Why is South Africa's Economy the Slowest in the Sub-Saharan Region?

The South African economy is not keeping up with the rest of sub-Saharan Africa, one of the world’s fastest-growing regions.

The country faces trouble on two fronts. At home, high unemployment, low productivity and increasing competition for exports have slowed down growth. This isn’t helped by a global slowdown of emerging markets in general, and the looming decision of the U.S. Federal Reserve to raise interest rates.

“The less robust growth in South Africa is partly a function of it being much more integrated into the world economy, through trade and financial linkages,” said Francois Groepe, deputy governor of the South African Reserve Bank, in an October speech.

The IMF predicts that the South African economy will grow by 2 percent this year, and just 2.5 percent in 2014, while the average rate for sub-Saharan countries is hovering around 5 percent.

The relatively small South African economy depends heavily on exports to sustain growth. But South African companies are having trouble competing for exports to its high-growth sub-Saharan neighbors because of cheaper Chinese products flooding the region.

The South Africa Reserve Bank announced last week that the country’s current account deficit widened to 6.8 percent of its gross domestic product in the third quarter, the biggest gap in more than five years.

“Exports were constrained by lusterless export markets and domestic supply-side constraints,” the report reads.

Monetary policy in the country has been stable, but there are still risks ahead. The central bank has lowered its policy rate since the beginning of the financial crisis, and the South African Reserve Bank has kept interest rates fairly low.

“We cannot predict how the market may react to the exit from unconventional monetary policy when it eventually arrives, though we have had perhaps a snippet of this,” said Groepe.

But as the U.S. Fed plans to taper its bond-buying program and raise interest rates, South Africa, like other emerging economies that have previously seen so much growth based on low U.S. interest rates, has a lot to consider.

“What we do know is that there are substantial risks that such an exit could cause significant negative spillovers for emerging market economies,” Groepe said.

To avoid negative effects, emerging countries should reduce their exposure to headwinds as much as possible by lowering their deficits. This could be a problem since South Africa spends most of its debt on large-scale social programs.

This kind of spending is so high because South Africa faces a unique set of domestic problems that have less to do with global trends and more to do with the country’s unique socioeconomic background.

“We cannot be under the illusion that the poor performance of domestic financial markets since the beginning of this year is a mere consequence of a less favorable international backdrop,” said Daniel Mminele, deputy governor of the South African Reserve Bank, in a speech last week.

South African productivity simply can’t compete with global giants such as Germany or the United States. Plus, unions have large influence in a country constantly dealing with worker strikes and demands for higher wages.

Unemployment reached more than 24 percent this year, according to the IMF, with more than 50 percent youth unemployment.

“At these growth rates, the economy creates jobs, but not enough for the growing labor force and those currently without work,” reads a recent IMF report.

The report recommends that South Africa continue to implement its “National Development Plan,” which involves education improvements, worker training, a reduction in transport costs, and the enhancement of competition in product markets. These programs require a great deal of public spending, and could make the country more susceptible to tapering shocks. But the IMF reports that these efforts are necessary to improve the country’s economy in the long term.