BRIC flying

At the recent Africa Forum, hosted by Standard Bank, Trevor Manuel noted the large investments that particularly Chinese and Indian companies have been making in Africa and specifically South Africa. He added that all BRIC nations were “sharpening” their relations with Africa.

In light of South Africa’s position as the largest and most important economy in Africa, it is imperative that South Africa aligns itself with the growth potential of the BRIC nations. As Martyn Davies, CEO of Frontier Advisory notes, Australia tied its fortunes to that of China’s some ten years ago and are now seeing the undoubted benefits, being the only so-called ‘western economy’ to continue to grow during the recession.

Brazil, Russia, India and China make up the BRIC group of nations and they are the nations that the 2003 Goldman Sachs report, “Dreaming with BRICs: The path to 2050”, identified as the most important emerging economies in the world and the ones which would outshine many of the developed nation economies by 2050. BRIC is now a widely used acronym but is very much an invention of the Goldman Sachs report. The formal ties between these countries as a united economic group are not entrenched, although the leaders of these nations did meet earlier this year to discuss their mutual interests. Despite the lack of formal unity, the countries each represent important economic partners for South Africa.

The BRIC countries are also defined by particular traits that have helped their tremendous growth trajectories. The high percentage of gross domestic product (GDP) spent on research and development (R&D) is the first such trait. Brazil spent 1.04%, Russia 1.28%, India 0.84% and China 1.31% of their respective GDPs on R&D in 2006, according to The Economist. This is on average higher than most developed nations and therefore contributes to their growth in innovative and competitive business concepts. South Africa on the other hand only spends 0.74% of its GDP on R&D. This is something, which South Africa will have to change to catch up with the innovative BRIC nations.

In line with this emphasis on innovation and excellence, the concentration on the development of human capital is another crucial element in all BRIC nations. The number of engineers for example that China and India together produce is about 900 000 each year. That translates into enormous capacity for all the technical skills needed in rapidly growing economies.

Lastly, the sheer size of each of their populations means that each economy has a very large market for its own goods and services to be consumed in.

Where South Africa stands

South Africa has a far smaller population in addition to which it has lost many skilled workers over the last five years. In the last year however, there seems to have been a slow down in emigration rates and conceivably a positive rate of repatriation of South Africans who have been working abroad.

South Africa will need to improve its own competitiveness and importantly maintain strategic alliances with all four BRIC countries to ensure that the lessons learned in those countries can be put to good use in South Africa.

"South Africa’s mature economy, recognised corporate governance structure and strong regulatory framework enable it to attract investors seeking a secure investment."

South Africa is already strongly positioned in many regards. In a rare business alliance between South Africa and Russia signed in March and completed in September this year, Standard Bank bought a 33% share in the Russian investment bank, Troika Dialog Group, with the Russian bank taking over Standard Bank’s Russian operation.

As Jacques Der Megreditchian, the Chief Business Officer of the Troika Dialog Group, points out, South Africa’s mature economy, recognised corporate governance structure and strong regulatory framework enable it to attract investors seeking a secure investment. South Africa is also home to a very important platform for purchasing listed private assets, the Johannesburg Securities Exchange (JSE). As Martyn Davies notes, "as much as 90% of portfolio investment into Africa goes through the JSE," and therefore South Africa is the platform on which investment throughout the continent is established.

Der Megreditchian says that investors and businesses all over the world recognise the importance of the major emerging economies. Troika Dialog recognises the emergence of the BRIC nations, “… as a fundamental trend towards profitable opportunities in emerging markets. There will continue to be flows of business and money between emerging markets rather than between developed and developing countries,” noted Troika’s Chief Business Officer.

It is also clear that many South African companies are well placed to provide services to BRIC nations looking to invest and do business in South Africa. Numerous South African companies have a presence in other African countries and therefore have the inside track on information about the different business environments. As Martyn Davies indicates, “South African expertise and sometimes capital are very important for the facilitation of business in many parts of Africa and therefore the BRIC nations will have to tap into this.” The banking, telecommunications, retail and construction sectors will be particularly well positioned to continue to facilitate BRIC nations’ investments into Africa.

According to Standard Bank statistics, BRIC nations are primarily focused on the energy, resources, telecoms and financial services sectors in Africa. Brazilian companies Vale and Oderbrecht Engenharia e Construçao have entered the South African market in the resources and construction industries respectively, while Russian companies Renova Group, Norilsk Nickel and Evraz have entered the mining and metals sectors.

India and China have more diversified interests in South Africa, including the telecommunications, financial services and automobile sectors. Indian companies in particular have become quite prominent with names such as Sahara (the computer company which has become synonymous with the naming of cricket grounds), ArcelorMittal South Africa (which bought out Iscor Steel) and Tata all featuring as major brands in the South African business landscape. The BRIC nations are already delivering on investment promises and continue to seek new opportunities. It is crucial for South Africa to attract part of that investment, be utilised as a facilitator and lastly compete with BRIC businesses.

Is BRICS a possibility

South Africa’s cause will be greatly enhanced if it can truly prove to the BRIC incumbents that it deserves to be among them in the emerging market bloc. This must be done by proving its economic metal and being a genuinely competitive economy. There are a few important elements that South Africa will need to address if it is to attain that higher competitiveness.

"Back a winning team"

Firstly, the countries infrastructure will need to be upgraded, expanded and made more competitive. The undersupply of electricity is the most crucial issue and the national state-owned energy supplier Eskom will have to go ahead with its new capacity building projects, while at the same time finding the necessary funding. The other major infrastructural issue is that of the ports. New expansion plans are rightfully in the pipeline and the development of a new deep water harbour at Coega is a welcome addition. The challenge is to raise efficiency and bring down costs for all port operations. The ease with which traded goods can be moved around the country as well as imported and exported out the country, is crucial for encouraging other countries to trade with South Africa. Infrastructure has fortunately become a national priority as a result of the 2010 Soccer World Cup. The South African government will have to build on this capacity and make sure the infrastructural developments built for the Soccer World Cup are well maintained in the future.

Secondly, there will need to be a better education and skills development programme to provide the skills and expertise needed to drive growth. Although certain government initiatives such as the Joint Initiative on Priority Skills Acquisition (Jipsa) have been developed, the economy still falls short of the skills requirements in job areas such as engineers and project managers.

Lastly, the South African government will have to develop a clear idea of the business sectors that the country can be internationally competitive in and then devote resources to maintain and heighten that competitiveness. On top of this, South Africa will need to develop new areas of expertise to enlarge the number of sectors the country will be competitive in.

South Africa is the continent’s largest economy and very much a base for doing business in other African countries. It is also internationally recognised as a rising economic force in the world, being for example included in the G8’s Outreach 5, which also includes India, Brazil, China and Mexico. In order to genuinely deserve recognition and be accepted among the BRIC nations, South Africa will need to drive its economic growth to a higher level and gain a higher level of international competitiveness. In the mean time, South Africa must as Martyn Davies suggests, “Back a winning team”, by tying its economic fortunes to those of the four emerging economies of BRIC.