The hopes and challenges of a rainbow nation

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By Robert Ruttmann

Fourteen years after the system of apartheid gave way to a freely elected black-majority government, South Africa is enjoying its longest period of economic growth ever: 96 months and counting.

The economy has grown by approximately 5 percent per year in the past four years, adding half a million jobs last year. Successful fiscal adjustment has been one of the major achievements of the post-apartheid government. From being at the brink of a debt crisis in the early 1990s, South Africa’s balanced budget is now held up as the model for responsible fiscal management in Africa. But sociopolitical reforms are also taking effect. People in informal settlements are gaining access to running water and electricity, an efficient constitutional court and a free press watch over the young democracy, and previously disenfranchised South Africans are gaining access to education and opportunity, resulting in the expansion of a new black middle class that has grown to 2.6 million South Africans.

As the country prepares to host the Soccer World Cup in 2010, the government has bold ambitions: to halve poverty and unemployment by 2014, which it aims to achieve by raising average growth rates from the current 5 percent to 6 percent from 2010 – 2014. Flushed with optimism, the country that used to be an international pariah state has become a guiding example for other young democracies in Africa.

Growth drivers are shifting
South Africa’s economic boom has over the past four years been driven by a surging domestic consumption from the country’s growing middle class. The current consumption boom was first ignited by an expansionary fiscal policy in 1999, offering tax relief to individuals and companies, as well as additional spending on social services and infrastructure. These fiscal measures, together with rising disposable income levels, stable inflation and low interest rates, triggered a surge in domestic consumption which continues to drive the South African economy today. While the expanding domestic consumption has supported the country’s economic growth, it has also had its downside: rising inflation and unsustainably high household debt levels.

On the one hand, inflation has been creeping up again over the last two years, even breaching the central bank’s 3 percent to 6 percent target band in March 2007. On the other hand, debt to income levels reached precariously high levels of 80 percent in 2007, up from 50 percent in 2003, indicating that consumers are increasingly relying on credit facilities to fund their expenditures. These increases in household debt and inflation have prompted the South African Reserve Bank to raise its interest rates by 4 percent to the current 11 percent in an effort to moderate consumer spending. As consumer spending moderates due to the tighter monetary policy, we expect a surge in infrastructure investment to replace consumer spending as the primary driver of economic growth. This shift has already begun, triggered by the announcement that South Africa would host the Soccer World Cup in 2010.

World Cup leads to infrastructure boom
The need for infrastructure investment is clear. A decade of underinvestment has resulted in infrastructure bottlenecks that are now curtailing exports and causing severe supply shortages in the electricity sector. The increase in electricity demand is mainly driven by thousands of previously disenfranchised South Africans moving from informal housing settlements without electricity into housing developments with electricity and running water. After 14 years of underinvestment in infrastructure, the investment ratio (investment/GDP) is beginning to rise again (page 44). The government has for instance allocated a total of 420 billion South African rand to be invested in infrastructure over the next three years.

The South African private sector is also involved. Making up 70 percent of total fixed capital investment, private companies are unloading some of the large amounts of cash they have on their balance sheets. This synchronized effort has given way to the country’s first ever coordinated upswing in infrastructure investment, with total infrastructure investment growth forecast between 10 percent and 15 percent per year between 2008 and 2014. The private and public sectors are also coordinating their efforts through publicprivate partnerships. The largest and most prominent example is the building of the 23- billion-rand Gautrain high-speed commuter rail system, a project in which the public and private sectors jointly finance the costs. Similar projects are already underway, as roads, ports, airports, power stations and sports stadia are built at a furious pace ahead of the starting whistle of the Soccer World Cup 2010.

Solid prospects with risks
Despite much progress in South Africa, several factors do cause concern. Firstly, education. One of the worst legacies of apartheid was the inferior schooling for South Africa’s black majority. Poor education still limits the social mobility of far too many South Africans. Today, 57 percent of the population lives on less than 3,000 rand (430 US dollars) a year. And although half a million jobs are created each year, unemployment remains above 25 percent and still mostly affects untrained black South Africans. The lack of skilled labor also continues to cause capacity constraints in the labor market as growing companies struggle to find skilled workers.

Another serious concern is crime. More than 18’000 people were murdered last year and 50’000 raped, giving South Africa one of the highest crime rates worldwide. Speaking to local South Africans, it seems most people have a story to tell on the pervasiveness of crime in South Africa, usually involving a home invasion or a carjacking. Equally disconcerting is the HIV/AIDS crisis, which has struck 5.5 million South Africans and continues to kill close to 1000 South Africans per day. The government has come under heavy criticism for its management of the epidemic. For too long, the official response ranged from denial of the problem to the promotion of traditional remedies like eating beetroot, garlic, lemon juice or the African potato, in efforts to combat the disease. Under much pressure, the government has made antiretroviral treatments available to 250’000 people, a figure many observers argue to be too little and too late as the number of new AIDS infections show few signs of slowing down.

No serious opposition to ANC power
The biggest worry for many foreign investors is that a mature multiparty democracy has yet to emerge in South Africa. After dismantling apartheid and building the foundation for a democracy in 1994, the African National Congress (ANC) today still faces no serious electoral challenge from the small opposition parties. The main opposition party, the socially and economically liberal Democratic Alliance (DA), won only 12.4 percent of the votes in the last general election in 2004 and continues to attract only 2 percent of the black electorate. As such, the DA cannot seriously challenge the incumbent ANC, which includes a broad range of eclectic groups such as former freedom fighters, the trade unions and the South African Communist Party. After 14 years of uninterrupted power, the ANC is at risk of becoming an entrenched, complacent political institution unable to renew itself, tacitly nurturing a culture of compliance rather than one of competence. If the South African political culture is unable to free itself of the idea that the ANC is preordained to rule indefinitely, the country’s democracy will be worse off.

Zuma presidency could cause rift
The recent acrimony leading up to the election of the controversial Jacob Zuma as the new ANC leader may already offer the first indications of a stronger opposition – albeit perhaps from within the ANC. If Zuma is elected president when Thabo Mbeki steps down in 2009, he may have difficulty reconciling the liberal, pro-growth economic policy the ANC has followed to date with the demands of his alliances within the party to leftwing factions such as the Congress of South African Trade Unions and the South African Communist Party. If gridlock occurs, the party may split.

Building a pluralistic democracy
South Africa is still a young, fragile democracy, mending its wounds after five decades of violent oppression under apartheid rule. After dismantling the apartheid structures, the next challenge the country faces will be to nurture a pluralistic democratic tradition, one in which an open dialogue of political ideas is encouraged and the space for debate broadened. In this context, South Africa will serve as a guiding example for many young democracies on the African continent. With all eyes on South Africa ahead of hosting the FIFA Soccer World Cup in 2010, Africa’s economic giant has several challenges to tackle as it continues on its path of mending the social wounds of the past, while ensuring economic growth and political stability for the future.

Source: Robert Ruttmann, Credit Suisse, March 31, 2008.

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