Why I am a relative pessimist about South Africa

After reading Tyler Cowen’s post on Bolivia, I thought about writing a similar post on South Africa, the economic giant in my neck of the woods. Without further ado, here are five reasons why I am a relative pessimist about former President Nelson Mandela’s beloved country.

1) Since the first democratic elections in 1994, the African National Congress (ANC) continues to maintain a grip on the country’s politics. As illustrated by this year’s elections (see previous post), Nelson Mandela’s party enjoys a relatively strong, but slowly diminishing control on the Rainbow Nation. The sooner a viable alternative to the ANC (Democratic Alliance?) comes onto the scene, the better Pretoria would be in the long run.

2) Lethargic economic growth in South Africa’s largest export market, the European Union (see chart below), has contributed to Pretoria being in the doldrums for the last five or 6 years. It is important to add that South Africa’s trade and investment relations with the EU are administered under the Trade, Development, and Co-operation agreement signed in 1999. Unlike the African Growth and Opportunity Act (AGOA), which provides non-reciprocal trade preferential treatment to most sub-Saharan African countries, Pretoria products don’t enjoy the same treatment to the European market. EU-ACP Cotonou agreement does not extend the same non-reciprocal treatment to Pretoria due to its status as a middle income/emerging economy.

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3) With a relatively stable government, abundant natural resources, a strong manufacturing sector, and a world-renowned stock exchange, South Africa has solidified its position as an economic powerhouse in southern Africa. However, recent labor strife in the mining and automobile sectors has slightly damaged its image to foreign investors. South Africa’s rigid labor sector is a serious impediment (see previous post).

4) Since the 2007 global economic downturn, South Africa has enjoyed a huge inflow of equity and portfolio investment (hot money) driven by low interest rates in the U.S. and Europe (see figure below). Cheap money has increased South Africa’s 40% debt to GDP ratio, and is fueling a housing bubble.

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5) As illustrated in Figure below, mineral products continue to be South Africa’s main export products. Falling mineral prices and mining sector instability have negatively impacted the country’s economy. Investors would continue to shun Pretoria’s mining sector despite its abundant natural resources due to labor sector friction.

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With a 25% unemployment rate, 20 percent of the population accounting for just 2.7 % of national income, and almost one third of the population living on less than $2 a day, it is imperative that the African National Congress (ANC) strengthens manager-employee relationship to avoid blemishing the country’s position as the main destination for investors. To make up for sluggish economic growth in Brussels, South Africa should follow the Mexican example, and aggressively diversify its trade partners by signing FTAs. Moreover, instituting labor sector flexibility and education reforms would go a long way in combating racial income inequality in the Rainbow Nation.

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