South Africa faces increased regional competition as a place for investment. Here are 4 areas that may help the country stay ahead.
This April marks the three year anniversary of the inclusion of South Africa in the BRICS group since South African President Jacob Zuma spent considerable efforts to be included. That group of widely diverse emerging economies has had widely divergent growth prospects recently, with some suggesting that a new grouping of emerging markets under the MINT (Mexico, Indonesia, Nigeria, and Turkey) category could potentially offer better returns for investors.
Growing skepticism towards emerging market indices has been bolstered by recent trends and their widely differing prospects. Back in April 2011, the addition of South Africa to the BRICS prompted skepticism and derision from some corners, as the economy of South Africa had already exhibited signs of slowing following 2008. Three years since its induction, with Zuma facing an upcoming re-election and many emerging markets looking considerably weaker, here is a look at four policy areas that South Africa needs to address.
1. Invest in infrastructure
South Africa has notoriously poor infrastructure. While the country has long been considered in good condition by regional standards, its infrastructure continues to result in risk and loss for companies seeking to do business in the country. With other African countries such as Nigeria and Mauritius making advances in infrastructure development, it is imperative that South Africa accelerate improvement to stay competitive.
Recently, South Africa fell to the second position in regional rankings by the World Economic Forum (behind Mauritius) and held a somewhat respectable 66th spot in overall global rankings. Hoping to address this, in 2012 President Zuma announced a $97 billion spending plan aimed at improving roads, ports, access to utilities and other areas. Zuma further stated his intention to put forward a larger package of $462 billion.
Despite this, infrastructure spending and both medium and large scale projects have been slow to develop with very little sign of the dramatic increases in expenditure that are needed. Accelerating spending, ensuring on-time production, and maintaining transparency with regard to project spending will do much to ensure that South Africa remains competitive both regionally and globally.
2. Labor unrest
Contemporary South Africa has a history of significant labor and social unrest. The summer and fall of 2013 saw another outbreak of strikes, which hurt manufacturing and mining sectors in particular. One strike in August 2012 ended with 34 miners being shot dead by police, drawing considerable negative international attention to both the country and one of its largest industries.
The mines themselves account for nearly half of the country’s exports, making the ramifications of unrest particularly damaging to the overall economy. The unrest is not only socially corrosive, but leads to greater degrees of uncertainty and volatility, particularly in areas central to continued growth. With demands for wage increases, inflation on the rise and a noticeable dip in the commodities boom, more periods of unrest seem likely, particularly in light of historical precedent.
Indeed, increased infrastructure spending may limit unrest and that was likely a factor in Zuma’s push for greater investment in this area. With striking workers also including airport technicians and construction workers, addressing this area of concern may be a good idea.
3. Education/Research and development
Much like its infrastructure, South Africa’s spending on research and development is relatively good by regional standards. However, it remains depressingly low compared to many other emerging markets outside of the continent. Given that South Africa relies heavily on manufacturing, agriculture and mining, enhanced research and development may help to offset the sharp and disproportionate blows dealt to the South African economy when commodities and other areas experience downturns.
Developing this area will also improve workplace efficiency, provide greater economic diversification and contribute to South Africa’s global brand, thus attracting greater foreign investment. Previous goals to increase R&D spending to 1 percent of GDP have fallen short, with South Africa being the only BRICS country to reduce R&D spending in three consecutive years during the height of the commodities boom.
Promisingly, the 2013-2014 national budget displays a marked increase in funding for universities and research. Additionally, great strides have been made in developing biotechnology as a leading industry.
4. Regulatory climate
South Africa has been successful in developing its biotechnology sector in large part as a result of providing an encouraging regulatory climate. That success offers an example, which policymakers may be wise to emulate. With other areas such as poor infrastructure, labor unrest and crime doing much to discourage business and investment in South Africa, it is crucial to have legislation and taxes designed to encourage business growth in an environment with greater risk.
South Africa has long benefited from the comparative regional transparency of its government, with areas like access to documents and recent tax reforms giving the country a very good ranking of 41 out of 189 by the World Bank for ease of doing business. However, South Africa has long benefited from being the regional powerhouse. With other countries on the continent rising fast in this category (nine of the twenty most improved countries since 2009 are in Africa), it is important that South Africa do more than maintain its regulatory climate. Rather, the country must take measures to open itself up and continue efforts to increase trade with its sub-Saharan partners.
As other African countries making impressive strides, the Rainbow Nation can no longer trust that it will beat out its regional competitors as a destination for business and investment. Admittedly, the country faces key constraints that may limit its ability to address these issues. A weakened currency recently coming off of a four year low and government revenues limiting investment capabilities, it is pivotal that South Africa work actively to address policy issues that remain a hindrance to its growth potential.
