A colossus in the kingdom of Lilliput

Tom Nevin

South Africa’s latest budget aims to boost job prospects and investor confidence at home, but it has to tread carefully to avoid stepping on its smaller neighbours.

South Africa is often referred to as the region’s “jolly economic giant”, but with great size relative to its neighbours, come problems of equal measure that must be dealt with, often for the benefit of the region.

This year is a little tougher than usual.

Considering what he had to work with, South Africa’s finance minister, Pravin Gordhan, did what many considered a remarkable job in drawing up the country’s financial and development plans for the year ahead.

“The budget is one of the most business-like, no-nonsense efforts I have ever witnessed,” enthused Cees Bruggemans, chief economist for First National Bank. Other South Africans were less upbeat, particularly the smokers and drinkers heavily penalised for their ‘sins’ with excise increases that sent them seeking comfort in a cigarette and stiff whisky.

Gordhan’s preoccupation with the economy is set firmly on stronger development to confront chronic unemployment and flagging investor confidence. As a consequence, the economy was read against the backdrop of the National Development Plan, reinforced by President Jacob Zuma as a major component in his recent state of the nation address.

Silver linings were, however, to be found on an otherwise cloudy economic horizon. Despite major demands in a slow growth environment and bearing in mind a revenue shortfall of ZAR16 billion (US$1.76 billion) in last year’s budget, the minister chose not to increase income tax rates, giving ZAR7 billion fiscal drag relief compensating for inflation. The budget deficit dropped last year to 5.2 percent of GDP, and is projected to fall to 3 percent by 2016. Inflation is at 5.5 percent, within the targeted 3-6 percent bracket.

Conceding that the South African GDP will grow at just 2.5 percent this year, well below its potential, Finance Minister Gordhan cut his budget cloth to suit the year ahead, although leaving some room for the economy to manoeuvre in its search for employment creating growth. While the latest GDP figures show that economic growth slowed last year, compared to 2011, positives emerged in the final quarter of 2012 to demonstrate increased economic activity.

The mining sector, traditionally the economy’s most reliable player, was plagued by strikes and dragged on the economy by contributing a negative 0.5 percent. Manufacturing was also under pressure, shedding 111,000 jobs last year. Other issues to be dealt with included: restive work forces; rocketing electricity, fuel and food prices; rising unemployment largely affecting young people; and persistent social delivery failure. Crime and corruption, too, have their stranglehold on the country’s growth prospects.

With an eye on next year’s general election, the budget presentation carefully explained the state’s many social spending efforts, laying to rest doubts that “the government is looking after the poor in an amazing number of ways,” as Bruggemans puts it.

Hopes were high of seeing the economy stimulated with a splurge of spending on much-needed new infrastructure and maintenance, but the state’s purse strings were loosened only marginally with total government spending up just 8 percent, in line with nominal GDP growth, keeping the state burden unchanged.

The private sector responded with cautious optimism to this disclosure, reading it as an indication that the government would widen its call for private developers to participate in infrastructure projects estimated to cost ZAR3 trillion over the next five years.

South African traders and investors are becoming increasingly involved in Africa north of its Limpopo river border, and see a widening middle class emerging in an environment of healthier economies, industrial development and political maturity.

Driven mainly by South Africa, the subcontinent is closing in on regional economic integration through commodity exchange markets. Such a coming together has long been a dream of the Southern African Development Community (SADC), an economic cooperative of 14 countries south of the equator and of Indian Ocean island nations.

“The global trading environment has become ever more competitive and this calls for the development and establishment of industries that are globally competitive,” says Taku Fundira, a researcher at the trade law centre for southern Africa (tralac). “Regional integration is the key for African governments to accelerate the transformation of their fragmented small economies, expand their markets, widen the region’s economic space, and reap the benefits of economies of scale for production and trade, thereby maximising the welfare of their nations.”

Is it working? “Well,” says Zambian entrepreneur Cephas Chala, “after years of talking, manoeuvring and strategising, a united and stronger trade and investment regional front is emerging. Boundaries that separate economic blocs are becoming mere geographical demarcations and less of a barrier to trade and financial dealings. The climate for freer cross-border deal-making is brightening.”

The southern and eastern regional economic communities of the Common Market for East and Southern Africa (COMESA), the East African Community (ECA) and the SADC are close to finalising an expanded free trade agreement.

An economy- and employment-building beneficiation sector, one that transforms local raw materials into secondary and tertiary merchandise, is high on the region’s development agenda. For example, there are plans to beneficiate platinum and manganese locally.

Doubts and suspicions persist, however, over South Africa’s alleged bamba zonke (take all) attitude in the region. The southernmost economy dominates the region massively. Its GDP is many times that of the total SADC membership, and if the upgrade aim is to be realised, much of the new beneficiation industry will need to be established in the smaller states.

“For too long we have exported our many vegetable, mineral and animal raw materials cheaply to manufacturers overseas and then bought them back as expensive finished goods. How can you build an economy like that? We need the factories here, on African soil. And the small nations must not be overlooked but favoured,” says Chala.

Nevertheless, South Africa is southern Africa’s kindly economic shepherd, a role not always appreciated by its often less than grateful flock. Generally, South Africa takes the lead in ventures and development projects that benefit the area as a whole, doing most of the work and paying the bills. However, it must remember to tread carefully, mindful of its image as the colossus in the kingdom of Lilliput.

About the author:

Tom Nevin is a Johannesburg-based freelance journalist


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