Why what happens in South Africa matters

It is undeniable that South Africa is a power house in Africa. However, the ‘Rainbow nation’s’ natural lustre has begun to fade. South Africa has not had it easy over the last few years, with real GDP growth declining from 3.2% in 2011, 2.2% in 2012, 2.2% in 2013 and 1.5% in 2014. The general economic slowdown can be attributed to low commodity prices, issues regarding energy security resulting in ‘load shedding,’ reduced investor confidence and labour unrest resulting furthermore in the depreciation of the South African currency, the Rand. On the social front, the country has been faced with public relations nightmare scenarios from the xenophobic attacks in 2015 on predominately African migrants and university students protesting against tuition increases and high youth unemployment.

In the twenty-one years since the first fully democratic elections in the Republic of South Africa, the current woes of the country have seldom been expressed beyond its borders and there is a fundamental problem with this lack of articulation. South Africa is undoubtedly the economic hegemon in the region, and its economic prowess cannot be understated in relation to other Southern African states. Indeed, the Republic of South Africa was structured historically to be the economic power house of Southern Africa. It founded the oldest customs union in the world, the Southern African Customs Union (SACU) in 1910 and its economy accounts for 70% of the Southern African Development Community (SADC) economy. So how does a South African economic slowdown potentially spell trouble for its neighbours?

South Africa is surrounds, and is surrounded by, states that have comparatively smaller economies by GDP: Namibia, Swaziland, Lesotho, Botswana, Mozambique and Zimbabwe. The purpose of SACU has been for the establishment and agreement of tariffs and revenue sharing between Botswana, Namibia, Swaziland and Lesotho. The resulting effect of this community has been to tie the macroeconomic policies of these countries, all of which have currencies pegged to the Rand, excepting Botswana, closely to those of South Africa.

Swaziland, a nation surrounded by South Africa, imports over 90% from, and exports 60%, to South Africa. The duties received from the revenue sharing agreement of SACU further constitutes a large proportion of the government budget, and worker remittances from South Africa supplement domestically earned income. With 70% of the population employed in subsistence agriculture, and the loss of the nation’s eligibility for the benefits under the African Growth and Opportunity Act with the United States of America on January 1 2015, Swaziland’s economic reliance on South Africa has therefore caused a slower economic recovery from 3% in 2013, to 2.5% in 2014.

Namibia to the north west of South Africa, and a member of SACU, receives between 30-40% of its government revenue from the sharing agreement. Its currency is pegged to the South African Rand and has experienced depreciation making exports cheaper. The mining sector accounts for 11.5% of the country’s GDP but provides more than 50% of its foreign exchange earnings, making the economy highly vulnerable to world commodity price fluctuations.

Lesotho, another state surrounded by South Africa, produces less than 20% of the nation’s demand for food. Similar to Swaziland, Lesotho imports 90% of its consumer goods from South Africa. Lesotho government revenues from SACU account for roughly 44% of government revenue in 2014. Its government receives further royalties from the South African government for water transferred from a dam and reservoir. Its currency, the Loti, is also tied to the Rand.

South Africa is bordered by two other countries that are not part of SACU: Zimbabwe and Mozambique. Zimbabwe, South Africa’s northern neighbour, has been in the grip of political and economic instability for over a decade.

Between the years 2009-2012, a multiple currency system was implemented spurring economic growth of an average 11%. However, from 2012 the economy has been severely hampered, with growth falling from 10.6% in 2012 to 4.5% in 2013 and 3.5% in 2014. The multiple currency system brought relative stability to the economy, and the South African Rand was one of the major currencies used. The appreciation of the United States Dollar against the Rand has made imports cheaper in relation to locally produced goods and exports more expensive reducing Zimbabwe’s competitiveness internationally. Zimbabwe and South Africa have a Preferential Trade Agreement, which undoubtedly benefits South African exports in such a scenario, as they appear cheaper than locally manufactured goods under the multiple currency system, further slowing the down domestic economic growth.

Finally, Mozambique to the east of South Africa, has grown at an average rate of 6%-8% in the decade up to 2014, one of the strongest performances in Africa. To a large extent however, this growth is predicated on the large investment projects in mining and infrastructure development. The predominant markets for such goods are China followed by South Africa. Imports into Mozambique are, in turn, proportionally coming from South Africa, making it a highly valuable trading partner.

The economic prowess of South Africa has long been noted, however such success comes with an economic reliance from its smaller neighbours. Being economically linked to South Africa has generally favoured its neighbours as a source country for relatively well-manufactured, cost effective goods. This reality creates an overall environment where costs of business are comparatively lower than importing goods from further afield. The benefit for South Africa is having comparatively advantageous export market access for goods and sustaining employment opportunities within the Republic.

The negative consequences however have been that through a heavy reliance on South Africa, its neighbouring states have been incapable, or unwilling, to diversify such heavy economic linkages. This leads us to the current predicament.

As South Africa’s economy begins to slow down, so too will the economies of its neighbours. The effects of such a slow will be numerous. With no reliable statistics on immigration of nationals from its neighbouring countries, it is important not to underestimate the remittances sent from nationals working in South Africa to their home states and with business interests in South Africa. The economic slowdown therefore jeopardizes the remittances sent to neighbouring states and business sentiment. This could, in effect, increase the numbers of un-skilled African migrants seeking employment in South Africa as small scale economic opportunities dwindle in neighbouring states, as well as forcing the African business elite to relocate to more amenable countries.

Such a scenario would increase the probability and likelihood of further xenophobic attacks, further isolating South Africa within Southern Africa as a country that stands on its own and not as an ‘African’, country, an ideological remnant from the Apartheid era. Furthermore, the effects on South Africa’s economy would be an increasing need to trade further afield inevitably leading to increased business costs in areas such as logistics hampering the integration ambitions of the Southern African Development Community and, broadly speaking, the African Union.

The socio economics of South Africa are vital to its neighbours, and its neighbours are vital to South Africa. A long-term economic slowdown and/or increased xenophobic sentiment in South Africa will inevitably trigger massive economic uncertainties. How South Africa aims to strengthen its economy and create a more cohesive civil society over the coming years will be both crucial, and testament to its already phenomenal progress thus far.

Author Bio

Chiziwiso Pswarayi is currently a Masters in International Relations candidate at the University of Cardiff. Chizi’s interests include Southern African politics and migration issues.

Cover image ‘South African flag, Port Elizabeth, Eastern Cape, South Africa‘ by flowcomm

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