further notes that public capital

increases the rate of return to private capital, thus stimulating private investment. This in turn substitutes for private

investment, thus discouraging private initiatives. Furthermore, King and Levine (1994) support this notion by stating

that increasing investment is the best way to raise future output. This idea emanates from the theory of "capital

fundamentalism" which asserts that capital accumulation is central to increasing the rate of economic growth. It

subsequently provides a coherent foundation to advice on development problems and correspondingly design

policies to increase nation's physical capital stock in order to foster economic development. Evidence in support of

this theory was based on case studies of developing countries.

Public spending on infrastructure such as roads, education, sewer and water systems, and power plants tend to

reduce costs facing the private sector, and raise productivity of private capital. As such it induces demand for private

sector physical capital through its effects in raising the marginal productivity of private inputs and perceived rate of

return. Furthermore, it is argued that infrastructure stimulates production by depressing fixed costs, attracting most

companies to invest and other factors of production (Haughwout, 2002 and Egger and Falkinger, 2003). This was

further supported by Kalaitzidakis and Kalaitzidakis (2007) who correctly pointed out that it enhances economic

growth through its external effect in the production function of private firms. The relationship between public capital

and economic growth has thus gain serious attention from various researchers and policy makers who seek to

scientifically prove the existing relationship between the variables for policy implementations.

Although numerous studies have been conducted to investigate the relationship between public capital and economic

growth, but it remain a subject of debate and interest to researchers due to inconsistence on findings produced by

different researchers. Other researchers find positive relationship between public capital expenditure and economic

growth, while some researchers realised existence of a negative relationship among the said variables. Moreover,

other studies concluded with the existence of bi-directional causality between public capital and economic growth. As

evidence to mixed findings produced by researchers with regards to this relationship are few empirical research

findings narrated chronologically, it start with researchers who concluded with positive results, followed by those who

found negative results and presents those who found bi-directional causality among the variables.

49

Onakoya and Somoye (2013) examined the impact of public capital expenditure on economic growth in Nigeria. They

adopted a three-stage least squares (3SLS) technique and macro-econometric model of simultaneous equations to

capture the disaggregated impact of public capital expenditure on the different sectors of the economy. The empirical

findings of the study are relatively diverse; firstly it showed that public capital expenditure contributes positively to

economic growth in Nigeria. Secondly, it indicated that public capital expenditure promotes output of oil and

infrastructure, but deleterious to the output of manufacturing and agriculture which is commonly referred to as Dutch

disease. It further revealed a positive but insignificant relationship to the services sector. Lastly, findings confirmed

that public capital expenditure indirectly enhances economic growth by encouraging private sector investments

emanating from government’s role in the provision of public goods.

Nannan and Jianing (2012) find that physical infrastructure development contributes positively to Chinese economic

growth. In this context, China’s aggressive investment (around 15 per cent of GDP) on infrastructure is justified to

sustain growth and minimize the impact of the global financial crisis. The contribution of investment to growth reflects

the investment-oriented growth strategy followed by China. Their study was mainly aimed at examining the effect of

infrastructure investment on economic growth in China using a data spanning from 1988 to 2007. The study

established a gross productive equation about the contribution of productive elements on economic growth based on

Cobb-Douglas production function. It also estimated the output elasticity of every productive element.

The negative relationship between public capital expenditure and long-term growth in 15 industrialized countries was

also discovered by Ghosh and Gregoriou (2009). The study notes that in Brazil and Thailand public capital

expenditure had a significant negative effect on economic growth. Moreover, their findings show no significant effect

of infrastructure economic growth of Sudan and Zimbabwe. In addition Canning and Pedroni (2004) estimated the

effects of infrastructure on long-run economic growth for a large panel of countries using data from 1950 to 1992.

The study mainly intended to address the question of whether infrastructure levels have been too low, too high or

moderate over the period in consideration. They utilized physical measures of infrastructure such as kilometres of

paved roads, kilowatts of electricity generating capacity and number of telephones rather than constructing stock

estimates from investment flows. Firstly, the empirical findings revealed an evidence of unit roots and cointegration

among the variables (GDP per capita and infrastructure) estimated. Secondly, it showed existence of bi-directional

causality between the variables both in the short-run and long-run.

It is worth noting that empirical findings on the said relationship vary with methodological framework adopted in each

particular study. This emanates from the fact that literature presented above had employed different methods in

attempting to achieve certain research objectives and thus found conflicting findings. This study will predominantly

concentrates on the relationship between provincial public capital and economic growth using different

50

methodological frameworks such as Unit root tests (Augmented Dickey Fuller test) to establish the order of

integration among the variables and stationarity of the series to avoid spurious regression problems. It will further

conduct Ordinary Least Squares (OLS) regressions, VAR, and Johansen co-integration approach.

5.3 Methodology

The study uses the production function approach to estimate the contribution of total provincial public capital stock to

provincial economic growth. The production function is specified as:

tttttttt gksAgksAfy ,, (1)

Where ty is the real aggregate level of provincial output (GDP) at time t ,

tk is the aggregate total national capital

stock (general government and private) in the province (excluding aggregate provincial public capital stock), tg is the

aggregate provincial public capital stock, and ts is the skill-adjusted aggregate provincial labour supply. This

represents an additional deviation from existing work as suggested by Gupta, et al (2011). The study uses skill-

adjusted labour incorporating data on average functional literacy, age 20+, completed grade 7 or higher. Assuming

Cobb-Douglas production function technology, A, &, are parameters satisfying A > 0, and ,, ε (0, 1).

5.3.1 Constructing a net fixed capital stock series for the provincial government

There are different methodological frameworks existing with respect to estimating the initial capital stock using

Perpetual Inventory Method (PIM) such as Steady state approach, Disequilibrium approach and Synthetic time series

approach. However, this study will only employ the national disaggregation approach; thereby disregard the three

conventional approaches. The aggregate national government gross capital stock will be disaggregated to provincial

level starting from 2001; this follows unavailability of reliable data at provincial level. The said data on national capital

stock will be sourced from the South African Reserve Bank (SARB). Calculating the total provincial government

capital stock is based on the following three steps:

Step 1. The total fixed capital stock (General government) based on the SARB statistics was R1.4 trillion in

2001 (constant 2010 prices).

Step 2. National government distributes on average about 32 per cent of its resources to the nine provinces

through the equitable share system and therefore it is estimated that the total fixed capital stock (Provincial

government) was R450 billion in 2001 (constant 2010 prices).

51

Step 3. Of this 32 per cent the province of KZN receives about 21 per cent and therefore the estimated total

fixed capital stock (KZN) was R94 billion in 2001(constant 2010 prices).

Gross fixed capital formation is defined as the acquisition, less disposals of tangible and intangible fixed assets plus

major improvements to, and transfer costs on, land and other non-produced assets. The assets disposed of may be

sold for continued use by another producer, they may be simply abandoned by the owner or they may be sold as

scrap and be broken down into reusable components, recoverable materials, or waste products. The real seasonally

adjusted fixed provincial government capital stock applying the PIM where.

K2001 = R94 299 811 200

GFK2001 = R75 427 628

δ = 1%

The rate of depreciation is assumed at 1 per cent since the majority of total fixed provincial government capital stock

has a long lifespan.

5.3.2 Provincial fixed capital stock and provincial economic performance

The study applies impulse response functions to actually explore the response of the public capital to variable

shocks. Application of VAR is motivated by the fact that a single-equation regression model that was initially used

suffered from many shortcomings which includes mis-specification bias of the production function, causality and

endogeneity. The latter possess numerous advantages such as imposing few economic restrictions as possible. It

further solves problems related to causality and endogeneity as well involves lag selection. Therefore, any

incorrectness occurred in choosing variables and optimum number of lags will directly compromise reliability of the

results. The number of lags is usually determined by statistical criteria such Akaike Information Criterion (AIC) and

Schwarz Bayesian Criterion (SBC), while variable selection on the other hand is generally informed by economic

theory.

The potential problems in estimating VAR include among others the following: Firstly, estimation problems increase

as the number of variables and lags included in the system rises. More specifically, micro-numerosity problems which

tend to arise in case of too many explanatory variables and short sample size. The application of economic theory to

help determine which variables to include in the VAR could be regarded as a restriction. However, such concerns can

be addressed by making the theory determining the choice of variables sufficiently general or uncontentious. Finally,

it should be noted that if the restrictions imposed by more traditional macro econometric models are valid, the

parameter estimates derived from such models are likely to be more precise than those derived from the VAR.

52

The VAR model that will be estimated is based on the Aschauer (1997) Cobb-Douglas production function. The study

let the time path of thety be affected by current and past realizations of the

ttt gsk &, sequence and let the time

path of the ttt gsk &, sequence be affected by current and past realizations of the

ty sequence.

The VAR system of I(1) variables is as follows:

ttttt egkyy 111311211110 (2)

ttttt egkyk 212312212120 (3)

Where ty represents a first differenced, I(1), provincial seasonally adjusted GDP per skill adjusted labour supply,

tk

is a seasonally adjusted fixed provincial government capital stock per skill adjusted labour supply and tg is a first

differenced, I(1), aggregate national capital stock (general government and private) per national skill adjusted labour

supply. Furthermore, the variables tt ky & are assumed to be stationary after first differences, the white-noise error

terms tt ee 21 & with standard deviations

ky & are also presumed to uncorrelated.

5.4 Results

This section discusses empirical findings of this study which is chronologically arranged as follows: Firstly, it provides

OLS regression results and VAR modelling which is also accompanied by various diagnostic inspection tests.

Secondly, it presents unit root tests as computed on residuals to meet prerequisite steps of the Engle-Granger co-

integration method. It further looks at error correction model. Lastly, the Johansen cointegration is discussed

purposively for statistical confirmatory of the Engle-Granger method.

Table 5.1 provides results of the estimated OLS regression. It is evident from the table that the regression model is

well fitted as shown by the adjusted R2 which is 0.57 per cent. Furthermore, the seasonally adjusted fixed provincial

government capital stock per skill adjusted labour supply is statistically significant as the null hypothesis that the

variable is equal to zero was rejected. According to the forecasting tests, a 6 per cent increase on the seasonally

adjusted real fixed provincial government capital stock per skill adjusted labour supply will result to a 4.7 per cent

increase in the seasonally adjusted real provincial GDP per skill adjusted labour supply, ceteris paribus.

Table 5.1: OLS regression results

Source: Author’s own calculations

Coefficient t-Statistic

DLOG(CAPEXRSALAB) 0.84 8.6

Constant -0.001 0.63

Adjusted R-squared 0.57

Durbin-Watson 1.37

53

Numerous tests have been conducted to possibly estimate the above equations using VAR. The results indicate that

the estimated VAR system confirmed to be stable (stationary) by all roots that have modulus less than one and lie

inside the unit circle. Secondly, the Granger Causality suggested that the model is stationary and free of spurious

Granger causality as confirmed by a p-value of 0.07 per cent. Thirdly, the lag length criteria supported optimal length

of 4 lags. Fourthly, several diagnostic inspections have also been done which include the residual Portmanteau tests

for autocorrelation suggesting no residual autocorrelation as confirmed by a p-value of 0.001 per cent at lag 5.

Furthermore, the residual serial correlation LM test indicates no serial correlation at lag order 6. Lastly, the White test

for Heteroskedasticity indicates the joint significance of the regressors by a p-value of 0.25. The results of the

diagnostic statistics in general support the appropriateness of the estimated VAR model.

The VAR modelling system was also applied in forecasting the provincial GDP per skill adjusted labour supply. It

shows that an average 6 per cent increase in the real provincial total fixed capital stock per skill adjusted labour

supply will cause an average of 0.6 per cent increase in the real provincial gross domestic product per skill adjusted

labour supply on annual basis.

The results of the Johannsen test suggest that there are indeed four co-integrating equations at the 0.05 significance

level. It can be observed that there is a statistically significant long run relationship between provincial economic

growth and provincial public capital stock (MaxEigen statistic at p value = 0.00). However, there is an inverse

relationship as suggested by the minus sign. The results of the vector error correction estimates (2 lags included)

yield a coefficient of -0.014 and -0.013 for the first difference of the log provincial total fixed capital stock (1ty ) and

first difference of the log provincial total fixed capital stock 2 lags (2ty ) respectively. Estimating the system using

OLS indicates that the1ty and

2ty coefficients are statistically significant. Testing for the joint significance (using

the Wald test statistics) of the lagged dependent variable coefficients indicate that they are jointly significant as

shown by a p-value of 0.014. This indicates that there seems to be short run causality between the provincial capital

stock and the provincial GDP. The coefficient of determination from the above model shows statistical robustness as

it exceeds 0.50 per cent (0.83). The joint estimation of the respective variable through the F stats reveal that all

variables are statistical significant to explain the dependent variable.

5.5 Summary and conclusions

The purpose of this study has been to assess the empirical contribution of provincial infrastructure accumulation

(fixed capital stock) to provincial growth using an explicit model of economic growth. The study introduces provincial

infrastructure capital into a neoclassical model of economic growth (Cobb Douglas production function) in a fashion

54

symmetric to private and national government capital accumulation and examines the empirical implications. The

study first had to construct a new dataset of total provincial public capital stock since national accounts do not report

a series for the provincial capital stock. The provincial capital stock was constructed using the PIM.

The empirical results support the argument of a long run equilibrium relationship between provincial capital stock and

provincial GDP. The results also suggest that the long run causality or effect fades over time, albeit slowly. However,

the nature and statistical significance of the long run equilibrium relationship is ambiguous at best. On the other hand,

some evidence of a short run equilibrium relationship was observed. Therefore, there seems to be some causality

between provincial capital stock and provincial GDP in the short run. This is not surprising given that provincial public

investment projects take some years to complete. The major contribution of this study is the analysis of the

relationship between provincial public stock and provincial growth. It presents models that analyse the link between

provincial public capital stock and provincial growth, in a spatial economic context.

55

Appendix : List of additional figures and tables

Figure A2.1: National GDP by Province, 2015

Source: Global Insight, 2016

Table A4.1: Total employment in KZN by district municipalities, 2003 to 2015

Source: Global Insight, 2016

WC, 13.8

EC, 7.5NC, 2.1

FS, 5.3

KZN, 16.0

NW, 5.5

GP, 35.3

MP, 7.3LP, 7.2

2003 2015 2003 2015

National Total 11 799 189 15 393 480

KwaZulu-Natal 2 112 229 2 605 749 17.9 16.9

EThekwini 1 049 935 1 296 585 49.7 49.8

Ugu 111 390 142 218 5.3 5.5

uMgungundlovu 245 866 309 899 11.6 11.9

uThukela 106 602 116 173 5.0 4.5

uMzinyathi 42 542 55 653 2.0 2.1

Amajuba 94 914 103 326 4.5 4.0

Zululand 83 881 101 191 4.0 3.9

uMkhanyakude 54 312 75 618 2.6 2.9

King Cetshwayo 162 331 192 347 7.7 7.4

iLembe 99 176 131 809 4.7 5.1

Harry Gwala 61 279 80 931 2.9 3.1

Total Employment Percentage share of employment

56

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