David Wessel Appears to Be in South Africa

Capital - WSJ.com: South Africa long will be regarded as a triumph of leadership. But it is also an economic experiment: Can a free-market, developing-country democracy -- blessed with gold, platinum, English speakers and an inspirational story, but plagued by AIDS, violent crime, poverty and an inconvenient location -- deliver a better life for the bulk of its people in an era of globalization?... South Africa is playing by the rules of the new global economy. If it fails to improve living standards for most of its citizens, the lesson would be ominous.

Early returns are promising. The economy has been growing at 5% annually for three years -- not Asian-style growth, but far faster than in the past. Private economists think the economy can sustain close to a 5% growth rate.... With a population growing at 1% a year, that's enough to deliver a better life for the typical South African -- if prosperity is widely shared.

The government is meeting its goal of 500,000 new jobs a year and is hopeful it can halve poverty from today's 26% by 2014. South Africa has First World shopping malls, but 30% of South Africans don't even have pit latrines; they use buckets.

Is globalization -- the integration of South Africa into an increasingly integrated world economy -- a help or hindrance to the country's aspirations? The answer is: Yes.... The growing mobility of people is drawing skilled workers, even luring back some expats (plus). But it also draws unskilled African immigrants to add to the existing surfeit of low-wage labor (minus) and creates a brain drain of disgruntled South African nurses, teachers and engineers to Europe and Australia (minus.)

Lowering barriers to trade brings the usual pluses -- imports for consumers, export markets for producers, a spur to the efficiency of flabby businesses. But here, too, globalization brings challenges. At first glance, the BMW plant outside Johannesburg is a paean to globalization. The robots are as modern as in BMW's German plants. Assembly-line workers, nearly all black, are unionized and well-paid by South African standards. Computer printouts clipped to each of the Series-3 sedans tells where the car is headed: Japan, Australia, the U.S. Last year, South Africa exported 14,000 BMWs to the U.S. In all, 80% of cars coming off this assembly line are exported.

But the plant produces one car every four minutes; BMW's bigger German plants produce one a minute. Labor costs are only 30% of the cost of the car so the savings from wages one-fifth German levels go only so far. A chart on the shop wall reveals that only half the South African-made BMWs come off the line without flaws that need to be fixed; in the best German factory making the same car it's 80%.

Employment at the plant is falling as robots replace workers (good for workers getting trained to keep ahead of the machines; bad for those who will never get hired.) And the enterprise is viable only because of a government subsidy: a complex formula allows BMW to avoid tariffs on importing other models in exchange for every car it exports. The government sees this as temporary expedient until productivity climbs to world levels; the plant's German technical director sees it as vital for the foreseeable future.

Here's the rub. South Africa occupies a middle ground in the global economy. The haves are doing well -- both whites and the new black working class and upper crust. But the same global economic forces that make them winners pose a challenge to widening the winner's circle.

South Africa can't create enough low-skilled jobs to employ its population. Its wages are too high to compete with China or India as a magnet for low-wage, low-skilled manufacturing, but South African workers see how well their best-off countrymen are doing and are pushing for higher wages.

The country's world-class companies can compete -- in finance, engineering, construction, synthetic fuels -- but they demand an increasingly educated and skilled work force. Yet, the country's education system is dysfunctional, and changing too slowly for the swift currents of the global economy.

And, as Mr. Netshitenzhe cautions: "The 13% [who are still poor] in 2014 will be angrier than today's 26%. They will be more impatient."

Comments

[jeff hoffman]

This gets to the Robert Barros vs Bill Gates debate earlier. This is the best case example for Barros. I've been to S.A. twice, last time 7 years ago,and have been told by friends and relatives there, invariably, that it's gotten less safe. Admittedly anecdotal. But if S.A. can't make it, the Barros argument (against Gates) does not hold up well at all for the rest of that continent.

[Meh]

It's not apparent why we should believe the globalisation model espoused for SA actually works, after all, it's never been tried out to this extent before. All previous successful economies have hunkered down behind particular tariffs and exploited particular trading opportunities.

[Praxis]

Oh god, not this nonsense again.

Question: What do the U.S., Canada, Italy, France, Germany, Japan, South Korea and now China have in common? Hint: It isn't free-trade liberalism or neo-liberalism...

[jeff hoffman]

Starbucks?

[Praxis]

Possibly, but that isn't what I meant ;)

What do they have in common with respect to economic and trade policy and economic development?

[Valuethinker]

Jeff Hoffman

My impression is crime has gotten better in SA. It's still horrible, but the police are more effective than they were. Just anecdotal.

Brad

There is a Harvard project on the South African economy. The question was why SA manufacturing employment hasn't grown in the way, say, Malaysia's has-- to take an example of a country with a similar population.

AFAICR the general view is that the problem with SA is the high level and strength of the unions has meant that manufacturers pay too high a wage (for the productivity) and cannot compete.

Given the ANC's power base is the industrial unions, this isn't going to change.

Another problem I think (at least recently) is the resource-dependent nature of the economy. That boosts exports, but also the exchange rate. And resources are highly capital intensive.

A further problem I suspect is the nature of S. African business. The areas of strength are finance (they have first world financial institutions) and resource extraction. Not particularly manufacture, except the manufacture of weapons.

Perhaps a last problem is they arrived on world markets at a time when China was making its big break. Throughout Africa, industries like textiles and footwear, which would provide employment, have been crippled by Chinese competition.

[jeff hoffman]

Value thinker.

My in-laws are from SA and visit there at least annually since leaving 6 yrs ago. I likewise have patients who are expats (saw one today in my office). All agree that it's gotten worse and that, in fact, the violence has spread out to areas, like the Western Cape, that were not so involved with it in the past. J-burg is extremely ill advised by the locals as a travel destination compared with 7 yrs ago when I last visited. The Harvard study is probably right about issues that are obvious to the natives.

Praxis.

What, no hints?