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Economy of South Africa

South Africa has a two-tiered economy; one rivaling other developed countries and the other with only the most basic infrastructure. It is therefore a productive and industrialised economy that exhibits many characteristics associated with developing countries, including a division of labour between formal and informal sectors and an uneven distribution of wealth and income. The primary sector, based on manufacturing, services, mining, and agriculture, is well developed.

South Africa's transportation infrastructure is among the best in Africa, supporting both domestic and regional needs. The OR Tambo International Airport serves as a hub for flights to other Southern Southern African and International countries. South Africa also has several major ports that make it a central point for most trade in the Southern African region.

Brief history of the South African economy

This is a chart of the trend of South Africa's gross domestic product at market prices estimated by the International Monetary Fund with figures in millions of South African Rand.

Year	Gross Domestic Product	US Dollar Exchange
1980	62,730	0.77 Rand
1985	127,598	1.47 Rand
1990	289,816	2.58 Rand
1995	1,548,100	3.62 Rand
2000	922,148	6.93 Rand
2005	1,523,254	6.36 Rand

The formal economy of South Africa has its beginnings in the arrival of Dutch settlers in 1652, originally sent by the Dutch East India Company to establish a provisioning station for passing ships. As the colony increased in size, with the arrival of French Huguenots and German citizens, some of the colonists were set free to pursue commercial farming, leading to the dominance of agriculture in the economy.

At the end of the 18th century, the British gained control of the colony, imposing the English language on the colonists, who were now developing a culture of their own. This in turn lead to the Great Trek, spreading farming deeper into the mainland, as well as the establishment of the independent Boer Republics of Transvaal and the Orange Free State.

In 1870 diamonds were discovered in Kimberley, while in 1886 some of the worlds largest gold deposits were discovered in the Witwatersrand region of Transvaal, quickly transforming the economy into a resource dominated one. The British, seeking the riches of the gold fields, invaded the Boer republics, and re-gained control over them in 1902 after the Second Boer War. The country also entered a period of industrialization during this time, including the organization of the first South African trade unions.

The government soon started putting laws distinguishing between different races in place. In 1948 the National Party won the national elections, and immediately started implementing an even stricter race-based policy named Apartheid, effectively dividing the economy into a privileged white one, and an impoverished black one. The policy was widely criticized and lead to crippling sanctions being placed against the country in the 1980s. The legacy of Apartheid will still have a major impact on the economy for generations to come.

South Africa held its first multi-racial elections in 1994, leaving the newly elected African National Congress (ANC) government with the daunting task of trying to restore order to an economy harmed by sanctions, while also integrating the previously disadvantaged segment of the population into it. As of 2005 agriculture, that once dominated the economy, contributes only 3.4% to the country's GDP, while services now account for 65.1%.

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 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 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 goals.

The outcomes of the GEAR strategy have been mixed. 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 declined from 6.9% in 1998 to less than 6.0% in 2000. The target was set to keep the consumer price index (CPIX) — a key indicator of inflation — 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.

From September 2003 to 2005, 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 down allowed the Reserve Bank to reduce the prime lending rate — that determines the interest rate. During 2003 alone interest rates were cut by 550 basis points (5.5%), while between 2002 and 2006 interest rates were cut by a total 650 basis points (6.5%).

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 growth in gross domestic product (GDP). 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%. Between 1996 and 2004, GDP growth averaged 3.1%, rising to 4.5% (based on 2005 market prices) in 2004.

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.

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. Another major export is diamonds. 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, based on a 2005 estimate by The World Factbook, 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 U.S.-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 Organization (WTO). U.S. products qualify for South Africa's most-favoured-nation tariff rates. South Africa also is an eligible country for the benefits under the African Growth and Opportunity Act (AGOA), and most of its products can enter the United States market duty free. 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.

As a result of a November 1993 bilateral agreement, the Overseas Private Investment Corporation (OPIC) can assist U.S. investors in the South African market with services such as political risk insurance and loans and loan guarantees. In July 1996, the United States and South Africa signed an investment fund protocol for a $120 million OPIC fund to make equity investments in South and Southern Africa. OPIC is establishing an additional fund--the Sub-Saharan Africa Infrastructure Fund, capitalised at $350 million--to investment in infrastructure projects. The Trade and Development Agency also has been actively involved in funding feasibility studies and identifying investment opportunities in South Africa for U.S. businesses.

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 the British based Vodafone and South Africa's Vodacom have taken place 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 R2 000,000 rand in offshore accounts. Since 2001, South African companies may invest up to R750 million in Africa and R500 million elsewhere. Smaller South Africa Companies can also move up to 50 Million Rand without SARB approval, allowing for swifter expansion to overseas markets. South Africa also has a strict policy of reducing its international debt and maintaining a healthy balance of trade. This has led to recent legislation promoting South African products through the Proudly South African campaign and new labelling legislation dictating all products must be labelled with their country of manufacture.

Human capital flight

There has been a large degree of human capital flight from South Africa in recent years. To quote the first of the preceding references:

South Africa has lost 25% of its graduates to the United States alone. Moreover, South Africans account for 9.7% of all international medical graduates practicing in Canada. Out of all the medical graduates produced by the University of Witwatersrand in the last 35 years, more than 45% (or 2,000 physicians), have left the country. 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.

There are a range of causes cited for the migration of skilled South Africans. In mid 1998, the Southern African Migration Project (SAMP) undertook a study to examine and assess the range of factors that contribute to skilled South Africans’ desire to leave the country:

Over two-thirds of the sample said that they had given the idea of emigration some thought while 38% said they had given it a “great deal of thought”. Among the reasons cited for wishing to leave the country was the declining quality of life. Indeed, it is a common belief that the South African brain drain is heavily driven by perceptions of deteriorating quality of life since the demise of apartheid. There is general dissatisfaction with the cost of living, the level of taxation, safety and security, and the standard of public and commercial services in South Africa.
...
Furthermore, the government’s affirmative action policy was identified as another factor influencing the emigration of skilled white South Africans. The results of the survey indicate that skilled whites are strongly opposed to this policy and the arguments advanced in support of it.

Indeed, it is often the case that South African debate on the brain drain tends to show the racial contours inherent in the South African flavour of global integration. The affirmative action policy in South Africa (see Black Economic Empowerment) acts to reduce the availability of work for those classified as "white" ("white" meaning precisely the group targeted for preferential treatment during the apartheid years); a large component of the highly skilled group likely to be wealthy enough to consider emigration. We note that "Migration of low-educated Africans is almost nil" and it is well documented that the majority of the emigrating group are white, although black professionals show no qualms in cashing in their skills abroad.

However, flight of human capital in South Africa should not be attributed solely to regional factors. For example the demand for skilled laborers in the UK, US, Canada, New Zealand and Australia has led to active recruitment programs by those countries in South Africa. These countries accounted for 75% (by volume) of recent skilled emigration with the UK receiving approximately half of annual skilled South African emigration from 1990 to 1996. It has been suggested that the role of domestic socio-political variables may be negligible:

The association of the brain drain with socio-political change has been so widely
accepted that no one – so far – has challenged the trend exhibited by the official
figures. However, the magnitude of the phenomenon has quickly been put into
question. Doubts arose in the mid-90s as empirical findings indicated that the
departures were far higher than what the Statistics South Africa figures stated. These
studies were based on embassies or removal companies’ data showing that more
people were leaving than the statistics mentioned. This evidence was later confirmed
by a punctual statistical comparison between South African emigration data and South
African registered immigration to countries such as Australia and the UK. Official
agencies acknowledged the fact and recognised that their figures could only include
the migrants who would declare themselves as such when leaving. However, the
size of the undeclared emigrant population remained unknown. This dark side of the
phenomenon had to be explored in order to bring the debate to more realistic grounds.
This is where the new statistics – extracted from the receiving countries’ data – came
into the picture. They showed that, even though the figures were much higher than
reported by official South African data, the net loss had not begun with the political
transition and was as much due to a decrease in immigration as to an increase in
emigration. The concern then moved to the less emotional and more practical matter
of reformulating the policy along this new perception. In this process the Ministry of
Home Affairs has come under criticism. Since 1994, it has indeed followed a hard line
approach towards immigration, with emphasis on controlling inflows of foreign
citizens and limiting their presence and competition on the national labour market.
This policy, trying to address a problem of widespread illegal immigration and
consequent xenophobic trends, has been judged as inadequate regarding highly
skilled people. There is now a consensus that they should rather be encouraged to
come to South Africa. However, the debate continues, on the ways to make this
happen. Indeed, several analysts think that the new law on immigration, coming late
and with bureaucratic inertia, should be completed by more proactive dispositions, to
look for skills instead of just facilitating their recruitments.

A widespread skills drain in South Africa and in the developing world in general is generally considered to be a cause for concern. While it may be the case that the economy will survive intact, the poor in South Africa undoubtedly suffer the most. The health sector has been hit particularly hard:

The report describes the exodus of healthcare workers from areas of poverty and low socio-economic development, to more highly developed areas. The flows follow a hierarchy of ‘wealth’ and result in a global conveyor belt of health personnel moving from the bottom to the top, increasing inequity. The report describes personnel flows and migration from rural to urban areas, from public to private sectors, from lower to higher income countries within southern Africa and from African countries to industrialised countries. International migration further increases and exacerbates inequities that exist between the public and private sector and between urban and rural areas. The knowledge and skills loss from the poorer to the richer countries is considered as a form of reverse (poor to rich) subsidy.
There are a variety of push and pull factors that impact on the movement of healthcare workers, arising both within and beyond the health system. Factors endogenous to the health care system are low remuneration levels, work associated risks including of diseases like HIV/AIDS and TB, inadequate human resource planning with consequent unrealistic work loads, poor infrastructure and sub-optimal conditions of work. Exogenous push factors are also noted, including political insecurity, crime, taxation levels, repressive political environments and falling service standards. Movement is also influenced by pull factors, including aggressive recruitment by recipient countries, improved quality of life, study and specialisation opportunities and improved pay.

This of course means that emigrating medical staff do not remain to assist in the fight against HIV/AIDS, exacerbating a dire situation; South Africa has the largest population living with AIDS in the world.

Effect of HIV/AIDS

South Africa is one of the countries most affected by H.I.V 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 29.8% 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 and has recently begun operating under the name, Neotel. Four cellular companies provide service to over 20 million subscribers, with South Africa considered to have the 4th most advanced mobile telecommunications network worldwide. The four cellular providers are Vodacom, MTN, Cell C and Virgin Mobile SA.

Agricultural sector

Unlike other African countries, South Africa's agricultural sector is not dominated by subsistence farming, with most farms being large commercial, albeit family-owned, enterprises. The country is completely self-reliant and has more than enough output to export massive amounts of agricultural produce. Many other southern African countries rely on South Africa for maize imports.

Due to the country's varied climate, many different crops are grown. The Western Cape province has the most varied and prolific agricultural sector. Wine has become a massive export, with South Africa now being the 5th largest producer worldwide. Deciduous fruit is also of major importance, with grapes, apples, cherries, pears, peaches, citrus and other fruit being exported in great quantities, mostly to Europe. Heavy wheat cultivation also occurs in the region, along with major wheat growing areas in the Highveld of Mpumalanga and the Free State. The Free State is the leading producer of South Africa's staple, maize.

The vast inland regions of the Karoo provide ideal conditions for livestock farming, especially sheep farming (for wool and mutton). Cattle farming is more popular amongst the indigenous people and flourishes more in the more well-watered eastern areas of South Africa. Ostrich farming is popular in the Oudtshoorn area of the Western Cape, along with extensive dairy farming in the Garden Route area just to the south. Sugarcane farming is a mainstay on the KwaZulu-Natal coast, with subtropical fruits, such as mangos, lychees, papaya, bananas and melons being extensively cultivated in KwaZulu-Natal, Limpopo and Mpumalanga Lowveld areas. Pineapples are cultivated around East London. Many game farms specializing in South African wild antelope are also gaining in importance and are found mainly in the north and east of South Africa.

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. This may also be due to the fact that indigenous people are mostly subsistence farmers and that anti-competitive practices like agricultural subsidies in developed countries and climate change are curtailing sector growth.

According to the OECD, "Agriculture contributes less than 4% to GDP but accounts for 10% of total reported employment.

Environment

South Africa's government is deeply concerned about managing the country's rich and varied natural resources in a responsible and sustainable manner. In addition, numerous South African non-governmental organisations have emerged as a potent force in the public policy debate on the environment. In international environmental organisations, South Africa is seen as a key leader among developing countries on issues such as climate change, conservation, and biodiversity. This leading role was underscored by South Africa's selection to be the host of the World Summit on Sustainable Development in 2002. However, environmental concerns often take second tier when perceived to be a threat to business or development.

South Africa is a disproportionately large producer of carbon emissions with much of its relatively cheap electricity produced by coal-fired power stations. However, recently, due in part to UN Environmental reports and recent water restrictions and climatic fluctuations, the South African government has started formulating legislation to mitigate the effects of climate change.

The electrical crisis

In 2007 the state-owned electricity supplier (Eskom) started experiencing a lack of capacity in the electrical generating and reticulation infrastructure. This led to an inability to meet the routine demands of industry and consumers, resulting in countrywide rolling blackouts. Initially the lack of capacity was triggered by a failure at Koeberg nuclear power station, but since then a general lack of capacity became evident. The supplier has been widely criticised for failing to adequately plan for and construct sufficient electrical generating capacity.

Social services

Since 1994, the government has channelled substantial resources into social programs and services, with varying degrees of success.

Households with access to clean water: 85% in 2001, 80% in 1996
Households using electricity for lighting: 69.7% in 2001, 57.6% in 1996
Households in formal housing: 63.8% in 2001, 57.5% in 1996
Households with chemical or flush toilets: 51.9% in 2001, 50.5% in 1996
Pupil-teacher ratio: 38:1 in 2003, 43:1 in 1994
People who have completed grade 12 schooling: 20.4% in 2001, 16.3% in 1996
People with access to electricity: 70% in 2003, 32% in 1994
Social grants: 6.8 million people (R34.8 billion) in 2003

Statistics

HDI Rank: 121st (2007) 120th (2005), 119th (2004), 111th (2003), 101st (1999), 95th (1995)

Industrial production growth rate: 5% (2004 est.), 7% (2001 est.)

Electricity:

production: 221.9 TWh (2004), 213.4 TWh (2003), 206.0 TWh (2002), 196.0 TWh (2001), 195.6 TWh (2000)
consumption: 204.26 TWh (2004)
exports: 12.45 TWh (2004), 10.14 TWh (2003), 6.95 TWh (2002), 6.52 TWh (2001), 4.01 TWh (2000)
imports: 8.03 TWh (2004), 6.74 TWh (2003), 7.87 TWh (2002), 7.25 TWh (2001), 4.72 TWh (2000)

Electricity - production by source:

fossil fuel: 93.5%
hydroelectric: 1.1%
nuclear: 5.5%
other: 0% (2001)

Total energy consumption by type:

Coal: 75.4%
Oil: 20.1%
Nuclear: 2.8%
Natural gas 1.6%
Hydroelectric: 0.1%
other: 0% (2004)

Agriculture - products: maize, wheat, sugarcane, fruits, vegetables; beef, poultry, mutton, wool, dairy products, essential oils;

Exports - commodities: gold, diamonds, other metals and minerals, machinery and equipment

Imports - commodities: machinery, foodstuffs and equipment, chemicals, petroleum products, scientific instruments

Debt - external: $25.9 billion (2004 est.)

Foreign exchange reserves: $17.618 billion (Nov 2005) $14.943 billion (Jan 2005), $6.5 billion (Oct 2003)

Exchange rates: Rand per USD (Avg Interbank rate - newest rate avg for months available)
6.16 (2006), 6.38 (2005), 6.46 (2004), 7.57 (2003)
10.5 (2002), 8.61 (2001), 6.94 (2000), 6.11 (1999)
5.53 (1998), 4.61 (1997), 4.30 (1996), 3.63 (1995)
3.55 (1994), 3.26 (1993), 2.85 (1992), 2.76 (1991)
2.58 (1990)

Weakest historical level: $1 = R13.85 (21 December 2001)
Strongest historical level: R1 = $1.49 (5 June 1973)

Historical annual growth in real GDP at 2005 market prices
4.5% (2004), 3.0% (2003), 3.7% (2002), 2.7% (2001)
4.2% (2000), 2.4% (1999), 0.5% (1998)

Average annual real GDP growth rate (1996-2004): 3.1%
''Note: GDP data drawn from official StatsSA revised statistics as released in Q3 2005