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 indicatorsin 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 constitutes80% 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 ofcomplex 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.
The South African Reserve Bank (SARB) has pursued a countercyclical monetary policy to soften the economic downturn. SARB has successively cut the repo rate from 12 percent at the onset of the crisis to a historical low of 5 percent currently. Its most recent Monetary Policy Committee meeting kept the repo rate unchanged at 5 percent. While noting that “risks to the inflation outlook remain on the upside”, the committee also recognized the persistence of downside risks to the outlook for the domestic real economy. Inflationary pressures are mainly supply side (higher food prices, exchange rate depreciation, and higher unit labor costs), while demand pressures remain subdued due to the weak economic recovery, the high levels of excess capacity, uncertainty for the mining sector, and unresolved labor relations. Exchange rate movements represent a potential risk to the inflation outlook, especially given the recent widening of the current account deficit. Headline CPI inflation in January 2013 stood at 5.4 percent.
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 identifiesthe 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.
Last updated April 2013
A Country Partnership Strategy (CPS) for 2013-2016, is currently under preparation with the International Finance Corporation (IFC), Multilateral Investment Guarantee Agency (MIGA), and the South African Treasury. The CPS sets out a framework for engagement with South Africa andwill be based on a partnership for development solutions.It builds upon the evolution of the past program and the growth in Bank-client engagement.South Africa is a unique client for the Bank. It is a large Middle Income Country (MIC) with sizeable revenues which obviate the need for significant external financing. It already has a substantial public and private capacity in a number of technical areas. The CPS is demand-driven and will be centered on knowledge and technical cooperation as well as support to the implementation of the ongoing lending program in energy and the environment. The World Bank will also work with South Africa to distill the emerging lessons from its unique development experience that can be helpful to other countries.
The CPS will be anchored to the government’s National Development Plan. It primarily focus on the 3 I’s:reducing inequality, which responds to priorities in improving access and quality of public service delivery at the national level as well as in smaller cities and townships; promoting investments, refers to the large infrastructure deficit in the country, and ambitious plans to meet this demand through both public and private investments. This is important for both short-term job creation through employment in infrastructure projects, and for medium- to longer-term development of the country’s productive base and thereby higher growth and employment and strengthening institutions, which aims to improve efficiency in the use of public resources as well as promote a better business environment for private investments. These three interlinked strategic goals will form the pillars for this CPS around which programs and activities will be organized.
Each pillar will support client demand-driven programs.Eight programs are currently identified in selected areas with prior agreement with the government where the Bank would provide global experience and tailored products and services. These programs will be programmatic, with the objective of providing deeper and more focused engagement. Some of these programs, such as energy and environment, will focus on the implementation of the existing activities. Others, such as health, will seek to bring new dimensions for Bank engagement. There also exist several areas for potential additional programs should government make an explicit request and contingent on availability of financing. Gender issues, where applicable, will be mainstreamed into ongoing and future programs.
A Knowledge Hub will be the primary vehicle for delivering development solutions. Its approach will be pragmatic, starting small in a few selected areas, showing quick results, developing momentum, and growing the Hub over time. It is currently hosted by the South African National Treasury, with support from the World Bank Country Office.
The World Bank works with a range of development partners in South Africa, including the specialized agencies of the United Nations system, such as the Food and Agriculture Organization of the United Nations (FAO), the International Labour Organization (ILO) and the United Nations Development Programme (UNDP), the African Development Bank (AfDB), the Department for International Development (DfID), and KZW.
Last updated April 2013
Improving energy security and greening South Africa’s energy mix and preserving the country’s biodiversity
The US$3.75 billion Eskom Investment Support Project (EISP) was approved in April 2010 was the Bank’s first large-scale lending operation in the country. The EISP seeks to enhance South Africa’s power supply and energy security in an efficient and sustainable manner so as to support both economic growth objectives and South Africa's long-term carbon mitigation strategy. The project has three components: US$3.05 billion for completing the 4,800 megawatt Medupi coal-fired power station using proven, efficient supercritical technology. Importantly, EISP also includes US$260 million for piloting a utility-scale 100 megawatt wind power project in Sere and a 100 megawatt concentrated solar power project with storage in Uppington. These wind and solar investments are also being supported by US$350 million in financing from the Clean Technology Fund under the proposed Eskom Renewable Support Project (US$250 million to be channeled through the World Bank and US$100 million though the African Development Bank). Funding comes from the Agence Française de Dévelopment (AFD), European Investment Bank (EIB), and the Kreditanstalt für Wiederaufbau (KfW), with Eskom making up the balance of the total cost of US1.55bn. In addition, the EISP include a US$485 million allocation for low-carbon energy efficiency components, including a railway to transport coal to reduce greenhouse gas emissions.
To sustain these investments the Bank is supporting a number of technical assistance activities and advisory services, including support to National Treasury and the Development Bank of South Africa for renewable energy market transformation. The objective of the project is to support the government’s efforts to establish policy and regulatory frameworks, and build institutional capacity for renewable energy development.
The Bank maintains a modest but important set of activities supported by the GEF, and over the last 10 years a number of national and regional activities have been implemented to support biodiversity conservation and renewable energy. Recently closed GEF programs, including Cape Action for People and Environment (US$9 million); Maloti-Drakensberg Transfrontier Conservation and Development Project (US$8.2 million); and the Greater Addo Elephant National Park Project (US$5.5 million), have helped boost South Africa’s global reputation as a leader in sustainable conservation of biodiversity.Ongoing GEF-financed activities include support for conservation, empowerment and development in the Isimangaliso Wetland Park (US$9 million) and the Renewable Energy Market Transformation Project (US$6 million), aimed at removing barriers and reducing implementation costs of renewable energy technologies to mitigate greenhouse gas emissions.
Growth, Jobs and Private Sector Development
Job creation is key to the government’s policy agenda to achieve inclusive growth in South Africa. The Bank is providing a range of analytical and advisory services to help the government address the issue. A suite of recently completed reports focuses on various aspects of private sector development.
The World Bank’s Investment Climate Assessment (ICA) assessed the state of South Africa’s overall business environment and policy options to further improve it for greater job creation and faster growth. It concluded that while South Africa’s overall business environment is good relative to its peer group of upper- middle-income economies, and has improved a great deal since 2003 in many respects, challenges remain. A key message in the ICA is that South Africa needs to strengthen competition to better allow high productivity enterprises to increase their market share and poor performing enterprises to exit. In addition, actions must be taken to improve the nation’s infrastructure, better educate its workforce, allow for better access to finance for small firms, and reduce crime.
The Bank’s last two Economic Updates focused more broadly on the topics of green growth and inequality in South Africa. South Africa is the thirteenth largest emitter of CO2 in the world. It is also in the upper quartile of countries on CO2 emissions per capita and per unit of real GDP. Policymaking in South Africa, therefore, is increasingly being conditioned by a growing recognition that future growth needs to be less carbon intensive. As in a number of developing and developed countries, opportunities in green economies are being viewed with keen interest, as a way of simultaneously targeting a cleaner environment and stimulating innovation, growth, and job creation.
The 3rd Economic Update highlighted the country’s persistently high levels of income disparity, focusing on its underpinnings for equality and opportunity. The report used the Human Opportunity Index (HOI) to analyze the prospects available for children from divergent backgrounds to reach their human potential. Extraneous circumstances that a South African child is born into (ethnicity, location, gender, and family background) were found in the report to variably affect the child’s access to basic opportunities in life. Moreover, some of the circumstances (location and ethnicity in particular) were found to be also important for equality of opportunity in later stages of the child’s life during employment search. While there are no simple solutions to addressing equity issues, the report argued for a dynamic system involving policy experimentation (from incentives for training and hiring of young workers to monitorable and incentive-based delivery of public services), backed by rigorous impact evaluation and greater community participation in the actual delivery of basic public service.
The Bank has maintained a long-standing dialogue with authorities around a program of technical engagement focused on capacity building, technical analysis, learning-by-doing and international knowledge transfer in support of national programs. This engagement has been structured around six areas: (i) Jobs and City Competitiveness; (ii) Environmental and Social Management of Urban Investments; (iii) Infrastructure Finance; (iv) Public Financial Management and Governance; (v) Land and Housing Markets; and (vi) Integrated Urban Transport Planning. A Reimbursable Assistance Service (RAS) for US$5 million to finance Bank support has recently been negotiated.
The Bank will also support the Government’s efforts to better understand how the townships and informal settlements and their populations are situated in the overall economy, the role they play in overall economic activity and employment (including self-employment) opportunities, the situation of housing and social services and linkages to the non-township economy in urban and rural areas. The Bank will support the Government’s efforts on piloting targeted interventions in townships for job creation and enhanced public service delivery in the context of its overall urban program.
Service delivery and human capital
South Africa continues to struggle with the HIV/AIDS epidemic, especially in the mining sector, which is the epicenter for the sub-regional TB-HIV/AIDS co-epidemic. South Africa’s mine workers have the highest TB incidence in the world: an estimated 3000-7000 per 100 000 are infected, with worrying levels of resistance to standard treatment regimens and very high underlying HIV prevalence rates. Mine workers have been shown to drive disease trends in the general population, and with the mining industry in South Africa heavily dependent on migratory workers from rural areas and surrounding countries, particularly Lesotho, Swaziland and Mozambique, this problem constitutes a regional public health crisis. Under joint leadership of the Ministers of Health in South Africa and Swaziland; the Bank has been tasked to lead inter country coordination efforts towards harmonization of treatment protocols; and tracking of mine workers and their families.