The euro and flight of capital from South Africa

Source: The Malta Independent

The banner headlines read “Euro in turmoil”. The future of the currency is finely balanced in the hands of Greece. If the Greeks opt out of the euro and exchange it for their former currency¸ the drachma¸ the contagion that will spread in the European financial system may send the markets to the wall.

But then the solution to the euro’s survival may also be helped by emerging countries which may be tempted to invest in the currency. The so-called BRIC countries (Brazil¸ Russia¸ India and China) meeting in Cannes at the G20 can be persuaded to throw a lifeline to the sinking euro and there is more untapped potential in countries on the African continent. These face the problem of capital flight which has indirectly resulted in them being rich providers of FDI foreign direct investment (FDI) to Europe.

The fact is that¸ from 1970 to 2008 there was an unregistered financial out-flowing from Africa of vast amounts of US dollars. South Africa is the biggest economy in the whole of Africa and from 1970 to 2004 there was a capital flight from that country of a cool $18 billion. This figure grew to $57 billion during the three years to 2008. First of all¸ there have been a number of companies that moved their primary listing from the Johannesburg Stock Exchange.

To mention a few¸ Investec Bank¸ Didada IT¸ BHP Billiton¸ Mondi Paper¸ SABMiller Beer¸ Old Mutual and Liberty Life Insurance have all migrated to other stock exchanges. Basically¸ this means that the South African economy is directly deprived of substantial profits¸ dividends and interest payments which is negatively influencing the current account deficit and accelerating the overall level of foreign debt. Economists agree that it is a particular reason why the South African economy is suffering stagnation.

In 2009¸ the year when the number of companies that left the country was particularly high¸ real GDP declined to -1.7 per cent. Although it improved in 2010 to 2.8 per cent¸ and is expected to increase to 3.6 per cent this year¸ you could say that the economy is in stagnation mode¸ especially compared to other developing BRIC countries. The official unemployment rate in South Africa was 25 per cent in 2010 and¸ ironically¸ this is a vicious circle. It is obvious that¸ as more capital leaves the country¸ there is not enough for new entrepreneurs – which leads to economic stagnation and reduced employment opportunities. As a result of a bad economic outlook¸ the country will be look less interesting for investors. And in addition to this¸ there is also a flight of human capital.

One may well ask what is causing this phenomenon. Why are professionals leaving and why is so much capital flowing out when South Africa is so resource rich? There is no simple explanation for the situation. In a democracy such as South Africa¸ there is no way that the government can object to companies being listed on the stock exchanges of other countries. Naturally¸ the cause of this multiple migration can be analysed and basically the conclusion is that it is mainly the high rate of corruption that has percolated government circles.

Regrettably¸ corruption is still a huge problem in South Africa and although the Zuma presidency is doing its best to eradicate it¸ a diligent observer can find it in every sector of society¸ even at the level of high officials in the administration. Another possible reason for the poor economic perform