South Africa’s Economic Growth

38.4.4: South Africa’s Economic Growth

The South African economy has recorded impressive growth, which in 2011 enabled the country to join the prestigious BRIC group. However, the country continues to struggle with many challenges, including high unemployment, a public health crisis, and one of the highest rates of income inequality in the world.

Learning Objective

Explain why South Africa was added to the BRIC bloc of countries.

Key Points

  • BRICS is the acronym for an association of five major emerging national economies: Brazil, Russia, India, China, and South Africa. Originally the first four were grouped as BRIC. The BRICS members are developing or newly industrialized countries, distinguished by their large, sometimes fast-growing economies and significant influence on regional affairs. In 2010, South Africa joined the BRIC grouping, after being formally invited by the BRIC countries. The group was renamed BRICS – with the “S” standing for South Africa – to reflect the expanded membership.
  • The economy of South Africa is the largest in Africa. South Africa accounts for 24 percent of Africa’s gross domestic product and is ranked as an upper-middle-income economy by the World Bank – one of only four such countries in Africa. Since 1996, at the end of over 12 years of international sanctions, South Africa’s GDP has almost tripled to $400 billion and foreign exchange reserves have increased from $3 billion to nearly $50 billion, creating a diversified economy with a growing and sizable middle class within two decades of establishing democracy and ending apartheid.
  • After 1994, government policy brought down inflation, stabilized public finances, and attracted foreign capital. However, economic growth was still subpar until 2004, when it picked up significantly. Both employment and capital formation increased. During the presidency of Jacob Zuma, the government has begun to increase the role of state-owned enterprises.
  • Unlike most of the world’s formerly poor and now developing countries, South Africa does not have a thriving informal economy. Only 15% of South African jobs are in the informal sector. Mining has been the main driving force behind the history and development of Africa’s most advanced economy. South Africa is one of the world’s leading mining and mineral-processing countries. The agricultural industry contributes around 10% of formal employment, relatively low compared to other parts of Africa, contributing around 2.6% of GDP.
  • The manufacturing industry’s contribution to the economy is relatively small, providing just 13.3% of jobs and 15% of GDP. Labor costs are low, but not nearly as low as in most other emerging markets, and the cost of the transport, communications, and general living is much higher. Over the last few decades, South Africa and particularly the Cape Town region has established itself as a successful call center and business process outsourcing destination. Tourism also creates a substantial percentage of jobs in the country.
  • High levels of unemployment, income inequality, growing public debt, political mismanagement, low levels of education, no reliable access to electricity, and crime are serious problems that have negatively impacted the South African economy. In 2016, the top five challenges to doing business in the country were inefficient government bureaucracy, restrictive labor regulations, a shortage of educated workers, political instability, and corruption. South Africa continues to have a relatively high rate of poverty and is ranked in the top 10 countries in the world for income inequality.

Examples

Key Terms

apartheid
A system of institutionalized racial segregation and discrimination in South Africa between 1948 and 1991, when it was abolished. The country’s first multiracial elections under a universal franchise were held three years later in 1994. Broadly speaking, the system was delineated into petty, which entailed the segregation of public facilities and social events, and grand, which dictated housing and employment opportunities by race.
G-20
An international forum for the governments and central bank governors from 20 major economies. It was founded in 1999 with the aim of studying, reviewing, and promoting high-level discussion of policy issues pertaining to the promotion of international financial stability. It seeks to address issues that go beyond the responsibilities of any one organization.
BRICS
The acronym for an association of five major emerging national economies. Its members are leading developing or newly industrialized countries, distinguished by their large, sometimes fast-growing economies and significant influence on regional affairs. All five are G-20 members.

 

BRICS

BRICS is the acronym for an association of five major emerging national economies: Brazil, Russia, India, China, and South Africa. Originally the first four were grouped as BRIC, before the induction of South Africa in 2010. The BRICS members are leading developing or newly industrialized countries, distinguished by their large, sometimes fast-growing economies and significant influence on regional affairs. All five are G-20 members. Since 2009, the BRICS nations have met annually at formal summits. In 2015, the five BRICS countries represented over 3.6 billion people, or half of the world population. All five members are in the top 25 of the world by population and four are in the top 10. The World bank expects BRICS growth to pick up to 5.3% in 2017. Bilateral relations among BRICS nations have mainly been conducted on the basis of non-interference, equality, and mutual benefit.

In 2010, South Africa began the formal process of admission to join the BRIC grouping, becoming a member at the end of that year and joining officially in 2011 after being formally invited by the BRIC countries. The group was renamed BRICS – with the “S” standing for South Africa – to reflect the expanded membership.

Leaders of the BRICS nations at the G-20 summit in Brisbane, 2014

Leaders of the BRICS nations at the G-20 summit in Brisbane, 2014. In April 2011, South Africa formally joined the Brazil-Russia-India-China (BRICS) grouping of countries, identified by President Zuma (first right) as the country’s largest trading partners and also the largest trading partners with Africa as a whole. Zuma asserted that BRICS member countries would also work with each other through the UN, the Group of Twenty (G20) and the India, Brazil, South Africa (IBSA) forum.

South African Economy in the 21st Century

The economy of South Africa is the largest in Africa. South Africa accounts for 24 percent of Africa’s gross domestic product and is ranked as an upper-middle-income economy by the World Bank – one of only four such countries in Africa. Since 1996, at the end of over 12 years of international sanctions, South Africa’s GDP has almost tripled to $400 billion and foreign exchange reserves have increased from $3 billion to nearly $50 billion, creating a diversified economy with a growing and sizable middle class within two decades of establishing democracy and ending apartheid. The nation is the only African member of the G-20.

After 1994, three years after apartheid was abolished and the year of first interracial elections, government policy brought down inflation, stabilized public finances, and some foreign capital was attracted. However, growth was still subpar, but increased significantly in 2004 when both employment and capital formation increased. During the presidency of Jacob Zuma (elected in 2009 and reelected in 2014), the government has begun to increase the role of state-owned enterprises. Some of the biggest state-owned companies are Eskom, the electric power monopoly, South African Airways (SAA), and Transnet, the railroad and ports monopoly. Some of these state-owned companies have not been profitable, which has required bailouts totaling 30 billion rand ($2.3 billion) over 20 years.

South Africa has a mixed economy (consisting of a mixture of markets and economic interventionism). Unlike most of the world’s formerly poor and now developing countries, South Africa does not have a thriving informal economy. Only 15% of South African jobs are in the informal sector, compared with around half in Brazil and India and nearly three-quarters in Indonesia. The OECD attributes this difference to South Africa’s widespread welfare system.

Mining has been the main driving force behind the history and development of Africa’s most advanced economy. Large-scale and profitable mining started with the discovery of a diamond in 1867 and in the 21st century, South Africa is one of the world’s leading mining and mineral-processing countries. Although mining’s contribution to the national GDP has fallen from 21% in 1970 to 6% in 2011, it still represents almost 60% of exports. The mining sector has a mix of privately owned and state-controlled mines.

The agricultural industry contributes around 10% of formal employment, relatively low compared to other parts of Africa, contributing around 2.6% of GDP. Due to the aridity of the land, only 13.5% can be used for crop production and only 3% is considered high potential land. The sector continues to face problems, with increased foreign competition and crime being two of the major challenges. The government has been accused of either putting in too much effort or not enough effort to tackle the problem of farm attacks as opposed to other forms of violent crime.

The manufacturing industry’s contribution to the economy is relatively small, providing just 13.3% of jobs and 15% of GDP. Labor costs are low, but not nearly as low as in most other emerging markets, and the cost of the transport, communications, and general living is much higher. The South African automotive industry accounts for about 10% of South Africa’s manufacturing exports, contributing 7.5% to the country’s GDP. BMW, Ford, Volkswagen, Daimler-Chrysler, General Motors, Nissan, and Toyota all have production plants in South Africa. There are also about 200 automotive component manufacturers in South Africa and more than 150 others that supply the industry on a non-exclusive basis.

The domestic telecommunications infrastructure provides modern and efficient service to urban areas, including cellular and internet services. Over the last few decades, South Africa and particularly the Cape Town region has established itself as a successful call center and business process outsourcing destination. With a highly talented pool of productive labor and with Cape Town sharing cultural affinity with Britain, large overseas firms such as Lufthansa, Amazon.com, ASDA, the Carphone Warehouse, Delta Airlines, and many more have established inbound call centers within Cape Town.

South Africa is also a popular tourist destination. According to the World Travel & Tourism Council, travel and tourism support around 10% of jobs in the country.

Canal Walk shopping center in Cape Town

Canal Walk shopping center in Cape Town. While this modern shopping mall serves as evidence that South Africa is becoming economically prosperous, the high levels of unemployment and inequality are considered by the government and most South Africans to be the most salient economic problems facing the country. These issues, and others linked to them such as crime, have in turn hurt investment and growth, consequently having a negative feedback effect on employment.

Challenges

South Africa has an extreme and persistent high unemployment rate of over 25%, which interacts with other economic and social problems such as inadequate education, poor health outcomes, and crime. The poor have limited access to economic opportunities and basic services. The official unemployment rate, although very high by international standards, still understates the magnitude of the problem because it includes only adults who are actively looking for work, excluding those who have given up looking for jobs. Only 41% of the population of working age has any kind of job (formal or informal). This rate is 30% lower than that of China and about 25% lower than that of Brazil or Indonesia.

There has been substantial human capital flight from South Africa in recent years. South Africa’s Bureau of Statistics estimates that between 1 million and 1.6 million people in skilled, professional, and managerial occupations have emigrated since 1994 and that for every emigrant, 10 unskilled people lose their jobs. Among the reasons cited for wishing to leave the country were declining quality of life and high levels of crime. Furthermore, the government’s affirmative action policy was identified as a factor influencing the emigration of skilled white South Africans. The results of a 1998 survey indicate that skilled white South Africans are strongly opposed to this policy and the arguments advanced in support of it.

Refugees and immigrants from poorer neighboring countries, including the Democratic Republic of the Congo, Mozambique, Zimbabwe, Malawi, and others, represent a large portion of the informal sector. With high unemployment levels among poorer South Africans, xenophobia is prevalent and many South Africans feel resentful of immigrants who are seen as depriving the native population of jobs. Although many South African employers have employed migrants from other countries for lower pay than South African citizens, especially in the construction, tourism, agriculture, and domestic service industries, many immigrants continue to live in poor conditions.

According to a 2015 UNAIDS Report, South Africa has an estimated 7 million people living with HIV, more than any other country in the world. A 2008 study revealed that HIV/AIDS infection in South Africa is distinctly divided along racial lines: 13.6% of black South Africans are HIV-positive, whereas only 0.3% of white South Africans have the disease. Most casualties have been economically active individuals, resulting in AIDS orphans who in many cases depend on the state for care and financial support. It is estimated that there are 1,200,000 orphans in South Africa.

High levels of unemployment, income inequality, growing public debt, political mismanagement, low levels of education, no reliable access to electricity, and crime are serious problems that have negatively impacted the South African economy. In 2016, the top five challenges to doing business in the country were inefficient government bureaucracy, restrictive labor regulations, a shortage of educated workers, political instability, and corruption, while the country’s strong banking sector was rated as a strongly positive feature of the economy. South Africa continues to have a relatively high rate of poverty and is ranked in the top 10 countries in the world for income inequality.

Attributions