Medium- and long- term prospects for the South African economy. By Vartika Garg/E MBA 11 Nyenrode Business University

Transcription

1 Medium- and long- term prospects for the South African economy By Vartika Garg/E MBA 11 Nyenrode Business University 1

2 Table of Contents 1. Introduction: Current Situation China and African sustainable trade relationship Medium term prospects for South African Economy HIV, Inequality and Unemployment Unemployement in South Africa s Context Unemployment is still hurdle for SA Solutions to Unemployment Manufacturing/mining Sectors Revenue contribution within mining Sector Lack of natural resources stocks Labor instability and wage inflation Infrastructure Education and public sector productivity Improvement in ICT & R&D Long- term prospects An economy that will create more jobs, eliminate poverty and reduce inequality Improving Infrastructure Improving the quality of innovation, training, education and R&D Quality health care for all Money Creating Triggers South Africa in an international context Transforming Society and uniting the country Conclusions References Web Links

3 1. Introduction The economy of South Africa is the largest in Africa. It accounts for 20% of its gross domestic product in terms of purchasing power parity and is ranked as an upper- middle income economy by the World Bank this makes the country one of only four countries in Africa in this category. According to official estimates, a quarter of the population is unemployed, According to a 2013 Goldman Sachs report, that number increases to 35% when including people who have given up looking for work. A quarter of South Africans live on less than US $1.25 a day. South Africa has a comparative advantage in the production of agriculture, mining and manufacturing products relating to these sectors. South Africa has shifted from a primary and secondary economy in the mid- twentieth century to an economy driven primarily by the tertiary sector in the present day, which accounts for an estimated 65% of GDP or $230 billion in nominal GDP terms. The country's economy is reasonably diversified with key economic sectors including mining, agriculture and fisheries, vehicle manufacturing and assembly, food processing, clothing and textiles, telecommunication, energy, financial and business services, real estate, tourism, transportation, and wholesale and retail trade. The total production of goods and services in South Africa, measured in real terms, increased from R211,2 billion in 1946 to R1954,3 billion in 2012, this translates in to an average growth rate of 3,4% per year over a period of 67 Years. If we look at the graph above after a number of years of tepid and disappointing growth up to 1993, we observe a distinct improvement in the country s economic growth over the next 15 years. In fact, economic growth stayed positive for 16 consecutive years (up to 2008). 3

4 The GDP expanded by 72% between 1992 and 2008 and disposal income per capita of households rose, in real terms, by 33% over the same 16 years periods. Since 1994, South Africa has been on an important and at times euphoric journey, from apartheid to democracy, from a racially preferential legal and constitutional system to the promise of equal rights and services for all. Significant progress has been made, but there is much more to be done to provide opportunities for all, and to remove the historical disadvantages, which continue to plague the country. High unemployment, unequal income distribution, a strained education system, and limited essential infrastructure are just some of the issues faced by South Africa. In this paper, I will focus on medium and long- term prospects for South African Economy. Which will consist of current economic conditions and what are the challenges for the next 8 years and in next 15 years for South Africa. 2. Current Situation As per the Quarterly bulletin of Reserve Bank of South Africa - The South African economy recorded erratic quarter- to- quarter growth in 2013, with the overall pace of expansion in real output for the year as a whole a disappointing 1,9 per cent. Apart from longer- term impediments to growth such as constrained electricity supply and logistical bottlenecks, production in the first quarter of 2013 was held back by industrial action, fire damage at a large steel mill and maintenance of production facilities, while widespread strike action again disrupted production in the third quarter. From the low base established in the third quarter, the subsequent normalization of production propelled growth to an annualized rate of 3,8 % in the fourth quarter of the year. South Africa s erratic growth pattern could well continue in the first quarter of 2014, with protracted industrial action again weighing on production. 2.1 China and African sustainable trade relationship Over the last decade China has become the biggest trade partner of South Africa. 4

5 During this decade South Africa also benefitted from these trade and investments, also concerns related to sustainable trade relationship with China came to the surface. If we look at the figure above it shows that Chinese investment in South Africa grew even faster than trade between the two countries. China also provided the loans to African countries including South Africa. Export to China mainly consists of raw material and South Africa is importing finished consumer goods. There are different solutions has been discussed for unsustainability of trade with China. First of all South Africa needs to focus on being more competitive and should focus of productivity. It s been shown earlier that there is a steady GDP growth since last decade in SA. One of the main reasons behind this growth is the demand for its raw materials from China. Trade between the two countries expanded enormously. Now South Africa has to decide how to make the most of their relationship with China. South Africa has a lot to do within its own borders. Productivity has to grow and labor issues have to be addressed. If South Africa wants to really change the trade pattern with China, it has to offer an alternative that is beneficial for both countries. 3. Medium term prospects for South African Economy Even though South Africa has been the largest economy within Africa but still large challenges to further transform the economy and defend structural advances. There are couple of areas where South Africa can focus on in order to transform the better Economy: 3.1 HIV, Inequality and Unemployment According to Goldman Sachs Report there are 4.6 million people suffering from HIV in South Africa. The lowering rate of infection are positive signs of the effects of a rising attack by South African on disease but still 4.6 million is a very big number. 4.5 million people are looking for a job and another 2.2 million have given for work. Together this shows a broad unemployment rate of 36%. As we can see from the figure below, 15 5

6 million people live below the absolute poverty line of $2/day. This is South Africa s triple challenge of HIV, unemployment and poverty still affecting the lives of around one third of the population Unemployement in South Africa s Context 6

7 If we look at the Gini Coefficient (measure of income inequality of population) and compare South Africa with its peers then it is on the highest level in high unemployment and inequality but it dropped from its peak 67 in 2006 to 63 in In total 7 million people are unemployed (or 36% of labor force) while 71% are youth aged between 15 and 34, making it largely youth unemployment problem Unemployment is still hurdle for SA Unemployment is the most important and shocking factor for medium and long- term prospects for South African Economy. Referring to the figure from Goldman Sachs report below - The Misery Index is a global economic tool used to measure the macroeconomics hardships of countries based on inflation, unemployment, GDP growth relatives to potential GDP and Cost of capital. As we can see which is not a surprise for us that the largest contributor to South Africa s Misery score is the high unemployment rate, accounting for 24.9 of the 36.8 index rating as shown in the figure below in the left hand side graph in red, even though other factors (GDP, Cost of Capital, inflation rate) are stable and going down. Graph on the right hand sideshows that from last decades South Africa has underperformed relatively to other markets. Unemployment still remains the biggest hurdle for South Africa. 7

8 3.1.3 Solutions to Unemployment It is difficult to identify the causes of unemployment in South Africa; it is virtually impossible to devise rules that will eliminate the problem within a year or two. It has been argued on large scale that unemployment in this country is mainly the result of a complex set of structural deficiencies that have evolved over many years, even decades. It would therefore, will be unrealistic to suggest that there is simple remedy to the unemployment crisis. 3.2 Manufacturing/mining Sectors Referring to the figure below from Goldman Sacs Report, Mining in South Africa has been the main driving force behind the history and development of Africa's most advanced and richest economy. After analyzing the nature of mixed of GDP in the SA economy and mining and manufacturing s combines contribution to GDP had declined from 38% in 1986 to 23% in After looking at their contribution to both exports and jobs then it is a concerning factor for SA s future growth. Banking and real estate s contribution doubled from 12.5% to 24% also government services increased its contribution. Mining and manufacturing multiple effects on jobs and its contribution to exports brings into focus the need to revitalize these sectors as critical to the overall health of the SA economy Revenue contribution within mining Sector If we look at the mining industry, South Africa has a competitive advantage over there as compare to the other countries. Platinum, gold and coal are 66% and 84% of revenue and employment contributors from mining. 8

9 Despite its relative decline in contribution to GDP, mining remains a crucial aspect of the growth of South Africa. The platinum and gold sectors are experiencing challenging profit margins due to rising costs and labor unrest. Which is why it is crucial for South Africa to keep up on mining and manufacturing sector to maintain and grow its economy Lack of natural resources stocks South African natural resources stocks have underperformed BRICs since 1994 but outperformed developed markets. 9

10 From the figure above, if we look at the performances of the resources indices of various countries as a measure of the gains from the commodity boom, in the grey highlighted area that despite a global commodity price boom, South Africa failed to take advantage from this boom. The overall regulatory approach to licensing, taxation, BEE, health and safety, environmental issues, labor and other areas have acted as a handbrake on investment in the mining sector in SA Labor instability and wage inflation Referring to the figure below from Goldman Sachs report, since 1994, real wages across SA's economy have grown on average by around 3% per annum. The change in average annual CPI inflation (red line) is consistently lower than the average annual wage inflation (orange line) demonstrating the rebalancing of wages that has taken place since The employed have thus benefited significantly from these gains, however at a cost to broader growth, investment and job creation. 3.4 Infrastructure By the developing country standard, South Africa has better developed infrastructure such as roads, health facilities and educational institution, but investment in key economic infrastructure such as energy, technology, internet have lagged behind the domestic demand. A generation of underinvestment in infrastructure can be problematic for South African Economy. As we can see from the figure below that South Africa has a significant infrastructure deficit mainly in power, roads and transport. In addition to this, the bulk of the existing infrastructure such as roads, railways and ports need sizable investment on maintenance and upgrading. South Africa needs to focus on financing and executing this infrastructure investment otherwise it can be a bigger challenge for South African Economy. 10

11 3.5 Education and public sector productivity Education is a critical problem in South Africa and overall Africa. Skill mismatches in the jobs represent one aspects of the continuous increasing unemployment rate, especially for youth. The education system is not producing the skills needed in the labor market. If South Africa is to achieve full employment, then it has to improve the quality of basic and vocational education. Goldman Sachs examined the government expenditure on health and education in South Africa. If we look at the figure above, 21 billion is allocated to basic education ad 11

12 71% is spent on government education, employee s compensations. Also in health 51% of 18 billion was spent on the employee s compensations. To improve the performance and outputs of the education and health sectors requires a more productive and efficient relationship between the government, as employer and its unionized employees. 3.6 Improvement in ICT & R&D When we look back at South Africa s success with regards to the development of high technology systems over the last years, the trend seems changing all the time. Now the question is that South Africa, as a developing country should keep on investing high amount in R&D and in IT or they should just out source knowledge and technology from countries, which are able to develop it? The answer is that South Africa lies somewhere in between. South Africa needs to build strong R&D ties with foreign partners, especially where complex technology transfer has to take place. The National R&D survey Indicates that SA has maintained a steady growth in R&D expenditure over past decade. It is possible to increase R&D in an environment of an expanding capacity for science, technology and innovation. To make meaningful impact on economic growth of South African, it is important to expand the capacity of science, technology and innovation. South Africa must close the gap and move closer to a series of indicators for innovation, competitiveness and development of more advanced economies. If we look at the top chart in the figure below mentioned from the Goldman Sachs report, the expenditure on R&D doesn t exceed 1% of GDP at any point since The bottom chart shows that South Africa is really lacking behind in R&D investments than other countries like Japan, Korea and China. SA requires a step- up in R&D investment. 12

13 4 Long- term prospects Today s South Africa looks very different from the one left behind in But still for many poor South African s it looks the same. In this section I will highlight the series of shortcomings in SA s development. And how things will look like in An economy that will create more jobs, eliminate poverty and reduce inequality As it s been discussed earlier in this paper that South Africa has a high unemployment and inequality rate. South Africa needs an economy that is more inclusive, more dynamic and more powerful in which the fruits of growth are shared more equitably. In 2030, economy should be close to full employment; educate people with the skills they need. Also make sure that ownership of production is less concentrated and more diverse where black people and woman own the same rights. To reduce inequality and eliminate the poverty, the economy must become more inclusive and grow faster. The national development plan proposes to create 11 million jobs by Improving Infrastructure In South Africa, public infrastructure spending is at low levels. In fact, South Africa has missed one generation of investment in ports, electricity, rails, roads, public transport, housing and water sanitation. To grow faster and in more powerful manner, South Africa needs a higher level of capital spending in general and public investment in particular. Gross fixed capital formation needs to reach about 30% of GDP by 2030 for the sustained impact on growth and household services. 13

14 4.3 Improving the quality of innovation, training, education and R&D As we can see from the previous section that South Africa really needs to work on the quality of education system. The education quality remained poor for majority of black learners, which is why they stayed unemployed. Poor education also leads to higher unemployment rate. South Africa needs a proper education system by 2030 with following attributes It needs to provide high- quality early childhood education with access rates exceeding 90 percent. Quality school education and further higher education and training that enables people to fulfill their potential. It is very important for better economy to expand the higher education system that is able to contribute towards higher productivity, rising income and the shift to more knowledge- intensive economy. Universities should be having focus on innovations in the area of economy and make it wider for students and professors. R&D played an important role in helping middle- income economies countries like South Korea to enter into high- income economy Country. South Africa needs to spend more on R&D and Government should partner with private sector to encourage the level or R&D in firms. 4.4 Quality health care for all Good health is essential for a person to have a productive and fulfilling life. There has been recognition of growing health problems and health systems crisis in South Africa over the last decade. The specific challenges faced by the health sector have been highlighted and analyses have identified common areas of concerns: 1- A highly increased burden of disease, primarily related to HIV and AIDS. 2- Significant areas of weakness in health system management. 3- Poor out come from the Country s health and wealth expenditure. By 2030, the health care system should provide quality care to all free or paid. There should be more hospitals and they should be more efficient and effective. It is important for South Africa to build a national health insurance system. There are four priorities for its success: improving the quality of public healthcare, lowering the relative cost of private care, more health care professionals in public and private sector and also developing the heath information system so that public can get the proper information. This development will take time and it requires the corporation in between private and public health care sector. 4.5 Money Creating Triggers One of the greatest mysteries surrounding economics is the creation of money. Money creation doesn t mean that production of new notes and coins by reserve bank, in fact it is very important to expand money supply by extension of credit by Banks. For the better economy South Africa needs to examine some of the forces in the economy that can lead to an increase in bank deposits. Can South Africa s income from balance of payments transactions- such as export or the inflow of the foreign capital be greater than payments made to foreigners (for export or capital outflow). By 2030, SA might find a way to have a balance in between Capital inflow and Outflow (Export and Import). 14

15 4.6 South Africa in an international context World has become overly connected over the past three decades. Global trade in goods and services has expanded, knowledge has been more widely disseminated and technology transfer has increased. The global power shift towards developing countries provides South Africa with an opportunity to maximize its regional and international influence over the next 20 to 30 years Africa- centric. As per National Development plan Vision; Government s global and regional policy- making stance should be South Africa- centric. Policy making should improve the country s functional integration in the region, on continent, among developing countries- especially with key states like Brazil, India and China- and in the world, with measurable outcomes. As per Goldman Sachs Report global competitiveness of South Africa is declining and it can be seen from the figure above. 4.7 Transforming Society and uniting the country To eliminate inequality and reduce poverty for better economy, it is very important to have more cohesive society and united people. South Africa s own history and the experiences of other countries taught SA that a sense of unity and social cohesion are necessary to its social and economic objectives. Achieving and maintaining this balance requires the confluence of several factors, not all of which are in government s control. A growing economy, rising employment and incomes, falling inequality, an improving education system, fertile conditions for entrepreneurship and career mobility in workplace will contribute significantly to uniting South Africa s people. South Africa needs to invest in human development. 5 Conclusions To make meaningful, rapid and sustained progress in reducing poverty and inequality over next two decades, South Africa needs to write a new story. The main core of this plan to gather people and seek to involve communities, youth, workers, the unemployment and business in partnership with each other, and in a more capable way. South African Government should have an aim to develop the capabilities of individuals and of the country in order to create opportunities for all South Africans and that would help in growing the Economy. To summaries as per the National Development Plans provides the key ingredients for better economy and success by 2030: 15

16 Active efforts of all South Africans Growth, investment, employment Rising standard of education and healthy population An effective and capable government Collaboration between the private and public sectors Leadership from all sectors of society Investment in human development If recent trends continue then South Africa will play an important role in over all Africa and world economy by Africa will be home for the young people. Labor forces will be top as China s. 6 References 1- National Development Plan Vision 2030 by National Planning Commission 2- Lions on the move: The progress and potential of African economies by McKinsey Global Institute 3- Africa path to growth: sector by sector by McKinsey Global Institute 4- Two Decades of freedom A 20- Year Review of South Africa by Goldman Sachs 5- South Africa: Investor s Handbook 2013/14 by Deloitte 6- OECD Economic Surveys SOUTH AFRICA March OVERVIEW OF HEALTH SECTOR REFORMS IN SOUTH AFRICA by HDRC 8- World in 2050 report January 2013 by PwC 7 Web Links africa/south- africa/ trends- triangular- and- south- south- africas- strategy- toward- china- and- its chinaafrica- 2010_eng.pdf guide- to- south- africas- economic- bubble- and- coming- crisis/ SouthAfrica/Local%20Assets/Documents/DTI- Investing_in_SA_ pdf 16

17 a- vision- for south- africa- s- national- development- plan s/plenarymeetings/2011/strategyrdinvestment.pdf NAL.pdf Crul- China- and- SA- on- their- way- to- sustainable- trade- relations fin.pdf 17