The Challenges for Growth in South Africa

June 29, 2012

The journey from apartheid to democracy in South Africa has taken place to a large extent in a peaceful manner. Nelson Mandela’s vision of a “rainbow nation” - a peaceful coexistence of people of all skin color - is still the foundation of South Africa’s economic and social development.

Even though South Africa’s economic power and political stability contribute to peace, safety and development in the entire region, many challenges remain:

  • Political infighting and uncertainty have created a policy drift and hampered the ability to execute the plan.
  • Policy drift: There is no consensus on whether or not to insulate state-owned enterprises from political interference, on whether or not to expropriate large landholdings by white farmers, or to re-nationalize or privatize the mines. 
  • Mining industry is in long term structural decline: from 21% of GDP in the 70s to only 6% now; mining employment has fallen from 700,000 in the 90s to only 150,000 today. Mining output is again down for the 3rd successive quarter. In addition, output has yet to return to pre-global crisis levels and stuck at around 3% versus the 5.5% + growth in labor need to generate jobs to dramatically reduce unemployment.
  • Mounting unemployment especially of youth—only 12% of South Africans under age 25 have formal jobs; 27% unemployment nation wide.
  • Business challenges, including widespread skills shortages, high crime rates, stricter consumer protection laws and the need to comply with black economic empowerment laws
  • Climate change:  Due to its large-scale utilization of coal to generate electricity, South Africa ranks among the largest CO2-emitters worldwide (ranking 11 absolute).   Adapting to the realities of a changing world presents a real challenge for the nation.
  • Managing Chronic Disease: SA is home to less than 1% of the world’s population but nearly 20% of all HIV/AIDS sufferers. So far, nearly 3 m have died. 6 m are living with the disease among the 50 m people living in South Africa. And it falls disproportionately on women and girls. South Africa also has one of the highest rates of TB infection in the world. 40% of the world’s TB cases are in SA. Such chronic diseases are imposing a huge cost in economic as well as human terms. that in 2003–07, South African GDP was about 15 percent smaller, and GDP per capita about 4.5 percent smaller than the levels that the economy would have attained without the impacts of HIV/AIDS.  This is the space Africare has been working in, very effectively for the past 8 years in the Eastern Cape.
  • Mounting budgetary pressures limit the government’s degrees of freedom to act on social challenges.

The good news regarding South Africa:

South Africa’s 7 Great Fundamentals!

  • A strong macroeconomic policy framework will continue to support a stable sovereign debt rating--but rising public debt—fueled by sustained pressure on the government to step up public spending—will weigh on sovereign risk.
  • South Africa’s inflation rate fell to an eight-month low, giving the central bank more room to cut borrowing costs to boost growth.
  • A relatively stable currency:  After a big slide last year, the Rand has managed to be stable and is supported by fairly robust investment inflows.
  • A sound banking system, supported by strong regulation.  
  • A highly diversified export base: gold, diamonds, platinum, other metals and minerals, machinery and equipment plus agricultural exports of South Africa including edible fruit and nuts, beverages, preserved food, tobacco, cereals, and wool.
  • Globally competitive: Over the last several years South Africa has been steadily climbing up the Global Competitiveness Index and now is number 50 right behind its fellow BRIC countries (Brazil 46; Russia 48; India 35;and China 19)
  • A terrific National Development Plan! It hits all the right notes: the focus on jobs, on improving education, training and healthcare, expanding infrastructure, and fighting corruption, by creating virtuous circles involving communities, youth, workers and the private sector with each other and a more capable state to eliminate poverty and sharply reducing inequality by 2030.

South Africa has made some extraordinary strides since the end of Apartheid and now stands as an essential part of the future of Africa.  Getting the correct mix of policy and implementation is vital -- not just for South Africa’s sake but also for its neighbors and indeed the rest of Africa.  Because, what we know is that a 1 percentage point increase in South African economic growth is correlated with a ½–¾ percentage point increase in growth in the rest of Africa. 

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