No longer the king of the playground?
South Africa is the largest economy in Africa; in fact it is bigger than Angola, Ethiopia, Ghana and Kenya combined. From 2000 up to the financial crisis, the country had averaged growth of around 5% each year and last year was included into the much hyped BRIC club (Brazil, Russia, India, China), becoming the “S” at the end of the acronym. The country boasts the best infrastructure in the continent, the biggest stock exchange and still gets the most FDI projects.
But this only covers up the signs that the crown is slipping from South Africa’s head. GDP Growth since the financial crisis has barely averaged 3%, with the 2012 growth forecast cut from 3.8% to 2.8% in July. There are many reasons for this decline in growth, one being the increased competition from its neighbours. Whereas South Africa used to account for half of Sub-Saharan Africa’s GDP, it now barely makes up a third and faces big opposition from Nigeria (who have averaged 7% growth for the last decade) and Egypt (whose GDP nearly rivals South Africa’s in purchasing-power parity). While a more peaceful Africa has seen smaller countries like Kenya and Botswana attract more foreign investment directly, without the need to go through South Africa as in the past.
In Purchasing-Power Parity terms, Egypt is not far behind South Africa, found at http://www.economist.com/node/21556300
Another reason for slow growth has been a decline in its biggest industry, mining. The mining industry accounts both directly and indirectly for about 18% of GDP in South Africa, while the country possesses the World’s largest amount of mineral resources. This was great when Commodity prices were booming, but a sudden decline in prices over the last year has seen the economy affected. Additionally, Global demand has softened, with the Euro crisis in particular affecting South Africa as they account for 22% of the country’s exports. Mining quality has declined over the last few years as well, with the country falling from 37th to 54th in a “mining investment attractiveness” survey. The recent fiasco over mining strikes has also shown the poor conditions for workers in the mines and leads us onto the next problem: inequality.
The Fraser Institute’s mining investment attractiveness table, showing South Africa’s lowly position.
South Africa is rife with inequality; nearly half the population lives under the poverty line (60% for Black South Africans), White South Africans earn on average eight times more than Black South Africans (despite only accounting for 9% of the population) and since 1994 the company director’s salaries have risen by 29% compared to just 6% for workers wages. The Gini Coefficient – a measure of inequality where 0 = total equality and 1 = total inequality – was 0.63 for South Africa, an increase from 0.59 two decades ago, while the gap between the rich and poor is one of the biggest in the world, larger than known offenders such as Honduras.
The world map showing each countries GINI Coefficient, with South Africa a dark red (>.60)
The poor growth rate has substantial impacts on the whole economy, with high annual growth of 7% predicted to be needed to improve the severe unemployment figures. In South Africa nearly a quarter of the population is out of work and the high growth of pre-2007 years did not create the jobs that were hoped (rather lining the pockets of the already rich). The current president swept into power in 2009 on the promise of economic reform and job creation, but his target of getting unemployment as low as 14% by 2020 looks unattainable and since his party took over, 2 million jobs have been lost and unemployment hasn’t dropped below 22% since 2002.
The South African Unemployment figures from 2000-2010, found at http://southafricaeconomywatch.blogspot.co.uk/2011_01_01_archive.html
That’s not the only problems the country faces either. One of the biggest problems is the poor education South Africans receive, where educational spending outstrips most other African countries per child but remains one of the worst educational systems in the continent. This creates the problem of an unskilled labour force (especially in IT skills) that is unqualified for the jobs on offer in the country (resulting in foreigners being brought in for the top jobs). Another problem is a lack of credit since the financial crisis, with the ratio of bank credit to GDP falling by 10% (see the Economist’s graph below). Bad economic indicators also show an economy in trouble; with the current account deficit at 5.5% of GDP (showing the weakening of exports due to the Euro slump and strong domestic currency) and the budget deficit at 5.6% of GDP (due to poor exports lowering income for the country) thought the debt to GDP ratio of the country is a lowly 33%.
Graph showing South Africa’s drastic drop in Bank credit to GDP ratio, found at http://www.economist.com/node/21559336
So is South Africa losing its crown?
At the moment the nation is still the biggest kid in the playground and remains far ahead of other countries in sophistication and diversity. Despite the country having the largest mineral reserves, the economy is not revolved around the mining industry; with clear signs of variety in different sectors like industrial production and some good headway in improving the service sector. But South Africa will find it hard to throw its weight around when all the other kids start experiencing growth spurts.