South Africa's Economic Reforms: A Delicate Balance between Growth and Structural Challenges

Strategic Insights -

South Africa's macro-economic stability has been praised globally, particularly in the wake of the crisis of confidence in emerging markets last year. Prudent policies, a sound banking system, and a flexible exchange rate regime have been credited for this success. However, experts warn that despite this stability, the country still faces significant structural challenges, including low savings and investment rates, a rigid labour market, and high rates of unemployment. The government's fiscal policies and tight inflation control have been commended, but economists caution that accelerating trade liberalisation, privatisation, and education reforms are crucial for long-term growth and development.

Key Takeaways:

  • The South African government's fiscal deficit declined to 2.9% of GDP in the 1998-99 fiscal year from 3.7% the previous year, thanks in part to a statistical revision of gross domestic product.
  • Inflation dropped to 4.9% in July from 7.3% in June, although core inflation (excluding volatile interest rates) climbed to 8.2% from 8%.
  • The ANC government maintained tight fiscal policies and control of inflationary wage demands from public sector trade unions.
  • Economists Warn of Short-term Growth Hurdles and Long-term Structural Challenges:

+ Real growth of GDP, a sluggish 0.5% last year, is expected to increase to about 1% this year.

+ Accelerating growth in the second half and rising to 3% or more in 2000.

+ Population expansion at 2%+ per year may limit average income growth.

  • South Africa's saving and investment rates are low, around 15% of GDP, compared to 25% or more in fast-growing eastern Asian economies.
  • Recent foreign investment figures show a decline in FDI inflows, with R3.2bn in 1999, compared to R3.7bn the previous year.
  • Labour laws enacted by the ANC have been seen as obstacles to job creation.
  • Hania Farhan, economist at FBC Fidelity, notes that higher productivity and skills bases are achievable in countries like Asia and Latin America.

Statistics:

  • Fiscal deficit: 2.9% of GDP in 1998-99 (down from 3.7% in 1997-98)
  • Inflation (headline): 4.9% (Jul '99)
  • Core inflation (ex. volatile interest rates): 8.2% (Jul '99)
  • Real growth of GDP: 0.5% (1999), expected to reach 1% in 2000
  • Population expansion: 2%+ per year
  • Saving and investment rates: 15% of GDP (1999)
  • FDI inflows: R3.2bn (1999), down from R3.7bn (1998)
  • Unemployment rate: 30% of the workforce
  • World Economic Forum's Global Competitiveness report ranking: 47th out of 59 countries (1999)

Sources:

  • International Monetary Fund, cited by Stanley Fischer, deputy managing director.
  • South African Reserve Bank, 1999 annual economic report.
  • FBC Fidelity economist Hania Farhan.
  • World Economic Forum's Global Competitiveness report 1999.
  • The Financial Times Limited, 1999.