South Africa’s peaceful political transition was one of the most remarkable political feats of the past century. The magnitude of the constitutional and institutional re-design had a deep transformative impact on the entire system of government as well as the region. Today, South Africa is a stable, multi-racial democracy with a vibrant civil society. The African National Congress (ANC) has been driving the policy agenda since 1994. ANC holds a majority of 65% under South Africa's proportional representation system, and governs eight of the country’s nine provinces. The ANC leads the government in a tripartite alliance with the Congress of South African Trade Unions (COSATU) and the South African Communist Party (SACP). In December 2012, President Zuma was re-elected as the ANC President and the presidential candidate for the 2014 election.
A sustained record of macroeconomic prudence and a supportive global environment enabled South Africa’s gross domestic product (GDP) to grow at a steady pace for the decade up to the global financial shock of 2008-2009. Improvements in the public budget management system and efforts to restore the macro fundamentals by National Treasury played an essential role. Fiscal balances consistently improved, causing central government gross debt to fall from around 50% of GDP in FY1994/95 to 40% today. Revenue collection quadrupled and the number of taxpayers more than doubled between 1996 and 2007. At the heart of the fiscal achievements were dramatic improvements in revenue collection by the South African Revenue Service (SARS) and disciplined spending choices.
Due to consistent and sound budgetary policies South Africa has been able to tap into international bond markets with reasonable sovereign risk spreads. South African government bonds were the first in Africa to be included in Citigroup's World Government Bond Index in 2012. The 2012 Open Budget Index prepared by the International Budget Partnership ranked South Africa second among 94 countries surveyed, behind New Zealand, and ahead of the United Kingdom, France and the United States.
Pro-poor orientation of public spending has contributed to improved social development indicators in a range of areas. Millennium Development Goals (MDG) on primary education, gender, several health indicators and environmental sustainability are likely to be achieved. Social grants expenditure and the number of beneficiaries have quadrupled since 1994. Social insurance programs including state old-age pensions, child support grants, conditional grants for school feeding and early childhood development and disability grants, currently cover around 16 million people and, at 3.5% of GDP, are more than twice the median spending among developing economies. These programs, managed by the South Africa Social Security Agency (SASSA), are well targeted and provide income relief for the poor.
Much has also been achieved in the provision of social infrastructure and environmental management over the last 19 years. Capital spending has supported the construction of 56,000 new classrooms and 1,700 new clinics, as well as their access to basic utility services. In addition, approximately two million free housing units have been constructed for low-income families. Household electrification has expanded substantially, with 73% of households electrified by 2009; and potable water supply and basic sanitation services were provided to additional nine million and 6.4 million people, respectively, during the same time period. Investment was also directed to the construction, rehabilitation and maintenance of 6,000 km of national roads and 15,000 km of provincial roads. On the environment front, South Africa is a global leader in biodiversity conservation and wildlife management and has in place a first-rate network of protected areas making it an ecotourism destination of choice.
Key Development Challenges
Despite the notable accomplishments, South Africa’s economic transformation agenda remains incomplete. A range of enduring legacy issues from the apartheid system continues to undermine economic efficiency and job creation. The limited progress since 1994 in lifting the living standards of the majority and reducing the income inequality has put the social contract under pressure and has grown into an open public debate. Service delivery protests by underserved groups suggest that parts of the population have become frustrated and disillusioned with the pace of reform, the poor quality of public health, education and infrastructure services, and modest job growth prospects. Wildcat strikes in the mining, energy, transport and farming sectors have put into question labor and business relations in the country.
South Africa remains a dual economy with one of the highest inequality rates in the world, perpetuating inequality and exclusion. Spatially, an advanced, modern urban economy coexists in sharp contrast with the socioeconomic poverty of disadvantaged townships, informal settlements and rural areas. With an income Gini of around 0.70 in 2008 and consumption Gini of 0.63 in 2009, the top decile of the population accounts for 58% of the country’s income, while the bottom decile accounts for 0.5% and the bottom half less than eight percent. Land distribution is one of the most unequal in the world, with 55,000 white farmers owning 85% of the agricultural land. Despite South Africa’s sophisticated financial sector, financial services do not adequately reach the poorer segments of the economy - only around 28% of adult South Africans have access to credit - stifling entrepreneurship and growth.
With a saturated growth potential for the advanced economy, faster trend growth would largely come from the less-developed economy, which may have the potential to take off in the same way that the emerging market economies did in mid-1990s. GDP growth in South Africa has averaged 3.2% a year since 1995, or 1.6% in per capita terms. This, however, has proven insufficient to absorb the wave of new entrants to the labor market ushered in by the dismantling of apartheid barriers, resulting in a persistently stubborn high unemployment rate. The potential for faster growth has been held back by industrial concentration, skill shortages, labor market rigidities, chronically low savings and investment rates and spatial barriers from the former apartheid system. As the dichotomous urban structure is likely to remain in the foreseeable future, focused policy attention is needed both to invigorate the hitherto flailing township and rural economies and, over time, to enable their steady convergence with the advanced economy.
Even though economic growth and rising social welfare payments have made a dent into poverty levels, large pockets of poverty remain deeply entrenched, mostly among the black population in townships and informal settlements. A 30% increase in per capita GDP since the late 1990s and a sharp expansion of the social grant coverage enabled a significant decline in the poverty rate - from 50.8% of the population living below R422 a month (in constant 2009 Rands) in 2000 to 34.5% in 2010. However, pockets of poverty remain deeply entrenched, mostly among the black population, which constitutes 80% of the overall population while accounting for over 90% of the people living in poverty. Women are also disproportionately affected by poverty: female-headed households have a 50% higher poverty rate than male-headed households, with rural women suffering more than urban. Inequality and poverty trends are significantly worse in urban areas, mainly a result of the rural poor migrating to urban centers for opportunity. Poor social outcomes are particularly persistent in the health and education sectors, which together make up 30% of government expenditure. South Africa's educational outcomes in terms of reading and math scores (modest compared to, say, Kenya or Tanzania) do not augur well for the development of a skilled labor force in the long run.
The highly unequal domestic circumstances continue to play a disproportionate role in South African children’s access to some of the basic opportunities, as measured by the Human Opportunity Index (HOI). Some opportunities, like school attendance and access to telecommunications, are on par with the universal levels (HOI above 90%) among South African children. Other opportunities, such as health insurance, access to safe water and improved sanitation, adequate space without overcrowding, and finishing primary school, are highly inadequate and unequally distributed among children of different circumstances. Access to early childhood development programs, safety in the neighborhood, access to electricity have low to moderate inequality of opportunity.
While South Africa fares well in international comparisons on HOI for school attendance, it is surpassed by most of its Latin American peers for completion of primary school on time. On access to safe water and improved sanitation South Africa, though ahead of other African countries, lags behind all Latin American countries, except the poorest (e.g. El Salvador and Honduras).
Life expectancy, after falling dramatically from 62 years in 1992 to 53 years in 2010, recovered to 60 years in 2012. The recent recovery was in large part due to the rapid expansion of the antiretroviral treatment programs to fight HIV/AIDS. And it is supported by declines in both adult and infant mortality. The adult mortality rate, however, is still three times higher in South Africa than in middle-income countries with similar income per capita. Infant mortality rates have also fallen from 73 per 1000 live births in 2006 to 42 per 1000 live births in 2012, but still remain higher than in peer countries. The poor are particularly vulnerable, and high HIV and AIDS infection rates, as well as TB infections, have severely strained the health system, contributing to the poor health indicators
Despite the government’s substantial investment in public infrastructure and free housing, spatial divisions and past development patterns persist, and one-quarter of the population continues to live in sub-standard, informal dwellings. This is due to large and growing backlogs fueled by the high migration rate to urban areas. The paradox is that South Africa's major cities are simultaneously the main source of about 60% of South Africa's GDP, but, fueled by a massive migration, are also the centers for open unemployment, stark social inequality, poverty, crime and HIV/AIDS and TB infections.
The unresolved set of complex economic challenges has locked South Africa into a low-level equilibrium of low growth, persistent poverty and widespread exclusion and unemployment. The required structural change to break-out of this state will have to come from investment in employment-intensive growth, tackling the unemployment and education challenges together and improving the policy coordination and implementation capacity of the state. Shifting South Africa’s developmental trajectory to a new frontier and inclusive growth will require the active participation of all citizens. Although many of the required policy actions are known to the policy-makers, implementation of these has been hampered by a lack of broad political consensus and the “deficit in trust between business, labor and government” (NDP 2012). This need for a new trajectory of growth is also underscored by the recent sovereign rating downgrade by several international ratings agencies, which raises concerns about the Government’s ability to maintain stability and resolve internal conflicts.
Recent Economic Developments
South Africa’s growth slowed from 3.5% in 2011 to 2.5% in 2012 (with the annualized fourth quarter growth coming in at only 1.2%), primarily reflecting the sluggish external environment and domestic labor strife. Eight out of the 10 major subsectors (agriculture and construction being the two exceptions) saw a decline in growth, with a decline of 4.3% in mining value added being the most damaging. The decline in mining also adversely affected manufacturing activity (especially metal products) where output growth was contained to a modest 2.2%, down from 3.6% in the previous year. On the demand side, the global economic slowdown kept exports growth to 1.1%, while household consumption growth slowed down considerably (from 4.8% in 2011 to 3.4% in 2012) as consumer confidence weakened on account of heightened unemployment, global economic uncertainties, and a weakened rand. Growth in fixed capital formation picked up by almost two percentage points, as accelerated investment spending by state-owned enterprises and the government overcame continued mild increases in private investment. Growth is projected to pick up only slightly to 2.7% in 2013.
The post-2008 economic slowdown has exacerbated the structural problems of exclusion and modest trend growth, with an especially severe impact on employment. The unemployment rate, already extremely high at about 21.9% in 2008, has since risen to 24.9%, with the number of employed workers falling by one quarter million. The unemployment rate remains elevated relative to the pre-crisis level, even though real GDP has exceeded its pre-crisis peak since 2010. Youth unemployment (15-24 years) stands at 50%. Sixty percent of the unemployed have less than secondary school education, and two-thirds have been unemployed for over a year, highlighting the underlying structural problem of low skill levels to suit a dynamic economy.
Owing to a solid record of fiscal prudence, South Africa entered the 2008 economic crisis in a sound budgetary position, enabling an aggressive countercyclical fiscal and monetary policy response. Fiscal space generated by several years of budgetary discipline, together with the country’s deep and liquid capital markets and access to global capital markets, allowed the Government to undertake a substantial fiscal expansion to offset weak private sector demand. The emphasis has been on scaling up infrastructure and social sector spending, despite a significant slowdown in revenue collection. As a result, the budget balance moved from a surplus over 2005/06-2007/08 to a deficit equivalent to 6.5% of GDP in 2009/10, and came in at 5.2% of GDP in 2012/13. Fiscal balances are projected to improve gradually over the medium term, predicated upon revenues picking up with sustained economic recovery and moderation of current expenditure growth. Net public debt is projected to peak at slightly over 40% of GDP in FY15/16 as the fiscal deficit falls to 3.1% of GDP towards the end of the period.
South Africa continues to experience considerable exchange rate and capital flow volatility. This reflects both spillovers from international (US tapering and concerns about China) as well as domestic developments. Markets remain concerned about South Africa's ability to weather the turn around in global capital and commodity markets given its combination of a high current account deficit (6.8 percent of GDP Q3 2013), low growth (staff forecast of 2.7% for 2014), and on-going labor unrest (strikes in the platinum sector are entering their 3rd week). The rand reached a five-year low of 11.40 rand per US dollar at end-January as spillovers from international capital markets contributed to non-residents pulling-out some $261 million from local bond and equity markets in January (to compare: total non-resident portfolio inflows amounted to just $108 million in 2013, down from just over $10 billion in 2012). But it also reflected initial market reaction to the surprise decision by SARB to raise its policy rate.
SARB signaled its growing unease with the risk of lagged pass-through from rand deprecation to domestic inflation, when raising its policy rates by 50 bps at end-January 2014, its first rate increase in more than five years. Although headline CPI inflation of 5.4% y/y (December 2013) remains within the target inflation band of 3-6%, revised inflation forecasts by SARB show headline CPI inflation breaking the upper-end of the target band from Q2 2014, and peaking at 6.6% in Q4 2014 and only declining to 6% in mid-2015.
Government Policy Priorities
The current administration is acutely aware of the immense challenges to accelerate progress and build a more inclusive society. Its vision and priorities to address them are outlined in the 2030 National Development Plan (NDP). Released in 2012, the report is the product of extensive nationwide consultations led by the National Planning Commission, an independent advisory body consisting of 26 eminent people drawn largely from outside government, appointed by the current administration to draft a vision and development plan for the country. The NDP was embraced by the ANC at their 2012 National conference as a platform for united action by all South Africans to eradicate poverty, create full employment and reduce inequality. The Cabinet has also endorsed the NDP as the country’s overarching strategic plan to implement its development vision. It also underpins the 2013 Budget.
The NDP calls for a broad, multidimensional action framework for changing the current development trajectory of South Africa. It identifies the failure to implement policies and an absence of broad partnerships as the main causes for the slow progress in eliminating poverty and reducing inequality. The two main strategic goals framed by the NDP 2030 vision are to double the GDP by 2030 and eliminate poverty, and reduce inequality, as measured by the income Gini coefficient, from 0.70 to 0.60.
Three priorities are identified by the NDP for achieving these overarching objectives; raising employment through faster economic growth, improving the quality of education, skills development and innovation, and building the capacity of the state to play a developmental, transformative role. These priorities are interlinked, with progress in one area supporting advances in others - a sustainable increase in employment will require a faster growing economy and the removal of structural impediments, such as poor education quality and spatial settlements patterns that exclude the majority. The state, in turn, will need to improve its service delivery efficiency by enhancing its capabilities and strengthening the skills profile of public servants.
The NDP identified the failure to implement policies and an absence of broad partnerships as the main cause for the slow progress in eliminating poverty and reducing inequality. To achieve its two main strategic goals, the NDP lists several critical factors for its successful implementation; focused leadership that provides policy consistency; ownership of the plan by all formations of society, strong institutional capacity at technical and managerial levels, efficiency in all areas of government spending including management of the public service wage bill and making resources available for other priorities, and prioritization and clarity on levels of responsibility and accountability at every sphere of government as well as a common understanding of the roles of business, labor and civil society.