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That engine is the South African economy. Not only is it the largest economy in Africa by far, with a gross domestic product (GDP) of $456.7 billion in 2003,[18] but over the past decade South Africa has become the single largest source of FDI in Africa, at $1.4 billion per annum.[19]

Much of South Africa’s foreign investment— 63 percent— is directed outside of South Africa’s regional trading bloc, the Southern African Customs Union (SACU), and extends into Francophone and North Africa as well.[20]

The positive effects of this investment are profound. Countries such as Mozambique, for example, which has one of the fastest-growing economies in the world, have been helped along by high levels of inward South African investment.

South African companies are helping to diversify African economies and reduce their dependence on primary sector industries. While most FDI from outside Africa focuses on oil and gas, South African firms are branching out, moving beyond mining and brewing to a diverse range of activities including telecommunications, retail, shipping and banking services.[21][22] ,

As South African companies spread across the continent, they are not only entering markets, but creating them. They are building infrastructure, transferring skills and technology, and prompting foreign governments to enforce laws and strengthen democratic institutions.

There are some concerns that South African investment represents a kind of “neo-colonialism” in Africa. These concerns are partly driven by lingering resentment over the destructive role that South Africa played in the last decades of the apartheid era in destabilizing its African neighbors.[23]

The “neo-colonial” argument is given added weight by South Africa’s huge trade surplus with the rest of the continent. Exports from South Africa to the rest of Africa in 2002 were worth R43 billion (roughly $7 billion at today’s exchange rates); imports amounted to only R5 billion (less than $1 billion), most of which involved oil purchases from Nigeria.[24]

That imbalance is at least partially offset by the benefit to African consumers of South African goods and services. Cellular telephones, for example, have become a hugely popular alternative to the inadequate state-run telephone networks in many African countries.

South African companies are also working hard to integrate themselves into local economies by training local employees and buying raw materials from local producers.[25] And the peacemaking efforts of the South African government have helped to restore goodwill towards the country in other parts of Africa.

In addition, companies in other African states have begun to return the favour by investing in South Africa. The media sector in particular has seen new investments by foreign, African investors. South Africa’s weekly Mail & Guardian newspaper is now owned by the Zimbabwean journalist and entrepreneur Trevor Ncube, and last year the Nigerian media group ThisDay launched a new national daily newspaper of the same name in South Africa.

On the whole, South African investment is good for African economies. And so, too, is growth in South Africa’s own domestic economy.

A recent study carried out by researchers at the International Monetary Fund concluded that “[a] 1 percentage point increase in South Africa’s per capita GDP growth, sustained over five years, is correlated with a 0.4 – 0.7 percentage point increase in growth in the rest of Africa”.[26]

Clearly, South Africa is the best and most important engine of economic growth and development across the African continent.

South African economic policy: using the engine?

The question then becomes how best to use the South African engine to promote economic growth so that South Africa and other African countries can begin to address the needs of ordinary Africans and to achieve the goals of the AU and Nepad.

In the late 1990s, the South African government adopted an ambitious economic policy— named Growth, Employment and Redistribution (GEAR)–that aimed to achieve growth rates of six percent per yearor higher.[27] The government pledged to privatize state-owned enterprises (SOEs) and enact labor market reforms that would encourage new investment and job creation.

While the government is still nominally committed to these reforms, it has begun to abandon them. It now favours a policy of state-centered development that aims to achieve economic growth and redistribution through policies of black economic empowerment (BEE), affirmative action and what is generally referred to as “transformation”.

There is certainly a need for programs in both the public and private sectors to help those people who were disadvantaged by apartheid. The goal of these initiatives should be to create new opportunities by improving education, expanding property ownership, and encouraging new investment, particularly in labor-intensive industries.

Instead, the government is committed to an approach that seeks to engineer particular social outcomes according to demographic targets of racial “representivity”.

For companies, this takes the form of “empowerment charters” within each industry, in which firms commit to divest and sell a certain percentage of their equity to black shareholders. It also means adhering to strict new regulations on hiring and promotion, such as the Employment Equity Act of 1998.

Thus far, the outcome of these policies has been rather disappointing. Not only have they failed to create economic growth and to expand employment, but they have also failed to benefit the overwhelming majority of black South Africans.

The lion’s share of BEE transactions has been taken up by a few players, all of whom have close ties to the ruling party. The public sector has extended new services to the poor, but has suffered enormous backlogs, particularly in housing.

The costs of the government’s policies are being borne by the poor, who must deal with the consequences of slow economic growth and inadequate public services.

The creation of a new black elite does have the political and social benefit of defusing racial tensions. Yet it does nothing to solve the underlying problem of widespread poverty which “transformation” theoretically hopes to address. Black unemployment continues to rise, and the gap between the multiracial rich and the overwhelmingly black poor continues to grow.[28]

Again, I must stress that there is a great need for programs that uplift those who have been the victims of racial discrimination in South Africa’s not-too-distant past. The problem is that once race becomes the all-important criterion in these policies, we lose sight of the poor, who were not only marginalized in the past, who but remain so today.

The poor are best served by a rapidly growing economy and an efficient public service. We are hurting the poor, not helping them, if we sacrifice these goals for policies that promote only a few well-placed individuals who stand in as proxies for a larger group.

We also need to take the concerns of foreign investors into account. Foreign investors admire and appreciate the South African government’s success in macroeconomic reform, but they are also expressing growing concern about some of the government’s empowerment policies.

Many foreign companies are quite eager to train and hire black employees, to work with new black business leaders, and to contribute in other ways to the upliftment of previously disadvantaged South Africans.

Most, however, are uncomfortable with equity divestiture. They feel that a foreign government should not tell them, as foreign investors, how to invest their assets.

The issue of equity divestiture remains a great challenge, and I trust that the South African government will be wise enough to deal with it in a way that resolves concerns about our country’s commitment to private ownership and, indeed, the market economy.

Whatever the political merits of the government’s current approach, it is quite clear that our domestic economy has not grown at a rate that can reverse our high unemployment rate of over 30 percent— or over 40 percent, according to the expanded definition, which includes those who have given up seeking work.

That is well above the unemployment rate of about 25 percent that prevailed in the U.S. during the Great Depression. South Africa needs urgent, sweeping changes in its economic policies— changes that encourage economic growth in the private sector, changes that provide for as much market as possible and only as much state as necessary.

Regardless of whether the government’s empowerment policies succeed or fail in reaching their demographic targets, what South Africa really needs is the emergence of new black entrepreneurs— people who create new goods and services, people who add value to the South African economy, people who are independent of government patronage and protection. That will only happen in an economy that has less state and more market— where the government intervenes to create opportunities but not to engineer outcomes.

Leading, or lagging?

The effect of South Africa’s current economic policies has been slow, jobless growth. Our economy is creeping along at a snail’s pace instead of opening up full throttle. It is growing at 1.9 percent per year, far behind the African average of 3.6 percent and well below the needed levels of 6 percent or higher.

In short, we are not using the South African engine to its fullest. South Africa’s positive impact on African economic development as a whole is therefore much smaller than it could be, and should be.

There are two other areas of critical importance to African development in which South Africa should be leading, but in which we are lagging.

One is the South African government’s stubborn refusal to intervene in Zimbabwe. Not only has this hurt the cause of human rights and democracy in Africa, but it has also had an enormous economic cost.

Quite simply, one of South Africa’s most important trading partners has collapsed. The cost to the South African economy alone has been estimated at just under $1 billion per year.[29]

In general, of course, South African foreign policy has been a tremendous boon for Africa. President Mbeki and his government deserve great accolades for their enthusiastic leadership in peace negotiations in Burundi and the Democratic Republic of Congo. The energy devoted to these cases, however, serves to highlight the government’s inaction on Zimbabwe.

The second area in which the South African government is lagging is in its slow response to the HIV/Aids pandemic. Of all the countries on the continent, South Africa is best placed to deal with the epidemic. Though our health system faces great challenges, it has better resources and better infrastructure than health services in the rest of Africa.

Yet the South African government fought for several years to avoid dispensing anti-retroviral medicines to pregnant mothers with HIV. It is well behind schedule in rolling out anti-retroviral therapy to extremely ill Aids patients, despite the fact that the medicines are being made available at low prices.

This tragic policy also has a cost. An international investment bank recently estimated that the South African economy will be 17 percent smaller in 2010 than it might have been without the impact of HIV/Aids.[30]

The long-term impact of the pandemic may even be greater. Our hospitals are filled with Aids patients and our schools and streets are filling with hundreds of thousands of Aids orphans, whose number is estimated at close to 700 000, and rising.[31]

The U.N. reports that average life expectancy in South Africa has fallen from roughly seventy years to below fifty. That, in turn, has pushed our ranking on the U.N. Human Development Index down twenty-five places in just three years, from number 94 in 2001 to number 119 this year.

Clearly, a change is needed.

A new direction for South Africa

South Africa needs to move in a new direction. We must use our economic engine to the fullest, both to benefit the people of our own country and to promote development in the rest of Africa.

To do so, the South African government must enact two sets of reforms.

The first set of reforms deals with the domestic economy.

* South Africa must make economic growth the number one priority of economic policy. We must free our economy from the dead hand of state intervention and control.

* We must embrace affirmative action policies that consider race, but never allow race to trump merit.

* We must develop empowerment policies that expand ownership and encourage entrepreneurship among ordinary people.

* Companies should not be forced to divest their equity. Instead, empowerment should start with the privatization of South Africa’s public assets, whose shares should be offered to the poor at a reduced price.

These reforms involve limiting the power and reach of the state. There are, however, several priority areas in which the South African government can and must intervene.

* We should improve our police force, for example— not just so that it is more effective, but so that it becomes one of the most effective police forces in the world.

* We must tackle HIV/Aids with far greater urgency and wisdom, so that our national programme is not only the most costly in the world, as it is today, but also the most effective.

* We must roll back our labour laws, not just so that they encourage employment, but also so that they become the global model for how to employ large numbers of workers cheaply and still uphold international standards of safety and environmental quality.

The second set of reforms that South Africa must undertake deals with our economic and diplomatic engagement with the rest of Africa.

* The South African government should continue to encourage investment in Africa— as well as investment in our own country— by getting rid of all remaining exchange controls.

There has been considerable progress in removing exchange controls in the past ten years, but more needs to be done, both to free up new sources of capital and send investors a signal of our confidence in South Africa and the African economy as a whole.

* Our government should work towards free trade in Africa, and should take the lead by lowering its own trade barriers. At present, Africa’s internal trade barriers are the highest in the world and cost African economies some $11 billion per year.[32]

* We should also make sure that South African investment in Africa is responsible investment. The new Corporate Responsibility Index of the Johannesburg Stock Exchange should be expanded and extended to more South African companies as a way of monitoring and rewarding firms that embrace fair investment practices.

* In foreign policy, South Africa must abandon its policy of quiet diplomacy toward Zimbabwe and adopt a more activist role.

Last year, the Democratic Alliance proposed a “Road Map for Democracy” in Zimbabwe with specific timetables and concrete rewards for progress.[33] A similar idea was taken up at the Commonwealth Heads of Government Meeting (CHOGM) in Abuja, Nigeria in December. It is worth reviving and using as the basis for South African mediation in the crisis.

* South Africa must also use its strong voice within the AU and Nepad to ensure that these institutions enforce a strong set of norms across the continent— norms that reflect the human rights and democratic values enshrined in South Africa’s own constitution.

* In addition, South Africa should make these pan-African institutions more effective by encouraging them to focus on their core functions.

In the case of the AU, that means focusing on peacekeeping efforts such as the Peace and Security Council, and the development of regional peacekeeping forces.

In the case of Nepad, that means strengthening the African Peer Review Mechanism and converting the Nepad bureaucracy into a management consultancy that offers services and advice to African governments and institutions.

* Finally, South Africa should continue to take the lead in re-shaping Africa’s relationship with the world. We should continue to negotiate free-trade arrangements such as the US-SACU agreement, and push for an end to the trade-distorting agricultural subsidies and import barriers in developed countries that hurt Africa’s economic growth.

Above all, South Africa must continue to remind Africa and the world of our continent’s great potential. South Africa’s own history teaches us that even the greatest obstacles to progress can be overcome through collective effort.

Through South African leadership in Africa, we can fulfill the prophetic dream of Dr Martin Luther King, Jr., who hoped for a world that was not only free from political oppression, but free from the oppression of poverty and need.

The key will lie in South Africa’s ability to overcome the racial obsession that is the legacy of our past. Demography is not, and should not be, destiny. Each of us is far greater than the sum of our demographic parts.

As the great American poet, Walt Whitman, wrote: “I am large. I contain multitudes.”[34]

Every human being is wonderfully complex. Race can never be more than one among the many ways in which we know ourselves.

South Africa itself is a hubbub of multitudes— of different groups of people whose rich diversity gives our country its uniqueness. At the same time, the amazing diversity within each of these subcultures suggests that what Whitman wrote of the individual is just as true of the group.

We will be far better off as a nation if we look beyond race. We must remember the dictum of the American philosopher John Rawls, that any policy of upliftment that we undertake must be “to the greatest benefit of the least advantaged”.