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Can SA help usher in Africa's economic renaissance?

South Africa occupies a unique position on a continent that is undergoing a boom. The country is an economic bridge that pairs Western investors with burgeoning business opportunities in sub-Saharan Africa, and it also is a source of ideas for other developing countries eager to learn how a fledgling democracy can work in the wake of a trying past.

Knowledge@Wharton spoke with South Africa’s ambassador to the United States, Ebrahim Rasool, who discussed the economic strength of the region - where GDP is projected to grow by 5% to 6.5% over the next two years (3.5% to 4.5% for South Africa itself) - its economic challenges and the common cause South Africa shares with other countries. The interview was arranged by the Sub-Saharan African Chamber of Commerce.

An edited transcript of the conversation follows:

Knowledge@Wharton: We’re speaking today with Ebrahim Rasool, who is South Africa’s ambassador to the United States. Thank you for joining us.

Ebrahim Rasool: Thanks very much. It’s a great pleasure.

Knowledge@Wharton: You have been a member of Parliament and a special advisor to the state president of the republic. You have also been a premier of the Western Cape Province and have served in numerous top cabinet positions, including heading up finance, economic development, health and welfare. You have also been deeply involved in the anti-apartheid movement from high school on, and you have spent time in prison and under house arrest in connection with those activities. Quite a varied background. I want to start our discussion by speaking about the South African economy. It has performed fairly well post-global financial crisis, as has sub-Saharan Africa in general. I wonder if you could talk about why it has done so well, and what the outlook is for the next couple of years.

Rasool: The South African economy has performed far better than many of the OECD [Organisation for Economic Co-operation and Development] countries, largely because our banking system has been very robust and strong. It had a strong regulatory environment. It did not lend money it did not have. So we felt some of the aftershocks from having been fairly integrated into Western economies, but we did not go into free fall. Our growth rate came down from about 5% on average, to just about 3% or slightly below. It’s not where we want to be, but I think that [given] where we could have been, we are fairly happy that we have settled at about 3% and are rebuilding from that point. We did have problems with unemployment, especially as Western countries, including American corporations, liquidified their assets in places like South Africa in order to bring that liquid capital home. They laid off some people. So we had those after-shocks, but we did not suffer the main recession.

Knowledge@Wharton: It sounds as if your economy may have reacted the way that Canada’s reacted, where the banking system was not involved in as many of the kinds of [toxic] investments as, say, the European banks and the American banks. So they were somewhat isolated [from the banking collapse]. And there’s perhaps another parallel, which is that they were then well-positioned to benefit from a great demand for commodities – oil, but also minerals and so forth. Could you talk about that?

Rasool: We maintained a flow of exports of, in South Africa’s case, mineral production, agricultural products and a range of other products that we have, like automotive components and fairly sophisticated transactional issues that South Africa has slowly, but surely, built up since Apartheid. We found ourselves in a space where there was a greater demand for those kinds of goods. That has created a robust underpinning to our economy, and we’re happy to see that it has endured all the vicissitudes of the post-2007 period.

Knowledge@Wharton: The World Bank projections for economic growth for sub-Saharan Africa in general are very strong over the next two years. Somewhere between 5% and 6.5%, I believe, climbing as you get towards the end of that two-year period. For South Africa, it’s also pretty strong - I think 3.5% to 5% - but slightly down from sub-Saharan as a whole. Sub-Saharan Africa is growing on the back of oil and other commodities being sold largely to China, but [also to] other parts of Asia, which have of course done better [than the West] through the crisis. Do you see South Africa rising up to the level of growth that the sub-Saharan African region has reached in general? Does the country have many plans for attracting foreign direct investment and so forth?

Rasool: No, the difference between say South Africa and a lot of other countries in sub-Saharan Africa is that we have a far more diversified economy - a far more industrialised economy. We manufacture a lot more things with our raw materials, and that’s what we try to get to market and where we’re getting into great competition, because suddenly excess production in the United States [is creating] a glut. There’s a price differential that then takes place. So South Africa has to be at its competitive best with its products, whereas selling oil to the world economy, selling cash crops to the world economy, selling gas to the world economy can put a massive spike in your growth rates and give you a sense of a greater GDP. But I think that if we were to choose, South Africa would choose its diversified manufacturing base a lot more over just a single product like gold. We had before relied on that as a main export. We now are fairly happy that we’ve diversified off that base and are servicing a world economy. The difficulty is that in servicing that world economy with manufactured goods, you run into heavy competitive headwinds from your traditional industrial powers.

Knowledge@Wharton: [Especially] while global demand is still at a fairly low ebb, at least.

Rasool: We are seeing that this is probably the crux of the global economic problem - that aggregate demand is down. That is why South Africa’s trade and investment strategy is shifting far more towards Africa, because for the whole world, Africa represents a last frontier of a market in which there’s a burgeoning middle class. It’s requiring commodities. It’s a growing consumer market. And so South Africa is diversifying its traditional destinations for trade into Africa itself. That’s the advice that we are giving to the United States - to get out of a protectionist mindset, to get out of a closed economy mindset, to get out of a siege mentality, and to see the burgeoning African market as a salvation or the point at which it can kick-start the U.S. economy back into life. Three hundred million people are requiring both capital goods and white goods [a term used to describe major appliances]. That’s where the U.S. should be focusing its attention. That’s where it should be investing in to develop productive capacity. That’s why it should not even consider ending the African Growth and Opportunities Act, because the more liquidity it creates back in Africa, the more it fills the middle class’s demand for goods. That’s the way we believe you overcome the crux of the problem, which is a decline in aggregate demand in the world.

Knowledge@Wharton: People who aren’t paying close attention might be surprised to learn, for example, that in sub-Saharan Africa, there were 40 million cell phones sold last year. So talk about a burgeoning middle class. That’s a perfect measure right there.

Rasool: I think 40 million is just the power of the technological capability that Africa is beginning to harness.

Knowledge@Wharton: You have talked about this growing competitiveness that you’re facing. Have you struggled? Can you tell me a little bit about the recent history of the currency differential between the U.S. [dollar] and your currency, or with the euro, for example?

Rasool: I think that we have had a fairly comfortable relationship with the U.S. currency - the dollar, the rand exchange rate - when we were in the order of seven and a half rands to the dollar. The weakening of the dollar has strengthened the rand, and that has increased the competitive headwinds against us because suddenly we have to export things into the world economy at a stronger rand rate. Our competitive advantage was that we were not too strong and not too weak in relation to the dollar. So dollar weakness has been a problem for economies like South Africa. I think Australia faces it currently. It affects your exports, it affects the cost of your goods and, ultimately, your competitiveness. But it is not a problem of our making.

Knowledge@Wharton: Right. Brazil has [also] been very outspoken, complaining about that.

Rasool: Absolutely.

Knowledge@Wharton: As have some other countries. You were premier of the Western Cape Province [and], as I understand it, in large part responsible for luring in some US$1 billion in foreign direct investment. What was the strategy you had there that worked so well? Can that model be replicated in South Africa in general? And can it be replicated throughout sub-Saharan Africa?

Rasool: I think the strategy is very simple. You’ve got to pick winning sectors in your economy. And then you’ve got to understand what the competitive advantages are within those sectors that you’re selling, and who the buyers are. We found, for example, that in agriculture, the buyers were going to be your Arab economies, your Middle Eastern economies, where food security is a major issue. On the other hand, we realise that in the film sector, we were producing film with world class facilities. In Cape Town, we were producing films 40% cheaper than a standard Hollywood production. All we needed to do was to persuade a group of actors and producers and filmmakers to take the long flight to Cape Town. Once they reached it, they discovered scenery they have never before seen on film. So it’s really been about using winning sectors, identifying competitive advantages and then having a marketing strategy led by the premier or the governor himself in order to lend the credibility of government hand-holding through the process of investment.

There is also property development because we realised that property values in South Africa, and particularly in Cape Town, yielded 50% returns year on year on your property investment, as opposed to a global average of 6%. Even in a post-recession period, yields are between 12% and 15%. Now that’s not the story of Cape Town. That’s the story of Africa. The average rate of return on investments in Africa is 8%. The global average is 3%. And the U.S. average is 2%. We realise that in the United States, there’s a lot of capital waiting for better days. They [investors] don’t want to put it where the yield is a 2% return. There are cultural and other impediments in the U.S. mind that prevent them from crossing the Atlantic pond and finding 8% rates of return.

I think that between myself, between my hosts – the sub-Saharan African Chamber of Commerce – our duty is to build confidence because the business case is apparent. We simply have to build courage and hold hands and take U.S. investors over to Africa, particularly sub-Saharan Africa - match partnerships with them so that they share risks - and be able to help them identify the right kind of investment. That’s the approach that we’ve taken with public entities like the Export-Import Bank of the United States that is now investing heavily in building 100 locomotives for South Africa, in funding a conventional power station, energy station with our public utility, Eskom. US$6 billion are going into that. But the result is that, for example, on the rail building, the locomotives, they would have been General Electric plants that would have had to close, lay off workers, slow down production. Along comes Africa, puts in an order for 100 locomotives, the money is put forward by the U.S. Ex-Im Bank. Not only does that money return with interest; it keeps the U.S. industry kicking over. That’s the virtuous cycle. That’s the logic we’re using.

Knowledge@Wharton: Investors, of course, associate higher return with higher risk. So, what are the myths about risk in investing in South Africa or, let’s say, Africa? Which challenges or risks are real and how can they be managed?

Rasool: First, you’re dealing with fairly relative terms. Because we are dealing with fairly good returns in Africa, it’s not excessively high. It’s just that in the U.S., it’s so low. That’s the first thing that we’ve got to change in the perception. The second thing we must understand is – and you don’t have to believe me; read the McKinsey Report [“Lions on the move: The progress and potential of African economies”]. The McKinsey Report says whatever risks you have overcome to invest in Africa are mitigated within the first year’s return. So if you have to put in extra security because you’re not feeling safe, if you have to put in extra insurance because you’re not clear about it, if you have to put in extra banking shore-ups because you’re uncertain, whatever you’ve put in you more than get back in your first year of returns. That’s the important thing.

But political risk and risks of violence have been reduced enormously. If we were having this conversation four years ago, you would have been justified in showing me 16 conflict zones across Africa. You would be hard-pressed to fill up the fingers of one hand today. That’s because Africa is reaping the benefits of democracy. It understands that when you have democracy, the returns financially and economically are enormous. Secondly, in the past three years, you’ve had about 50 safe elections. We can point to the one in Kenya that went wrong. We can point to the one in the Cote d’Ivoire that went wrong. But the fact is that this was de rigueur four years ago. Today you’re speaking about safe elections, presidents retiring - in Ghana, the split in the election was 51/49. The incumbent president got 49. Retired. That’s de rigueur for Africa. So I think you’ve got a diminishing political risk. You’ve got democracy dividends coming up. But most importantly we are building durable institutions of democracy, the rule of law and financial and economic institutions that I think give predictability to certain situations. And that’s the reason that today you have over 20 home-grown, multinational corporations across Africa, with an average each of profit of about US$3 billion per anum. Now that is a partnership. Before, you would have had to come in on your own and take all the risk on the chin. Now you have over 20 multinationals with whom you can partner - share that risk, share the input cost. You don’t have to do it on your own. That is the story of Africa. It’s told by the McKinsey Report … it’s told by J.P. Morgan and many others.

Knowledge@Wharton: Those corporations that are out there and available for partnerships, many of them are actually right in South Africa. Is that correct?

Rasool: I think probably for the next decade, that is still going to be the case. That they’re going to use the strong platform that South Africa offers because it’s got an enduring democracy, it’s got a … rule of law [and] it’s got a global 24/7 banking system.

Knowledge@Wharton: It’s got the infrastructure.

Rasool: It’s got the massive infrastructure. It’s got the telecommunications connectivity. It’s got fibre-optic cables running from both sides of the country across Africa and [to] the world. So many countries will locate head officers in South Africa to take advantage of it, and from there, springboard into sub-Saharan Africa.

Knowledge@Wharton: So that’s a good argument for attracting investment. We’re all familiar with the BRIC countries – Brazil, Russia, India and China – the fast-growing large, emerging market countries. There’s a new group behind them sometimes called the CIVETS, which includes Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa - all very different, in different regions of the world and so forth, and considered up-and-comers. How would you say South Africa is different? And what advantages might South Africa offer over, say, Indonesia?

Rasool: I think it’s surprised many that South Africa took up membership in BRICS [which has become an international political organisation made up of Brazil, Russia, India, China and, more recently, South Africa was invited into the group] … because we didn’t share India’s, China’s and Brazil’s GDP and growth rates. But the emerging economies in BRICs understood that if they wanted to make any headway in the world, they needed a strong, reliable African partner. So not withstanding the differential in GDP growth, South Africa became a member of the BRICS.

With CIVETS, we are probably at GDP levels far more on par with other emerging economies … fairly average per capita incomes. We share that. We are trying to make the transition … to industrial economies - from extractive economies to knowledge-based economies. That’s what I think we have in common. I also think that countries in CIVETS fulfill very strategic geopolitical roles. Turkey, for example, is a bridge between Europe, Asia and the Middle East, and South Africa plays much the same kind of role as a fulcrum for sub-Saharan Africa. Indonesia plays that in Southeast Asia and so forth. So I think that there are ways in which we have more similarities. What I think we need is really to aggregate, because in the global world that we’re living in, national economies mean nothing. You’ve got to find partners that share basic characteristics with you if you are going to turn your sales to take the best advantage of opportunities and ward off the worst aspects of globalisation in the world today. There are also many cultural benefits that come from being in CIVETS. If you look at Turkey, Indonesia and South Africa, [they are all] struggling with how to manage democracy [and] also deal with legacies - in Turkey of heavy secularism, if not secular fundamentalism; in Indonesia, a history of coups, and [then there is] bloody South Africa’s history of apartheid. So you’re also dealing not only with economic globalisation, you’re dealing with the globalisation of identity as well - and identity politics. In the U.S., we should know what the dangers are of ignoring identity politics because you can get mired in roles that you think you can get out of very quickly if you don’t understand, fundamentally, that globalisation is a double-edged sword. I think that’s really why we find ourselves in those kinds of partnerships.

Knowledge@Wharton: There are some challenges that outsiders considering investments would look at. You’ve had a series of difficult strikes and labour issues. How would you address that? Someone is thinking of investing and they say, “Oh, but you have this labour strife” …. what would you tell them on that issue? And what other issues would you think would be important for them to understand specifically?

Rasool: With CIVETS, we have far more in common because we are all emerging democracies, unlike say, in BRICs, where not all of us share some democratic underpinnings, [and it’s more] a pure economic arrangement. In CIVETS, we’re trying to deal with the push and pull of democracy. You want to have protective economic growth. But you also need healthy mechanisms for sharing the countries’ resources in order not to have tensions between competing groups that create a new form of instability within emerging democracies, and so you may not face the coups that you used to face before, you may not face the civil wars that you used to face before. But social unrest and social inequality becomes the biggest danger, and the CIVETS countries would really have to put their minds together on how to manage it. What we would want to understand is that it’s been institutionalised. In South Africa, you’ve got a bargaining season. We know it opens in June and closes by August. That’s when all the unions line up to negotiate the next increases. It has its sound and fury, but at the end of the day, it’s all institutionalised. You can manage it. And the ability to manage and to build in the tensions in society in a constructive way is probably one of the biggest lessons that I think those emerging democracies will teach - even the established ones, because it will find anti-social forms in your established democracies like Britain.

Suddenly out of the blue, you have these riots. The British government is taken by surprise because it has taken for granted many aspects of its democracy and has not kept its finger on the pulse of social inequality growing and identity inequality growing within British societies. So they will now have to find ways to institutionalise it rather than be caught by surprise. And I think this is what Africa is trying to do, in much the same way that we’ve tried to solve the Kenya problem. How do you deal with competing electoral claims? And I think that [one sees this in] the problems of North Africa and the Middle East, where people want democracy and are shunning the undesirable elements of fundamentalism but also are saying that the current regimes are unsustainable. I think it’s [about] how we respond to these tensions and how we institutionalise them but give them vent.

Knowledge@Wharton: Would you also explain how the broad-based Black Economic Empowerment effort is progressing?

Rasool: You know, you can discuss economic empowerment or empowerment in very technical terms, in legal terms or in moral terms. I’d want to put it a lot more scientifically. It’s like osmosis, where you have to have a movement of matter from areas of high concentration to areas of low concentration until the organism is in equilibrium. The objective is to find equilibrium in your society. You cannot sustain in South Africa high concentration of wealth in a minority that is colour-coded and high concentrations of poverty in a majority that is colour-coded. You’ve got to create active mechanisms for osmosis to take place in order to build equilibrium into South African society. Now if we understand that, then everything else is a matter of methodology. Black economic empowerment is simply a matter of saying, “How do we take mining and ward off the clamor for nationalisation by getting greater ownership transferred to black people?” When we speak about greater ownership, we’re not speaking about 50%. We’re not speaking about 100%. We’re speaking about 26%. When we speak about management, we speak about 26%. When we speak about employment equity, we’re speaking about using national demographics. The point I’m making is that these are mechanisms to create the flow of osmosis in order to bring equilibrium.

Now we understand, therefore, that we can’t make our problem the U.S. companies’ problem. So we create the exceptions to the rule that your partners who are South African would have to comply with. But we can’t simply say, “Let’s put a brake on, for example, inward investment to South Africa by making onerous osmotic processes their problem as well.” I think that we’re getting the debate out of ideological terrain and into practical terrain. Even investors who come from countries like the United States later understand that the stability of the company depends on how you spread ownership and how you create participation in the structures of that company.

Knowledge@Wharton: One last question. Your country hosted the World Cup in 2010. What were the permanent benefits of that, and what were some of the lessons you learned?

Rasool: You know, sometimes when you have a set of competing priorities – a school system that isn’t optimum, a health system that is screaming, a road system that is creaking, public servants that want more pay, infrastructure that is not on par, railway systems that need to be built and so forth – you actually need a focus. For South Africa, more than the romance of the World Cup was that it provided us with a focus and with a guillotine - it had to happen by 2010. So everyone looks at the stadiums. The truth of the matter is, only two new stadiums were built. The other eight were upgraded. But most importantly, it said that if you wanted a rapid rail system, you’ve got to get it done by 2010. Today, we have a rapid rail system in the most populous part of South Africa. If you wanted to re-do your road systems and get them wider, get them re-tarred and get them longer and connected to the rest of Africa, 2010 was the deadline. If you wanted your airports modernised, 2010 was the deadline. All our airports are modernised today and they look better than Dallas International. And if you wanted your ports upgraded in order to bring in passenger liners, which would act as floating hotels, 2010 was the deadline. If you wanted to bring your hotel infrastructure from the 20th century into the 21st century, 2010 was the deadline.

We have achieved all of that. Those are permanent gains. But most importantly, on a continent which to the rest of the world - they can’t distinguish Zimbabwe from South Africa, Somalia from Congo, Kenya from Egypt - it was a geography lesson. It was a mind-blowing experience. The most visitors who came were citizens of the United States. They spent the most. They stayed the longest. And they enjoyed themselves thoroughly. They came with a low threshold - how to beat off people who will mug you, how to ward off elephants in the road, etcetera. They came with all of those misconceptions in their head. They had the most wonderful experience.

Knowledge@Wharton: They’re not even the world’s biggest soccer fans.

Rasool: They’re not. But their team did well. We were torn in South Africa between – they played Ghana in the knock-out rounds, because our instinct was that an African team needed to go ahead…. It was such a pity when the U.S. was eliminated because then the Visa indicators of spend in the country began to drop. So the romance of an African team going forward versus the money spent by the U.S. fans was a tremendous dilemma. But I think it was a mind-opening experience for people.

Knowledge@Wharton: Thank you very much for joining us today.

Rasool: Thanks very much to you.

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