by Piet Coetzer

South Africa's economic fault lines

Good progress over 20 years but short on potential

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Despite the great advances since the end of apartheid nearly two decades ago, the economic circumstances of most South Africans have remained largely the same. It is a pluralistic democracy with a robust free press, an independent judiciary, and a commitment to the rule of law. The country's mixed economy is the largest – and  arguably least risky for investors – in Africa, yet it is not reaching its full potential.

This the core conclusion of experts in an analysis on the country prepared by the Council on Foreign Relations (CFR), an independent American-based think tank.

Income inequality and a legacy of apartheid-era education policies remain the greatest challenge facing South Africa today, experts say.

The failure of the governing African National Congress to deliver on its economic promises has fueled social unrest and poses a threat to its leading economic and political position in Africa.

Nelson Mandela's victory in South Africa's first multiracial, democratic elections in 1994 inspired high expectations, both within South Africa and around the world, for a more equitable society. But the reality was more complicated.

The transition was essentially a deal between the old regime and the anti-apartheid opposition, and the old regime was not destroyed. White South Africans retained property rights, their pensions and control over much of the economy.

While this allowed for a non-violent changeover to democratic rule, it made it more difficult to implement a comprehensive social-economic overhaul of a deeply unequal society.

Amongst the challenges identified are:

In the first decade after apartheid, South Africa experienced annual economic growth of around 3.4 percent and an overall reduction in poverty. However, despite these trends, and the government's highly redistributive economic policies, income disparities grew;

The pervasive inequality threatens to destabilise the country. Persistent high levels of inequality have resulted in serious challenges to democracy. Specific outcomes range from a decline in the willingness of citizens to support democracy to actual reversal of democracy," according to one study;

Connected to income inequality, South Africa's other major challenge remains the failure of the education system for most black citizens, which has fed pervasive structural unemployment. There is a huge mass of black people with access to the labor market, but without the skills to take up those jobs.The government has also failed to provide sufficient vocational training for black workers looking to acquire new skill sets, particularly in the fields of carpentry, electrical work, and plumbing. The result is a "fundamental productivity gap" between blacks and whites;

There remains a large gap between primary and secondary schools that were formerly designated for black South Africans and those for white South Africans. "Teachers in black state schools work an average of 3.5 hours a day, compared with 6.5 hours in the former white state schools," while only one out of six South Africans advances to the university level, reports the Economist. In 2008, 1.4% of working-age blacks (PDF) had completed university, while nearly 20% of working-age whites had a degree, according to an OECD report; and

 South Africa's annual GDP growth slowed to 2.5% in 2012 from 3.1% in 2011, according to the World Bank as a result of a continued slowdown in the EU and China, it’s two primary export partners. Without a growth rate of 7%, set as target by the government, South Africa has been unable to absorb the wave of new entrants to the labor market from dismantling apartheid's barriers. This was however, not always the case. In the decade after apartheid the was a substantial increase in labor market participation, with the labor force growing at around 5% annually between 1995 and 2002.

Experts describe the situation as a vicious circle; slow growth is limiting employment opportunities even as an unqualified labor force is holding back growth prospects. South Africa's growth prospects will be held back until the issue of 'black education' is more satisfactorily addressed.

South Africa's skills base is extraordinarily narrow, and teachers aren't teaching. If schools perform badly, there are no consequences. This can partly be blamed on South Africa's powerful trade unions, which limit government's ability to hold teachers accountable by providing concrete incentives and penalties.

The World Bank cites high inequality as being the central factor in South Africa's "inability to create employment opportunities on a large enough scale.

In addition to a skills and education deficit, structural inflexibility in the labor market has also contributed to the chronically high unemployment level and the militant trade union movement has been a major problem for small business employers. The legal hurdles created by the unions is a disincentive for small businesses to expand.

Unions proved instrumental in the anti-apartheid struggle and have played an outsized role in contemporary South African political life. However, deadly strikes in the country's lucrative platinum mining belt in 2012 and 2013 highlighted the negative side of union power in South Africa.

South Africa's "economic weight in the region," according to the IMF’s Abebe Aemro Selassie, "resembles that of Germany in the euro area.”

 South Africa's economy is far less reliant on commodities and more diversified than others in the region (and) is an important anchor of economic stability in sub-Saharan Africa.

The driving sectors of South Africa's economy over the past two decades have been mining and manufacturing, agriculture, and financial services. However, the country has arguably failed to augment those industries through investment, particularly in the area of mining and manufacturing, and to solidify its economic leadership role in sub-Saharan Africa.

The economy is very dependent on primary and primary-processed products. The productive capacity of the country is linked to mining and mineral processing.

Yet South African industry has not invested in labor-intensive facilities that would use the raw commodities to develop secondary products and bolster its domestic market. South Africa has failed to implement a well-targeted industrial policy aimed at light manufacturing. This has allowed the market to be flooded with inexpensive goods from India and China.

If South Africa invested more in textiles and light manufacturing, it could help to alleviate youth unemployment and move the country along a path toward more equitable growth.

The growth trajectory is based on a dependence on heavy manufacturing, the resources sector, and foreign equity to finance the current account deficit.

One expert called for the development of a "more labor intensive and competitive growth path" by focusing on supply and demand policies, increased wages, and deregulated product markets.

Africa's largest economy remains locked into a low-growth trap within a continent with some of the world's fastest-growing economies," he said.

Under such circumstances, South Africa risks getting left behind as growth in other African countries accelerates, some experts say.

In 1994, South Africa’s GDP comprised 50% of sub-Saharan Africa's GDP. Today it makes up only 35%. Nigeria poses the biggest threat to South Africa's dominant economic positionon the continent and its attendant political weight in Africa and around the globe.

However, some experts caution against taking sub-Saharan growth statistics at face value. In his book, Poor Numbers, Morten Jerven says the underlying data for GDP in sub-Saharan Africa are often reached through inconsistent and inaccurate "methods of measurement and aggregation."

Still, it is clear that South Africa is falling short of its full economic potential, both on the continent and vis-à-vis other major global southern countries.

While South Africa joined the informal BRIC group (now BRICS) of leading developing nations (Brazil, Russia, India, and China) in early 2011, its economy is quite limited compared to these other emerging markets.

South Africa, unlike Nigeria, was not included in Goldman Sachs's 2005 'Next Eleven' prediction of the largest economies beside BRIC states that could significantly impact the global economy. This indicates skepticism about its ability to match economic potential with its hitherto inflated political influence on the global stage.

Unless South Africa addresses its high level of inequality and low competitiveness, it will become increasingly difficult for the country to claim leadership in Africa and to manage its gap between diplomatic stature based on international approval and economic performance based on domestic realities.

(Original version of the paper published the CFR)

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