The brightly lit bars lining Long Street in Cape Town, South Africa’s second largest city, usually come to life after midnight, as competing DJs crank up the music to draw bigger crowds. As a multitude of excited teenagers and twenty-something South Africans stream onto the bars’ dance floors, the smaller, scattered groups of older party-goers find themselves outnumbered, in a scene that is emblematic of South Africa’s wider demographic.

South Africa’s population of 50 million is overwhelmingly youthful. The country’s National Youth Development Agency (NYDA) estimates that up to 70% of its population is aged between zero and 35. While the younger crowds in Long Street’s bars represent one of South Africa’s unique selling points, particularly for international businesses seeking to recruit a young, cheap and skilled workforce, they also represent South Africa’s biggest challenge.

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Key concerns

South Africa's economic growth has been slowing in recent years and unemployment has been on the rise. According to the NYDA, about 25% of the country’s workforce is unemployed, with 18- to 25-year-olds the worst affected. According to research firm the International Development Research Centre, as many as 60% of young South African university graduates are unable to find a job.

Disaffection among South Africa's youth is increasingly manifest on the country’s streets, where there are widespread protests. It has been estimated that in the past four years, there have been as many as 3000 protests in South Africa.

Dina Pule, South Africa’s communications minister, says that youth unemployment is a key concern for the country’s government. She says that the government has worked to encourage foreign companies to develop South Africa’s information and communications technology (ICT) sector, and harness the potential of the country’s educated youth in order to develop creative solutions that will increase South Africa's broadband capacity.

“We want young people who can come up with solutions [that will allow us to] quickly roll out broadband in the rural areas, so that people in the entire country have access to broadband. We have identified areas where we want to promote more work in the ICT sector,” she says.

Greenfield investment into South Africa slowed last year, according to investment monitor fDi Markets – but still dwarfs that of its regional rivals.

Losing interest

Long perceived by foreign investors as sub-Saharan Africa’s foremost economy and a key entry point for access to Africa’s markets, South Africa has come under pressure to maintain its momentum. The country’s infrastructure, although advanced by regional standards, has struggled to keep up with growth. And a stubbornly high crime rate – a government study estimates that 50 people are murdered each day in South Africa – coupled with ongoing labour unrest in the mining sector, led the country’s GDP to slow from 3.5% in 2011 to 2.5% in 2012, according to the African Development Bank.

Declining investor confidence and slowing demand for South Africa’s exports has caused concern, while the economy in the rest of Africa is growing at a rate in excess of 5%.

“We were affected by the crisis and we were frankly unable to sustain [growth] because of the balance of trade deficit,” says Rob Davies, South Africa’s minister of trade. “Against a background of challenges, particularly in the mining sector and in retail, which is another sector that was strongly affected by slowing external demand, we were losing jobs.”

Revitalisation plan

According to Mr Davies, this slowing economic growth has been the impetus behind the government’s renewed push to attract foreign companies to its industrial development zones (IDZs), by providing attractive incentives and offering advanced infrastructure to support foreign investor needs. He expects that IDZs will play an increasingly important role in attracting efficiency-seeking FDI, as well as helping to boost job creation.

The East London IDZ (ELIDZ) was established in 2003 in the country’s Eastern Cape province, and was South Africa’s first IDZ. It was established as part of a governmental initiative to improve South Africa’s industrial and manufacturing base, and was designed to provide a specialised manufacturing platform for companies involved in the automotive, renewable energy, ICT and agro-processing sectors.

Since its official opening in 2005, the ELIDZ has experienced some success in attracting global and local players, with its companies ranging from Germany-based car manufacturer Mercedes-Benz South Africa and US-based automotives equipment supplier Johnson Controls, to South Africa-based dairy-processing company Sunningdale Dairy. In 2012, it was decided to further expand the capacity of the ELIDZ by building a new metal surface treatment plant worth R50m ($4.9m), in a bid to attract a wider range of international automotive companies.

Gaining traction

Mr Davies says that export-oriented IDZs will enable the country to “gain more traction” internationally among investors. Coega IDZ, which is also located in South Africa’s Eastern Cape province, was created as an industrial complex customised for heavy, medium and light industries. Located next to one of South Africa’s largest deep-water ports, Ngqura, Coega IDZ’s chemicals, logistics, food-processing and automotive plants have attracted more than R30bn in FDI.

While the country’s export-oriented IDZs will continue to play a significant role in attracting FDI in the near term, Mr Davies says that the country's IDZs are undergoing a transformation to become special economic zones (SEZs), in order to benefit from adding value to finished goods, which will also serve the country’s domestic markets.

“The ELIDZ, in 2009, hosted investments worth R600m and that figure has now increased to more than R4bn, which is a sizeable increase in FDI,” says Mr Davies. “We have seen a similar increase in the Coega IDZ near Port Elizabeth. What we are doing now is expanding the model of IDZs to SEZs, so that these zones are not confined to export-oriented industries alone.

"We wish [to expand our] value chain activities and we have identified 10 potential new SEZs to develop in South Africa. There are two South African provinces that are talking about creating a platinum-producing SEZ, and other regions are examining SEZs built around agriculture and agro-processing. We have a bill, which is currently passing through parliament, which will create an SEZ framework.”

Focused on the long term

The minister remains sanguine about South Africa’s prospects. In his view, the country’s slowing economy reveals that it is maturing into an upper middle-income country. As with other maturing economies, as South Africa reaches a higher base of income, it is inevitable that growth will slow down as worker incomes increase and government spending shifts from supporting investment-intensive low value-added industries, to developing knowledge-based sectors.

While SEZs will help South Africa in its quest to enter into higher value-added production, the country’s deepening trade partnerships with emerging markets will enable the country to stay firmly on the path to recovery.

“The global economic crisis has meant that, with the exception of Germany, our trade with countries in the EU is yet to reach the level that it was in 2008,” says Mr Davies. “But, our trade with Brazil, Russia, India and China has been growing very rapidly, and we saw a 12% increase in trade in 2012.

"We have seen significant investments from China and India, and one of the largest corporate investors in South Africa is Tata Group from India. China’s First Auto Works, an automotive company, is also going to establish a plant in the Coega IDZ. In the medium and long term, prospects are not looking too bad.”