Is South Africa afflicted by the resource curse?

Abstract

This paper addresses the question of how best to explain South Africa's prolonged economic stagnation, manifest especially in manufacturing decline, both in total employment share and value addition to the economy. Despite its wealth of natural resources, South Africa's economic performance – especially in the manufacturing sector – has been weak, especially since 2008. The extent to which the country's resource abundance determines manufacturing performance has largely been overlooked in the literature. Utilising analytic narrative, we examine the plausibility of competing hypotheses that may account for manufacturing decline in South Africa. Our primary hypothesis is that South Africa is afflicted by a particular manifestation of the resource curse known as “Dutch Disease”. After examining several explanatory hypotheses, we conclude that the decline of South Africa's manufacturing industry is strongly linked to its reliance on mineral rents, but through multiple channels. The decline is exacerbated by poor institutional quality, itself driven by "state capture," hindering the country's ability to combat corruption and inefficiencies in government effectiveness. To recover from these dynamics, we suggest that South Africa should focus on strengthening institutions, improving political governance, and enhancing financial transparency. Addressing these challenges is crucial to manufacturing recovery, diversifying the economy and fostering broad-based economic development in South Africa.