FORMER SOUTH African President Nelson Mandela, center, lifts the World Cup trophy after it was nnounced that South Africa will host the 2010 World Cup. (Photograph by Steffan Schmidt/AP Photo.)

The AIDS Crisis
Perhaps the country’s most serious long-term economic challenge is how to deal with a labor force that is literally dying on the workplace floor from AIDS. About 11 percent of the population is HIV positive, and the figure in the hardest-hit regions reaches 25 percent. If left unchecked, AIDS could hollow out the economically active portion of the population, as it is doing in Zambia, Botswana and Zimbabwe. Early in his presidency, Mbeki refused to acknowledge the scope of the problem. Recently, he has been more forthcoming, and the government is now working to roll out antiretroviral drugs across the country.

Perhaps the country’s most serious long-term economic challenge is how to deal with a labor force that is literally dying on the workplace floor from AIDS.

There are a number of South African initiatives to address the crisis, many of which benefit from overseas supporters. These measures are a step in the right direction, but the fight against AIDS will continue to be handicapped until the government makes it a national priority. One example to follow in the fight against the epidemic is that of Uganda, which has seen a decline in HIV infection since 1995, when it launched, in combination with various other efforts, a prevention initiative known as the ABC plan (abstinence, being faithful to one partner and condom use).

The second most precarious situation for foreign investors is the awkward manner in which the country has begun its land redistribution plan. The Restitution of Land Rights Act has allowed black South Africans whose families lost their property after June 19, 1913, when the first race-based laws took effect, to lodge claims for restitution. The practice is well and good as long as the government carefully manages it. However, the government has not balanced the redistribution plan with a similar commitment to the protection of private property rights, the absence of which is bedeviling so many emerging and former communist economies. Nor does Mbeki’s administration seem to have fully recognized the risk it is running in neglecting to send clear signals about its position on this policy to the foreign investment community.

Indeed, foreigners who own property in South Africa are wary of growing resentment due to rising property prices caused by their purchase of vacation homes in the country’s most scenic areas. They fear that, in the event the land restitution program is unsuccessful, they might become scapegoats and bear the brunt of any retaliation.

Many in industry and government have realized the issue is crucial. Clem Sunter, a senior director of the U.K. and South African mining giant Anglo American, says, “South Africa will have little alternative but to develop a land ownership model…more in keeping with the industry model.” He suggests, “One way to do this would be to turn farms into companies, with shares being spread variously among employees, new black shareholding consortiums and the original farm owners.” Regardless of what model the government chooses to follow, it is imperative that the process is just, and that it does not unduly jeopardize the fragile agricultural economy.

Growing Pains
The government is acutely aware that it needs to promote growth. Trevor Manual, the minister of finance, wants to raise the rate of investment and halve the unemployment rate. The ministry has not fully addressed how it intends to accomplish this. It could spend more and tax less. It could also change the tax policies to encourage growth. For example, a more expansionary fiscal policy with less dependence on income tax, especially corporate income tax, would help.

Foreigners who own property in South Africa are wary of growing resentment due to rising property prices caused by their purchase of vacation homes in the country’s most scenic areas.

As in many first-world countries, there will have to be an effort to create more jobs, the majority of which need to be in the micro-, small- and medium-sized enterprise sectors. The government will also need to support sustained growth of established small and midsized enterprises, which have already survived for some time in the market, rather than squandering resources on funding untested start-ups.

The dire unemployment situation raises the risk that, in an effort to appease the masses, Mbeki may be tempted to put a brake on privatizations, because they often lead to the loss of jobs. Indeed, a number of ministers, along with Mbeki himself, have indulged in antimarket and antiforeigner rhetoric. While their frustration with the complexities of governance, tepid economic growth and lack of FDI may be understandable, these sentiments will repel foreign investors.

South Africa will be seeking to boost its transportation and power infrastructure. As a consequence of a poorly managed rail system, South African roads have been overstressed, and there is a significant need to rebuild and expand them. Meanwhile, South Africa will reach its power generation capacity in 2007, and will no longer be able to maintain low power prices. At that point, there will be a need for substantial investment in generating capacity. It is likely that the government will look toward private-sector partnerships to finance these investments.

Housing is another trial for the government. The rapidly emerging middle class is creating demand for new housing and low-rise office development. Construction corporations are likely to benefit from a steady increase in demand through the medium term and into the preparation phase for the World Cup.

Fiscal Fortitude
Despite these formidable long-term challenges, there is good news. Much is going right in South Africa today. Mbeki’s African National Congress, having secured 69.68 percent of the votes in the 2004 national election, is stable and may well be the most democratic emerging-market government today.

Its accomplishments in the past decade are astonishing and symptomatic of enormous adaptive potential. In what is surely one of the steepest political learning curves in history, the nation has recovered from the near financial meltdown of the apartheid era, entrenched a democratic constitution, reduced inflation to within reach of the officially targeted 3 percent to 6 percent range, and reduced the sovereign risk premium from approximately 300 basis points in mid-2002 to a less than 100 basis points.

Following its plunge in late 2001, the rand has recovered from its sordid reputation as the world’s worst-performing currency, and it has a stable long-term outlook. Moreover, the economy has grown consistently. Though GDP growth needs to reach 6 percent to cut a significant swath in unemployment, it has inexorably climbed from the 2 percent to 3 percent range of the past few years to a projected 3.5 percent in 2004 and 4 percent in 2005.

South African companies have recently begun retooling, which bodes well for future competitiveness, and there has been a surge in private investment spending. Both are likely indicators of renewed confidence in the political and economic course of the nation, and will send a positive signal to candidate foreign investors.

The prospects of several business sectors are improving. The government has announced that it will invest 1 percent of GDP in the biotechnology sector to spur its growth. Foreign banks are likely to follow the example of Standard Chartered’s expansion into South Africa last year, now that the banking sector has consolidated into four major players that enjoy relatively high profit margins. Foreign companies are eyeing growth opportunities in the retail and telecom sectors, both of which are pushing vigorously into countries to the north, as far as the Sahara, and will need funding to support this expansion.

The great hope of all investors, however, is in the tourism industry, which has become the fastest-growing sector, expanding at more than 4 percent last year. It has overtaken mining as the country’s largest foreign currency earner. To accommodate surges in tourism from Europe and Asia, the Durban area has completed the first phase of a new waterfront development, and South African safaris are becoming a destination of choice for travelers wishing to enjoy first-class amenities with their African bush experience.

The market for retirement communities and services is another growth area. The moderate climate, stunning geography, relatively low cost of real estate and significantly lower global costs of private medical services will combine to make South Africa a hugely attractive magnet for retirees, who are pouring in from Europe already. One “only in Africa” offer that European visitors in particular seem to be snapping up: Get a hip replacement and undertake a recuperative safari in a luxury game park—all for less than you would pay for private surgery at home, including airfare. If this degree of inventiveness thrives throughout the country, the prospects for its economic health are strong indeed.

James Thompson is an associate director of Wharton Entrepreneurial Programs at the Wharton School, University of Pennsylvania, where he oversees a private-sector HIV management initiative. Ian C. MacMillan is the academic director of the Sol C. Snider Entrepreneurial Research Programs and the Fred Sullivan professor of management at the Wharton School.