Accelerating South Africa’s economic transformation

By Jeff Immelt

Two decades ago, South Africa defied expectations by transforming itself into an inclusive democracy. Now it’s time to take the next leap forward.

Most people do not realize that the General Electric Company first came to South Africa in 1898—it was among our first offices overseas. For a brief period, and as part of the global effort to end apartheid, we left the country. Today, GE has a very strong team in South Africa—we have built lasting partnerships with the government, the private sector, and universities to help build local skills and technical and managerial capabilities and support economic growth. I am happy to say that we expect to be part of the country’s growth and development for a long time to come. It is without a doubt one of the most exciting places in the world for GE, with its abundant resources, vibrant culture, and most of all, a talented, entrepreneurial population. All of this was vividly on display as South Africa hosted the 2010 World Cup. The images and atmosphere reverberated well beyond South Africa (especially the vuvuzelas!) and helped to bring about a shift in the image of Africa globally. Today, Africa is viewed as a region with an exciting future and is becoming a key destination for investment.

Much has been accomplished in South Africa since the end of apartheid and the beginning of democracy 20 years ago. Despite a history of racial inequality and civil protests, South Africa defied most expectations by negotiating a peaceful transition to full democracy and by setting the foundations for an inclusive society. Under the stewardship of Nelson Mandela, the first democratically elected president, South Africa’s leaders came together to achieve this momentous goal, which many had doubted was possible. We can celebrate two decades of democracy thanks to the vision and wisdom of South Africa’s leadership.

A crucial factor in reducing historical inequalities and building a more inclusive economy has been the significant progress made in providing fundamental services to a much wider population. These services include access to primary and secondary education, expansion of primary healthcare, and provision of electricity and water. Just as important, South Africa’s constitution has become an exemplar of inclusive governance with its clear emphasis on the socioeconomic advancement of all South Africans. This strong governing framework, as well as the establishment of institutions like the nation’s much-admired judiciary, has played a key role in creating a business climate conducive to the growth and expansion of multinational companies like GE.

Creating the right jobs

Despite a challenging history of inequality and exclusion, South Africa has maintained robust economic growth and has begun to reshape its economy to meet the needs of its growing and young population in the 21st century. Over the 2002–12 period, South Africa’s economy grew by about 3.6 percent per year,1 while per capita incomes increased by about 2.2 percent per year. But the structure of growth has remained largely reliant on commodity exports and mining, leaving the country vulnerable to external forces. South Africa’s leaders in government and the business community recognize that current growth patterns are not up to meeting the challenges of the future. South Africa needs growth that generates the kind of investment and technology transfer that will lead to long-term increases in economic development and the creation of higher-paying jobs—changes that will enable people to transform their lives.

South African leaders are well aware of this challenge and have done the math; with roughly a doubling of per capita income growth, South Africa could achieve per capita income similar to that of Portugal or Poland in only 17 years.2 South Africans have set out their own vision for the next 20 years, in a way that is compelling and comprehensive. It calls for accelerating progress, building a more inclusive society, deepening democracy, and translating political emancipation into economic well-being for all.3

It is possible to achieve that vision, though the challenge in doing so is not to be underestimated. Between 1950 and the end of the 20th century, only 13 economies worldwide grew at an average rate of 7 percent a year or more. Countries that have succeeded have had strong and stable macroeconomic policies. Stable macroenvironments have underpinned reforms in resource allocation, pricing, and labor policies that have enabled productivity increases and new, more productive firms to enter and produce for either domestic or export markets.4

No single recipe for success

Countries that have succeeded have had strong political leadership that made transformative strategic choices, and they have communicated their goals to the public in a way that was credible and gave them license to put through difficult reforms. And both single-party and multiparty countries have succeeded. In short, there is no single recipe for success. Sustained investments in infrastructure, health, and education have been key ingredients of success, enabling the labor force to increase productivity and compete on a global scale. Policies and reforms were not dogmatic—adjustments were made to get results.

At the same time, the 21st century brings new challenges, including the impact of global warming and climate change, changes in relative prices of commodities and manufactured goods, a rising youth bulge in developing countries, and uncertainties in global governance. Moreover, the acceleration of technological change—the meshing of the digital and the physical world—is having a profound impact on design and production techniques, requiring the workforce to be more creative and entrepreneurial.5 This will put added pressure on South Africa to invest in people to help them develop the knowledge, skills, and ability to both use and ultimately create innovations in power growth. One of the darkest legacies of the apartheid era was the government’s unwillingness to provide equitable educational opportunities for the country’s majority population; it is a reversal of this reality, already well under way, that will arguably have the greatest impact on the nation’s future economic competitiveness.

Achieving the vision

I have no doubt that the vision set out by South Africans is achievable, and GE is committed to supporting South Africa as it continues to transform its society, build inclusiveness, and improve the lives of all its people.

It’s easy to give advice, but I often like to think about how I would address problems if I had that responsibility, because leadership and change are difficult. So let me suggest what I would do if I were responsible for South Africa’s economy and had to get growth and employment moving faster.

First, invest in infrastructure, and in particular energy and transportation. Without it, investors will hold back, and productivity, technology transfer, and trade will all be choked. We are already seeing some of the detrimental effects of the recent recurring power shortages. The steps taken so far, such as the wind program, have helped to encourage the private sector to create partnerships to address the problem. I would extend the model further and look to the private sector to bring the project expertise and capital necessary to increase generation, while looking at ways to foster investment in transmission and grid expansion to increase reliability and access to power for all South Africans.

In transportation, South Africa is already reaping benefits from investment in rail-freight services. GE is pleased to be one of the leading contributors to increases in efficiency of operations at Transnet as well as an investor in locomotive assembly through our joint-venture relationship with Transnet Engineering (TE), a $50 million investment by GE. This is a good example of the way a company like GE can support South Africa in achieving its goals. By supporting TE with more than 150,000 hours of skills training and management development for its 400-plus employees, and by working closely with GE Transportation manufacturing facilities in the United States, the time needed to assemble locomotives has more than halved. Quality has improved at the same time. TE is now a leading supplier of locomotives domestically and is expanding with exports to Mozambique and with opportunities in Angola, Botswana, and Namibia. Moreover, as TE grows, we see employment growing to more than 1,000 jobs in the next five to seven years and localization of more of its operations to South Africa, resulting in significant opportunities for local suppliers as well as services across Africa.

Second, I would work to improve the business environment, especially for small and medium-size enterprises (SMEs) that can integrate into local and global supply chains. As an example, for each job that GE hires directly, we create multiple jobs for outside suppliers, many of which are SMEs. SMEs as a whole are abundant job generators and help foster a climate for entrepreneurs to grow and prosper. To succeed, they need to have an environment that provides them with market opportunity and with support to achieve the necessary quality, volume, and reliability to meet the needs of global supply chains.

GE is investing $20 million in a supplier development vehicle (SDV) to develop South African black-owned-and-operated SMEs. Our goal is to contribute directly to the creation of sustainable local suppliers that create jobs through production of cost-competitive products. We will work with the SDV to identify sourcing opportunities across GE technology and will also work with it so that it can grow to become a qualified supplier for GE. By providing offtake for its products and services, GE can be an engine for SME growth.

Third, improving education is critical. South Africa needs to educate the next generation of engineers, scientists, and technologists if it is to thrive in the future. This will require a creative and comprehensive approach, especially given the rapid development of technology and the growth of the industrial Internet. GE integrates training for its entire technical staff, and we want to have world-class technicians coming out of South Africa. Government should focus more resources on creating a broad path for young South Africans to graduate from university while also expanding opportunities for those interested in technical and vocational occupations. GE is supporting development of skills in critical areas through a number of initiatives. We are investing about $60 million to support a customer-innovation center (CIC) that will serve as a technology hub for the region—bringing together about 125 engineers to work on innovation and solutions for customers. The CIC will deliver value through three pillars: innovation around regional challenges, learning and development, and customer engagement that awakens new solutions. We have partnerships with institutions in South Africa to support math and science initiatives to encourage learners to follow careers in aviation and to develop aerospace industrialization. We will continue to find opportunities to support South Africa in developing the competencies needed for the 21st-century industrial age.

I believe that South Africa will continue to be one of the leaders of Africa’s growth and development over the next 20 years. All the ingredients are there. The successful transition from apartheid to an inclusive democracy shows the capacity to move forward methodically, patiently, and pragmatically to achieve difficult—indeed, some said impossible—goals. The infrastructure base is the best in the region and can quickly be improved with the right mix of policy and reforms to promote investment by the private sector. Gains in healthcare and education can set the stage for greater gains in the future, though they must be expanded quickly. And, like others, GE is ready to invest more in the country, given the right opportunities.

There are headwinds, too—the commodity boom that fueled growth over the past decade is not going to power growth in the future. This puts greater pressure on the country’s leaders to diversify the sources of growth. And young South Africans are increasingly anxious about whether they will reap any benefits from the post-1994 democratic dividend, most tangibly in the form of employment in the formal economy. If their aspirations are not met, then there are obvious implications for social stability.

South Africa has no shortage of challenges, but its people have already proved their resilience, creativity, and ability to envision a better future. The country has surmounted tremendous obstacles, and I have no doubt that South Africa’s political leaders and citizenry will yet again rise to the challenge. GE is in South Africa for the long term, and we look forward to being a part of its history as it enters a new era.

This essay is one of 20 from the book Reimagining South Africa, edited by McKinsey & Company. For more information, visit the McKinsey South Africa website.

About the author(s)

Jeff Immelt is the chairman and CEO of GE.

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