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Jumpstarting South Africa’s Economy
Could mega-regional trade deals be the key to help Africa’s sputtering growth engine?

In our last post we introduced you to part one of our two-part GED video series on trade integration in Africa. We talked about Africa’s heavy commodity export reliance and about inner African trade zone proposals. In today’s video we want to get more focused and talk about trade development in South Africa!

 

Trade integration in Africa – Part 2:

 

 

This blogpost in short:

  • Before the financial crisis of 2008, South Africa experienced a long stretch of high positive economic growth.
  • This growth has declined drastically over the last seven years and has most recently flat lined at not much more than one percent.
  • This is in part due to South Africa’s heavy reliance on raw material exports to China, where growth has started to decrease as well.
  • An Asian free trade agreement such as the FTAAP could restart South African growth, but would likely present a non sustainable solution to the problem that could further increase African inequalities.

 

For a long time, South Africa was considered Africa’s model economy. Between the years 2000 and 2007 South African GDP growth averaged a sizzling 4.3 percent annually. The world noticed and eventually South Africa claimed its spot as the newest addition to the illustrious BRICS club of countries. Along with fellow members Brazil, Russia, India and China this makes South Africa one of the most powerful emerging markets in the world.

 

Then the big financial crisis hit and South Africa’s economy plummeted. In the years after the crisis, they were never able to regain pre-crisis levels of growth and recently it appears that growth has flat lined at a meager 1.3 percent. What happened?

 

As we discussed in Part 1 of our series, Africa – since being forced into this role during colonial times – has always been heavily reliant on raw material exports to the rest of the world and, most recently, especially to China. South Africa is no exception. Although the finance sector was responsible for a lot of pre-crisis job creation, mining and the export of precious metals and rare earth elements remained a main driver behind its wealth. A whole fourth of the country’s exports were gold, iron ore and platinum. Most recently though, Chinese growth has slowed down significantly from its once astronomical heights. Less growth in China however, means less demand for South African exports, giving us at least a partial explanation for the slump South African growth has been experiencing over the last some years.

 

Could trade agreements be the answer?

 

Before, we talked about trade zones and agreements within Africa, their potential and problems in facilitating intra-Africa cross-border trade. Today we want to take a look at global deals – so called mega-regional free trade agreements – and their potential to grow the South African economy. In our study “The Forgotten Continent – The effects of mega-regional free trade agreements on Africa” we analyzed the effects of various planned agreements of the west such as TTIP and TPP on South Africa. We also looked at planned Asian agreements such as the RCEP and the even more ambitious FTAAP (Free Trade Area Asia-Pacific). While western Agreements – which by now look unlikely from a political viewpoint anyway – showed little to no effect on South African growth, the Asian agreements tell a different story.

 

BST_Afrika_Grafik10

 

Our results show that a China led FTAAP could bring about a 62.4 percent value added growth in the South African mining sector translating to a whole 7.86 percent real income growth for the country. As we said before, if China is doing well South Africa is getting a windfall.

 

Is any growth good growth?

 

Such numbers would certainly pull the struggling BRICS country out of its stagnation. But would it be real positive growth? History shows that the wealth of the mining sector reaches only a fragment of South African population. Another China fueled growth jump would almost definitely further increase the already large inequality in the economy. Let’s face it: The commodity lottery has never been a prescription for lasting, sustainable growth.

 

It remains up to South Africa then to decide how it wants to face the global trading order of the future. To learn more about the situation at hand and the results we found, click here to read the full study, or click here to read our first blogpost and watch video one of our series on trade integration in Africa!