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SOUTH AFRICA: Globalization Brings South Africa Gains -- and Pains

by David WesselThe Wall Street Journal
June 21st, 2007

South Africa is a miracle: Political power passed 13 years ago from a small white minority to a black majority without a bloodbath.

It didn't become Zimbabwe or Yugoslavia. "We went from being one of the ugliest societies in the world to the most hopeful," says Bobby Godsell, chief executive of gold producer AngloGold Ashanti. South Africa, he says with a touch of patriotic hyperbole, is becoming "a normal society with normal problems."

South Africa long will be regarded as a triumph of leadership. But it is also an economic experiment: Can a free-market, developing-country democracy -- blessed with gold, platinum, English speakers and an inspirational story, but plagued by AIDS, violent crime, poverty and an inconvenient location -- deliver a better life for the bulk of its people in an era of globalization?

During apartheid, sanctions created "an unsustainable economy that could only compete against itself," says Philip Hourquebie, chief executive of Ernst & Young in South Africa.

When the African National Congress took over in 1994, the failures of Soviet communism and African socialism were evident, but today's backlash against globalization hadn't yet arrived.

ANC leaders chucked decades of rhetoric and opened the South African economy to the rest of the world. They balanced the government budget, didn't expropriate mines and lowered tariffs. Joel Netshitenzhe, head of policy coordination in the president's office, calls it "a self-imposed structural-adjustment program," an insider's boast that South Africa didn't wait for the International Monetary Fund to force it to sober up.

South Africa is playing by the rules of the new global economy. If it fails to improve living standards for most of its citizens, the lesson would be ominous.

Early returns are promising. The economy has been growing at 5% annually for three years -- not Asian-style growth, but far faster than in the past. Private economists think the economy can sustain close to a 5% growth rate despite obvious capacity constraints, such as a recent shortage of carbon dioxide to put the fizz in soda and beer. With a population growing at 1% a year, that's enough to deliver a better life for the typical South African -- if prosperity is widely shared.

The government is meeting its goal of 500,000 new jobs a year and is hopeful it can halve poverty from today's 26% by 2014. South Africa has First World shopping malls, but 30% of South Africans don't even have pit latrines; they use buckets.

Is globalization -- the integration of South Africa into an increasingly integrated world economy -- a help or hindrance to the country's aspirations? The answer is: Yes. Globalization is a double-edged sword.

China's and India's thirst for commodities has sharply raised the prices South Africa gets for its minerals (plus), but also has raised the prices it pays for imported corn and oil (minus). Global financial markets are helping to finance an investment boom (plus) and stoke a big home-grown banking and money-management industry (plus). But foreign money is flowing into the stock markets and lending, not factories, and that poses a risk the money will flee when interest rates rise elsewhere (potential minus) and contribute to volatility in the country's currency (potential minus).

The growing mobility of people is drawing skilled workers, even luring back some expats (plus). But it also draws unskilled African immigrants to add to the existing surfeit of low-wage labor (minus) and creates a brain drain of disgruntled South African nurses, teachers and engineers to Europe and Australia (minus.)

Lowering barriers to trade brings the usual pluses -- imports for consumers, export markets for producers, a spur to the efficiency of flabby businesses. But here, too, globalization brings challenges.

At first glance, the BMW plant outside Johannesburg is a paean to globalization. The robots are as modern as in BMW's German plants. Assembly-line workers, nearly all black, are unionized and well-paid by South African standards. Computer printouts clipped to each of the Series-3 sedans tells where the car is headed: Japan, Australia, the U.S. Last year, South Africa exported 14,000 BMWs to the U.S. In all, 80% of cars coming off this assembly line are exported.

But the plant produces one car every four minutes; BMW's bigger German plants produce one a minute. Labor costs are only 30% of the cost of the car so the savings from wages one-fifth German levels go only so far. A chart on the shop wall reveals that only half the South African-made BMWs come off the line without flaws that need to be fixed; in the best German factory making the same car it's 80%.

Employment at the plant is falling as robots replace workers (good for workers getting trained to keep ahead of the machines; bad for those who will never get hired.) And the enterprise is viable only because of a government subsidy: a complex formula allows BMW to avoid tariffs on importing other models in exchange for every car it exports. The government sees this as temporary expedient until productivity climbs to world levels; the plant's German technical director sees it as vital for the foreseeable future.

Here's the rub. South Africa occupies a middle ground in the global economy. The haves are doing well -- both whites and the new black working class and upper crust. But the same global economic forces that make them winners pose a challenge to widening the winner's circle.

South Africa can't create enough low-skilled jobs to employ its population. Its wages are too high to compete with China or India as a magnet for low-wage, low-skilled manufacturing, but South African workers see how well their best-off countrymen are doing and are pushing for higher wages.

The country's world-class companies can compete -- in finance, engineering, construction, synthetic fuels -- but they demand an increasingly educated and skilled work force. Yet, the country's education system is dysfunctional, and changing too slowly for the swift currents of the global economy.

And, as Mr. Netshitenzhe cautions: "The 13% [who are still poor] in 2014 will be angrier than today's 26%. They will be more impatient."

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