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vol. XVI no. 2 The South African Economy Nine years after the fall of apartheid, South Africa has developed into a country with many world-class features that make it the most advanced economy on the African continent. It boasts a sophisticated financial infrastructure with one of the top 10 stock exchanges in the world, an abundant supply of resources and well-developed communications, energy and transportation sectors.
Like other developing countries, however, South Africa also has its challenges - a 30 percent unemployment rate, high levels of inequality between the classes (3 percent of whites live in poverty vs. 60 percent of blacks) and an HIV/AIDS epidemic that if not controlled could wreak havoc on the country's future growth.
But many South African business and government leaders remain positive. Ronald Gault, managing director of J.P. Morgan Chase's Johannesburg office and one of the most influential blacks in South Africa, admits that South Africa faces many challenges but senses optimism within the country.
"Governments of developing countries as well as others always face challenges," commented Gault. "And when a country is going through the kind of transformation that South Africa has been going through, tension is to be expected. But I can tell you that things are better today than they were three or four years ago, and they are improving every day."
Gault points to several areas that he sees as highlights for the country such as President Thabo Mbeki's economic development efforts. Other positives include the country's strong and well-respected judicial system and the country's rich natural resources, which have helped the increase of tourism.
While the tragedy of September 11, 2001 had severe implications for tourism in the States and throughout the world, South Africa's tourism industry, which started to gain momentum in the mid '90s, never faltered and actually increased. According to government figures, it is the country's fourth-largest industry, contributing close to 5 percent of the country's gross domestic product.
According to Gault, after September 11th travelers were looking for somewhere safe from terrorist threats and South Africa fit the bill. However, he is quick to point to other factors such as the increased marketing efforts of the new head of tourism and the popularity of ecotourism. Both, he says, have played a vital role in strengthening the industry.
Tourism employs an estimated 7 percent of the South African workforce, and its growth has the potential to help alleviate one of the country's most challenging issues unemployment.
"Many of the indigenous population used their young people in the fight against apartheid, which has created a large pool of unskilled 25 to 35 year olds," said Gault. "Tourism has created jobs that will allow this group to be trained in specific areas and fill the needs of employers."
But Gault doesn't let his optimism blind him to the challenges South Africa faces.
One of the most publicized issues facing South Africa and the entire continent is the HIV/AIDS epidemic.
According to the United Nations AIDS program, South Africa has the largest number of people infected with HIV approximately 11 percent and the number is closer to 20 percent for those 15 to 49. Until recently, the government had been criticized throughout the world for its failure to provide the population with anti-HIV drugs. However, in July 2003, the government announced that it will develop a plan to offer drugs to people infected with the virus through its public health system by October 1.
Another issue plaguing the country is the high unemployment rate. While tourism will help some of the country's unemployment problems, it won't solve them all. Currently hovering around the 30 percent mark, South Africa's high unemployment is linked to economic growth. In the 1980s, South Africa averaged 2.1 percent growth, and in the '90s it was approximately 2.4 percent. In 2001, the region grew at an average of 4.3 percent but then dropped back down to 3 percent in 2002.
"If we are going to see any kind of difference in the unemployment rate, we are going to need economic growth that is more in the 5 to 6 percent range," said Gault.
In addition, the weakened U.S. economy has affected the country's economic growth.
"When the United States sneezes, the rest of the world gets a cold, which affects investments," said Gault.
And investments from the United States and other countries are one of the biggest challenges facing the entire African continent, which attracts less than 2 percent of global foreign direct investments (FDIs).
In his address to government and business leaders at the World Economic Forum's 2003 Africa Economic Summit, Haiko Alfeld, the forum's director for Africa, said, "The conundrum is that GDP growth is a prerequisite for FDIs, yet FDIs are seen as an essential driver of economic growth, along with domestic investment."
In South Africa, FDIs are an important part of the economic growth picture. But the country's past combined with the "fickle" nature of outside investors has made it difficult.
"During apartheid, South Africa was not exactly the flavor of the month,'" said Gault.
When he first arrived in Johannesburg, investors were interested to see what things looked like under Mandela's regime. "They were impressed but took a 'wait-and-see' attitude. A year later, they came back down but still wanted to give the 'Mandela factor' some time to play out.
ow Mbeki is president and investors are saying 'well, he's got a good reputation, but let's wait and see how it goes.' The government keeps trying but until we can convince investors to jump in with both feet, it's going to be a bit of an uphill battle," said Gault.
Gault also believes that Africa should not rely solely on FDIs but must increase domestic investing. For Gault, that investment is also about investing in human capital.
Ten years ago, while Gault was managing director of First Boston, he lobbied the financial industry to help him launch a professional internship program for black South African managers. The idea was to bring South Africans to the United States for six months of real-world experience. Each was placed with a U.S. company in a sector similar to one they worked in - J.P. Morgan, Merrill Lynch, Disney and Phillip Morris participated in the program.
"The program worked for both parties. On one side, we went into South Africa asking how we could help rather than here's what we're doing," explained Gault. "Once they explained their need for professional development, we went back to the States and approached companies that were eager to be positioned in the post-apartheid society."
Today, Gault continues this idea through his company, J.P. Morgan Chase. The company recruits some of the country's top college students interested in a career in finance. After the training program in the United States or United Kingdom where they learn everything from mergers and acquisitions to investment banking, they come back to South Africa and start on the first rung of their careers.
While South Africa still has some hurdles to overcome, it is a country rich in opportunity. With government and business committed to its prosperity, South Africa's position as a global economic leader should only be strengthened.
About Ronald Gault
Before the South Africa assignment, Gault was based at J.P. Morgan's corporate offices in New York where he headed an infrastructure group in public finance.
Prior to Wall Street, he served as senior advisor to New York City Mayor Edward Koch and was a founding member and chairman of the Professional Development Program (PDP).
He received his master's degree in public administration from the University of Michigan and gained his undergraduate degree from Grinnell College.
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