Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
March 24, 2005 McGill University: North America and the Global Economy Trade report on South Africa Prepared by: Karim Sarr Racha El Salah 260157336 110036968 1. Country Profile Introduction South Africa finally abolished apartheid in 1994 and ended the world’s economic embargo against them. The following year they joined the WTO and embraced global trade. South Africa is blessed with many natural resources, and its economy is the largest and most well developed of the entire African continent. The nation’s exports and imports account for over 20% of the entire continents total exports and imports. Its modern infrastructure is common in nearly all of the country. The discovery of diamonds in 1867 and gold in 1886 encouraged economic growth and immigration, but intensified the subjugation of the natives. History South Africa is one of the oldest nations in the world. Extensive fossil remains suggest that ape-men, who were succeeded by various species of Homo, including Homo-sapiens, existed in South Africa from about 3 million years ago. The written history began in 1652 when the Dutch East India Company settled at the Cape of Good Hope and began expanding its Dutch settlement. In 1797, during the Anglo-Dutch War, Great Britain seized the Cape of Good Hope and annexed the Cape Colony in 1805. There were continuous struggles, in both the forms of wars and political discord, between the Dutch Afrikaners and Englishspeaking whites for power. This culminated during World War II when one political party sought to support the United Kingdom and the National Party sympathized with Nazi Germany and sought racial segregation known as apartheid after the war. South Africa’s National Party began introducing the policy of apartheid, a series of harsh laws segregating the country along racial lines, after winning the general election of 1948. However, after international sanctions, divestment abroad, and a long struggle by the black majority, as well as many white, colored and Indian South Africans, the National Party, under the leadership of F.W. de Klerk, started to dismantle the policy in 1990. Nelson Mandela was let out of prison after 27 years, apartheid legislation was gradually removed from the books, and the first multi-racial elections were held in 1994. The African National Congress won the elections by an overwhelming majority, and has been in power ever since. The nation is one of the few in Africa to have never had a coup, and has held regular, free, and fair elections since 1994, making it among the strongest and most stable democracies in Africa. Politics South Africa became a republic in 1961 following an October 1960 referendum. The Republic of South Africa is a constitutional democracy with a three-tiered system of government. The three main branches of the government are the Executive, which is the President/Head of State and is the leader of the majority party in the National Assembly, the Legislature, which is a bicameral Parliament comprising of the National Assembly with 400 members and the National Council of Provinces with 90 members, and the Judiciary, comprising of the Constitutional Court, the Supreme Court of Appeal, and the High Court. Unlike many other Commonwealth nations, South Africa does not have the British monarch as head of state, which makes the nation a republic rather than a constitutional monarchy. The government is federalist, meaning that the national, provincial, and local levels of government all have legislative and executive authority in their own spheres. The elections for both chambers of the legislative branch are held every five years. The ANC dominates politics in South Africa, and received 69.7% of the vote in the 2004 general election. Its closest challenger was the Democratic Alliance party, which received only 12.4% of the vote. The National Party now represents only 1.7% of the vote. The president of South Africa is named Thabo Mbeki and has ruled since Nelson Mandela stepped down as ANC leader in 1999. His trade and industry minister is Mandisi Mpahlwa. He has recently spoken out against the effects of globalization on a category of people, mostly black, which don’t have the mobility to move between jobs. At a meeting with the South African Clothing and Textile Workers Union in September of 2004, he explained that globalization seeks to “[leave] behind those who do not have the skill to participate meaningfully in the new global environment”. The country’s finance minister, Trevor Manuel, serves on a lot of major international committees. In 1997 he was named Euro money’s “African Minister of the Year” and he now serves as a Governor on the Board of the World Bank Group, the African Development Bank Group and the Development Bank of Southern Africa. He is also the Chairman of the Southern African Development Community Finance and Investment Sector.1 South Africa also has ministerial positions that relate to the economy such as: agriculture and land affairs, environmental affairs and tourism, minerals and energy, public works, transport, and water affairs and forestry.2 Mbeki is lauded for having women make up 43% of his cabinet. This percentage is progressive by any country’s standards, and certainly for one that has a recent history of oppressing minorities. Population The 2001 census determined that there were 44.8 million people in South Africa. 3 The estimated population as of June 30th 2004 was 46,586,000.4 The age distribution is estimated to be 29.5% for people between 0 and 14 and 65.3% for 1 http://www.finance.gov.za/people.htm www.southafrica.info/ess_info/sa_glance/government/mbeki-cabinet.htm 3 www.statssa.gov.za/census01/html/Key%20results_files/Key%20results.pdf 4 www.finance.gov.za 2 people between 15 and 64.5 The life expectancy in the country has been steadily decreasing and is now thought to be 44.2 years old.6 The ethnic composition of the population is estimated to be 75.2% black, 13.6% white, 8.6% colored, and 2.6% Indian. The republic has 11 official languages, second only to India in number, and also acknowledges eight non-official languages. South Africa has the largest population of people from a European descent in Africa, the largest population of Indians outside of Asia, as well as the largest colored community, making it one of the most ethnically diverse countries in the continent. The growth rate in 2004 was estimated to be -.25%, which has a lot to do with the high rate of HIV. The Nelson Mandela Study of, 2002 estimated that 11.4% of all South Africans above the age of 2 were infected with the virus.7 The population’s religious composition consists predominantly of Christians, which make up 68% of the people. 2% of the population is Muslim, 1.5% is Hindu, and the remaining people follow a multitude of indigenous beliefs. Geography Above is a map of South Africa (1,219,912 sq. km). It is located at the extreme southern tip of the continent and its capital, Pretoria, is in the northeastern region of the country. The country is made up of nine provinces. Cape Town, in the Southwest, is the legislative headquarter, and Bloemfontein is the judicial center. Its largest city is Johannesburg with a metropolitan area population of about 8 million. The state borders Namibia (967km), Botswana (1,840km), Zimbabwe (225km), Mozambique (491km), Swaziland (430), and contains the entire small nation of Lesotho (909km) within it.8 The land is a vast interior plateau rimmed by rugged hills and narrow coastal plain that boarder both the Atlantic and Indian Oceans. It has the third-highest level of biodiversity in the world and is the only 5 www.cia.gov/cia/publications/factbook/geos/sf.html www.infoplease.com/ipa/A0004393.html 7 www.avert.org/safricastats.htm 8 www.cia.gov/cia/publications/factbook/geos/sf.html 6 country to contain an entire floral kingdom.9 Its seven major terrestrial biomes or habitat types (broad ecological life zones with distinct environmental conditions and related sets of plant and animal life) can be seen in appendix D. It has a Mediterranean climate, with hot, windy summers and cool, moist winters. An array of agricultural products, from wine, to wheat, to sugarcane is grown on the land. Arable land is 12.08%, irrigated land is 13,500 sq. km, permanent crops inhabit less than 1% of the land, and the highest point is Mount Njesuthi (3,408 m). The land is blessed with many different minerals including gold, coal, iron ore, nickel, phosphates, tin, uranium, diamonds, platinum, copper, salt, and natural gas. South Africa is the world’s largest producer of platinum, gold, chromium and ranks among the highest in coal production as well. It is the only country in the world that manufactures fuel from coal.10 Mining is the primary sector of the nation’s economy. Economy South Africa is an upper middle-income, emerging market with well-developed financial, legal, communication, energy, and transportation sectors. Its stock exchange ranks among the 10 largest in the world and its modern infrastructure supports an efficient distribution of goods. However, economic problems from the apartheid era still remain and vast disparities of income exist between blacks and whites. The gap between the rich and the poor widens as disadvantaged groups continue to lack economic empowerment. Despite ongoing efforts of black empowerment, signs of social mobility, and an emerging black middle class, the country’s wealth remains very unequally distributed along racial lines. Although South Africa’s economy has grown substantially since 1994, growth has not been large enough to lower South Africa’s high unemployment rate, which is conservatively estimated at 28% (some sources claim up to 42%) and seems to actually be increasing.11 High levels of crime and a high HIV/AIDS infection rate deter investment. More South Africans are infected by HIV than any other country in the world. It is estimated that if the rate of infection continues, 25% of the labor force will carry the disease by 2010 and the life expectancy rate could be lowered to 38!12 This high rate of disease has a lot to do with South Africa’s ranking of 119th out of 177 countries evaluated for their human development index, a composite index that factors longevity as one of the three main aspects of human development.13 Another factor that contributes to the reluctance of companies to invest in South Africa is its corruption index. According to the 2004 global corruption report, South Africa ranks 48th out of 133 countries.14 A “lack of adequate legislative instruments to prosecute offenders”15 was cited as a major 9 www.southafrica.info/ess_info/sa_glance/geography/biodiversity.htm www.state.gov/r/pa/ei/bgn/2898.htm 11 www.southafrica.info/doing_business/economy/econoverview.htm 12 http://dbic.datamonitor.com/countries/country/index.asp?gid=SouthAfr 13 http://hdr.undp.org/reports/global/2004/pdf/hdr04_complete.pdf 14 www.globalcorruptionreport.org/download/gcr2004/11_Country_reports_L_Z.pdf 15 www.globalcorruptionreport.org/download/gcr2004/11_Country_reports_L_Z.pdf 10 hurdle to combating corruption in the state. A 2002 announcement South Africa was closing its Anti-Corruption Unit, which had been investigating corruption within the police since 1994, also led to a negative perception of police corruption in particular. Nevertheless, a lot is being done to assure confidence in the financial sector. A unified supervisory/regulatory body is being formed, a comprehensive legal structure is being developed to combat money laundering, and the nation became a member of the Financial Action Task Force on Money Laundering (FATF) in June of 2003. A third key indicator that investors consider is a country’s global competitiveness. South Africa ranked 41st out of 104 in 2004.16 The World Economic Forum also releases an Africa Competitiveness Report in which south Africa ranked 3rd out of 25 African economies in 2004. This indicator is a based on a number economic and social statistics in addition to corruption, the impact of HIV/AIDS on business, access to financing, and the nation’s infrastructure. Despite having much room for improvement, South Africa is sticking with its decision to invest in globalization and trade liberalization as a means of creating job growth and increasing household incomes. Despite the deprivation of millions of South Africans who continue to live in poverty, the country was ranked 29th in the world for total GDP in 2003 with a total of almost 160 billion USD.17 Based on the purchasing power parity, South Africa’s GDP per capita is $10,700 and is about $3500 in current USD terms. The growth rate has averaged about 3% since 1994, which is modest but is twice the average growth prior to 1994. The real GDP increased from 2.8% to 3.7% in 200418 and although it is projected to grow to slightly above 4% in 2005 (see appendix E), the government estimates that the growth rate must reach a minimum of 6% to offset unemployment. What is distressing about the government’s hypothesis is that the last time that the growth rate was even over 5% it was 1984 and followed two years of negative growth. Another sad issue is that GDP growth is a macroeconomic indicator and often has no correlation with household income growth whatsoever. This is especially true in the case of South Africa where a few large conglomerates dominate almost 80% of the economy. Nonetheless, positive GDP growth is a primary goal of any nation and has been positive since South Africa’s trade embargo was lifted and trade liberalization policies were implemented. GDP growth was fueled mainly by the value added services sector of the economy, which represented over half of employment and 65% of the country’s GDP.19 Main industries made up 31% of GDP and consisted almost solely on mining and manufacturing production. Manufactured goods mostly include processed minerals and products such as foodstuffs, machinery, and automobiles. Platinum, gold, diamonds and chromium make up a large part of their mining industry. Gold and platinum account for 20% of the country’s total 16 www.weforum.org/pdf/Gcr/Growth_Competitiveness_Index_2003_Comparisons www.worldbank.org/data/databytopic/GDP.pdf 18 www.statssa.gov.za/keyindicators/gdp.asp 19 http://devdata.worldbank.org/dataonline/ 17 exports. Agriculture, which represents 30% of the workforce and consists primarily of corn, wheat, sugarcane, fruits, vegetables and animal products, only yielded 4% of total GDP. This is a big reason why South Africa wants the WTO to enforce a reduction of agricultural subsidies in international trade. Regionally, the EU is South Africa’s leading trading partner in both imports and exports and both sides seem to be benefiting from their bilateral free trade agreement that was signed in 1999. South Africa’s main trading partners can be seen in appendix F. Total exports of goods and services were valued at 45.3 billion USD and imports were 42.6 billion USD.20 Despite this positive balance on merchandise and services, the country has a current account balance of negative 1.3 billion USD. FDI flows were barely positive at 99 million USD as compared to a billion more in 2002.21 External debt situation, however, remains very comfortable at 27.8 billion USD, which is 17.4% of GDP and down from 23.5% of GDP in 2002.22 A country’s currency can have a major impact on an external debt figure. The unpredictability of South Africa’s currency, the rand, has played a distinct role in destabilizing the economy, which is why the country has focused its fiscal efforts at curbing inflation. Currently, the rand is valued at 6.07 Rand’s per US dollar.23 The steady devaluation and subsequent resurgence of the rand since 2002 can be viewed in appendix G. The currency’s generally strengthened position over the last year was largely a reflection of increases in commodity prices. The currency has appreciated by over 50% in real effective terms since the end of the large currency depreciation in December of 2001. Increasing international foreign exchange reserves, valued at 8.3 billion USD including gold reserves in 2004 (see appendix H), also serve to reduce currency volatility and keep long-term interest rates low. However, it must be noted that, compared with other emerging-market economies, South Africa’s stock of reserves is relatively low and the South African Reserve Bank (SARB) should aim to continue increasing reserves to a level comfortably above the nation’s short-term external debt obligations. Nevertheless, the purchases of foreign currency by the SARB allowed the country to close its open position in the forward market in February of 2004. This exposure in the forward market had represented a major source of external vulnerability and macroeconomic instability.24 Another one of the successes of the ANC government has been to get consumer inflation, which had been running in double digits for over 20 years, under control (see appendix I). Low and predictable inflation is necessary for financial stability and sustained economic growth. Reducing inflation has had a lot to do with the strength of the rand, the reduction of fiscal debt, and the increase in foreign exchange reserves. In addition, we found that the careful management of saving and investment rates had a direct correlation with inflation rates. As one can see 20 www.imf.org/external/pubs/ft/scr/2004/cr04378.pdf www.imf.org/external/pubs/ft/scr/2004/cr04378.pdf 22 www.worldbank.org/cgi-bin/sendoff.cgi?page=%2Fdata%2Fcountrydata%2Faag%2Fzaf_aag.pdf 23 http://www.x-rates.com/d/ZAR/USD/data120.html 24 www.imf.org/external/pubs/ft/scr/2004/cr04378.pdf 21 from appendix J, the rise and fall of both lending and deposit interest rates closely followed inflationary and deflationary movements. Currently the lending rate is 12.5% and the saving rate is less than 8%. Both of these figures are the lowest interest rates since 1980 so it bodes well for the government’s goal of drastically curbing inflation. Inflation has been cut by 50% since 2002 and is now well within the 3 to 6% range that the SARB was targeting. In 2003, Public debt to GDP improved significantly at well. The public debt was 37% of GDP compared to 48% of GDP in 1997 USD. Revenues were 24% while Expenses totaled 26%. The revised budget deficit for 2004 is believed to equal a mere 5.2 billion USD (less than 3% of total GDP).25 Government finances are summarized in the following table:26 Total in Billions of Rand Total as % of GDP Government Revenues 299.5 24.5% Government Expenditures 329.1 26.9% Public Debt 456.3 37.3% Budget Deficit (-) 29.6 (-) 2.4% Small budget deficits and effective taxation policies have helped South Africa to manage its external debt prudently. Medium- and long-term external debt presently stands at less than 10% of GDP. However, South Africa’s ministry of finance notes that allowing the deficit to rise much above 3% of GDP could place too much pressure on long-term interest rates and the value of the rand. Three percent is, therefore, considered the upper limit of what is desirable to maintain macroeconomic stability and to keep indebtedness under control.27 Overall, South Africa’s economy is in relatively great shape. 2. International Trade South Africa's exports include machinery, motor vehicles and fertilizers to African countries, and minerals, mineral and agricultural products to developed markets. Mining and related activities remain at the core of the South African economy. The mining and excavation sector accounts for between 8 and 10% of GDP and for some 40% of earnings from merchandise exports. In consequence, developments on world mineral markets are critical to South Africa's economic performance. The manufacturing sector, largely centered on mineral processing, contributes nearly 25% of GDP. South Africa is usually a net exporter of agricultural products, agriculture accounts for some 5% of GDP and for 8 to 10% of goods exports. Services are the largest employer, with over half of total employment, and account for some 53% of GDP. 25 www.globalinsight.co.za/news.asp?id=279 www.imf.org/external/pubs/ft/scr/2004/cr04378.pdf 27 www.imf.org/external/pubs/ft/scr/2004/cr04378.pdf 26 The reintegration of South Africa into the world economy has contributed to an increase in its foreign trade. Merchandise imports have grown faster than exports, leading to a contraction of South Africa's traditional trade surpluses and to external current account deficits since 1994. The rise of merchandise imports indicates an increase in investment. Capital and intermediate goods, particularly machinery and mechanical appliances, represent almost 30% of South Africa's total merchandise imports. South Africa is also a net importer of a broad category of services. Direct investment In relation to Canadian trade with other developing countries, trade with SubSaharan Africa is extremely marginal. It makes up only 3.2% of imports from developing countries into Canada and 4.1% of exports from Canada to these countries. Crude petroleum and other mineral oils represented 46% of imports from Africa in 1999 and used clothing is a top Canadian export to many African countries. South Africa offers significant opportunities for Canadian trade and investment, with outstanding potential in mining, transportation, telecommunications and infrastructure development. Canadian FDI to South Africa has grown in recent years, with Placer Dome, McCain, SouthernEra, Hatch and others acquiring large stakes in the country. Additionally, South Africa generates considerable investment in Canada, large firms such as Anglo American/De Beers, BHP Billiton (now London-based), and Harmony, already entrenched in Canada, plan to increase their investments. South Africa is by far Canada's largest trading partner in Sub-Saharan Africa and while trade flows have reached a plateau in the last 18 months, new opportunities are constantly being identified in the areas of information technology and telecommunications, the health sector and the environment, as these in particular attend to the social needs of South Africa. Canada-South Africa trade and investment ties are facilitated by a proactive bilateral Chamber of Business in Johannesburg. A number of business delegations visit each other's territories and partner projects such as the Canadian Alliance for Business in South Africa (CABSA). In addition, Canada and South Africa concluded a Trade and Investment Cooperation Agreement (TICA) in September 1998, providing a framework for enhanced dialogue on bilateral and multilateral trade and investment matters. In 2001, under a funding agreement with CIDA, Canada has been assisting South Africa in developing an industrial strategy in the IT sector, with a view to promoting more private-sector involvement, both local and foreign, in emerging IT market opportunities. Transport Canada, under a Declaration of Intent on Technical Cooperation in Transportation signed with the South African Department of Transport is providing technical assistance to South Africa in a number of areas related to the transportation sector, opening up business opportunities for Canadian companies. South Africa's trade relations South Africa has negotiated a host of general trade agreements since 1994 as part of the process of normalizing trade relations with international trading partners. South Africa participates in a number of preferential trade relationships, both regional and bilateral. It was a founding member of the General Agreement on Tariffs and Trade (1947), and is an active member of the World Trade Organization. It is committed to the principles of these organizations, and to increasing South Africa's global competitiveness. Tariffs have been reduced, and non-tariff barriers are being phased out. Previously, South Africa was a founding member of the GATT and participated in, or observed, several Tokyo Round Agreements and Arrangements. Under its Uruguay Round commitments, South Africa bound the 98% of its tariffs (excluding petroleum products); tariff bindings are at ad valorem rates, with a simple average of 19.8% but with maximum ceiling rates of almost 400% (on agricultural products). In addition to petroleum products, unbound tariffs are mostly on fishing products and preparations thereof, and arms and ammunition. Subject to limitations on the presence of foreign natural persons, South Africa bound market access and national treatment under the General Agreement on Trade in Services (GATS) for several categories of services, including in the areas of business, communications, distribution, tourism and environment. The US provides such market access opportunities to a number of African countries, including South Africa, through the African Growth and Opportunity Act (AGOA). A number of other countries provide market access through the generalized system of preferences (GSP) mechanism. The following countries accord South Africa GSP status: EU Countries, Norway, Switzerland, Hungary, Japan, Canada, USA, Czech Republic and EUROPE. Europe is South Africa’s biggest source of investment and accounts for almost half of South Africa’s total foreign trade. Seven of South Africa’s top ten trading partners are European countries. South Africa has placed greater importance on forming strong economic trading blocs to gain access to key markets. The South African government has actively pursued negotiations for an agreement on trade. South Africa has also turned its attention to pursuing agreements for greater South-South co-operation. The move to establish trade relations with Mercusor via a free trade agreement with Brazil, and also with India, is top of the government's export-oriented trade agenda. This will facilitate greater trade with South America and the East. South Africa's participation in the Southern African Development Community (SADC), comprising 14 sub-Saharan African countries, allows access to a market of approximately 140-million, which is expected to grow at an annual rate of around 3%. A vociferous critic of apartheid, Canada was strict in its application of sanctions against South Africa until September 1993, with relations normalizing fully in 1994. President Mandela's visit to Canada in September 1998 brought the two countries close together. Currently, South Africa is Canada's most important trading partner in sub-Saharan Africa and provides a gateway for Canadian companies to other countries in the region. South Africa is also the largest source of African direct investment in Canada. Furthermore, South Africa was chosen as the destination for the partnership trade mission because it is the most advanced and productive economy on the African continent. In addition, South Africa possesses a sophisticated free market economy with a modern and expanding infrastructure and communications system. South Africa is a beneficiary of Canada’s General Preferential Tariff (GTP). The GTP rates range from duty-free to reductions in the most favored nations rates. South Africa has a memorandum of understanding with Canada relating to the export from South Africa of certain textiles and textile products for import into Canada – granting South Africa quotas for these products. In September 1998, there was a Ministerial trade and investment mission to Canada. The mission coincided with the President’s State visit to that country. During the mission, a Trade and Investment Co-operation Arrangement were signed. Export Development Corporation has made financing available through general purpose lines of credit, and short-term financing is readily available from Canadian commercial banks. Two-way investment remains modest but newly released figures indicate that Canadian direct investment in South Africa increased from $37 million in 1992 to more than $520 million (Jan.-Sept. 1999). Moreover, investment in Canada by South Africa was negligible in 1998, but stood at $240 million before the 1999 year's end (Jan.-Sept.1999). Canadian companies are expanding joint-venture and investment activities and at present there are some 75 Canadian companies with local participation in South Africa. Mining and related undertakings continue to be an area of considerable activity and promise with estimates that roughly half of all new mining ventures in all of Africa have Canadian participation. Other key sectors of interest include transportation, telecommunications, information technology, the knowledge industry, agriculture and agri-food. Canada has a bilateral development assistance program of up to $62 million over five years. Four priority areas have been identified for the CIDA bilateral program: 1) restructuring of South African government institutions; 2) human resource development; 3) support to civil society; and 4) economic development. South Africa Economic and Trade Data (2003) Merchandise exports: C$ 54,221 million Merchandise imports: C$ 49,036 million Current-account balance: C$ 9,101 million Labor force by occupation (1999): Agriculture (30%), Industry (25%), Services (45%) GDP: GDP per capita: Real GDP growth: Inflation: South Africa C$ 224 billion C$ 4,837 1.9% 5.9% Canada C$ 1,215 billion C$ 38,459 1.7% 2.7% Bilateral Trade (2003, C$ million) Cdn imports fm S. Africa Iron & steel Fruits; cocoa Platinum; prec. stones; ores Uranium oxide; etc. Wine; etc. Machinery Cdn exports to S. Africa 61.2 116.5 111.1 21.0 25.2 25.6 Machinery Cereals Sulfur; etc Malt Vehicles Optical; medical equip. 97.4 14.1 27.0 10.5 17.8 13.1 Vehicles 18.9 Total imports 503.3 Meat Aircraft Total exports: 16.0 25.0 316.8 There are numerous Global companies based in South Africa. Acer Africa acquired ownership of a locally based company they had been working with to distribute peripherals and printers since 1980. Agrid South Africa, an offspring of Agrid International, was formed in July 1999; they are the manufacturers of diesel/petrol engines and agricultural implements for small farmers, a sizeable change from their history of manufacturing for massive farming. Britannia biscuits decided that in order to access the local and Southern African market, South Africa seemed an outstanding option as an investment destination. Cisco Systems established business in South Africa in 1989 and became the exclusive partner to Dimension Data. EDS South Africa was formed through the merger of three local IT companies in 1995 and by September 1999 was a wholly owned subsidiary of EDS Corp. The British-based EMS chose South Africa as a site because of its close proximity to Europe, similar banking, accounting and legal systems to the United Kingdom. The fact that there are no real time zone differences or language barriers between South Africa and the United Kingdom were also contributory factors. Dorbel, a locally based company invited Johnson Controls into South Africa to produce seats for Volkswagen worldwide. The company produces cockpit seat liners, headliners and central steering columns, but they have been exporting leather and front ends for Volkswagen since 1995. Senior Flexonics, a manufacturer of automotive components, set up operation in 1997 as part of the company's drive to become the lowest cost producer and highest volume source for flexible connectors in the world. Johannesburg stock exchange-south Africa In 2002, The South African government will allow local private companies to invest even more in other African countries. This move is in line with the New Partnership for Africa's Development (Nepad) plan to boost investment and economic growth in Africa. South Africa’s Reserve Bank announced that exchange controls had been relaxed. South African companies are now allowed to invest up to R2 billion in Africa, up from R750 million. "As part of South Africa's commitment to Nepad, government is particularly supportive of investment in Africa, South Africa's Finance Minister said about the issue. Following this announcement the National Treasury Director-General said there were likely to be further liberalization in next year's national budget, to be released in February. Up to now South Africa has seen a gradual approach to relaxing exchange controls. 28 28 http://www.tralac.org/scripts/content.php?id=877 Over the past couple of years, SA has benefited from a "sweet spot" which has two components: low global interest rates and high demand for commodities. South Africa has been a beneficiary of the slowdown in the US in the past few years. Low interest rates in the US and developing economies have come about with a decrease in global structural inflation. Low interest rates result in low nominal yields, risk contraction, credit and currency premiums. Global long-bond yields in particular have been exceptionally low. This reduced risk premium globally has been extremely beneficial for the risk premium of emerging markets permitting these markets to do extremely well. As a result, South Africa has benefited from this combination of low rates, leading to a lowering of global risk premiums and a compression of yields. At the same time, South Africa's markets have benefited from the increase in demand for commodities in developing countries, in particular China and India. With gross domestic product growth of more than 9% a year, the demand from China has been extremely beneficial to the domestic market - resulting in an increase in the price of commodities at a time of rand strength. SA's stock market stumbled slightly last April when Chinese authorities tried to slow the growth in China and when interest rates in the US started to increase on the back of more positive data. Neither of these factors was permanent and the JSE Securities Exchange SA recovered to post great returns for last year. Upcoming Events - Nelson Mandela Bay Trade and Investment Conference 2005: The Nelson Mandela Metropolitan Municipality in South Africa constitutes the towns of Port Elizabeth, Uitenhage and Despatch. The Metro will be holding a Trade and Investment Conference on 1 and 2 June 2005 for both local and international buyers and investors. Their objective is to ensure that the Conference is attended by quality companies who are seriously interested in growing their business links with the Nelson Mandela Bay area. Companies will include potential investors and/or companies interested in buying products from South Africa. The Metro is aiming to focus on the following sectors: Automotive component manufacturing, Packaging and recycling, General manufacturing: Food and beverage processing, textiles, and pharmaceuticals and Tourism infrastructure: projects include a Convention Centre and a theme park. - Trade dynamics, September 2005. The Trade Dynamics course is intended to provide a background to the way trade works, especially in the agricultural sector. An understanding of INCO terms, arbitration and foreign currency management is also provided by leaders in their fields. - Fundamentals of Futures, June 2005. An in-depth understanding of the competitive and volatile agricultural commodities market. How to control and minimize risk is an essential part of trading. It is critical to understand the Futures market and the effect it has on price setting. 3. Trade Policies Trade Policy: SA’s foreign trade has historically been characterized by inward-looking and protective policies. Since the lifting of UN sanctions in 1993 and the stabilization of political conditions, there has been a marked increase in overall trade. The nation is rapidly re-integrating its economy into the multilateral trading system. Economically, the government’s main objective is to reduce unemployment by enhancing the value of labor-intensive products. The government’s main goal in terms of trade is to promote exports. Tariffs and “supply-side measures” are South Africa’s main trade policy instruments.29 By means of a wide variety of incentives, such as tariff concessions and credit facilities, the country aims to continually improve its trade balance. Mining, the backbone of the economy receives the largest share of government assistance. Enunciated Goals and Objectives: In South Africa’s Yearbook, which was published in 2004 to coincide with the state’s 10 years of democracy, the Department of Trade and Industry enumerated their key objectives in the Yearbook’s chapter on the economy.30 Their goals are to: 1. 2. 3. 4. 5. Grow investments and exports Grow markets for South African products abroad Grow small, micro and medium enterprises Grow women-owned enterprises Redress inequities in the economy by bringing the previously disadvantaged into the mainstream 6. Grow Southern African Development Community (SADC) region and assist with the New Partnership for Africa’s Development (NEPAD) 7. Reduce geographic/spatial development inequalities by spreading investment over the provinces 8. Create a fair and efficient marketplace for business and consumers alike To help the economy continue to grow, South Africa is pushing forward with tariff reform on a unilateral basis. 29 30 www.wto.org/english/tratop_e/tpr_e/tp72_e.htm www.gcis.gov.za/docs/publications/yearbook/7economy.pdf Trade Policy Actions: As a founding member of the General Agreement on Tariffs and Trade in 1947, and an active member of the World Trade Organization, South Africa is committed to the principles of these organizations and to increasing its global competitiveness. Tariffs have been reduced, and non-tariff barriers are being phased out. The average outweighed tariff has been reduced from 22% to an estimated 11% in 2003.31 The tariff structure, however, is highly complex and remains highly protected in a number of sectors, such as textiles and footwear. The Department of Trade and Industry is proposing further simplification of tariffs and the application of ad valorem rates for most items. To make itself more attractive to foreign direct investment, South Africa has formed a number of economic trading blocs to gain access to key markets. Within Africa, the country has made a commitment to large capital projects in the fields of infrastructure and logistics, energy and information communications technology, water and waste management, transport, construction, oil and gas infrastructure, agribusiness, mining and human resource development. One of South Africa’s most effective trade policies has been its Motor Industry Development Program (MIDP), which was initiated in 1995. This program has led to gains in employment and a significant increase in automobile exports. Authorities suggest that the success of the program also provided a catalyst for new investment more generally in South Africa. The program, which has been extended to 2012 involves a combination of export subsidies and heightened protection for domestic production. When exporting finished motor vehicles or components, the program allows domestic producers of motor vehicles to gain import duty credits in proportion to the local content of vehicles and parts. Import credits can also obtain import duty credits by investing in productive assets for export production. From 1995 to 2003, the number of vehicles exported grew more than tenfold as a result of this program. To protect this industry from European manufacturers, South Africa has ensured that tariffs still remain on imported automobiles and parts. In the agricultural sector, the government is promoting the deregulation of the marketing system. The country is a member of the Cairns Group, an association of countries exporting agricultural products with the objective of free and fair trade in the global agricultural market. The group, which participates as a cohesive unit in WTO agricultural negotiations, consists of Australia, Bolivia, Canada, Chile, Colombia, Costa Rica, Fiji, Guatemala, Indonesia, Malaysia, New Zealand, Philippines, Thailand and MERCOSUR. 31 www.imf.org/external/pubs/ft/scr/2004/cr04378.pdf Trade Agreements: The ITED, South Africa’s International Trade and Economic Development Division of the country’s Department of Trade and Industry is responsible for negotiating international trade agreements and ensuring that the country’s commitments are honored in the multilateral rules-based trading system underpinned by the WTO. 32 South Africa believes that its integration with the rest of the continent and Africa’s active participation in the WTO will be a key success factor for the future. Africa forms the focus of South Africa’s global economic strategy. Partnerships with countries on the continent are therefore considered vital. The Department of Industry and Trade has established trade and investment promotion offices throughout the continent for the purpose of facilitating trade and investment flows. The Department seeks to restructure regional arrangement promoting industrialization. Most recently, the leaders of Algeria, Egypt, Nigeria, Senegal and South Africa convened in Abuja in 2001 to launch the New Partnership for Africa’s Development (NEPAD). NEPAD asserts that while globalization has increased the cost of Africa’s ability to compete, the advantages of an effectively managed integration present the best prospects for future economic prosperity and poverty reduction. President Mbeki played a major role in forming this regional initiative. The main goals of NEPAD are to investment development and good governance. Other regional initiatives in Africa include the SADC and SACU. The Southern African Development Community (SADC) is a free trade agreement that includes Angola, Botswana, the Democratic Republic of the Congo, Lesotho, Malawi, Mauritius, Mozambique, Namibia, the Seychelles, Swaziland, Tanzania, Zambia, and Zimbabwe. The first implementation phase of the agreement began in September of 2000 and was destined to establish a Free Trade Area by 2008. Two-way trade between South Africa and the SADC member states is currently lopsided because South Africa exports 4 times as much they import from these countries. Mozambique absorbs most of the continents exports from South Africa and accounts for 18% compared with Zimbabwe’s 16%. These two countries also make up the largest proportion of imports that South Africa receives from the continent. Within the SADC is a smaller group of countries that form the Southern African Customs Union (SACU). These countries, which include South Africa, Botswana, Lesotho, Namibia and Swaziland, share a common tariff regime without any internal barriers. SACU is the oldest customs union in the world. According to the WTO, the SACU agreement is the principal treaty governing the common trade policy of SACU member countries. All tariff and non-tariff related laws are set by South Africa and applied by all members. The agreement 32 www.gcis.gov.za/docs/publications/yearbook/7economy.pdf provides for duty-free circulation of goods within the countries and grants transit rights to people across the territory. Duties collected by SACU members are pooled in a common fund and subsequently distributed according to an agreed upon formula. Trade agreements between South Africa and other countries or regions pose a number of challenges to policy makers in the region. In January of 2000, a trade agreement between South Africa and Europe, called the SA-EU Trade Development and Cooperation Agreement (TDCA), was implemented after four years of negotiations. The deal certifies that the EU will liberalize 95% of imports from South Africa at the end of a 10-year transitional period and that South Africa will liberalize 86% of imports from the EU at the end of a 12-year transitional period. While South Africa secured a high degree of access to the EU market for its industrial goods, it has offered a higher level of access to the EU in agricultural products than it was able to secure for South Africa’s agricultural exports. South Africa offered an elimination of tariffs on 81% of EU agricultural exports to South Africa, while the EU offered an elimination of only 62% of tariffs on agricultural imports from South Africa.33 Although South Africa did not succeed in eliminating EU export subsidies, the TDCA is a key component of South Africa’s trade policy since the EU accounts for about 40% of the nation’s total world trade and Europe accounts for almost half of the state’s foreign trade. Seven of South Africa’s top ten trading partners are European countries and fortunately the trade balance is in favor of South Africa’s exports to the region. The EU released a statement in May of 2002 stating that South Africa had overtaken Algeria, Saudi Arabia, Malaysia and Singapore in overall trade with the EU. Since the signing of TDCA in 2000, exports to the EU have increased by 50% and FDI from the EU alone equals 70% of total FDI. In terms of North America, South Africa is still negotiating a trade agreement with the United States. The trade and industry department director told the South African Press Association that the two sides remained far apart after six negotiations.34 However, South Africa is a beneficiary of the USA’s Generalized System of Preferences (GSP), which grants duty-free access for more than 4,650 products. The EU, Norway, Switzerland, Hungary, Japan, Czech Republic and Canada also accord South Africa this GSP status. In addition, South Africa is one of the 38 countries in Africa to qualify for the Africa Growth and Opportunity Act of 2000 (AGOA), which granted duty-free access to another 1,800 products not covered under the GSP access until 2008. The AGOA Acceleration Act, signed by George W. Bush in July of 2004, extended the benefits to 2015. Exports falling under AGOA alone amounted to $1.3 billion in 2002 and have been steadily increasing. The US is South Africa’s biggest trading partner and exports continue to exceed imports. A bilateral trade agreement does not exist between South Africa and Canada either, however, a Trade and Investment Co-operation Arrangement was signed 33 34 www.igd.org.za/pub/g-dialogue/Special_feature/trade.html www.southafrica.info/doing_business/sa_trade/agreements/trade_northamerica.htm in 1998 with the aim of enhancing bilateral trade and investment. South Africa is also a beneficiary of Canada’s General Preferential Tariff (GPT) which allows duty-free or reduced rates for a number of exports to Canada including clothing and textiles. South Africa also has a Memorandum of Understanding with Canada relating to the export of clothing and textile products Although trade with Latin America is only about 2% of South Africa’s total trade, South Africa and Mercosur signed a framework agreement for the creation of a free trade agreement. In Asia, many co-operation agreements involving technology transfer, investments and overseas development assistance exist such as the Indian Ocean Rim Association for Regional Cooperation (IOR-ARC) whose member countries account for about 7% of world trade. The closest thing to a trade agreement in these two continents is the recently adopted “New Delhi Agenda for Cooperation” agreement with India and Brazil. The aim of this collaboration is to increase trade flows between the three countries from $4.6 billion to $10 billion by 2007. A Trilateral Business Council has been established as the framework for businesses from the three countries to work together and evolve into and inter-continental free trade area. Trade with the Middle East has increased significantly as well. Israel is one of the major destinations of South African exports, but South Africa has a major trading deficit in the region due to a significant percentage of its oil being purchased from Saudi Arabia. Overall, it is clear that South Africa has signed and benefited from a lot of trade agreements. It continues to form regional, multilateral, and bilateral trade agreements, and continues to have a positive trade balance as a result of its endeavors. Position for Doha Round: South Africa is moving ahead with trade liberalization and has been a vocal and effective participant in the Doha round of the World Trade Organization. The nation truly believes that its exposure to competition through trade liberalization and deregulation is what has helped its economy double to 3% since ’94. It is a strong advocate of removing agricultural subsidies in industrial countries. As mentioned before, the country has joined the Cairns group to lobby for the removal of these subsidies. They are also highly involved in anti-dumping legislation. Between 1995 and 1999, South Africa filed more anti-dumping complaints to the WTO per USD of imports.35 Outlook for expansion The high sophistication of SA’s financial sector and institutions is critical to the growth of South Africa’s economy because banks and financial institutions have 35 econ.worldbank.org/files/15652_wps2851.pdf the ability to handle sophisticated international financial transactions. An IMF audit suggests that, despite being in the 64th percentile in terms of the global corruption index, the banking and corporate sectors in South Africa are generally sound. The rand has been accepted as a clearing currency by the Continuous Link Settlement Bank in London since November 2003, providing for a mitigation of time-zone settlement risk and increased confidence in the banking system. In addition South Africa’s export base is diversifying rapidly with success having been achieved most notably in industrial machinery, processed agricultural goods, and automobiles. All of their success has been achieved despite an astronomical unemployment rate. This is still a tremendous resource that must be tapped into. The government must fund initiatives to improve the skills of the unemployed. Trade should continue to increase as the world discovers the high quality and price competitiveness of many SA goods. Assessment of Canada’s potential for further trade and investment w/SA: In support of NEPAD, Canada scrapped tariffs for LDC’s and created a C$500 million Fund for Africa that is well into its implementation phase. The fund is set up to respond to the need for more investment to spur economic growth, reduce poverty and support social programs throughout the continent. Working closely with African institutions, governments, community organizations and private sector groups, and reflecting the "African priorities in agriculture, water and environmental management", the fund supports initiatives that deal with some of the most developmental critical issues: HIV/AIDS, peace and security, good governance and poverty. These goodwill measures will certainly improve the relations between these two countries. Mining is the key to the economic relationship, with trade in raw materials, mining equipment, technology and services predominating. New growth is being seen in the fields of agro processing and Information Communication Technologies (ICTs). It is clear that both sides will have a lot to gain in this bilateral relationship. Appendix A South Africa's Age Distribution 64+ yrs 5.2% 15-64 yrs 65.3% 0-14 yrs 15-64 yrs 0-14 yrs 29.5% 64+ yrs Appendix B South Africa's Ethnic Composition White 13.6% Colored 8.6% Indian 2.6% Black 75.2% Black Colored White Indian Appendix C South Africa's Religious Composition Indigenous 29% Hindu 2% Christian 67% Muslim 2% Christian Muslim Hindu Appendix D Appendix E Indigenous South Africa's GDP Growth 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 Real GDP Growth (%) 5.0% -2.0% -3.0% Appendix F South Africa's Top 5 Trading Partners 17.0% 16.0% 15.0% 14.0% 13.0% 12.0% 11.0% 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Exports C hi na y G er m an pa n Ja U S U K Imports 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 Value (Billions of US$) 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 Rand per US$ (annual average) Appendix G South Africa's Rand 12 11 10 9 8 7 6 5 4 3 2 1 0 Appendix H South Africa's FOREX Reserves 9 8 7 6 5 4 3 2 1 0 Appendix I 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 16% 15% 14% 13% 12% 11% 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 1991 Inflation (consumer prices annual %) South Africa's Inflation Year APPEDIX J Inflation VS. Saving & Investment Interest Rates 25% 20% 15% 10% 5% 0% 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 % < Investment < Savings <Inflation Inflation Year Inflation Savings Investment South African share in world trade South African share in world trade 1948 1950 1960 1970 1980 1990 1995 1996 1997 1998 1999 2000 2001 2002 2003 Exports Imports 2 1.85 1.52 1.06 1.25 0.68 0.54 0.54 0.56 0.48 0.47 0.47 0.47 0.46 0.49 2.49 1.44 1.19 1.17 0.94 0.52 0.58 0.55 0.58 0.52 0.45 0.44 0.44 0.44 0.49