By Kartik Ganotra
South Africa is popularly known as the ‘Rainbow Nation’. The term was first coined by the legendary social rights activist and retired South African Anglican bishop, Archbishop Desmond Tutu in 1994, after the countrys first ever democratic elections. Tutu was one of the prominent figures, who rallied against all odds and fought against the then Apartheid Government to banish all kinds of racial discrimination from their nation.
As a result of their combined efforts, South Africa emerged as a rainbow nation in the true sense of the word, from its unique flag, multiculturalism, racial tolerance and unity in a country which was once painted in the colours of black and white.
South Africa’s dilemma
[su_pullquote align=”left”]The expansion in consumer base has had almost no effect on South Africa’s economy, with private consumption increasing at only 2.8% in the last five years.[/su_pullquote]
Cut to 2016 and South Africa is Africas second biggest economy, behind Nigeria. It is one of the five nations in the BRICS grouping, along with Brazil, Russia, India and China. It boasts a highly diversified economy with a deep, sophisticated and resilient financial sector. South Africa is ranked second on the World Economic Forum rankings on corporate governance framework. Remarkably, the country has been able to lift three and a half million of its citizens out of extreme poverty in the past decade. Not to mention an additional nine million households in the consuming class, accounting for $191 billion in personal consumption.
Yet, this expansion in consumer base has had almost no effect on its economy, with private consumption increasing at only 2.8% in the last five years, and by just 1.6% in 2015, bringing to light their ‘reluctant consumers’. With the consumers unwilling to spend, South Africa’s economic prospects in the near future seem bleak.
South Africa’s consumers are under pressure and have been so for a while. | Photo Courtesy: Mail and GuardianWhat do the stats say?
South African consumers are a cautious lot, and why shouldnt they be? With inflation averaging 5.4% over the last five years, and at 6.4% in 2016, and a low real growth in the wage rate – averaging just 1.3% in the last five years, consumers have no option but to indulge in dissaving (using up previous savings) or make purchases on credit, amounting to massive financial pressure. There exists a strong economic divide, with one-third of the working population excluded from the economy. The per capita income is falling, and the unemployment rate, at a staggering 25.2%, is one of the highest in the world.
[su_pullquote align=”right”]South Africa is crippled with high inflation rates, low real wage growth rates, falling per capita income, one of the world’s highest unemployment rates and a strong economic divide.[/su_pullquote]
Economic growth in South Africa is at a dismal zero percent in 2016. Too low to raise average living standards.
The country is facing one of the worst recessions in its history. David Lipton, a former Managing Director of the International Monetary Fund (IMF), stated that the South African economy has reached its critical point, and needs a fundamental transformation. The South African Reserve Bank Governor, Lesetja Kganyago, recently, forecasted economic growth in South Africa to be at a dismal zero percent in 2016. Too low to raise average living standards. The odds are stacked up against the African nation, with consumer confidence at its lowest.
High inflation coupled with plunging unemployment in South Africa is contributing to widening of economic inequalities. | Photo Courtesy: Daily MaverickWhat do the consumers say?
McKinsey & Company, one of the worlds foremost management consulting firms, cited that in a survey of 1000 South Africans, nearly 70% are worried about imminent job loss and almost 55% are living from paycheck to paycheck. Around 60% of the respondents stated that they are reducing spending, controlling and delaying expenditure till they get the best deals. This is in stark contrast to the results of McKinseys global survey along the same lines, with a pool of 22,000 respondents from 26 different nations, which showed rising consumer confidence in other parts of the world, including China and North America, where consumers showed no fears about job loss.
Even after halving the number of poor in its 52.98 million population, South Africa has failed to achieve robust economic growth.
To make matters worse, when asked about the effect of a 10% increase in their income on their consumption expenditure, a majority of them responded that they would spend only 22% of the additional Rand on expenditure, with the rest going into savings or paying off previous debt. This is an alarming violation of the Keynesian Psychological Law of Consumption, given by the English economist, John Maynard Keynes, in which he stated that as income increases, consumption increases.
Many people argue that the situation in the African nation is not as bad as it looks. In fact, South Africa has overtaken Egypt to become Africas second largest economy and is closing in on Nigeria, which holds the first spot. But they fail to read between the lines and see the larger picture. The main reason for this phenomenon is that the other two countries are doing just as bad as South Africa. The Nigerian Naira and the Egyptian Pound, are getting devalued heavily, with the former devalued by nearly 30%. South Africa has had its currency devalued by about 50% in a period of 3 years. So, instead of celebrating South Africas new achievement, the political class must wake up and smell the coffee.
[su_pullquote align=”left”]After successfully bridging the gap between the black and the white, South Africa has to now bridge the economic divide to reform its economy, through inclusive growth. [/su_pullquote]
South Africa may have succeeded in bridging the gap between the black and the white, but now it is faced with a fight to bridge the economic divide that has risen due to the various factors plaguing its economy. The primary challenge for South Africa is to reform its economy and create job opportunities for all its citizens, including the excluded one-third. This may look like a tough task but if the citizenry pursues this like they pursued democratic change, the nation can achieve stronger and inclusive growth. As Nelson Mandela, the first President of the rainbow nation is famously quoted After climbing a great hill, one finds that there are many more hills to climb. South Africa just needs to climb the current hill.
Featured Image Source: Mendoza Post
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