South Africa - Economic Growth and Development

This study note covers aspects of economic growth and development in South Africa

The South African economy has been described by economist Ruchir Sharma in his recent book Breakout Nations as “a developed market wrapped inside an emerging market". Two decades on from the formal end of the old apartheid regime, the South African economy can lay claim to being one of the wealthiest in Africa and one with a stable functioning democracy. It is Africa's biggest economy but also one which has deep-rooted structural problems constraining its growth and development.

South Africa is one of the biggest economies on the African continent. But – despite a period of strong growth from 2003-2007 – their average annual growth rate for real GDP between the years 2001-2010 has been relatively poor and certainly well below the African average. A cluster of African countries has achieved much stronger growth rates helping to bring about improvements in a range of development measures.

South Africa appears to be struggling to raise her annual growth rate towards the 5% or 6% mark that most economists regard as crucial to make faster progress towards MDG goals and to address the chronic problem of very high structural unemployment in the economy. The rate of unemployment in South Africa has remained stubbornly above 24% of the labour force but this average hides an enormous disparity in jobless rates between whites and non-whites.

The government has a target of reducing unemployment to 15% of the labour force but this will take a substantial improvement in economic growth to bring about and will also require labour market investments and reforms – one of the perceived weaknesses of the South African system is a bloated welfare state, indeed there are more people receiving social grants than in employment. In 2009, only 12% of the population paid any income tax. Unemployment rates in the townships are horrendously high – often in excess of seventy per cent. It is no surprise that in addition to more than 6 million South Africans unemployed, there are well over 2 million people working in the informal economy.

The South African economy is heavily dependent on mining – but in some sectors the real value of output has been on a declining trend as well as being volatile from month to month. South Africa is experiencing de-industrialisation – a falling share of industrial output and jobs as a share of total economic wealth.

South African growth is not slow by the standard of the growth record of many Euro Zone countries in recent years! But her economy does not seem to have achieved the “take-off" required to kick start significant development progress especially against the background of her deep social problems. One important feature of the economy is that South Africa has made relatively modest progress in meeting a number of key development targets and some of the Millennium Development Goals.

For South African economic growth to increase, the competitiveness of the economy needs to improve. The economy was ranked 50^th out of 142 countries in the 2012 World Competitiveness Rankings. South Africa scores relatively well for the efficiency of their product markets and for having a large market size. Many South African businesses have a high international reputation for innovation – the modern part of their economy stands comparison to high income countries around the world. What stands out is a low ranking in health and education, weaknesses in human capital and limited infrastructure.

• Global competitiveness ranking 2012: 50/142
• Infrastructure: 62/142
• Health and primary education: 132/142
• Labour market efficiency: 95/142
• Availability of scientists and engineers: 111/142
• Organised crime: 112/142
• Market size: 25/142

What is holding back growth in South Africa?

This country is an interesting case study in some of the growth constraint factors that have been discussed in previous chapters of the study companion. The underlying pace of expansion of national income – known by economists as the trend rate of growth – is held back by a number of key features:

Two speed economy

• Tourism, banking and finance, some parts of mining and farming doing well
• Slower growth in many informal urban industries, traditional manufacturing and many parts of South African farming

Low capital investment

• Capital investment in South Africa has been falling measured as a share of GDP
• Many South African companies invest abroad rather than focus on the domestic economy

Gold prices

• In recent years the surper-charged world price of gold may have proved a resource curse for South Africa - creating a Dutch Disease effect
• As gold prices has risen, the value of the local currency (the rand) has appreciated undermining the cost / price competitiveness of South African manufacturers

Wage rises

• South Africa has a powerful trade union movement that is part of government
• The annual rise in wages has been strong - boosting purchasing power for those in work but lifting unit wage costs and affecting global competitiveness

Closed economy

• Common to many developing countries - South Africa has monopolistic / oligopolistic utility businesses whose prices are high and efficiency is low
• The South African economy is relatively closed and highly protectionist

Deep inequality

• South Africa has very high levels of income and wealth inequality
• There is plenty of private sector wealth but the Gini coefficient is around 0.6
• Millions of people inactive in the labour market dependent on public and private cash transfers

Infrastructure Gaps

• A widely acknowledged problem for South Africa especially in the areas of roads, sanitation, energy efficiency, supply and cost
• Ambitious plans to boost infrastructure spending and signs of inward investment from China that might help to close the gap

Human capital

• In part a historical legacy from apartheid - an entire generation deprived of access to schooling
• Standards of literacy and training are lower than for many other emerging countries