By: Brian Williams
Good economic news has recently come out of South Africa, as the country experienced 3.1% GDP growth in the fourth quarter of 2017, and is now projected by the World Bank to exceed an earlier projection and have GDP growth reach 1.4% in 2018. While this is certainly something to take pride in, South Africa has some lofty goals for their future economic growth, as the government’s ambition is to achieve a 5% growth rate in the coming years. This post will analyze the historical growth of South Africa to gain a better understanding of future growth prospects for the Rainbow Nation.
Government Policy Analysis
In order to sustain and even improve growth, Paul Noumba Um, South Africa’s World Bank Director, acknowledged that GDP growth in his country is being challenged by unemployment, inequality, and poverty. The GINI Coefficient, a measure of the inequality of a country with values between 0 and 100%, is very high in South Africa relative to other countries at 63. This means that a small percentage of the population owns a large proportion of the wealth.
The South African Department of Trade and Industry highlights that companies will have a large pool of both semiskilled and unskilled workers to potentially employ as a major draw for investment, which would reduce the high inequality prevalent in the country, as well as help grow the economy with more people working. To reduce poverty and close the inequality gap, Julie Schaffner’s textbook on Development Economics describes government policies that take into account the financial constraints the poor are faced with, such as bringing markets into remote areas whose inhabitants are commonly poor due to their large proximity away from financial centers, along with policies that “explicitly create new assets owned or used by the poor,” as the most effective. These policies perform multiple tasks, as they promote a reduction in inequality along with promoting growth in the economy with equal success to policies targeting those with average income.
To get a better picture of South Africa’s future, it’s past economic progress can be a useful guide. BRICS is an acronym used to group the countries of Brazil, Russia, India, China, and South Africa together. First established by Goldman Sachs economist Jim O’Neil in 2001 to identify strong, growing economies, BRICS has advanced into “a new and promising political-diplomatic entity, far beyond the original concept tailored for the financial markets,” with Summits between member countries held annually and group decisions made often. In his paper Divergence, Big Time, Lant Pritchett studied the average growth rates of 17 currently high-income countries from three different time periods. Divergence in this case is defined as the state when the GDP per capita of wealthy countries increases quicker than the GDP per capita of other countries, creating a greater divide between the two groups. The table below presents a similar study to Pritchett’s, conducted with data for the BRICS countries over three different time periods.
One observation from this analysis is how South Africa has fallen from having the highest GDP per capita to having the fourth highest of the BRICS countries. Couple that with their consistently low average growth rates relative to the other countries (1.80, -0.467, and 1.586), and it becomes a signal that South Africa is diverging away from countries like Brazil, China, and Russia in terms of economic growth per capita.
The economies of the BRICS countries are often thought of as less developed relative to the advanced economies of the world, which are typically considered to be the OECD countries. Pritchett defines the OECD countries as European countries, their offshoots, and Japan. In his work, Pritchett estimated “that from 1870 to 1990, the ratio of per capita incomes between the richest and the poorest countries increased by roughly a factor of five,” which is a signal that divergence had occurred between the “developed” OECD countries and the other “less developed” countries. By comparing the adjusted income per capita of South Africa and the OECD member countries, as shown in graph below, it becomes apparent that the divergence Pritchett discussed has occurred here as well.
Numerically, the World Bank estimates that in 1971, the adjusted income per capita in South Africa was 728.245, while for OECD member countries it was 2,547,569. Had convergence occurred between these two countries, it would be expected that this gap of approximately 350% would have been reduced by today as South Africa’s economy would have grown faster than the OECD member’s economies, but this is not what happened. In fact, the current adjusted income per capita of South Africa is estimated to be 4,258.973, while this statistic for OECD member countries is now approximately 30,785,193, over 700% greater than South Africa’s. This exceeds Pritchett’s estimation and shows a high degree of divergence between South Africa and the developed OECD countries.
Future Growth Potential
Even with the positive news of growth for the South African economy, the government still believes that higher growth rates can be achieved. Taking a step back, it may be ideal for the South African Government to decide if this goal is actually feasible and sustainable. One calculation that can help determine a countries future growth is based off of the observations from a graph included in the 1997 paper On the Evolution of the World Income Distribution penned by Charles Jones. Jones compared a countries 1960 GDP per worker to that of the United States and found that for most countries, those that had a GDP per worker greater than 15% of the United State’s converged, or grew towards the same value, whereas those with a GDP per worker less than that figure saw divergence. For our experiment, we will compare South Africa’s 2016 GDP per worker to that of the United States use that to determine if convergence or divergence will occur in the future. No assumptions were made about the countries in Jones paper, as he simply observed a result from the raw data. The table below describes this relationship between South Africa and the Untied States, the reference country.
Dividing 13614.28556 by 114512.8955 yields the approximation that South Africa’s ratio is 11.889% that of the United States. This is below the 15% threshold Jones observed for divergence, so if his findings hold than South Africa should be expected to further diverge away from the United States. As a result, with this evaluation, South Africa will not achieve their target goal of 5% growth, as they will be expected to grow slower than the United States, a country that averages around 2% growth annually.
 Winning, Alexander. “World Bank Raises South Africa 2018 Growth Forecast.”
 GINI Index-South Africa. Raw data. The World Bank.
 “Why Invest in South Africa.” Trade, Exports & Investment.
 Schaffner, Julie. Development Economics: Theory, Empirical Research, and Policy Analysis.
 Rachid, Biatriz. “Information about BRICS.”
 Pritchett, Lant. “Divergence, Big Time.”
 Pritchett, Lant. “Divergence, Big Time.”
 Income per Capita-South Africa and OECD countries. Raw data. The World Bank.
 Jones, Chad. “On the Evolution of the World Income Distribution.”