AFRICANGLOBE – This week, Africa has been gripped by the horrifying images coming out of South Africa, in which thousands of foreigners have been hounded out of their homes and businesses by xenophobic mobs and forced to take refuge in police stations and camps.
The common narrative in trying to explain — or at least understand — these attacks, is that foreigners (mostly Africans) have flooded South Africa, taking away the jobs and opportunities of the locals.
South Africa’s political, economic and social problems are many, complex and layered, and it is futile trying to outline them all in one article.
But there is something in the structure of the South African economy that partly explains its shocking inequality and crime, sluggish growth, and why the African National Congress government has struggled to deliver on its promises of prosperity; hence the scapegoating of “foreign” Africans.
It starts not in the spaza shops of the Durban or Johannesburg, but on the floor of the Johannesburg Stock Exchange.
A few weeks ago, reports out of South Africa indicated that the number of initial public offerings on the stockmarket in the first quarter of 2015 accelerated to levels not seen since the global financial crisis, as the benchmark index rose to a record and companies took advantage of the rally — even as the broader economy is in the doldrums.
In 2014, there were two IPOs in the first quarter; in 2013 just one; and none in 2012. It seems paradoxical that the stockmarket would be doing so well, considering the rest of the economy is almost stagnating, with growth rates now less than 2 per cent and unemployment almost 25 per cent.
While the rand has declined 2.4 per cent against the dollar this year, the stockmarket climbed 6.1 per cent and touched a record in February. In effect, the JSE bears little resemblance to the economy.
But, far from being an aberration, the disconnect between what happens on the JSE and in the wider South African economy is the key in understanding the country’s structural problems.
Mining is considered the backbone of South Africa’s economy, and, historically, gold and diamond mines were central in making the country the richest on the African continent. But today, the South African economy is driven by its financial sector, which, relative to the economy at large, is one of the largest in the world.
Data from the World Bank shows that South Africa has the third-biggest market capitalisation, relative to GDP (160 per cent) second only to Hong Kong and Switzerland.
Market capitalisation of the JSE is nearly three times the country’s GDP. It is curious that a country of South Africa’s size and population could have so much capital concentrated in its financial markets.
The reason for this is rooted in the apartheid era, where mining barons would not easily stash their profits outside the country, and so ended up accumulating it within the economy, particularly in the stockmarkets.
The effect is a Dutch disease of sorts, where money multiplies itself endlessly on the stockmarkets, therefore, there is little incentive to direct it into the productive economy — resulting in “jobless growth” and outsized gains for investors in the financial markets, who can comfortably live off interest accrued from their financial assets and do not necessarily have to build anything in the labour-absorbing economy in order to create wealth.
The end of apartheid meant even better fortunes for the financial sector. Since 1994, South Africa’s already large and sophisticated financial services sector has grown from 15.3 per cent of GDP to 21.4 per cent of GDP in 2009.
The informal sector accounts for just 15 per cent of jobs, compared with 70-80 per cent in East Africa.
The reason, again, goes back to the white-dominated economy that apartheid created, where the majority Black population was only valuable for their labour, so any entrepreneurial self-sufficiency in the Black community was stifled, in order to channel them into the wage economy.
The ANC came to power with promises of redistribution and social justice, but big businesses won the day. The administration has largely been faithful to the inflation-targeting, economic liberalisation model, with a few (often politically-connected) Blacks allocated rents in the form of the Black Economic Empowerment Programme, but the overall structure has remained intact.
The over-formalisation presents a situation where a mama mboga (vegetable retailer) is expected to a get a food handling inspection licence, pay corporate tax, pay the official minimum wage and provide health insurance for her assistant before being allowed to open a shop.
There is no space in such an economy for boda boda riders or mitumba (second-hand clothes) sellers, and so, no wriggle room to quickly accommodate the mostly Black young people coming of age every year.
Over-financialisation means there is little pressure to create formal sector jobs, and over-formalisation means there is little ability to create informal sector jobs.
It means that the Black person has very narrow options if they want to make a living — and in comes xenophobia and crime.
By: Christine Mungai