South Africa's economy: Much to be done

According to some estimates, one in three South Africans have no job

By James Walker

Even if the results seem a foregone conclusion, the state and future of the South African economy has been one of the major issues in the election campaign.

The ANC says it has succeeded in handling the transition to a fairer system, but its supporters hope for even more transformation and a reduction in income disparity.

The opposition argue that the government has presided over a stagnant economy, in which thousands of jobs have been lost, growth has been negligible and rigid policies have proven inappropriate in the face of South Africa's structural problems.

The reality, as always in South Africa, is somewhere in between.

The ANC government has delivered in terms of improving basic services, such as building houses and providing electricity and water to the majority of the population.

And their efforts in maintaining the country's standing in international financial markets were made during a period when crises swept Asia, Russia and South America.

Economy into Gear

South Africa's financial credibility has been closely linked to its economic reform programme, Gear - standing for Growth, Employment and Redistribution.

ANC president Thabo Mbeki is one of the architects of the strategy, which foresees increased revenue along with responsible expenditure as a way to reduce the government deficit.

In this respect, Gear is beginning to work. The 1999 budget deficit is estimated to be only 3% of GDP, in line with IMF targets.

But detractors say Gear has failed to deliver on three crucial target areas.

Critics say the government has focused on traditional monetary policy instruments, which contributed to weak growth performance over the past few years.

Unemployment

Despite criticism of the strategy, Mr Mbeki will continue with Gear.

With his hand-picked economics team now in place at the Ministry of Finance and the South African Reserve Bank, the government will brook little opposition to its declared path.

Post-elections, the first item for consideration will undoubtedly be employment.

A special job summit last year emphasised the huge task ahead of the government.

The economy has shed around 400,000 jobs in the formal sector in the past four years. Some critics have even put the losses at twice that level.

Opposition

Predictably, mainly white opposition parties and businesses unhappy in complying with affirmative action labour legislation are the main ciritcs of government policy.

And there is also opposition to the Gear strategy from one of the ANC's allies in the government coalition - the 1.8m member Congress of South African Trade Unions (COSATU).

COSATU and other labour groups fear that the government's insistence on targeting inflation and monetary targets led to, and will continue to hamper wage settlements.

Business argues that wage demands in turn lead to layoffs and redundancies as South Africa attempts to compete in international markets.

All agree that the only way forward will be to improve the growth prospects for the economy.

With population growth in South Africa at least 2% per annum, sluggish real GDP growth in 1997 and 1998, and the depreciation of the rand, real GDP per head has declined by almost $600 since 1995.

Despite the government's commitment to a higher growth path, South African GDP has been constrained by a number of factors over the past two years.

Problems have included the downturn of the business cycle, the El Niņo weather phenomenon, a bottoming out of world commodity prices and the after-effects of the East Asian crisis.

The economy, which is presently mired in recession is expected to recover starting from the second half of this year, and real growth of 3% is not inconceivable for 2000.

The government itself concedes that 4-5% growth is needed in the medium term to begin to increase incomes for all members of South Africa's population.

Just where that growth will come from remains to be seen.

Export market

South Africa's economy still remains highly dependent on the fortunes of its exports.

Gold, which typically makes up a quarter of exports, is in for a difficult period over the next few years, as central banks dispose of built-up stocks and prices remain depressed.

Other exports, which have been severely constrained by the slowdown in the world economy will begin to recover in 1999 and 2000, particularly as the lower value of the exchange rate will make manufactured exports more competitive.

Potential for growth

South Africa's economy is by far the largest in sub-Saharan Africa in both size and complexity. It is often seen as a potential engine for growth in the region.

Certainly in recent years South African goods have penetrated many markets, particularly in southern Africa, but its neighbours claim that South Africa has not responded with matching trade concessions for their exports.

The recent signing of a South Africa-EU trade deal will mean further worries for its African neighbours, who fear even further trade diversification.

The fate of the South African economy, and by extension, many of the countries which border South Africa will depend on the successful and peaceful conclusion of the elections.

Once the ANC wins its expected majority the hard work will begin in earnest.

Mr Mbeki will have to deliver on specific macroeconomic targets to assuage financial markets, while at the same time trying to transform the economy to satisfy his electorate.

The delicate balancing act which the ANC has attempted so far will continue, and Mbeki is fortunate in the timing of the recovery of both commodity prices and the business cycle.

The transition period is coming to an end and the challenges for South Africa are both numerous and formidable.

As Mr Mbeki is fond of saying, "It's time to get to work".

James Walker is Africa Editor at The Economist Intelligence Unit