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South Africa’s knowledge economy key to high-income status

South Africa’s knowledge economy key to high-income status

November 2017

Editor’s note: this article first appeared in The Star, South Africa on 7th November 2017

South Africa seems to be stuck in a classic “middle income trap”. Weak levels of economic growth, low productivity, rising unemployment and fiscal deficits, will make it near impossible to graduate to high-income status.

The inertia will remain as long as the economy is skewed towards natural resources and basic manufacturing. These sectors generate little economic value and few high-quality jobs. Large numbers of low-skilled jobs face automation from the onset of robotics and artificial intelligence. They are dead-end sectors for South Africa.

Economists generally agree that sustainable economic growth depends on diversifying away from these sectors to focus on higher value services, manufacturing, research and development (R&D).

In the US, for example,  85 percent of the value of companies in S&P 500 index comes from “intangible assets”: ideas, concepts, brands and innovative products and processes.

South Africa needs to move from natural resources to knowledge industries to prosper long-term

Knowledge-intensive goods and services from biotech, chemicals, entertainment, pharmaceuticals and more  make up over half of all US exports. Forty years ago, manufacturing and agriculture dominated.

Further down this road are the advanced Asian economies of Japan, South Korea, Singapore and Taiwan after similar moves up the value chain. Knowledge-rich Singapore is now considerably richer per person than the United States.Mexico and Malaysia are following suit. They are on the brink of high income status by moving up the global manufacturing value chain and attracting foreign investment, technology and knowledge.

The World Bank recognises that boosting its knowledge economy is vital for South Africa.

“South Africa’s productivity growth is diverging from global growth, and the country risks falling further behind its peers,” says Paul Noumba Um, World Bank Country Director. “This would be to the detriment of the poor for whom a growing economy is necessary for jobs and a sustainable system of social grants. In such an environment, South Africa can turn to encouraging private innovation as one of several ways in which to improve people’s lives”.

To succeed in this, South Africa’s knowledge economy must be boosted by becoming a meaningful player in globalised innovation networks.

Thriving knowledge-based industries rarely emerge purely from domestic resources. Scientific knowledge, technological know-how and the required R&D capital are dispersed globally. Gone are the days when one commercial  giant, such as General Electric, created products in-house from start to finish.

Today, multinationals collaborate with small companies, academia and the public sector throughout the R&D  cycle, often across borders.

Plugging in South Africa’s knowledge economy

South Africa’s challenge is to compete in this new world of networked innovation. Multinational companies must move here,  bringing the capital, skills and technological know-how that South Africa may be missing.

South African innovators will benefit, too. While the next Google is unlikely, a richer international knowledge base in South Africa will generate myriad opportunities for local collaboration and partnerships on innovative products and services tailored for the local market.

What foreign investors and local innovators need most is certainty over their intellectual property (IP) rights, including clearly defined and readily enforceable patent rights. Weak protection will deter companies from investing or entering local partnerships. They will not launch innovative new products if their rights could be compromised.

As a WTO member, South Africa has the IP basics in place. But it lags behind its peers for IP protection. Ranked 33 out of 45 countries in the US Chamber of Commerce 2017 international IP index, it trails Kenya, Peru and Ukraine. The Global Innovation Index compiled by the World Intellectual Property Organization places South Africa 57 out of 127 countries suggests the country has major innovation weaknesses.

Investors worry further about their future welcome in South Africa. The draft IP law under consideration by the cabinet aims to better coordinate South Africa’s fragmented IP laws. But its focus is not on creating new, economically valuable IP in South Africa, but more on how to increase access to existing knowledge assets, particularly medicines.

It proposes, for instance, making it more difficult for medicines to obtain patents in South Africa, but also easier to override them via “compulsory licenses”.  Elsewhere, the Dramatic, Artistic and Literary Rights Organisation has complained that the draft copyright legislation places too much emphasis on free access to creative works, and not enough on the benefits to creators.

The government may achieve some short-term political popularity, but such moves work against the country’s long term economic interests. Few knowledge-based companies will want to invest, removing opportunities for local companies and reducing the flow of innovative products launched in South Africa.

Sadly, without  a more hospitable environment for innovative companies South Africa will stay marooned in its middle-income status. Future generations will inherit an economy characterised by low-skilled, low-paying jobs. Legislators should therefore view the draft IP bill as an opportunity to turn the ship around.

Philip Stevens is director of Geneva Network, a UK research organisation focusing on trade and innovation policy.