South Africa’s structural challenges

Summary:

– South Africa has many assets: a strategic location on international maritime trade routes, abundant natural resources (agricultural and mining), a developed service sector (particularly the financial sector), and the rapid emergence of a new black middle class.

– A member of the BRICS since 2010, the country’s growth rate is nevertheless much lower than that of its counterparts. The country is struggling to emerge from the 2008/09 crisis. From 1.9% in 2013, South Africa’s GDP is not expected to exceed 2.4% in 2014.

– Beyond that, the country’s long-term growth is constrained by numerous structural challenges: endemic unemployment, considerable inequality, a failing education system, a worrying health situation (HIV/AIDS), infrastructure in need of modernization, and high levels of corruption.

Twenty years after its first free elections, South Africa went to the polls on May 7 for general elections. This is an opportunity for us to present the South African economy, its strengths, and the many challenges thatthe African National Congress ( the historic party, which won 62.2% of the vote) and its president, Jacob Zuma, will have to face in the coming years.

A nation full of resources…

A vast country covering 1.2 million^{square kilometers} (2.2 times the size of metropolitan France), South Africa has many assets. Located at the southern tip of the continent, the country is bordered by 2,500 kilometers of coastline, which, thanks to its dynamic ports, makes it a key hub for international maritime trade.

In addition, the country has abundant natural resources. Its varied climate (Mediterranean in the southwest, subtropical in the southeast, and tropical in the north) has enabled the development of a highly diversified agricultural sector, including fruit, vegetables, cereals, and livestock (sheep and cattle). Located in the southern hemisphere, the country has also been able to take advantage of the reversal of seasons compared to Western markets.

South Africa also has vast mineral resources (gold, platinum, chromium, vanadium, manganese, titanium, diamonds, coal, etc.), which enable the country to attract most of the foreign investment in the region.[1]and have enabled the development of industry: steel, chemicals, textiles, agri-food, electronics, and automotive. These industries are concentrated in the provinces of Gauteng, KwaZulu-Natal, Western Cape, and Eastern Cape, the country’s main employment centers.

The service sector is also well developed, with financial services at the forefront. Although the South African banking sector is highly concentrated, it is both healthy and profitable. It contributes 10% to the country’s GDP (Financial Stability Board, 2011). It is also a pioneer in banking regulation, with banks quickly complying with the new Basel III provisions (effective since January¹, 2013). Finally, the banking sector can rely on the Johannesburg Stock Exchange, ranked first on the African continent, which offers sophisticated products and real financial expertise.

The rapid emergence of a new middle class seeking new goods and services is also an asset for the South African economy. According to a recent study published by the Unilever Institute at the University of Cape Town entitled « Four million and rising, » the middle class (defined as the portion of the population that meets three of the following four criteria: owns a car, has a college degree, earns between €1,000 and €3,600 per month, or runs their own business) reached 8.3 million people in 2012, or 15.9% of the total population. In addition, the racial composition of the middle class has changed significantly in recent years. The number of black individuals in the middle class more than doubled between 2004 and 2012, from 1.7 million to 4.2 million, while the figure for the white population remained stable. According to the Unilever Institute study, in 2012 the middle class was composed of 51% Black, 34% White, 9% mixed race, and 6% Indian. The increase in the proportion of the black population within the middle class can be explained, in part, by the implementation since 2003 of a policy of positive discrimination, known as « Black economic empowerment, » designed to promote access to economic power for populations that were discriminated against on racial grounds under apartheid. However, the emergence of a new black middle class has been accompanied by a diversification of the goods and services consumed, enabling the development of new sectors, notably the automotive, mobile phone, and food industries.

… but whose growth is constrained

Building on these many strengths, South Africa has long been ranked as the leading economy on the African continent. This year, however, the country was overtaken by Nigeria, whose GDP stood at $510 billion and whose growth rate exceeded 6% (IMF). While this change can be explained by a change in the statistical method used by the Nigerian authorities, which now takes into account sectors of activity that were not included in the previous base year (1990), the fact remains that South Africa has been recording fairly low average annual growth for an emerging country in recent years.

After settling at 2.5% in 2012, South African growth reached only 1.9% in 2013. Hard hit by the financial crisis of 2008/2009, the country is struggling to return to its pre-crisis growth level. Both structural and cyclical factors explain these results. Domestic demand is constrained by endemic unemployment and sustained inflation (around 5.7% in 2013, IMF). Externally, the global slowdown has had a heavy impact on exports. 2013 was again marked by weak sales to the European Union, its leading trading partner.[2]. The lack of investment (both domestic and foreign) is hampering production[3]. High levels of crime and corruption, inadequate infrastructure, a rigid labor market, low productivity, and high exchange rate volatility are all factors that discourage investors.

By way of comparison, South Africa’s growth rate is lower than that of the other BRICS countries (a group to which it has belonged since 2010) and the new emerging economies[4], whose average growth rates were 3.9% and 4.3% respectively in 2013 (IMF). However, the gap is widening. Long-term growth is constrained by numerous structural challenges: persistent endemic unemployment, high levels of inequality causing social unrest (demonstrations, crime), inadequate education, a worrying health situation (with one of the highest HIV/AIDS prevalence rates in the world), aging infrastructure, and high levels of corruption.

… by numerous challenges

The South African economy is facing endemic unemployment, which is thought to affect 25% of the population[5]according to official statistics, compared with 20% at the end of apartheid. This rate is particularly high among young people (aged 15-24), 51% of whom were unemployed in 2012, compared with 22% for young adults (aged 25-54) and 8% for seniors (aged 55-64) (OECD)[6]. In addition, interracial differences are very marked: in 2012, the unemployment rate among the black population reached 28.5%, compared with 5.5% among the white population (OECD)[7.

These developments can be explained by economic growth that is insufficient to absorb the surplus labor entering the job market. Investment is too low to stimulate economic activity (around 19% of GDP in 2013, IMF) and there are still too few small and medium-sized enterprises due to a lack of competition in the goods and services market. In addition, the economic fabric is not conducive to job creation. The key sectors of the South African economy, namely mining and agriculture, are relatively labor-intensive, and the financial services sector is looking for skilled labor. However, there is a real mismatch between the needs of the economy and the skill level of the working-age population.

The cause is a failing education system. Admittedly, the school enrollment rate for 5-24 year olds is rising: from 70.1% in 1996 to 73.5% in 2011; and the percentage of the population aged 20 and over who have received higher education has increased from 7.1% in 1996 to 11.8% in 2011. However, inequalities in education, particularly basic education, persist. The white population continues to have the highest enrollment rate (77.7% in 2011 compared to 73.9% for the black population, 67.2% for mixed-race people, and 71.8% for Indian/Asian people) (Statistics South Africa).

Beyond educational inequalities, South African society is characterized by a high level of economic inequality. Admittedly, extreme poverty has declined since the end of apartheid, with the proportion of the population living on less than USD 1.25 per day (in 2005 PPP) falling from 21.4% in 1995 to 13.8% in 2009. However, more than 31% of the population continues to live below the poverty line ($2 per day) and the country remains plagued by deep income inequalities. In 2013, its Gini index stood at 0.7, one of the highest levels in the world. According to the World Bank, in 2009 the poorest 10% of South Africans accounted for 1.2% of income, while the richest 10% accounted for 51.7% of income. In addition, income inequality is still very pronounced between races: the average income for a black person is six times lower than for a white person (Statistics South Africa). In fact, the country still bears the scars of 43 years of apartheid, which is a source of discontent and social unrest (demonstrations, crime).

In terms of health, the country still has a high infant mortality rate (33/1,000) and life expectancy fell between 1994 and 2012 from 62 to 56 years (World Bank). Furthermore, South Africa has the highest number of people infected with HIV/AIDS (6.1 million in 2012, UNAIDS). According to UN data, the prevalence rate stood at 11.7% of the total population and 17.9% of adults (aged 15-49) in 2012, with inequalities persisting as the prevalence rate is higher among the black population.

The country also suffers from inadequate and even obsolete infrastructure. In terms of energy, there is a real mismatch between electricity demand and the country’s generation capacity. Over the past decade, electricity demand has increased by 20%, exceeding production capacity. The latter has not received the investment needed for its modernization and development. This has resulted in frequent blackouts, which are hampering the development of the national economy. The transport network (road and rail infrastructure), on the other hand, is relatively well developed and has been the subject of recent investment in preparation for the 2010 World Cup, but still needs to be modernized.

Conclusion

Weakened by the economic crisis of 2008/2009, South Africa also suffers from structural weaknesses that are hampering its long-term economic development. Until now, these weaknesses had been masked by sustained global economic growth and high commodity prices.

Today, if the country wants to return to a growth rate worthy of an emerging economy, it must embark on structural reforms, whether in the goods and services market (to increase competition and thus facilitate the entry of small and medium-sized enterprises that create jobs), the labor market (to reduce its many rigidities, particularly hiring and firing procedures, wage setting, etc.), or the education system (to match the economy’s need for skilled labor with the population’s level of qualifications).

In addition, the authorities will need to ensure that they continue their efforts in terms of investment (transport and energy infrastructure) and social spending (education, health), which began in 2010 with the adoption of the National Development Plan.