Two years ago, economists representing the African National Congress, now South Africa’s ruling party, met with business leaders to assure them the wheels wouldn’t fall off the economy under the ANC.
To make serious points, they used lighthearted illustrations. One, of Greek mythology’s Icarus, stood for reckless government spending that ended only when international bankers demanded their money back. The message was, “You flew too high, too quickly, and the sun melted your wings,” recalls Gavin Keeton, an economist with Anglo American Corp., the mining giant, who was in the audience.
Another picture showed a splendid flamingo cruising along steadily, if at a modest altitude. It was the path of sustainable growth through careful spending and restraint, the party’s preference, its economists said. “It was a wonderful thing to behold,” Keeton recalled.
While many investors in South Africa and beyond remain unconvinced the new government will avoid Icarus’ fate, President Nelson Mandela has done much to keep the economy he inherited aloft like the flamingo.
Mandela, who in May became the first black to head the nation, has a difficult balancing act in apartheid’s wake. To fulfill his campaign promises of a better life for South Africa’s mostly poor black majority, he must have an activist government that spends on education, housing and health care for blacks, areas long ignored by past racist governments.
But he also must be fiscally conservative if he is to increase investor confidence. Investors are essential if the economy is to grow quickly enough to reduce significantly the vast unemployment, which some estimates place at nearly 50 percent, though official figures are lower.
In short, he must find a way to satisfy the haves and the have-nots in the country of more than 40 million people, 75 percent of whom are black. To put it in an American context, he at once needs to be Presidents Herbert Hoover and Franklin D. Roosevelt. Though the task seemingly is impossible, Mandela has proved he shouldn’t be underestimated.
What Mandela has going for him is an economy as large as Singapore’s and Hong Kong’s combined. It is an economy that has proved surprisingly resilient considering the world strangled it for years with anti-apartheid sanctions.
The country’s infrastructure and services, at least those that once served only whites, rival the best anywhere. Highways are modern and maintained. Mail delivery is reliable. Electric and telephone utilities operate smoothly, as do airports and railways. Shelves at shiny marble-and-chrome malls are well-stocked. In many ways, it is very American.
This year’s gross domestic product-the total value of goods and services produced in the country-is expected to rise at least 3 percent from 1993’s $105.68 billion. That contrasts with years of declines in the 1980s.
The inflation rate is 7.5 percent, high compared with inflation in the U.S., but much lower than it was several years ago. Meanwhile, investments in buildings, equipment and inventories are rising.
It’s a dramatic transformation from the last 15 years, when the South African economy appeared to be headed for a meltdown. The economy boomed in the 1950s and ’60s from intensive mining development, cheap black labor and South Africa’s push to become self-sufficient as the world grew increasingly hostile toward it.
In the 1980s the country, which relies heavily on exports and is a major producer of gold and diamonds, was battered by a tightening of sanctions and fluctuating international commodities prices. Its crisis deepened in 1985, when foreign lenders yanked its short-term credit, demanding repayment of $10 billion after hard-liners, notably President P.W. Botha, told apartheid’s international foes to get lost.
Money was pulled out of the country. Every year from 1984 to ’93, foreign reserves averaging 2.5 percent of the country’s GDP left, despite currency controls designed to slow the flow. And in seven of the years from 1982 to ’92, South Africa had zero economic growth or declines on a per capita basis. Meanwhile, population grew on average of 2.5 percent annually, a rate that continues.
When F.W. De Klerk came to power in the late 1980s, he named as his finance minister a highly respected, hard-nosed mining chief executive named Derek Keys who helped right the capsized economy with strong economic medicine.
Mandela kept Keys in his new Cabinet to allay investor fears that the freedom fighter’s communist and socialist allies would call the economic shots. Mandela had contributed to such anxieties when in his first speech on leaving prison in 1990 he said nationalizing some industries was inevitable, causing a major sell-off of shares on the Johannesburg Stock Exchange. He since has been more careful.
Keys recently retired for “personal reasons.” But Mandela moved quickly to retain investor confidence by replacing him with banker Chris Liebenberg, another esteemed and economically cautious businessman.
Keys didn’t leave before creating Mandela’s first-and no-nonsense-budget. The $38.6 billion budget has South Africans paying upfront for many transition costs, instead of government borrowing increasing the deficit.
Beyond the regular income tax, it includes a one-time, 5 percent surcharge on individuals with more than $14,300 in income and on businesses. The surcharge is expected to raise $857 million and affect 30 percent of the population, primarily whites. Among its purposes, it would help pay to fold the ANC’s former military units into the regular army.
“We’re trying to make sure whatever social expenditures we engage in, they don’t increase the budget deficit inordinately and begin to create inflationary circumstances,” said Moley Nkosi. A businessman and ANC member, Nkosi advises the new government on economic policy.
So far, investors like what they see. “I tell you, there’s a lot of euphoria, but the hardest decisions are still to come,” said Keeton, the economist at Anglo American, a bellwether investor.
Some U.S. companies with stakes in South Africa before sanctions went into effect have announced plans to return as direct investors. They include Motorola, Coca-Cola and KFC (Kentucky Fried Chicken).
The U.S., which had dropped to fifth place as a South African trading partner because of the sanctions, has regained its position as South Africa’s premier trading partner since the sanctions ended.
That economic link should only get stronger. The U.S. Commerce Department has named South Africa one of 10 emerging markets in which it wants to expand trade. Others include India, Poland and China.
Most American companies headed to South Africa were there before. “In terms of direct investment, there’s a very understandable wait-and-see attitude” among companies with no history in the country, said Len van Zyl, chief executive of the South African Foreign Trade Organization.
Part of the reluctance no doubt is a result of the continued existence of the dual currency system South Africa erected in the 1980s to stem capital flight.
South Africans use commercial rands for daily transactions. Foreign investors who sell their holdings are paid in financial rands, which then must be sold before investors can pocket their cash. The speculation is that South Africa will return to one currency before next summer.
Of the tasks lying ahead for Mandela, winning the private sector’s confidence may be among the easiest. It will be far harder to deliver on promises to substantially improve the lives of black South Africans.
A huge income gulf exists between whites and blacks. While average household income for urban whites in 1990 was about $20,000, it was slightly more than $3,000 for urban blacks. Whites, just 15 percent of South Africa’s population, own 87 percent of the land.
The disparities are apparent everywhere. In the cities, many whites live on walled properties that wouldn’t be out of place in Beverly Hills. Most blacks are in nearby townships, where many live in rough shacks.
To address this, the new government has embraced affirmative action and land redistribution, neither of which will happen without loud protests by whites.
“Affirmative action is not an option in South Africa,” said Van Zyl. “It’s an absolute necessity.”
Affirmative action isn’t new to South Africa; it’s just that in the past it was always used to benefit whites. One example is the nation’s domestic auto industry. With a demand of 240,000 vehicles a year, there are 7 automakers, the government’s attempt to keep whites employed.
That and protective tariffs caused cars to be almost twice as expensive as in the U.S. “It was crazy,” says Keeton. “Our needs could have been met by one U.S. auto plant.” Now South Africa must rationalize its auto industry and other sectors that were skewed to give whites advantages.
The ANC also has its reconstruction and development program. Among its goals, it calls for the building of 1 million homes over five years. The new leaders are very particular about the kind of housing they want.
“Some people want to come and build modular housing,” Nkosi said. “We’re not interested. What we’re interested in is housing projects in which we look for infrastructure-physical, social and otherwise.
“We tell you we have 60,000 people who need to be housed,” said Nkosi. “What type of roads would be built? Would they be electrified? Would there be parks? Would there be clinics and industries in the neighborhood? In those areas where we’ve made a commitment to get a lot of work done, those areas offer opportunities, both for domestic and international firms.”
