Economy of Orange Free State

The economy of South Africa is the largest in Africa, accounts for 24% of its Gross Domestic Product in terms of PPP, and is ranked as an upper-middle income economy by the World Bank, which makes the country one of only four countries in Africa represented in this category (the others being Botswana, Gabon and Mauritius). About a quarter of the population is unemployed and about the same proportion lives on less than US $1.25 a day.

Advanced development is significantly localised around four areas: i.e. Cape Town in the Western Cape, Port Elizabeth in the Eastern Cape, Durban in KwaZulu-Natal on the east coast, and Pretoria–Johannesburg in Gauteng Province. The latter province, although the smallest in land area of 17,010 square kilometres, accounts for 34% of the country's GDP and would it have been an independent territory, its economy would be larger than that of Morocco, Angola or Kenya. Beyond these four economic centres, development is marginal and poverty is still prevalent. However, key marginal areas have experienced rapid growth since the advent of democracy in 1994. Such areas include the Garden Route region from Mossel Bay to Plettenberg Bay; Rustenburg; Nelspruit or Mbombela; Bloemfontein; the Cape West Coast; and the KwaZulu-Natal North Coast.

The South African rand is the most actively traded emerging market currency in the world. It has joined an elite club of fifteen currencies, the continuous linked settlement (CLS), where forex transactions are settled immediately, lowering the risks of transacting across time zones. The rand was the best-performing currency against the United States dollar (USD) between 2002 and 2005, according to the Bloomberg Currency Scorecard.

History
The formal economy of South Africa has its beginnings in the arrival of Dutch settlers in 1652, originally sent by the Dutch East India Company to establish a provisioning station for passing ships. As the colony increased in size, with the arrival of French Huguenots and German citizens, some of the colonists were set free to pursue commercial farming, leading to the dominance of agriculture in the economy.

At the end of the 18th century, the British gained control of the colony, imposing the English language on the colonists, who were now developing a culture of their own. This in turn lead to the Great Trek, spreading farming deeper into the mainland, as well as the establishment of the independent Boer Republics of Transvaal and the Orange Free State.

In 1870 diamonds were discovered in Kimberley, while in 1886 some of the world's largest gold deposits were discovered in the Witwatersrand region of Transvaal, quickly transforming the economy into a resource-dominated one. The British, seeking the riches of the gold fields, invaded the Boer republics and gained control of them in 1902 after the Second Boer War. The country also entered a period of industrialisation during this time, including the organisation of the first South African trade unions.

The government soon started putting laws distinguishing between different races in place. In 1948 the National Party won the national elections, and immediately started implementing an even stricter race-based policy named Apartheid, effectively dividing the economy into a privileged white one, and an impoverished black one. The policy was widely criticised and led to crippling sanctions being placed against the country in the 1980s.

South Africa held its first multi-racial elections in 1994, leaving the newly-elected African National Congress (ANC) government the daunting task of trying to restore order to an economy harmed by sanctions, while also integrating the previously-disadvantaged segment of the population into it. The 1994 government inherited an economy wracked by long years of internal conflict and external sanctions.

The government refrained from resorting to economic populism. Inflation was brought down, public finances were stabilised, and some foreign capital was attracted. However, growth was still subpar. At the start of 2000, then President Thabo Mbeki vowed to promote economic growth and foreign investment by relaxing restrictive labour laws, stepping up the pace of privatisation, and cutting unneeded governmental spending. His policies face strong opposition from organised labour. From 2004 onward economic growth picked up significantly; both employment and capital formation increased.

In April 2009, amidst fears that South Africa would soon join much of the rest of the world in late-2000s recession|recession, Reserve Bank Governor Tito Mboweni and Finance Minister Trevor Manuel differed on the matter: whereas Manuel foresaw a quarter of economic growth, Mboweni predicted further decline: "technically," he said, "that's a recession."

This is a chart of the trend of South Africa's gross domestic product at market prices estimated by the International Monetary Fund:

Natural resources
Mining has been the main driving force behind the history and development of Africa's most advanced and richest economy. Large scale and profitable mining started with the discovery of a diamond on the banks of the Orange River in 1867 by Erasmus Jacobs and the subsequent discovery and exploitation of the Kimberley pipes a few years later. Gold rushes to Pilgrim's Rest and Barberton were precursors to the biggest discovery of all, the Main Reef/Main Reef Leader on Gerhardus Oosthuizen's farm Langlaagte, Portion C, in 1886, the Witwatersrand Gold Rush and the subsequent rapid development of the gold field there, the biggest of them all.

Diamond and gold production may now be well down from their peaks, though South Africa is still the second largest producer of gold, but South Africa remains a cornucopia of mineral riches. It is the world's largest producer of chrome, manganese, platinum, vanadium and vermiculite, the second largest producer of ilmenite, palladium, rutile and zirconium. It is also the world's third largest coal exporter. Mining now accounts for a mere 2.3% of employment and 3% of GDP, down from around 14% in the 1980s.

Agriculture
South Africa has a large agricultural sector and is a net exporter of farming products. There are almost a thousand agricultural cooperatives and agribusinesses throughout the country, and agricultural exports have constituted 8% of South African total exports for the past five years. The agricultural industry contributes around 10% of formal employment, relatively low compared to other parts of Africa, as well as providing work for casual labourers and contributing around 2.6% of GDP for the nation. However, due to the aridity of the land, only 13.5% can be used for crop production, and only 3% is considered high potential land.

Although the commercial farming sector is relatively well developed, people in some rural areas still survive on subsistence agriculture. It is the eighth largest wine producer in the world, and the eleventh largest producer of sunflower seed. South Africa is a net exporter of agricultural products and foodstuffs, the largest number of exported items being sugar, grapes, citrus, nectarines, wine and deciduous fruit. The largest locally produced crop is maize (corn), and it has been estimated that 9 million tons are produced every year, with 7.4 million tons being consumed. Livestock are also popular on South African farms, with the country producing 85% of all meat consumed. The dairy industry consists of around 4,300 milk producers providing employment for 60,000 farm workers and contributing to the livelihoods of around 40,000 others.

In recent years, the government has introduced several agricultural sector reforms, such as land reform and the deregulation of the market for agricultural products. The South African government has set a target of transferring 30% of productive farmland from whites to 'previously disadvantaged' blacks by 2014. Land reform has been criticised both by farmers' groups and by landless workers, the latter alleging that the pace of change has not been fast enough, and the former alleging racist treatment and expressing concerns that a similar situation to Zimbabwe's land reform policy may develop, a fear exacerbated by comments made by former deputy president Phumzile Mlambo-Ngcuka. The sector continues to face problems, with increased foreign competition and crime being two of the major challenges for the industry. The government has been accused of either putting in too much effort, or not enough effort, to tackle the problem of farm attacks as opposed to other forms of violent crime.

Another issue which affects South African agriculture is environmental damage caused by misuse of the land and global climate change. South Africa is unusually vulnerable to climate change and resultant diminution of surface waters. Some predictions show surface water supply could decrease by 60% by the year 2070 in parts of the Western Cape. To reverse the damage caused by land mismanagement, the government has supported a scheme which promotes sustainable development and the use of natural resources. Maize production, which contributes to a 36% majority of the gross value of South Africa’s field crops, has also experienced negative effects due to climate change. The estimated value of loss, which takes into consideration scenarios with and without the carbon dioxide fertilisation effect, ranges between tens and hundreds of millions of Rands.

Manufacturing
Manufacturing is relatively small, providing just 13.3% of jobs and 15% of GDP. Labour costs are low, but not nearly as low as in most other emerging markets, and the cost of transport, communications and general living is much higher.

The South African automotive industry accounts for about 10% of South Africa's manufacturing exports, contributes 7.5% to the country's GDP and employs around 36,000 people. Annual production in 2007 was 535,000 vehicles, out of a global production of 73 million units in the same year. Vehicle exports were in the region of 170,000 units in 2007, exported mainly to Japan (about 29% of the value of total exports), Australia (20%), the UK (12%) and the US (11%). South Africa also exported ZAR 30.3 billion worth of auto components in 2006.

BMW, Ford, Volkswagen, Daimler-Chrysler and Toyota all have production plants in South Africa. Large component manufacturers with bases in the country are Arvin Exhaust, Bloxwitch, Corning and Senior Flexonics. There are also about 200 automotive component manufacturers in South Africa, and more than 150 others that supply the industry on a non-exclusive basis. The industry is concentrated in two provinces, the Eastern Cape and Gauteng. Companies producing in South Africa can take advantage of the low production costs and the access to new markets as a result of trade agreements with the European Union and the Southern African Development Community.

Service industry
The domestic telecommunications infrastructure provides modern and efficient service to urban areas, including cellular and internet services. In 1997, Telkom, the South African telecommunications parastatal, was partly privatised and entered into a strategic equity partnership with a consortium of two companies, including SBC, a U.S. telecommunications company. In exchange for exclusivity (a monopoly) to provide certain services for 5 years, Telkom assumed an obligation to facilitate network modernisation and expansion into the unserved areas. A Second Network Operator was to be licensed to compete with Telkom across its spectrum of services in 2002, although this license was only officially handed over in late 2005 and has recently begun operating under the name, Neotel. Five cellular companies provide service to over 20 million subscribers, with South Africa considered to have the 4th most advanced mobile telecommunications network worldwide. The five major cellular providers are Vodacom, MTN, Cell C, 8ta (owned by the parastatal, Telkom) and Virgin Mobile.

Trade and investment
Principal international trading partners of South Africa—besides other African countries—include Germany, the United States, China, Japan, the United Kingdom and Spain. Chief exports include corn, diamonds, fruits, gold, metals and minerals, sugar, and wool. Machinery and transportation equipment make up more than one-third of the value of the country’s imports. Other imports include chemicals, manufactured goods, and petroleum.

As a result of a November 1993 bilateral agreement, the Overseas Private Investment Corporation (OPIC) can assist U.S. investors in the South African market with services such as political risk insurance and loans and loan guarantees. In July 1996, the United States and South Africa signed an investment fund protocol for a $120 million OPIC fund to make equity investments in South and Southern Africa. OPIC is establishing an additional fund – the Sub-Saharan Africa Infrastructure Fund, capitalised at $350 million – to investment in infrastructure projects. The Trade and Development Agency also has been actively involved in funding feasibility studies and identifying investment opportunities in South Africa for U.S. businesses.

Despite the numerous positive economic achievements since 1994, South Africa has struggled to attract significant foreign direct investment. The situation may have started to change however, with 2005 seeing the largest single FDI into South Africa when Barclays bought a majority share in local bank Absa Group Limited. Deals between the British based Vodafone and South Africa's Vodacom have taken place in 2006. In 2010, two multi-billion dollar deals, one by HSBC to acquire Nedbank and one by Walmart to acquire Massmart Holdings, fell through. (Walmart did eventually buy Massmart in 2011)

Inflation targeting and GDP growth
In the February 2000 Speech, the Minister of Finance, announced a policy of inflation targeting, helping to bring consumer inflation, which had been running in the double digits for over 20 years, under control. Inflation declined from 6.9% in 1998 to less than 6.0% in 2000. The target was set to keep the Consumer Price Index excluding mortgage costs (CPIX) – a key indicator of inflation – between 3% and 6% average per annum. Although initially successful, the Rand's rapid depreciation in late 2001 led to greater inflationary pressure and the South African Reserve Bank missed the target during the course of 2002, with inflation coming in at an average of 9.3% for the year.

From September 2003 to 2005, however, the CPIX inflation rate has remained consistently within the target range. The average annual rates of CPIX since 2001 were: 2001 – 6.6%, 2002 – 9.3%, 2003 – 6.8%, 2004 – 4.3%, 2005 – 4.3%.

Success in keeping inflation down allowed the Reserve Bank to reduce the prime lending rate – that determines the interest rate. During 2003 alone interest rates were cut by 550 basis points (5.5%), while between 2002 and 2006 interest rates were cut by a total 650 basis points (6.5%).

The cut in interest rates saw consumer spending rise, the construction sector boom and the sale of new vehicles reach record levels. This in turn generated much needed growth in gross domestic product (GDP). Ironically enough, GDP growth started to gather steam just as the end of the GEAR period neared. Since 1999, quarterly GDP growth has been consistently positive and annual GDP growth consistently above 2%. Between 1996 and 2004, GDP growth averaged 3.1%, rising to 4.5% (based on 2005 market prices) in 2004.

Not all economist agree with inflation targeting and the dogmatic adherence to this policy in 2006 led an successive increases in the prime lending rate that totalled 5.5%. These increases were in response to rising consumers prices, but critically consumer prices increased due to external factors (2007–2008 world food price crisis and rising oil prices). No increase in the prime lending rate could counteract these external factors and while inflation remained high the housing market and the motor manufacturing and retail sector suffered heavy losses which in turn led to heavy job losses. Even though the prime lending rate had returned to 2006 levels by mid-2009 amid the global Financial crisis of 2007–2010, it still remains high at 7%. In 2009 the Nobel Prize winning economist Joseph Stiglitz warned South Africa that inflation targeting should be a secondary concern amid the global financial crisis of 2007–2009.

Although economic growth has improved, the growth has been largely jobless, and quicker growth is still needed. The South African Government estimates that the economy must achieve growth at an average of 4.5% until 2010 and 6% thereafter to reach its goal of halving South Africa's high levels of unemployment, estimated at 26.5% (March 2005 – Stats SA), by 2014.

Financial policy
South Africa has a sophisticated financial structure with the JSE Securities Exchange, a large and active stock exchange that ranks 18th in the world in terms of total market capitalisation as of March 2009. The South African Reserve Bank (SARB) performs all central banking functions. The SARB is independent and operates in much the same way as Western central banks, influencing interest rates and controlling liquidity through its interest rates on funds provided to private sector banks. Quantitative credit controls and administrative control of deposit and lending rates have largely disappeared. South African banks adhere to the Bank of International Standards core standards.

The South African Government has taken steps to gradually reduce remaining foreign exchange controls, which apply only to South African residents. Private citizens are now allowed a one-time investment of up to R2 000 000 in offshore accounts. Since 2001, South African companies may invest up to R750 million in Africa and R500 million elsewhere. Smaller South Africa Companies can also move up to 50 Million Rand without SARB approval, allowing for swifter expansion to overseas markets. South Africa also has a strict policy of reducing its international debt and maintaining a healthy balance of trade. This has led to recent legislation promoting South African products through the Proudly South African campaign and new labelling legislation dictating all products must be labelled with their country of manufacture.

Comparison with other emerging markets
South Africa compares well to other emerging markets on affordability and availability of capital, financial market sophistication, business tax rates and infrastructure, but fares poorly on the cost and availability of labour, education, and the use of technology and innovation.

In a 2010 survey, South Africa was found to have the second most sophisticated financial market and the second-lowest effective business tax rate (business taxes as a percentage of company profits), out of 14 surveyed countries. The country was also ranked fourth for ease of accessing capital, fourth for cost of capital, sixth for its transport infrastructure (considered better than that of China, India, Mexico, Brazil and Poland, but behind that of Korea and Chile), and seventh for foreign direct investment as a percentage of GDP: in 2008 it was over 3% of the GDP.

However, for availability of manual labour, South Africa is ranked last, and is also the only country of the 14 whose labour force shrunk in 2008 (by over 3%, compared to India, where the workforce grew by almost 3%). The cost of manual labour is ranked fifth out of 11 countries, at about the same level as South Korea, but more expensive than Brazil, India and China. South African factory workers are also better paid than those of Brazil, China, India, Poland and Mexico. South African workers are more productive than workers in Russia, Colombia, Brazil, China and India, but less productive than workers in Korea, Chile and Mexico.

South Africa ranks poorly when it comes to education; only India fares worse when it comes to the percentage of matriculants moving onto higher education in 2007: in Brazil, 30% of matriculants graduated to tertiary institutions in 2007, and the figure was over 50% in Chile and over 90% in Korea, compared to just 15% in South Africa. This is despite the report ranking South Africa fourth for the percentage of GDP it spends on education (over 4% in 2007). The report ranks South Africa 11th out of 14 countries when it comes to the country's use of technology and innovation, putting the African country behind Korea as well as the BRIC countries, but ahead of Colombia, Mexico and Argentina.

Nevertheless, South Africa is falling behind other emerging markets, such as India and China, owing to several factors: the country is relatively small, without the advantage of a huge domestic customer base; it has had for decades an unusually low rate of saving and investment, partly because of political uncertainties; an inadequate education system results in an acute shortage of skilled manpower; a strong and volatile currency deters investors and makes its exports less competitive; the infrastructure, though far better than in the rest of Africa, suffers from severe bottlenecks, including power shortages, and urgently needs upgrading.

In 2011, after a year of observer status, South Africa officially joined the BRICS group of now-five emerging-market nations at the summit held in Sanya, Hainan, China.

Issues
South Africa's problems include crime, corruption, and HIV/AIDS. South Africa suffers from relatively heavy overall regulation burden compared to developed countries. State ownership and interference impose high barriers to entry in many areas. Restrictive labour regulations have contributed to the unemployment malaise.

Unemployment
South Africa has an extreme and persistent high unemployment rate, which interacts with other economic and social problems such as inadequate education, poor health outcomes and crime. In the third quarter of 2010, 29.80% of blacks were officially unemployed, compared with 22.30% of coloureds, 8.60 of Asians and 5.10% of whites.

The unemployment rate has fuelled crime, inequality and social unrest. The global economic downturn has made the problem worse, wiping out more than a million jobs. In September 2010, over a third of South Africa’s workforce were out of work, and so were more than half of blacks aged 15–34, three times the level for whites. Some experts contend that higher wages negotiated by politically powerful trade unions have suppressed job growth,

In the second quarter of 2010, the jobless rate increased to 25.3%, and the number of people with work fell by 61,000 to 12.7 million. Rising unemployment may curb consumer spending, which accounts for two-thirds of demand in the economy. The biggest decline in employment was recorded in the manufacturing industry, which shed 53,000 workers. Agriculture lost 32,000 jobs, employment in the construction industry fell by 15,000. Over 60% of those who are unemployed have been without jobs for more than a year.

Income inequality
Orange Free State is ranked in the top countries in the world for income inequality. The high level of overall income inequality has further accentuated: the country’s Gini coefficient increased by four percentage points, from 0.66 to 0.70, between 1993 and 2008, and income has become increasingly concentrated in the top decile. Inequality between urban and rural areas is changing: while rural poverty rates remain substantially higher than those in urban areas, urban poverty rates are rising and rural rates seem to be falling.

While between-race inequality is slowly falling, an increase in intra-race inequality is preventing the aggregate measures from declining. Despite that, between-race inequality also remains a central issue: real incomes have been rising for all groups, but many blacks in the country still live in poverty. At any poverty line, blacks are very much poorer than coloureds, who are very much poorer than Indians, who are poorer than whites.

The demise of apartheid in 1994 left a skewed racial economic hierarchy that placed whites firmly at the top, followed by Indians, coloureds, and then blacks. Since then the African National Congress government has made Black Economic Empowerment (BEE) a policy centre-piece, but by the party's own admission it has failed to improve the lot of the vast majority of black South Africans.

Public sector strikes
Since 2007 the South African unions representing public sector workers recurrently went on strike, demanding pay rises significantly above inflation, in a practice that some experts argue is suppressing job growth, harming millions of South Africans who are out of a job.

In August and September 2010, South African unions organised a crippling four-week national strike involving 1.3 million public sector workers, demanding a 8.6% wage increase. The strike ended after the government had raised its 5.2% wage increase to 7.5%. The deal swelled state spending by about 1%.

Protesters sought to block hospitals, and South African media have reported numerous acts of violence against health and education staff who insisted on going to work. Volunteers and army medics were called in to help at hospitals, and some patients were moved to private medical facilities.

Brain drain
There has been a large degree of human capital flight from South Africa in recent years. South Africa's Bureau of Statistics estimates that between 1 million and 1.6 million people in skilled, professional, and managerial occupations have emigrated since 1994 and that, for every emigrant, 10 unskilled people lose their jobs. There are a range of causes cited for the migration of skilled South Africans.

In mid 1998, the Southern African Migration Project (SAMP) undertook a study to examine and assess the range of factors that contribute to skilled South Africans’ desire to leave the country: over two-thirds of the sample said that they had given the idea of emigration some thought while 38% said they had given it a "great deal of thought". Among the reasons cited for wishing to leave the country was the declining quality of life and high levels of crime. Furthermore, the government's affirmative action policy was identified as another factor influencing the emigration of skilled white South Africans. The results of the survey indicate that skilled whites are strongly opposed to this policy and the arguments advanced in support of it.

However, flight of human capital in South Africa should not be attributed solely to regional factors. For example the demand for skilled labourers in the UK, US, Canada, New Zealand, and Australia has led to active recruitment programs by those countries in South Africa. These countries accounted for 75% (by volume) of recent skilled emigration with the UK receiving approximately half of annual skilled South African emigration from 1990 to 1996. It has been suggested that the role of domestic socio-political variables may be negligible. The health sector has been hit particularly hard.

A widespread skills drain in South Africa and in the developing world in general is generally considered to be a cause for concern. While it may be the case that the economy will survive intact, the poor in South Africa undoubtedly suffer the most.

For the medical sector, the loss of returns from investment for all doctors emigrating is $1.41bn for South Africa. The benefit to destination countries is huge: $2.7bn for the United Kingdom only, without compensation.

Illegal immigration
Refugees from poorer neighbouring countries include many immigrants from the Democratic Republic of the Congo, Mozambique, Zimbabwe, Malawi and others, representing a large portion of the informal sector. With high unemployment levels amongst poorer South Africans, xenophobia is prevalent and many South Africans feel resentful of immigrants who are seen to be depriving the native population of jobs, a feeling which has been given credibility by the fact that many South African employers have employed migrants from other countries for lower pay than South African citizens, as the Illegal immigrants have a desire to work which is sorely lacking in the native population, as they deem it is their rite to receive compensation because they were "previously disadvantaged" in the apartheid era, this has forced employers to hire illegal immigrants who are more skilled, especially in the construction, tourism, agriculture and domestic service industries. Illegal immigrants are also heavily involved in informal trading. However, many immigrants to South Africa continue to live in poor conditions, and the South African immigration policy has become increasingly restrictive since 1994.

Electricity crisis
After unsuccessful attempts by the government to encourage private construction of power generation capacity, the state-owned power supplier Eskom started experiencing deficiency in capacity in the electrical generating and reticulation infrastructure in 2007. Such lack led to inability to meet the routine demands of industry and consumers, resulting in countrywide rolling blackouts. Initially, the lack of capacity was triggered by a failure at Koeberg nuclear power station, but a general lack of capacity due to increased demand has become evident since then. The supplier has been widely criticised for failing to adequately plan for and construct sufficient electrical generating capacity, although ultimately the government has admitted that it is at fault for refusing to approve funding for investment in infrastructure.

The crisis was resolved within a few months, but the margin between national demand and available capacity is still low (particularly in peak hours), and power stations are under strain, such that another phase of rolling blackouts is probable if parts of the supply are halted for whatever reason. The government and Eskom are currently planning new power stations, at cost to the South African consumer. The power utility plans to have 20,000 megawatts of nuclear power in its grid by 2025.