From a longer-term perspective, two pressing challenges involve infrastructure bottlenecks and job creation. The two are closely related, because the growth needed to reduce unemployment requires real progress in the area of infrastructure, particularly electricity generation—and that goes back to the problem of energy subsidies that create disincentives for investment.
The commodities boom also highlights the need to better manage the revenue coming from natural resources in countries now tapping new resource deposits. It is a crucial issue if countries are to avoid the resource curse. This is an area where the IMF is focusing its technical assistance to help countries truly benefit from their natural bounty.
South Africa’s prospects
Clearly, South Africa has benefitted from sub-Saharan Africa’s success. The Number Two market for this country’s goods, after Europe, is the countries to the north, accounting for 15 percent of exports. They account for roughly the same export share as China. Indeed, the natural resources boom has lifted shipments of mining equipment. The Southern African Development Community could soon become South Africa’s biggest market for manufactured goods. On top of that, the country is expanding its role as a regional transport hub.
Investments in the region by South African companies are also rising sharply. The stock of South African direct investment in the rest of Africa equals approximately 5 percent of the country’s GDP, up from 1 percent before the global financial crisis. A broad cross-section of the corporate community is involved, and South African banks appear well positioned to take advantage of expanding financial services throughout Africa.
But African growth will not offset continued weak global demand and the domestic factors that restrain this country’s growth. South Africa’s outlook is subdued—and likely to remain so. In 2010-11, real GDP growth averaged 3.3 percent, falling to 2.5 percent in 2012. Meanwhile, unemployment is at 25 percent. The IMF expects a modest recovery this year to 2.8 percent, and possibly 3.3 percent in 2014. This will come from increased export demand from the region and China. The recent exchange rate depreciation should also help, as will public infrastructure investment.
But here is just so much that external demand can be expected to do. Any renewed downturn in Europe and the emerging markets would be cause for concern. Similarly, weaker commodities prices would be a drag on the economy. Against this backdrop, South Africa needs to rely more on sustainable domestic sources of growth without exacerbating its vulnerabilities, a point I’ll return to in a moment.
Capital flows also enter the picture. South Africa has benefitted from the flow of capital to the emerging markets in recent years. This is a tribute to the country’s financial openness; the sum of external assets and liabilities equals about 170 percent of GDP. But South Africa’s very openness—and its high need for external financing—expose the country to the risk of capital outflows. A sudden outbreak of global risk aversion or market turbulence could trigger an unwelcome turn of events. That would make the financing of the country’s twin deficits—budget and current account—much more difficult.
Home-grown issues
That’s where the home-grown issues facing the economy come into play. Employment is too low, especially in the private sector. One in two young South Africans is unemployed. At the same time, real wage growth has outstripped productivity growth. South Africa’s competitiveness problem is manifesting itself in a growing trade deficit, even against a backdrop of weak growth. Power and transportation bottlenecks are a drag on the economy. And despite strong corporate performance, depressed business confidence has held back private investment.
Rigidities in labour and product markets underlie many of these problems. The collective bargaining system needs to serve the interests of the entire population—and not just insiders. Product markets also need to see greater competition, which in turn would allow new businesses, including small and medium-sized enterprises. These reforms would also bring lower prices and provide greater incentives to innovation and increased productivity. Reforms in these areas will not be easy, but a Grand National social bargain could help overcome the impasse.
South Africa is fortunate to have capable economic managers. They need to maintain the prudent macroeconomic policies that can create an economic climate conducive to growth and job creation. At the same time, a medium-term strategy, as outlined in the 2013 budget, is essential to rebuild fiscal buffers and reduce external vulnerabilities. These policies can provide the space to implement the reforms needed to increase growth and employment. The government’s National Development Plan contains a thoughtful and broad blueprint for addressing several of the constraints I’ve described, notably in infrastructure, education, healthcare, and public service delivery.
Now is the time for concrete action. As the NDP says, “South Africa needs to fix the future, starting today.” Failure to address the structural problems would weaken growth prospects and hamper efforts to reduce unemployment and inequality. It could also trigger a decline of confidence and a pullback of capital flows. In the long run, failure to deliver inclusive growth poses a risk to social stability. Structural reforms are the key to unlock South Africa’s potential.
The IMF is deeply committed to working with South Africa to provide the advice and analysis that can help address these problems and unleash the economy’s full capabilities. As a member of the G-20 and the largest economy in sub-Saharan Africa, South Africa has a role to play in ensuring global economic stability—and contributing to sustained and balanced growth—by addressing its own problems.
South Africa has made great strides in economic and social development since the end of apartheid. It has raised income levels and reduced poverty. The imperative now is to generate the growth necessary to create the millions of jobs needed to reduce unemployment and absorb new entrants into the labour force. The reform process will require political courage, but it is the way to bring the most benefits to the entire population and continue building an inclusive country that can be a proud example to the international community.
Lipton is IMF first deputy managing director.
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