The FINANCIAL -- South Africa celebrates two decades of democracy on 27 April 2014. Significant social and economic progress has led to relatively high growth since Nelson Mandela was elected president in 1994 and prudent fiscal management has reduced government debt ratios. But structural challenges remain, including low skill levels, frequent industrial stoppages, high real-wage settlements and infrastructure bottlenecks.
In addition, as one of the ‘Fragile Five’ markets with slow growth, weak currencies and macroeconomic imbalances, South Africa’s near-term macro outlook looks challenging.
The country must overcome these formidable obstacles to unleash its full growth potential. But by focusing only on the negatives, it is easy to forget how far it has come since the end of apartheid.
On the financial markets side, prudent fiscal management and solid monetary policy over the past two decades has increased transparency and boosted investor confidence. South Africa now ranks third among 148 countries on the World Economic Forum’s Global Competitive Index for financial-market development.
But it ranks far lower on supply-side reforms such as infrastructure spending and is bottom of the league on labour relations.
The union-dominated labour market is among the most inflexible in the world, resulting in real wages rapidly outpacing productivity. Businesses shed workers to manage their total wage bill. High wage increases thus become counter-productive.
Labour market rigidities mean 2.6 million temporary contract jobs have been created since 2000 while permanent positions fell by 2 million. The agricultural workforce plunged from 1.4 million in 2000 to 661,000 in 2012 while mining employment dropped from 432,000 to 349,000.
Although union membership declined from a peak of 45.2 per cent of the workforce in 1997 to roughly 25 per cent in 2012, average man-days lost per year increased from 1.8 million in the 1980s to 3.9 million between 2000 and 2011. Some 2.8 million days were lost in the top 10 strikes in 2012 – mainly in mining and all wage-related.
But despite poor supply-side reform, progress has been made over 20 years. South Africa’s real GDP grew at a respectable 3.2 per cent a year between 1994 and 2012 and rose from USD4,253 a head in 1994 to USD5,862 in 2012.
CPI inflation has been brought down from the double-digit levels of the apartheid era. The ratio of government debt to GDP fell from a peak of 50.4 per cent in 1995 to 24.6 per cent in 2008 and, despite a return to 40.1 per cent in 2012, remains low by international standards.
However, it is harder to make a case for the South African economy in the near term. Recovery from recession has been frustratingly slow. Household consumption growth has decelerated markedly since mid-2012 as gains in disposable income were hit by weak employment growth, higher inflation and household debt.
One hindrance to South Africa’s potential long-term growth is demographics. Its population is expected to grow at just 0.6 per cent a year until 2050 compared with 2.1 per cent for all Africa. The birth rate has fallen from 26 per 1,000 population to 23 in the past two decades.
South Africa is one of the most unequal countries in the world. Addressing long-standing inequality and poverty remains a key objective. The World Bank says 31.3 per cent of people lived on less than USD2 per day in 2009 and the government supports about 30 per cent of the population through social grants.