The problems are mounting for South Africa’s ailing economy

Rampant inequality, corruption and poor education standards continue to impede growth in South Africa. A year into his presidency, Cyril Ramaphosa will have to tackle an array of structural impediments to turn things around

Africa's second-largest economy is being forced to confront a large swathe of socioeconomic problems that continue to hamper growth in the country
Africa's second-largest economy is being forced to confront a large swathe of socioeconomic problems that continue to hamper growth in the country 

South Africa is a country of dualism. Within the second-largest economy in Africa, a plethora of opportunities may exist, but they are impaired by gruelling challenges: the legacy of a painful past hinders hopes for the present, while progressive regulations are impeded by inefficient implementation. The lives of the wealthy one percent could not be more different to those of around 50 percent of a 56.72 million-strong population living in poverty. The highly educated juxtapose with the illiterate (of which there are around three million), and mansions in heavily guarded areas are but a short drive away from rickety shanties in townships. Beneath all this, there is a current of deeply conflicting, racially aligned views on how to resolve the country’s biggest problems.

Within the second-largest economy in Africa, a plethora of opportunities are impaired by gruelling challenges

Though South Africa boasts good infrastructure, a well-developed financial system and sound innovation capability, extraordinarily high crime rates, poor security and a problematic labour market continue to stunt the country’s potential. This duality has long marred its economy. And then, in May 2009, came Jacob Zuma, a president who commanded the country with disgraceful illegality.

A long-awaited surge of optimism swept the nation when Cyril Ramaphosa was named the fifth president of South Africa in February 2018. The protégé of Nelson Mandela, he was the icon’s former aide turned self-made billionaire, and a hero of the anti-apartheid struggle. Ramaphosa’s shrewdness has been hailed worthy of the challenge laid down by Zuma – a leader accused of stifling the economy not only through his ineptitude, but by breeding a culture of corruption throughout.

Crime never pays
Zuma’s infamy has been amplified by a long string of scandals involving racketeering, fraud, money laundering and, of course, corruption – a word with which he has since become synonymous. In addition to allegedly taking bribes from arms dealers, Zuma and his associates have been found at the centre of a carefully calculated system of stealing taxpayer’s money through state-owned enterprises (SOEs). Zuma denies any wrongdoing, telling a crowd in April 2018 that he is “innocent until proven guilty”.

‘State capture’, once an academic term that is now frequently used by the South African populace, is defined by Transparency International as when “companies, institutions or powerful individuals use corruption, such as the buying of laws, amendments, decrees or sentences, as well as illegal contributions to political parties and candidates, to influence and shape a country’s policy, legal environment and economy to their own interests”.

The very nature of crime is a deterrent to doing business in both the formal and the informal sectors

“In the first instance, what [state capture] has done is undermine the performance of SOEs,” explained Professor Haroon Bhorat, Director of the Development Policy Research Unit at the University of Cape Town. “That has reduced the ability of SOEs to act as a lever for economic growth, to crowd in investment, [and do] all sorts of good things in the private sector.”

As well as starving companies generally, and much of the private sector of government business in particular, state capture has also reduced the South African economy’s international competitiveness. The implementation of regulations, the predictability of the policy environment and process efficiency have all been affected, as evidenced in October, when the World Economic Forum revealed that South Africa had slipped five places since 2017 in its annual Global Competitiveness Report.


Population of South Africa in 2017


murders take place every day in South Africa


Increase in murder rate between 2017 and 2018

Deeply intertwined in the scandal are the now-fallen business tycoons, the Guptas. The trio of brothers, who emigrated from India in the early 1990s, are accused of using their friendship with the former president to influence political appointments and win state contracts. Though the Guptas said in 2017 that there were no cases to answer, stories of diverting government funds intended for development projects to bolster their already bulging bank balances – and even, allegedly, to pay for an extravagant wedding in 2013 – will stain the social consciousness for years to come.

The outcome has been almost unfathomable. As Bhorat told World Finance: “It’s been close to a decade of lost years for the South African economy – they’ve been lost at the altar of corruption and state capture, and the cost to growth has been absolutely enormous.” Some economists believe it could be quantified to the tune of ZAR 100bn ($7bn) – others say it has been far more costly.

Many who supported Ramaphosa’s campaign are hopeful that the state capture commission of inquiry will expose the corruption that has permeated the state. Since starting in August, the commission has already implicated several high-ranking individuals, including the former ministers for communications and mineral resources.

Inherent vice
But the sense of wrongdoing has not just been circulating among the upper echelons: it goes deep throughout all segments of society. Living against a backdrop of crime is a reality that South Africans face every day. An unwavering feeling of angst comes from multiple sources – violent crime, property crime, gender-based crime and all the many variances in between. And things seem to be getting worse.

According to the latest statistics released by the South African Police Service together with Statistics South Africa, overall crime rates had slightly dipped from March 2017 to April 2018, but the murder rate had increased significantly. Up by 6.9 percent from the year before, 57 murders take place in South Africa every day, at an alarming rate of 35.7 out of every 100,000 people. Expressing his shock at the figures, which were released in September, Police Minister Bheki Cele said the country was becoming a “war zone”.

Cash-in-transit crimes, meanwhile, soared by 57 percent to 238 cases reported during the period, bank robbery was up by 333 percent, and increases were also reported for truck hijacking, stock theft and drug-related crimes.
This high rate of financial crimes acts as an unfortunate deterrent to investment. “Firms have to spend significantly larger amounts relative to competitive firms in other countries on crime prevention items, whether it’s burglary bars, alarms systems [or] armoured vehicles,” said Bhorat.

The very nature of crime is a deterrent to doing business in both the formal and the informal sectors, meaning that firms – domestic or foreign – are less inclined to start a business. Johan Fourie, an economics professor at Stellenbosch University, told World Finance: “If one looks at the amount of money spent on safety and security by businesses, it is likely to [be] a huge consideration when international firms decide where to [invest]. Higher costs make products and services more expensive, and there is no doubt that we all pay for the high level of crime in the country.”

There’s another harm, too, that inevitably transpires: South Africa’s notorious crime rates can be off-putting for an untold number of tourists. Tourism is a vital sector to the economy – according to the World Travel and Tourism Council, it accounts for 9.5 percent of total employment in South Africa. In a country with an unemployment rate of 27.3 percent – a figure that has been rising over the last decade (see Fig 1) – the industry becomes even more significant. It’s no wonder, then, that the government is making a big push into the sector, speeding up visa processes and upgrading event infrastructure in a bid to bolster numbers by 40 percent by 2021. But the perception of the country must alter if these ambitions are to be reached, and for that to happen, the root causes of crime in South Africa must be addressed.

The scourge of inequality
With concentrated poverty come high rates of alcoholism, drug addiction and joblessness – which, in turn, can contribute to climbing criminality. But these factors alone cannot explain the situation in South Africa. While neighbouring countries exhibit greater poverty, for instance, they do not suffer from the same problems with crime that are endemic within South Africa. As many experts believe, it is not poverty per se that causes high rates of crime, but evident inequality.

Economic growth can help to combat inequality in South Africa, but the country is somewhat trapped in this respect

Over the years, various studies have alluded to this link. Offering a starting point was the seminal work of Nobel Prize winner Gary Becker in 1974, Crime and Punishment: An Economic Approach, which argued that crime rates are dependent upon perceived risks, as well as the difference between potential gains and opportunity costs. Others have then gone on to interpret income inequality as an indicator of the distance between this difference.

A study published in 2002 by the World Bank, meanwhile, stated: “Crime rates and inequality are positively correlated.” According to the paper, in accordance with the theory of relative deprivation, “the feeling of disadvantage and unfairness leads the poor to seek compensation and satisfaction by all means, including committing crimes against both poor and rich”.


Approximate percentage of South Africans living in poverty


Estimated number of illiterate South Africans


Rate of unemployment in South Africa

Inequality is the unhappy cornerstone of the South African economy. In fact, according to a March 2018 paper by the World Bank, South Africa had a Gini coefficient (a statistical measure of the distribution of wealth) of 0.63 in 2015, making it the worst in the world. The report went on to suggest that education and the labour market are “primarily responsible” for overall inequality.

Further exacerbating the problem is the enduring legacy of apartheid. In addition to its contribution to the strong spatial element of poverty in South Africa, it plays a cultural role too. “Sociologists talk about a culture of violence, which comes from apartheid being quite a violent way of running society,” Bhorat explained. Distrust in the police force from that time has remained, and given the unreliability that the body is known for, it simply fails to deter criminals.

“We do have a fairly weak enforcement regime, so what you have is a police service that could be much, much stronger and much more efficient in clamping down on criminal activity,” said Bhorat.

And even then, it’s not quite so simple. Fourie believes that a lack of study prevents a greater understanding of the root causes behind South Africa’s abnormally high rate of crime. He told World Finance: “Crime is not only related to poverty or inequality. There are a multitude of factors at play, and there are simply too few researchers trying to understand the causes from an analytical perspective. Only once we understand the causes better will we be able to do something fundamental about it.”

The low-growth trap
With the right mechanisms in place, economic growth can help combat inequality in South Africa, but the country is somewhat trapped in this respect. “South Africa has only grown by around 2.5 percent per annum over the last 25 years [see Fig 2] – on a per capita basis it’s about one percent,” said Bhorat, comparing it with China’s 10 percent. “We are in this class of Brazil, South Africa, perhaps Turkey even, of middle-income countries in what is called a low-growth trap… They are just chronically unable to move beyond two, three percent growth rates.”

In addition to having a level of gross domestic fixed investment relative to GDP that is far too low (standing at around 17 percent, when, Bhorat advised, over 20 percent is needed), South Africa’s export profile is too reliant on natural resources. “That speaks to a lack of sophistication in our manufacturing,” said Bhorat. “So you’ve seen a decline in the manufacturing sector in the share of GDP.”

Many economies that manage to shift to a high-income status do so through export-based, low-wage manufacturing. But in South Africa, a deteriorating manufacturing sector has resulted in a decline in export revenue. “So we’re in this conundrum where we’re unable to kick-start manufacturing-based growth. The difficulty, then, is that our growth trajectory is based on hi-tech services, financial and business services and so on, outside of natural resources,” Bhorat told World Finance.

These sectors naturally require a highly skilled workforce, but herein lies another problem – South Africa’s schooling system is of extremely poor quality. To put it into perspective, in 2015, a league table put together by the OECD ranked South Africa’s education system 75th out of 76. The Trends in International Mathematics and Science Study in November 2016, meanwhile, showed that a whopping 27 percent of students that had attended school for six years still couldn’t read. The rate in Tanzania, for comparison, is four percent.

Apartheid has a lot to answer for in terms of education in South Africa. With Mandela, racial segregation in schools came to an end, but in its place came economic segregation. But ironically, a lack of public funding isn’t actually the issue: in fact, South Africa spends around 6.4 percent of its GDP on education, a fair share more than the EU average of 4.8 percent. In terms of university, the level of enrolment is high too – but the standard of graduates, simply, is not.

Many pin this discrepancy down to the quality of teachers and a lack of accountability, both of which can be attributed to the South African Democratic Teachers Union (SADTU). “We have the problem of a very highly unionised teacher body that protects low-quality teachers, I think, at the cost of the schooling system,” Bhorat told World Finance. A damning report by Professor John Volmink published in May 2016 brought systemic and widespread corruption in the education system as a result of the SADTU to the surface. This included “the practice of selling posts whether through the exchange of money or other favours”. Further, too few students enter into technical and vocational education and training, meaning there is a considerable mismatch in the graduates produced in the country and the graduates needed by the economy.

The ugly legacy
Added into this already complex fold is a market that’s highly concentrated. “If you take manufacturing subsectors, on average a maximum of five firms control 70 percent of the market share – food and beverages, motor vehicles and so on,” Bhorat explained. “Effectively what you have is a highly concentrated product market that doesn’t generate the kind of domestic competitiveness you need.”

Apartheid has a lot to answer for in terms of education in South Africa

He continued: “I give a simple example to my students – if you were in the UK or the US and you’re a really good artisanal baker, you will be able to find a market, establish a business, you’ll get a decent revenue stream and you’ll do well. In South Africa it’s impossible, because the barriers to entry are really high. You try and do that and the large retailers lock you out very quickly. And that’s true across most areas.”

This is another remnant of apartheid rule that continues to reverberate throughout the economy. During that period, the South African economy was cut off from the rest of the world – a situation instigated by the ruling regime and cemented by economic sanctions. Shielded from international competition, with incentives given for the favoured few, certain companies were able to grow and expand, becoming giant conglomerates in an oligopolistic market structure.

This path sees business giants maintain first-mover advantage, thereby preventing SMEs from gaining a piece of the pie. Aside from the somewhat impossible competition, institutional inefficiencies that are exacerbated by labour regulations further dissuade foreign and domestic investors.

A new hope
South Africa has a long way to go, with numerous obstacles to overcome. But for the first time in a long time, there is hope – hope in a new president who has already begun dealing with the mess left behind by his predecessor.

“The president’s doing a good job,” Bhorat said. “He’s slowly changing the cabinet and he’s reorientating SOEs to get rid of corruption – I think in the short run, those are the challenges, but I think we’re on the right mark.”

Liberating SOEs from the clutches of corruption will see funds move back to the areas in which they were initially intended. Competitiveness in South Africa can be given the chance to improve once more. But within this space, it is vital to give enterprising individuals the chance of market entry – enabling them to compete freely will have untold consequences on the economy.

In parallel, issues within the labour market and the education system must be addressed, corruption must be squashed, and teaching standards must be improved. Given that these could well be the underlying reasons behind South Africa’s incredible levels of inequality – and, subsequently, crime – the ripple effects of doing so could positively spread to every corner of this diverse country. South Africa’s past has been brutal and its present remains difficult, but there is still a chance to see the fair and fruitful future promised to the rainbow nation when apartheid ended in 1994.