Abstract
South Africa is a privileged member of various global governance clubs. This status is based on its relative economic weight in sub-Saharan Africa and its legacy of ‘soft power’ derived from the peaceful transition from apartheid to democracy. However, those foundations are waning in the face of the African National Congress (ANC) government's growing ambivalence towards democratic norms and the relatively rapid growth and development taking place in sub-Saharan Africa. The ANC government's own policy choices, particularly its emphasis on state-driven economic policy, and the internecine power struggles racking the party have set the country's economic policy adrift. Thus investor confidence has been undermined at a time of global economic crisis. Taken together, these trends suggest South Africa's days as the African representative of choice are numbered. Ironically, this development may portend reversal of current trends, by concentrating the ANC leadership's collective mind on what really needs to be done to restore growth, and international confidence, in the country.
Introduction
Since 1994, the onset of post-apartheid democratic governance in South Africa, the country has been thrust onto the international stage. By virtue of its relative economic weight in Africa and the ‘soft power’ bequeathed by its peaceful transition to democracy, it has assumed the role of ‘go-to partner’ in sub-Saharan Africa. This has been cemented through the country's inclusion in several important international groupings, notably the G-20 heads of state; the Brazil, Russia, India, China, South Africa (BRICS) formation; and the Economist Intelligence Unit's CIVETS (Columbia, Indonesia, Vietnam, Egypt, Turkey and South Africa) class of emerging economies [5].
But in recent years South Africa's fitness to punch above its weight has increasingly come into question. For example, Goldman Sachs did not include South Africa in their ‘Next 11’ list. They did include Nigeria, which Morgan Stanley projects may exceed South Africa's GDP level by 2025. Similarly, rapid economic growth has taken root in a number of countries in the subcontinent, but not in South Africa. And South African politics look increasingly destructive, whilst economic growth is anaemic.
This article explores the factors behind the approaching eclipse of sub-Saharan Africa's ‘champion’. First, using a political economy lens, the growing domestic constraints on South Africa's global governance leadership aspirations are explored. Next, the recent furore over the Dalai Lama's proposed visit to South Africa is discussed as an example of the country's waning soft power. Then, South Africa's soft underbelly, its touting of itself as the ‘gateway to Africa’, is analysed. The final section offers a conclusion.
Domestic constraints
Since 1994 South Africa's economic growth has been steady, but not spectacular. It was underpinned by a conservative, and successful, macroeconomic stance centred on inflation targeting and prudent debt management. During the 2003–7 global growth period, South Africa's real economic growth rate averaged around 5% per annum. However, towards the end of the period the economy ran into significant capacity constraints revolving around the availability of quality network services infrastructure. During the last two decades of apartheid, the National Party government neglected infrastructure investment whilst it focused on containing the growing political challenge to its rule. Compounding this, the African National Congress (ANC) government made substantial microeconomic policy errors, notably in its neglect of electricity infrastructure investment, which culminated in country-wide blackouts in 2008. Subsequently, the government embarked on a major infrastructure spending programme designed to address the bottlenecks in the transportation and energy systems.
The ANC government is committed to state-driven direction of the economy in order to promote social transformation. In the infrastructure sphere this means using the vast state-owned enterprises at its disposal whilst according the private sector a minimal role. Since state capacity is, to be charitable, patchy, the pace of investment has been slow. So it will take considerable time to modernise the infrastructure, reduce the back-log and unleash economic growth.
The emphasis on state-driven transformation plays out in a range of other policy areas. Trade and industrial policy, for example, have become more inward in their orientation, with the government keen to promote the manufacturing sector through local preferences and protection for ‘strategic sectors’. Social policy has burgeoned across a range of fronts, from child support grants to current ambitious proposals to establish a national health system. A relatively small middle class funds the projected increased fiscal burden.
Labour market policy seems to be too accommodative of trade union interests. Since the ANC governs in partnership with the South African Communist Party and Congress of South African Trade Unions, this is not surprising. Nonetheless, unemployment remains unacceptably high, with no credible plan to reduce it. Rather, the government advocates more state direction, more subsidies and protection for industry, increasing worker protection and increasing social welfare payments.
Overall, the cost structure and regulatory burden are rising amidst an increasingly hostile and competitive global economic environment. South Africa's continued reliance on crisis-ridden European markets and investors aggravates matters. Not surprisingly, economic growth is muddling along at 3–4% per annum, nowhere near the level required to make a major dent in unemployment.
Worse still, South African politics are increasingly fractious in the build-up to the ANC's leadership conference at the end of 2012. The succession battle is heating up. The president, dithering at the best of times, is incapable of developing a decisive economic policy [3]. ‘Economic transformation’ is now a key battleground, devolving into a debilitating debate over whether mines, banks, insurance companies and land should be nationalised. Not surprisingly, mining companies, farmers, agro-processing multinationals and private investors, at home and abroad, are carefully calibrating their investment plans.
Worryingly, the ANC is sponsoring policy moves to clamp down on press freedoms. Many see this as an increasingly corrupt governing class seeking to hide its misdemeanours whilst continuing to loot state resources. The infamous Kenyan case, captured in the title of Michela Wrong's compelling book
So a potentially deep-seated rot has set into South Africa's body politic, accompanied by policy mis-steps made worse by state incapacities. This is not the model of a vibrant emerging middle power as portrayed by the CIVETS acronym. And this relative weakness is now on display, most notably in the recent Dalai Lama saga.
‘Soft power’ foregone: the Dalai Lama saga
South Africa actively lobbied to join the then BRIC formation. This meant it would always be in a position of relative weakness compared to that of the four founding members, whose economic and political power potential outweighs South Africa's by a significant margin. Then at the end of September 2011, the South African government dallied over granting the Dalai Lama a visa to attend Nobel Peace Prize laureate Archbishop Desmond Tutu's 80th birthday party. Instead of emulating its BRIC peer Brazil, which granted the Dalai Lama a visa as a private citizen, the ANC government simply looked the other way until he withdrew his application.
Thus South Africa's source of soft power—its embrace of democracy in painful circumstances—was sacrificed on the altar of preserving economic relations with China. If South Africa's BRIC partners did not take the country seriously before this debacle, why would they do so now? The country has assumed the position of China's stooge [4] and further alienated domestic constituencies already concerned that the ANC is set on dismantling hard-won democratic freedoms. Similarly, South Africa's standing in the West, where democracy is valued—admittedly sometimes in the breach—has been diminished. Since Western powers still largely control the key instruments of global governance, this outcome should not be taken lightly, especially by a state aspiring to punch above its weight. And in Africa, where growing concerns over China's economic and resource extraction footprint are being expressed, the South African government's capitulation to China must surely have been noted [1].
Overall, this episode will hasten the search for alternate representatives of African interests. South Africa's economic clout in the subcontinent remains much larger than its nearest rivals, so this process will take time. But in the wake of the global financial crisis, economic growth has taken off in some of those rivals, notably Nigeria and Angola, and seems set to continue for the foreseeable future. In this light the South African government is reasserting its widely perceived role as the ‘gateway to Africa’.
Relative economic decline: South Africa as the ‘gateway to Africa’
The ‘gateway’ notion underscores the South African government's ambition to retain the country's pivotal role in African affairs. Yet it is seldom substantiated. The gateway role could entail three linked possibilities. 1 First, multinational companies could use South Africa as a hub for regional headquarters, utilising the country's relatively superior services infrastructure to coordinate their regional activities. Second, multinationals could take advantage of the country's relatively advanced transportation and distribution networks. Third, they could use South Africa as a sourcing hub.
The following analysis is adapted from Draper and Freytag [2].
Attracting regional headquarters could have positive spin-offs such as branding South Africa and adding pressure to upgrade supportive network infrastructure. However, the country's chronic crime problems, bureaucratic challenges and some policy failures, notably concerning work permits, constitute strong headwinds to attracting skilled foreign personnel. Hence, this is not likely to lead to major income or employment benefits.
The logistics hub possibility would also have positive spin-offs particularly for transportation, logistics and distribution companies, in which South Africa has relatively strong corporate capabilities. The revenues generated constitute export receipts, and these activities create employment. The challenges revolve around the rapidly escalating costs of maintaining and developing physical infrastructure.
The sourcing possibility is the most interesting possibility since it involves adding value in South Africa. More domestic production linked to expanding exports would generate sustainable jobs and foreign exchange, and draw in complementary services such as transportation, distribution, finance and other areas of South African competitive strength.
Unfortunately, self-inflicted policy obstacles to securing this beneficial outcome are mounting. The flagship project is the Trilateral Free Trade Agreement (T-FTA) encompassing the South African Development Community (SADC), the Common Market for Eastern and Southern Africa (COMESA) and the East African Community (EAC). South Africa stands to gain much from a rapid liberalisation process stretching all the way up the African east coast via Nairobi to Cairo. Instead the government seems to be slowing it down to a cumbersome and politically charged tariff-line-by-tariff-line negotiation, avoiding the liberalisation of services. This approach, if pursued to its logical conclusion, will take a decade or more to deliver a result—if at all.
This cautious approach arises from the government's inward-looking trade policy stance. The South African government wants to pick ‘winners’ and thereby create a long-term comparative advantage. However, trade protection increases the prices of items such as food, textiles, apparel and other consumer goods. Since these price increases are borne disproportionately by the poor, the policy is socially unjust. It also increases input prices for exporters, thus working as indirect export taxation. Trade protection also causes an appreciation of the currency, because demand for foreign currency is reduced when import prices rise and imports are diminished. This appreciation hurts exporters and competing import firms again.
Changes for the better are not on the horizon. The government promises selective tariff liberalisation delivering tariff escalation: processed goods are more highly protected than unprocessed ones. This is meant to improve export performance; inputs are cheaper than before and thereby enhance exports. However, this only generates short-term benefits. Protection from foreign producers of processed goods represses structural change and prevents productivity gains, which are mostly created by means of import competition. In the medium and longer run, technology and human-capital-intensive export industries suffer through tariff escalation.
It also causes South Africa to behave like the industrialised world. By mimicking the North's discriminating trade policy, South Africa distorts trade with less developed countries, particularly other African ones, since it forces them to specialise in unprocessed goods and prevents them from developing skills in processed goods. In the long run, that may reverberate politically, too, and undermine the T-FTA.
Concluding observations
Everywhere we look we encounter growing scepticism about South Africa's economic management. This encompasses business scepticism concerning the emphasis on state-driven development in the government's New Growth Path; worries over what appears to be an increasingly interventionist attitude to foreign direct investment (FDI) in South Africa; 2 tolerance of a destabilising, one-sided ‘debate’ over nationalisation; and resultant concerns over who is actually driving economic policy.
The highly publicised, and ongoing, Walmart takeover of South African retailer Massmart being the most prominent example.
Since Keynes is back in fashion it is worth recalling his dictum concerning what drives investment: the ‘animal spirits’ of the investor. There is a growing feeling in the international and domestic investor community that South Africa is not getting it right, whereas better opportunities are emerging elsewhere in the subcontinent. The trickle of FDI previously destined for South Africa but now diverted to the likes of Nigeria and Kenya is unlikely to immediately become a flood. But, if current trends continue, in 5 to 10 years the reality may be very different.
Read in conjunction with the ANC government's rapidly declining ‘soft power’, this picture of relative economic decline in sub-Saharan Africa should alarm South African policymakers. After all, these two claims—to soft power and to relative economic weight—form the core of South Africa's privileged status in global governance forums.
Whilst South Africa's eclipse is not immediately on the horizon, based on current trends it is a scenario that looks increasingly likely. Ultimately, it may prove to be this factor more than domestic pressure that induces government economic policy responses in the direction of delivering a more investor-friendly and therefore growth-oriented policy environment. Meanwhile, the fiddling continues whilst Rome burns.