Nelson Mandela's election victory in 1994 allowed South Africa to emerge from decades of political and economic isolation. A "middle income" developing country, it is the richest nation on the continent, with a Gross Domestic Product almost half that of total Sub-Saharan Africa's GDP. Its economy exhibits a paradoxical dichotomy between a highly-developed formal sector and an informal sector characteristic of third world countries. Growth has been lukewarm in recent years, but other measures of performance have elicited praise from the World Bank and the IMF. Mandela's successor, Thabo Mbeki, has continued to promote investor-friendly policies. Considered alone, these policies would indeed present a convivial environment for foreign business. But the country is beset with intractable social problems that have deterred investors. While the market is inviting, caution should be exercised in market entry.

Radicals to Pragmatists

Despite the anti-socialist rhetoric of Apartheid governments, Mandela's "Government of National Unity" (GNU) inherited what might best be described as a neo-mercantilist economy, structured to shield the country as much as possible from the outside world. This system was based on high tariffs and export subsidies, strict foreign exchange controls, extensive state intervention, and import substitution. A surprising 50 percent of South African assets were state-owned under the Apartheid regime (1931-1994). The new stewards of South Africa's economy under Nelson Mandela were members of the African National Congress (ANC). In the transition period of the early 1990s, the ANC had undergone a significant ideological shift away from the socialist imperative of the "liberation" years. While the initial plan of action under Mandela's GNU featured programs to provide housing and improve services, education, and health care, simultaneous efforts were begun to restructure the economy toward export-led growth and to institute fiscal and monetary constraints. In June 1996, the GNU implemented a market-driven strategy it termed "Growth, Employment, and Redistribution" (GEAR) which has received international praise.

Unfortunately, the GDP target of 6 percent annual growth by the year 2000 has proven overly ambitious. The emerging market crisis of the late 1990s dampened South African growth and thwarted hopes of ameliorating the country's staggering unemployment rate, which remains at approximately 30 percent. The country reports that GDP growth for 2001 measured 3.0 percent. Growth of 3.4 percent is projected for 2002. No matter what their ambitious goal was, these are not bad numbers in the current circumstances.

Cabinet appointees whose biographies could send chills down the spines of business interests have earned their respect in the nearly eight years of post-Apartheid rule. Alec Erwin, Deputy Minister of Finance in Mandela's cabinet, and Minister of Trade and Industry since 1996, is a former trade unionist and long-time member of the South African Communist Party (SACP). A clever and erudite academic, he has engineered steep reductions in tariff rates and led efforts to establish a free trade area with the country's partners in the Southern African Development Community. (SADC member states include Angola, Botswana, Democratic Republic of Congo, Lesotho, Malawi, Mauritius, Mozambique, Namibia, Seychelles, South Africa, Swaziland, Tanzania, Zambia, and Zimbabwe). Erwin's crowning achievement is a free trade deal negotiated with the European Union. Some industries, highly protected in the Apartheid economy, have been unable to adapt to international exposure.

Foreign exchange controls, introduced in 1961 to stem capital flight, have been liberalized, allowing the South African Rand to float against other currencies. It is now among the most heavily traded emerging market currencies, though its value plunged against most major currencies in the final months of 2001. Decontrol of foreign exchange is one of many institutional reforms initiated by Trevor Manuel, Finance Minister under both the Mandela and Mbeki administrations. As head of the ANC's Department of Economic Planning, it was chiefly Manuel who managed to subordinate its ideology to the practical realities of the global economy. Under his care, government deficits and the national debt have dropped substantially as a share of GDP. These accomplishments have earned him accolades from both foreign and domestic investors.

Privatization of state assets has generally adhered to a parastatal (government/private sector) model, though some full privatizations have been conducted. Majority interest is often retained by the state, while equity is sold to "strategic equity partners." These private sector managers are given a great deal of operational freedom. Recent partial privatizations have included Telkom, the Airports Company, and South African Airways, all with foreign participation. Future privatizations will involve Transnet and Eskom, among other parastatals. Besides the macro-goal of facilitating growth, the government hopes privatization will promote skills transfer and fulfill the social goal of extending ownership to employees and disadvantaged groups.

Investors Sought

From early on, officials within the GNU realized that South Africa lacks the domestic savings needed to finance investment and create jobs. Mandela and Mbeki have both made attracting foreign investment the key objective of economic policy; both have pursued this goal in letter as well as spirit. Even before reform legislation was passed, Mandela moved to squelch resurgent union militancy by warning activists that mass action would undermine stability and economic growth. In similar fashion, Mbeki and his lieutenants, Erwin and Manuel, have appeared before public events to dress down their former colleagues and comrades within the powerful unions.

In his first "State of the Nation" speech in July 1999, President Mbeki announced the creation of the International Investment Council composed of eminent international business leaders whose advice would help South Africa to position itself as an attractive destination for foreign investment. George Soros and Percy Barnevik are among Mbeki's appointees to the Council.

Concrete steps to facilitate foreign investment have included eliminating the discriminatory non-resident shareholders' tax; allowing foreign investors 100 percent ownership; reducing the corporate tax rate on earnings to 30 percent; and halving the secondary tax on corporate dividends. In 1995, as part of the long-term exchange reform policy, most controls were removed on non-residents. With few exceptions, there are no controls on repatriation of investment earnings. Foreign-controlled firms are subject to domestic borrowing restrictions, but they can rely on a financial system as sophisticated as those found in New York or Zurich.

Companies locating production in South Africa will benefit from lower labor costs than those found in countries of the industrialized West, though they can also expect lower skill levels and productivity. While the Apartheid educational system left black South Africans ill-prepared for high skill jobs, companies can benefit from the transport infrastructure developed during the period. The country's well-developed road and rail networks provide links to the interior of Sub-Saharan Africa, thus making South Africa a viable export platform.

Foreign companies may want to consider investing within one of the special "investment corridors" established by Pretoria to promote development in specific regions. Seven such initiatives are underway. They feature government investment in infrastructure to relieve bottlenecks, the creation of industrial development zones, and private participation in the provision of local public services.

Bedeviling Social Problems

For all the commitment of post-Apartheid administrations to open markets, fiscal discipline, privatization, and restructuring, capital flows into South Africa have remained below expectations. The country is plagued by a high crime rate, corruption, and an epidemic of HIV/AIDS, all of which have impacted growth and undermined investment. Criminal activity, sometimes violent, occurs on a routine basis. Under Apartheid, crime within the black townships was considered little more than a nuisance by police authorities. In post-Apartheid South Africa, township crime bosses have used the new freedom to target middle-class and affluent suburbs, as well as commercial districts, where bank holdups, burglaries, cash heists and carjackings are de rigueur. Some of South Africa's most prestigious companies have left Johannesburg for the new financial and commercial metropolis of Sandton, located a few kilometers north. Meanwhile, President Mbeki has announced increased funding and expanded powers for police, while publicly admonishing those of his countrymen engaged in criminality.

Disclosures of corruption emerge on a nearly weekly basis - not only among local government officials, but also at the national level. Over the past two years, several corruption scandals have shaken the South African government. A controversial R 43 billion (approx. US $4.11 billion) arms deal points to a lucrative funneling of contracts to European companies with which some ANC government officials and their families have personal interests. The fact that such allegations are being acknowledged and investigated is a plus for Mbeki, but the perception of a lack of transparency and integrity in public institutions is hardly conducive to increased foreign investment.

A tragic phenomenon in itself, the HIV/AIDS crisis has significant implications for business and the economy. About 13 percent of South Africa's workforce carries the HIV virus, and the United Nations expects that number to double by 2006. What's more, the World Health Organization estimates that the disease diminishes the country's GDP by 0.3 to 0.4 percent per year. In the past, Mbeki has publicly questioned the link between HIV and AIDS and, in an atavistic tone, even accused the medical community of succumbing to CIA propaganda meant to increase the sale of American pharmaceuticals.

Conclusion

Notwithstanding these problems, many foreign companies have found ample reason to invest in South Africa. Excellent potential exists for investors and exporters in agricultural equipment, automobiles, cellular phones, air pollution and waste management, computer software and services, electronic commerce, mining, and security and safety equipment sectors, among others. BMW, Caltex, Daimler-Chrysler, Dow Chemical, Mercedes-Benz, Nike, SBC Communications, Siemens AG, and Volkswagen are among companies that have made substantial capital commitments. Even upmarket firms like Fashion Fair, an African-American cosmetics firm, are exporting to South African customers.

An investor seeking a portal into the continent of Africa would be remiss to ignore the Republic of South Africa. A market of 40 million consumers, possessing a sound legal environment, and served by a first-world infrastructure and financial system, is a market worth investigating. Add South Africa's excellent position as a springboard to the rest of Sub-Saharan Africa, and the prospects multiply. Nevertheless, any overseas venture presents its own set of issues involving contractual relationships, legislative compliance, and contingent liabilities. A firm specializing in due diligence and risk analysis can provide a crucial measure of safety while your business pursues opportunities in the "Rainbow Nation."

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