Economy
By UN classification, South Africa is a middle-income country with an abundant supply of resources, well-developed financial, legal, communications, energy, and transport sectors, a stock exchange (the JSE Securities Exchange), that ranks among the top twenty in the world, and a modern infrastructure supporting an efficient distribution of goods to major urban centres throughout the region. South Africa's per capita GDP, corrected for purchasing power parity, positions the country as one of the fifty wealthiest in the world.
In many respects, South Africa is developed; however, this development is significantly localised around four areas, namely Cape Town, Port Elizabeth, Durban and Pretoria/Johannesburg. Beyond these four economic centres, development is marginal and poverty still reigns despite Government strategies. However, key marginal areas are experiencing rapid growth recently. Such areas include: Mossel Bay to Plettenberg Bay; Rustenburg area; Nelspruit area; Bloemfontein; Cape West Coast; KZN North Coast amongst others.
Large income gaps and a dual economy designate South Africa as developing; South Africa has one of the highest rates of income inequality in the world. Consecutive growth rates in the last ten years are helping lower unemployment; however, daunting economic problems remain. Other problems are crime, corruption and HIV/AIDS.
GEAR Economic Policy
The Government of South Africa demonstrated its commitment to open markets, privatisation and a favourable investment climate with its introduction of the crucial Growth, Employment and Redistribution (GEAR) strategy - the neoliberal economic strategy to cover 1996-2000. Introduced by Finance Minister Trevor Manuel in June 1996, the policy set government the ambitious goals of achieving sustained annual real GDP growth of 6% or more by the year 2000 while creating 400,000 new jobs each year. The policy was meant to increase investment, especially Foreign Direct Investment, in the country to help achieve these ambitious goals. South Africa uses a mixed economy.
The strategy had mixed success: it brought greater financial discipline and macroeconomic stability but largely failed to deliver in key areas. Formal employment continued to decline, and despite the ongoing efforts of black empowerment and signs of a fledgling black middle class and social mobility, the country's wealth remained unevenly distributed along racial lines. The desperately needed FDI also remained elusive, and consequently the ambitious economic growth targets were never realised. The policy came under stringent fire from many critics, especially when growth slumped to only 0.8% (later revised even lower to 0.5% by Statistics South Africa) in 1998.
South Africa's budgetary reforms such as the Medium-Term Expenditure Framework and the Public Finance Management Act - which aims at better reporting, auditing, and increased accountability - and the structural changes to its monetary policy framework (including inflation targeting) have, however, created transparency and predictability and are widely acclaimed. Trade liberalisation also progressed substantially since the early 1990s. Average import tariffs in South Africa, for example, declined to 14.3% in 1999 from more than 30% in 1990. These efforts, together with South Africa's implementation of its World Trade Organisation (WTO) obligations and its constructive role in launching the Doha Development Round, show South Africa's acceptance of free market principles.
One of the key pillars of the GEAR macroeconomic strategy was to reduce the fiscal deficit, which had reached over 9% of GDP during the 1993/4 fiscal year. The deficit has remained below 3% since the implementation of the reforms, greatly improving South Africa's fiscal health. The Government's 2002 budget called for a moderate increase in spending to promote faster growth and poverty alleviation.
Inflation Targeting and GDP Growth
In the February 2000 Budget Speech, the Minister of Finance announced a policy of inflation targeting, helping to bring consumer inflation, which had been running in the double digits for over 20 years, under control. Inflation fell from 6.9% in 1998 to less than 6.0% in 2000. The target was set to keep CPIX between 3% and 6% average per annum. Although initially successful, the Rand's rapid depreciation in late 2001 led to greater inflationary pressure and the South African Reserve Bank missed the target during the course of 2002, with inflation coming in at an average of 9.3% for the year.
Since September 2003, however, the CPIX inflation rate has remained consistently within the target range. The average annual rates of CPIX since 2001 were:
- 2001 - 6.6%
- 2002 - 9.3%
- 2003 - 6.8%
- 2004 - 4.3%
- 2005 - 4.3%
Success in keeping inflation at bay gave the government room to drastically bring down interest rates. During 2003 alone interest rates were cut by 550 basis points, while between 2002 and 2006 interest rates were cut by a total 650 basis points.
The cut in interest rates saw consumer spending rise, the construction sector boom and the sale of new vehicles reach record levels. This in turn generated much needed GDP growth. Ironically enough, GDP growth started to gather steam just as the end of the GEAR period neared. Since 1999, quarterly GDP growth has been consistently positive and annual GDP growth consistently above 2%. The present business cycle upswing is the longest on record. Between 1996 and 2004, GDP growth averaged 3.1%, rising to 4.5% (based on 2005 market prices) in 2004. Growth for 2005 is expected to comfortably exceed 4%, some predicting growth rates greater than 5%. This contrasts sharply with the erratic growth rates of 4.3% in 1996, 2.6% in 1997, 0.5% in 1998 and 2.4% in 1999 under GEAR (baseline 2005).
Although economic growth has improved, the growth has been largely jobless, and quicker growth is still needed. The South African Government estimates that the economy must achieve growth at an average of 4.5% until 2010 and 6% thereafter to reach its goal of halving South Africa's high levels of unemployment, estimated at 26.5% (March 2005 - Stats SA), by 2014.
In an effort to boost economic growth further and spur job creation, the government has launched special investment corridors to promote development in specific regions and also is working to encourage small, medium and micro-enterprise development.
Trade and Investment
South Africa has rich mineral resources. It is the world's largest producer and exporter of gold and platinum and also exports a significant amount of coal. During 2000, platinum overtook gold as South Africa's largest foreign exchange earner. The value-added processing of minerals to produce ferroalloys, stainless steels and similar products is a major industry and an important growth area. The country's diverse manufacturing industry is a world leader in several specialised sectors, including railway rolling stock, synthetic fuels, and mining equipment and machinery.
Agriculture accounts for only 3.4% of the gross domestic product. Major crops include citrus and deciduous fruits, corn, wheat, dairy products, sugarcane, tobacco, wine and wool. South Africa has many developed irrigation schemes and is a net exporter of food.
Exports reached 29.1% of GDP in 2001, up from 11.5% a decade ago. South Africa's major trading partners include the United Kingdom, the United States, Germany, Italy, Belgium, China and Japan. South Africa's trade with other Sub-Saharan African countries, particularly those in the Southern Africa region, has increased substantially. South Africa is a member of the Southern African Customs Union (SACU) and the Southern African Development Community (SADC). In August 1996, South Africa signed a regional trade protocol agreement with its SADC partners. The agreement was ratified in December 1999 and implementation began in September 2000. It intends to provide duty-free treatment for 85% of trade by 2008 and 100% by 2012.
South Africa has made great progress in dismantling its old economic system, which was based on import substitution, high tariffs and subsidies, anticompetitive behaviour, and extensive government intervention in the economy. The new leadership has moved to reduce the government's role in the economy and to promote private sector investment and competition. It has significantly reduced tariffs and export subsidies, loosened exchange controls, cut the secondary tax on corporate dividends, and improved enforcement of intellectual property laws. A new competition law was passed and became effective on 1 September 1999. A US-South Africa bilateral tax treaty went into effect on 1 January 1998, and a bilateral trade and investment framework agreement was signed in February 1999.
South Africa is a member of the World Trade Organisation (WTO) and is also an eligible country for the benefits under the African Growth and Opportunity Act (AGOA). South Africa has done away with most import permits except on used products and products regulated by international treaties. It also remains committed to the simplification and continued reduction of tariffs within the WTO framework and maintains active discussions with that body and its major trading partners.
Despite the numerous positive economic achievements since 1994, South Africa has struggled to attract significant Foreign Direct Investment. The situation may have started to change however, with 2005 seeing the largest single FDI into South Africa when Barclays bought a majority share in local bank Absa Group Limited. Deals between Vodafone and Vodacom followed in 2006.
Financial Policy
South Africa has a sophisticated financial structure with the JSE Securities Exchange, a large and active stock exchange that ranks 18th in the world in terms of total market capitalisation. The South African Reserve Bank (SARB) performs all central banking functions. The SARB is independent and operates in much the same way as Western central banks, influencing interest rates and controlling liquidity through its interest rates on funds provided to private sector banks. Quantitative credit controls and administrative control of deposit and lending rates have largely disappeared. South African banks adhere to the Bank of International Standards core standards.
The South African Government has taken steps to gradually reduce remaining foreign exchange controls, which apply only to South African residents. Private citizens are now allowed a one-time investment of up to 750,000 rand in offshore accounts. Since 2001, South African companies may invest up to R750 million in Africa and R500 million elsewhere.
Effect of HIV/AIDS
South Africa is one of the countries most affected by HIV with 5-6 million HIV infected individuals. Nearly 20% of the 15-49 year old population is infected and in parts of the country up to 40% of women of child-bearing age are infected. Overall, 12-13% of the population is infected and by 2005, this rate could reach 15%. About 2,300 new infections occur each day or over 850,000 annually. Approximately 40% of adult deaths and 25% of all deaths in 2000 were due to AIDS.
Without effective prevention and treatment 5-7 million cumulative AIDS deaths are anticipated by 2010 (with 1.5 million deaths in 2010 alone), and there are projected to be over 1 million sick with AIDS. Recent studies predict the epidemic could cost South Africa as much as 17% in GDP growth by 2010. The extraction industries, education and health are among the sectors that will be severely affected.
Over the last decade, national government leadership has not effectively addressed the epidemic although a good HIV prevention strategy was initiated. In April 2002, a revitalisation of the HIV/AIDS program was announced by the Cabinet with substantial funding increases anticipated in 2003-04.
Telecommunications Sector
The domestic telecommunications infrastructure provides modern and efficient service to urban areas, including cellular and Internet services. In 1997, Telkom, the South African telecommunications parastatal, was partly privatised and entered into a strategic equity partnership with a consortium of two companies, including SBC, a U.S. telecommunications company. In exchange for exclusivity (a monopoly) to provide certain services for 5 years, Telkom assumed an obligation to facilitate network modernisation and expansion into unserved areas. A second Network Operator was to be licensed to compete with Telkom across its spectrum of services in 2002, although this license was only officially handed over in late 2005. Three cellular companies now provide service to over 20 million subscribers.
Agricultural Sector
Despite attempts by government to reform the distribution of land, historically mostly held by whites, these efforts have not yet translated into growth in the agricultural sector, which continues to lag or decline in relation to the rest of the economy.
According to the OECD, "Agriculture contributes less than 4% to GDP but accounts for 10% of total reported employment."
