The Middle-Income Trap and Premature Deindustrialization in South Africa

Abstract

Abstract South Africa has been experiencing premature deindustrialization and poor growth over an extended period of time. Premature deindustrialization is among the key factors locking many middle-income countries in a trap of stagnant growth and thwarting their catching-up with advanced economies. Premature deindustrialization shrinks middle-income countries’ opportunities for technological development, and also their capacity to add value in global value chains (GVCs), which reduces their scope for the sustained increases in productivity required for catching up. This chapter analyses key structural factors contributing to a ‘middle-income technology trap’. Throughout the chapter, reference is made to the divergent experiences of three middle-income comparator countries to South Africa: Brazil, China, and Malaysia. Building on this framework, the chapter presents new econometric evidence of premature deindustrialization in South Africa through an international comparative lens. By studying the relationship between countries’ GDP per capita and their shares of manufacturing in total employment, the chapter identifies the level of GDP per capita and share of manufacturing in total employment associated with the ‘turning point’ at which the share of manufacturing levels off and begins to decline. The chapter groups countries into four categories based on their (de)industrialization dynamics, and identifies possible premature deindustrializers, among which South Africa is found. South Africa’s lack of structural transformation helps to explain its failure to escape the middle-income technology trap.