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Why the West(ern Cape) is growing faster than the Rest
Lessons from the Little Divergence
The ‘Little Divergence’ occurred when North-Western European incomes overtook those of Southern Europe. By the 15th century, the leading economic hubs of Europe were on the Mediterranean coast, in places like Florence and Venice. But by the 17th century, Southern Europe was in decline, while cities in North-Western Europe, places like Amsterdam and London, prospered. (The Little Divergence should be read against the Great Divergence, which is a debate in economic history about when European moved ahead of Asian incomes.) The reasons for the Little Divergence, much like the Great Divergence, were technological and institutional: the invention of the printing press and the emergence of active parliaments, to name just two of these innovations.
But why should we in South Africa care about these reversals of fortune in Europe many centuries ago? There seems to be a general sentiment that we are currently experiencing a Little Divergence in South Africa. Fifty years from now, economic historians of South Africa will probably debate when it was that the Western Cape overtook Gauteng as the region with the highest per capita income.
There will certainly be those who argue that if you look at living standards (incomes, yes, but also other things like health, education, and lifestyle) then the Western Cape has always been on top. But they would be foolish: for most of the twentieth century, (white) wages in Johannesburg were far above those of other regions, and even on par with some of the richest countries on earth. When democracy arrived in 1994, Johannesburg and its surroundings were clearly the economic heart of South Africa.
A more informed opinion would be that things started to change in the 2010s. Cape Town and the Winelands have done remarkably well in a country that has experienced almost a decade of negative per capita economic growth. Future historians might even point to the arrival of Covid-19 and its repercussions as the time when the gap between the West(ern Cape) and the Rest opened up.
A third view might be that, hang on, Gauteng is still a richer place than the Western Cape, and is likely to remain so for some time. And proponents of this view would have a strong case. According to estimations by Quantec, the GDP per capita of residents in Gauteng in 2019 was R72 921 compared to the Western Cape’s R63 693, a gap of almost R10 000. But what is also true is that the gap has closed in the previous two decades. Were the same two per capita growth rates projected into the future, Western Cape incomes would overtake Gauteng ones by 2040.
GDP per capita figures, of course, focus on averages. What is clear is that there has been a rapid increase in the semigration of high-income earners into the Western Cape in the last year or two. Construction trends reflect that: StatsSA recently revealed that the Western Cape recorded an increase in the value of building plans passed in the first half of 2022 (up 33%), with Gauteng recording a decline (-7.5%). While the Western Cape may therefore not be ahead of Gauteng just yet, all evidence suggests that it may not be long before it takes the lead.
So if we agree that there is indeed a Little Divergence in South Africa, or one on the horizon, then what explains it?
Simple: just as with the Little Divergence in Europe, it is the technological innovations and political institutions that are mostly responsible. Much has already been said about the Western Cape’s well-run municipalities – its good political institutions. But its innovation culture is often forgotten. Take the figure below. It shows the total published patent applications between 2009 and 2021 for the top 20 entities in South Africa. Most of them, as can be expected, are universities. But there is a striking result: the top two are both in and around Cape Town. More impressively, Stellenbosch University comes out on top, a university much smaller than almost all of the others on the list. It is this innovation that is at the heart of a dynamic local economy.
That Stellenbosch would be an innovation economy was not a foregone conclusion. By the early 1980s, Stellenbosch was a sleepy economic backwater compared to Paarl, its bigger neighbour. Paarl had not only a thriving agricultural sector, but also a long history of manufacturing and even a fledgling financial services industry – the home of Bolank Bank, for example. If you had to gamble on the future hub of the knowledge economy, Paarl would have seemed like a good bet.
But then things began to change for Stellenbosch. In the late 1980s, Technopark was developed on the outskirts of the town as a way to provide opportunities for university spin-off companies to build technology-intensive products and services. Other high human capital services firms moved in too; Mediclinic, founded in 1983, chose Stellenbosch as its headquarters. By the early 2000s, a new bank, founded by many of the same people that were previously involved with Boland Bank, was established: Capitec. And since Stellenbosch University founded the LaunchLab in 2013 to support university spin-out companies, more than 200 businesses have been incubated, several of them now with offices in Technopark. The key to Stellenbosch’s success in the last three decades has been innovation.
Will the Western Cape continue to outpace the rest of the country? That depends on whether the Western Cape can continue to nurture and deepen the innovation and efficient institutions on which its success has depended, and whether other regions will learn and catch up. One innovation that could accelerate such catch-up will soon be tested on the outskirts of Stellenbosch, in the township of Kayamandi. A new project, launching in 2023, will see the residents of Kayamandi receive uncapped fibre at a fraction of the cost of existing data bundles. Again, innovation is at the heart of the project: it will use blockchain technology for payments.
The only way to build a successful South Africa is to replicate the lessons from Europe’s Little Divergence: innovation should be the cornerstone of our economy – with substantial investment by both the private and public sector – and our political institutions efficient, transparent, and democratic.