The Growth of South African Economy

The Republic of South Africa (RSA), also known as South Africa is the 25th largest country in t...

  • The Growth of South African Economy
    Karren Baker Image Karren Baker

    The Growth of South African Economy

    • Wednesday 29th of April 2015
    • News

    The Republic of South Africa (RSA), also known as South Africa is the 25th largest country in the world by land area with a population close to 53 million. It is the second largest economy in Africa, behind Nigeria, with a coastline of 2,798 kilometers that stretches along the South Atlantic and Indian Oceans. The country’s wide variety of cultures, languages and religions make it a multi-ethnic society which is reflected in the constitution’s recognition of 11 official languages.

    World Bank has identified South Africa as an upper-middle income economy and a newly industrialized country. The country holds the tag of the seventh-highest per capita income in Africa in terms of purchasing power parity. Poverty and inequality act as hindrances to the growth of the economy with about a quarter of the population unemployed and living on less than US$1.25 a day yet it has identified itself as a middle power in international affairs and maintains significant regional influence.

    Within two decades of established democracy and ended apartheid, South Africa has been able to recover from the 2000s recession and achieved the following goals:

    • Rise in the Gross Domestic Product (GDP) from $133 billion to $400 billion.
    • Rise in the Foreign exchange reserves from $3 billion to nearly $50 billion.
    • A substantial rise in the long-term potential growth rate from 1.7% in 1994 to 3.5% in 2000.
    • Rise in the per capita GDP from 1.6% a year from 1994 to 2009 and by 2.2% over the 2000-09 decade.

    The history of South Africa shows a downfall in GDP under the rule of Dutch followed by a substantial rise from 131% in 1995 to 501% in the year 2005. The country lacks in terms of the labor force resulting in unemployment. Nevertheless, the economy is blessed with abundant natural resources that are recognized globally. Different sectors have given their contribution to the growth of the economy of South Africa:

    Natural resources

    The history and development of South Africa are mainly driven by mining. South Africa has been considered as one of the leading mining and mineral-processing countries. The mining sector accounts for up to 9% of the value added. Both private and state authorities share equal rights over the mining sector. This sector represents almost 60% of the exports.

    Agriculture and food processing

    The development of the agriculture sector is comparatively low as compared to other sectors. The contribution is around 10% of formal employment and 2.6% of GDP for the nation. Edible fruits, nuts, beverages are the most important agricultural exports of South Africa and account for over 80% of agricultural export revenue. The economy face competitive pressures from abroad, especially from China and India, which has resulted in the decline of exports for the food, textiles and paper sub-sectors, as firms in these sectors increasingly compete with lower cost producers yet South Africa has managed to remain competitive.

    Manufacturing

    Like the agricultural sector, the rise of the manufacturing sector is low, contributing just 13.3% of jobs and 15% of GDP. The economy is trying to lower the labor costs nearly as low as in most other emerging markets. South Africa is a leading large component manufacturer of BMW, Ford, Volkswagen and Toyota. The economy experienced a steep decline of 10.4% in 2009, yet has managed to grow by 5% in 2010. The sector remained curtailed by low demand in South Africa’s export market.

    Business process outsourcing

    South Africa has established itself as a successful call center and business process outsourcing destination. Cape Town shares cultural affinity with Britain, large overseas firms such as Lufthansa, amazon.com and many more established inbound call centers as a means of utilizing its low labor costs and talented labor force.

    Tourism

    Being a popular tourist destination with around 860,000 arrivals per month, the travel and tourism sector directly contributed ZAR102 billion to South African GDP in 2012 and supported 10.3% of jobs in the country.

    Trade and investment

    South Africa is a chief exporter of corn, diamonds, gold, metal and minerals and its imports mainly includes machinery and transport equipment. Germany, the United States of America, China and Japan are some Principal international trading partners of South Africa. A 1993 bilateral agreement allowed US investors to invest in South Africa. An additional fund- the Sub-Saharan Africa Infrastructure Fund, capitalized at $350 million was established to invest in infrastructure projects. The year 2005 saw the largest single FDI into South Africa, which increased the Foreign exchange reserves up to 10%.

    In terms of affordability, availability of capital, financial market sophistication, business tax rates and infrastructure, South Africa compares well to other emerging markets. The country stands ahead of China, India, Mexico, Brazil and Poland on the account of ease of accessing capital. A survey conducted in the year 2010 states that South Africa had the second most sophisticated financial market and the second lowest effective business tax rate.

    Out of 14 surveyed developing countries, South Africa has managed to maintain excellent positions:

    • Fourth for ease of accessing capital.
    • Fourth for cost of capital.
    • Sixth for its transport infrastructure.
    • Seventh for foreign direct investment as a percentage of GDP.

    In contrast to the growth and development, the country lacks in some areas. The country stands last in the terms of availability of manpower. Although South Africa ranks 5th out of 11 countries in terms of cost of manual labor, at about the same level as South Korea, but is more expensive than Brazil, India and China, Poland and Mexico. The country also ranks poorly when it comes to education as it spends only 4% of its GDP on education, yet the country is trying to realize its full potential. International agencies claim that South Africa is expected to improve its GDP up to 2.9% in 2016. The agency pointed to industrial action as a major dampener on growth. It is planning to revise its industrial policies particularly on the increase in the labor force to ensure maximum employment. In a nutshell, it would not be wrong to say that the South African economy is the fastest developing economy in the world.