South Africa Faces Many Challenges in Its Economic Rise

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We are nearly at the end of the “potential future super power” series. It would be remiss of me to skip the African continent in any discussion about the future. Every time we make a new acronym now for emerging markets, we try to insert an “S” for South Africa (for example, the “CIVETS”, which includes Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa). In fact, we even tried to insert an “S”, after the fact, at the end of BRIC (Brazil, Russia, India, and China).

South Africa is the largest country in Africa with a throbbing population of 50.6 million. It is a very serious player in the commodities markets as a global mining and mineral processor which controls about three quarters of the world’s platinum production and major shares in palladium, gold, manganese, and diamonds. There is a lot of buzz surrounding South Africa and it seems to have all the makings of a global emerging market with its multi-ethnic population and diverse cultures—11 official languages are recognized in its constitution.

The World Bank ranks it as an upper middle-income country, ranked 28th in the world with a gross national product in purchasing power parity terms of 555 billion (2011) with a GDP per capita of $10,973. It’s stock market is ranked 20th largest in the world. South Africa burst onto the world’s stage in early 2004 with high growth rates and ended that decade with a very successful World Cup in 2010. The question is where does it go from here? Do countries like Brazil and South Africa continually need mega events with strict, hard deadlines to stay credible in the eyes of private capital markets? (Perhaps this represents a new growth model for development i.e. continually hosting large sporting events as a central tenant to emerging markets development and investment plans).

The economy of South Africa is diverse; it is reliant on mining, farming, and tourism. The country has tried to base its future growth on high technology (entrepreneurship, IT, biotechnology, etc) as opposed to manufacturing. South Africa publicly acknowledged that competing with South East Asian economies in manufacturing would be futile—they are right. Thus, it is an unusually insightful country. It has instead decided to focus on scientific and technological innovations. Some noteworthy achievements have been, for example, the first human-to-human heart transplant, vaccine for yellow-fever, cutting edge work in molecular biology, x-rays computed tomography (otherwise known as CT scans to most of us)—all of which have earned South Africa numerous Nobel Prizes. This country has the unique ability unlike any other on this sub-Saharan continent to reinvent itself politically and economically—especially given its size. 

Regrettably that does not diminish any of the significant and persistent social, political, and economic problems—unemployment, poverty, and AIDS taking the top slots. Unemployment is high (ranging from 25-40 percent unemployment depending on your source) and income disparity is one of the highest in the world (it is in the top 10 countries). Poverty is extremely prevalent amongst the majority of black South Africans. While most other emerging markets for better or worse, like Brazil or India, have thriving shadow economies (the informal market which is by and large not illicit, but just not taxed, not monitored by the government, and not included in the national GDP), South Africa has a relatively small shadow economy occupying about 15 percent of the jobs—thus not a sufficient outlet for the poor unemployed. Perhaps the most disturbing is that its public health system is being crippled fighting the deadly AIDS disease on a scale we have never seen before. South Africa has the highest number of infected people in the world, approx 6 million. The good news is that it also has the highest domestic investment in the disease in lower- and middle-income countries. The bad news is that it leaves the healthcare system venerable to other issues not being addressed.

Asides from the issues mention above, the list of “things to do” for South Africa is long and complex, for example:

  • education levels among the black population is substandard
  • high corruption
  • economic growth plan is based on natural resources thus unsustainable in the long term
  • public services requires an overhaul in many arenas
  • high violent crime
  • the transfer of agricultural lands owned by whites to black African owners is moving very slowly
  • the “townships” (huge, informal housing settlements near big cities) are serious thorns in the country’s underbelly
  • the ever present shortages of clean water and electricity
  • underdeveloped infrastructure restricting economic activity and social inclusion for its diverse population,
  • abject poverty with more than 50 percent of children living in poverty. A 2012 UNICEF report found:
    • 1.4 million children live in homes that rely on often dirty streams for drinking water
    • 1.5 million have no flushing lavatories
    • 1.7 million live in shacks, with no proper bedding, cooking, or washing facilities
    • four in 10 live in homes where no one is employed (and seven in 10 in cases of dire poverty)
    • 330,000 children and 5 million adults are currently infected with HIV and 40 percent die from the disease annually.

I think I should stop making the “to do list,” as with all things African (good and bad), it is overwhelming.

Growth averaged 5 percent from 2004 to 2007, extremely impressive, but growth has slowed with the not so surprising dip into negative territory in 2009 due to the global financial crisis—it now rests between 3-4 percent. For South Africa to bounce forward it must deliver some serious growth numbers over a very long period of time. This is not in the cards unless there is a game changer in the system….I have yet to see one (even rising precious metals and mineral prices will not be enough). Let’s wait and see if there is a game changer but keep in mind medium- to long-term has a different meaning in Africa than it does for private capital markets.

South Africa need to reduce the gap between the rich and poor or it will roll back into political strife—but this is the central modern challenge facing all governments to varying degrees—developed or emerging.

Despite the potential and richness of this country that in many ways represents the soul, rhythm, and heartbeat of Africa; long-term prosperity is still a distant dream for many South Africans.

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