2 November 2017

Southern Africa Is Losing Its Economic Edge

analysis

Southern Africa is economically Africa's most advanced region - but its collective economy is stagnating. And unless the continent can diversify its economies away from their dependence on commodity exports, they will remain forever locked into roller-coaster rides as global commodity prices fluctuate, and average growth will stay low.

The European Union (EU), which is meeting the African Union (AU) for an inter-continental summit later this month to discuss this and other issues, is looking to Southern Africa as a kind of laboratory as it adjusts the way it provides development aid to Africa.

'This is a region which is on average the most advanced in Africa,' says Stefano Manservisi, director-general for development in the EU Commission. That's mainly - but not only - to do with South Africa, he says. Yet this region is steadily losing its lead on other regions, he says - not only in GDP but also in unemployment and other structural inequalities.

The EU has created a multi-annual budget of €8 billion for development in Southern Africa

Manservisi says the EU has observed that where other regions recovered fairly soon from the global financial and economic crisis of 2008-9, the Southern African graph has remained flat since then. Last year Africa's overall GDP growth slowed to 2.2%, mainly due to the continued fall in commodity prices and weak global economic growth, according to the African Economic Outlook 2017 report. Southern Africa was second last with 1.1% growth compared to West Africa's 0.4%, and would probably have been last had it not been for Nigeria's recession, largely caused by the plunge in oil prices.

To Manservisi, Southern Africa sits on the cusp. 'It can go right, it can go wrong.' Right would be going up onto the high road of real regional integration. Wrong would be continuing to muddle along, with a little externalisation of production from the key economy - South Africa.

'South Africa has been and still is heavily the economic centre of gravity of the region at large, not only SACU [the Southern African Customs Union] but also SADC [the Southern African Development Community] ... because it is much more developed, has skills, infrastructure; and because of the profile of the industry, including manufacturing,' says Manservisi.

But, he asks, is regional integration in Southern Africa real, with a genuine circulation of goods and services, and a fully integrated internal or single market (like the EU) - or is this 'regional integration' just about South Africa outsourcing small bits of production?

SADC has a free trade agreement on paper, but still faces major impediments to regional integration

In the EU's experience, having a strong core economy like South Africa's can create real regional integration and add great value. However if the right institutions aren't created and regional integration doesn't happen, it can just increase the burden on that core economy. Manservisi's impression is that regional integration isn't working in Southern Africa - and making it work should be a priority for both South Africa and the EU.

To that end, the EU has created a multi-annual budget of €8 billion for development in Southern Africa. It is increasingly focusing this away from traditional development aid towards transforming economies and generating investment, while also reducing unemployment, social injustice and inequality. At the heart of the EU's effort to help Southern Africa - and other African regions - to restructure their economies are the Economic Partnership Agreements (EPAs). These EPAs transformed the non-reciprocal trading relationship of the EU with development-receiving countries (former colonies) to essentially reciprocal relationships.

The so-called SADC EPA (though only six SADC countries participate) has been operating for just over a year. One of its key provisions is to allow 'cumulation of origin' in the rules of origin. This means, for example, that fruit harvested in one SADC EPA state may be preserved in another SADC EPA state and still be exported to the EU duty-free. So the idea is to encourage SADC EPA states to jointly produce goods, forming value chains to take advantage of the preferential access to the huge EU market.

The EU has set aside €4bn for guarantees against political and economic risks that deter investment

But the EU is also directing money and attention to helping Southern African (and of course other African) countries to make their business environments more attractive to investors. It's also helping them improve their taxation systems so they can collect more taxes and generally mobilise more of their own national resources to finance their needs.

The EU is trying to encourage more investment from the union into Africa by providing guarantees to EU companies against the political and economic risks that deter investment. Manservisi says it has, for the next few years, set aside a €4bn fund for such guarantees which it is sure will be able to leverage some €44.5bn worth of investment.

One can detect differences in emphasis between the approach Manservisi spells out and SADC's own official Industrialization Strategy. The strategy gives the lead to 'the developmental state' rather than the private sector and perhaps lays more stress on protective measures for local industry, for example.

Nigel Gwynne-Evans, chief director for African integration and industrial development at South Africa's Department of Trade and Industry, says the EU's views are broadly echoed in Southern Africa. 'Africa is now [South Africa's] single largest export market if both goods and services are included and therefore we need our regional partners as much as they need us. This is why we have established a new entity, Trade Invest Africa, to shift the focus from a straight export play to one where we are supporting capacity-building investments by South African companies and large global players in key value chains.

'We are actively building relationships with our neighbours, particularly in the SADC region, around the industrialisation strategy where we are identifying concrete investment opportunities to support the diversification and modernisation of the region.'

He acknowledges that while SADC has a free trade agreement on paper, the region still faces major impediments to greater actual free trade and regional integration. The unilateral restrictions Zimbabwe has slapped on South African exports and, more generally, bureaucratic blockages and corruption at border posts are examples.

He agrees with Manservisi that regional economies must be steered away from merely producing and exporting commodities. He welcomes the EU's decision to invest in the region's productive capacities to help it move up value chains.

Is this all pie in the sky? Donor countries and institutions like the EU have previously tried to redirect development away from the traditional areas like boosting health and education access. Yet the structure of recipient countries has remained much the same.

This time more EU resources are being mobilised. And the EPAs are a new development. Whether they can at last provide the push that finally lifts Southern Africa and other developing regions into a normal economic orbit is the critical question.

Peter Fabricius, ISS Consultant

Southern Africa

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