Broken BRIC

South Africa looks like grim shadow-BRIC

South Africa is sometimes listed as a near member of the BRIC, the group of developing world giants. Alas, it comes close in the wrong direction: Russia's one-party rule, Brazil's corruption, China's spiraling labor costs and India's inefficiency.

When the BRIC group was doing very well, the exclusion seemed unfortunate and almost unfair. Some analysts even started to speak of BRICS, and the 'S' for South Africa, was included in conferences and calculations of the global balance between rich and enriching countries. Now, though, it has become clear the BRIC economies attracted too much capital without engaging in enough policy reforms. All of them are destined for some sort of slowdown.

South Africa seems likely to join them. Its second-quarter real GDP was only two per cent above the level in 2012. But because South Africa's population is growing at 1.2 per cent annually, it doesn't do much for living standards. More ominously, South African real wages have increased by 51 per cent since 2000, while productivity has fallen 41 per cent. It is thus not surprising that South Africa's current account deficit is running around six per cent of GDP, with a record balance of payments deficit in the second quarter, according to the country's Reserve Bank.

The country resembles the BRIC nations in lacking strong institutions. Like Russia, it has a political system that has institutionalized the dominance of a single party and blocks necessary reforms. Like Brazil and India, a large state sector extracts cash from, and imposes high costs on, the rest of the economy. Like China, its competitiveness has been hit by rising labor costs - although South Africa has missed China's increase in productivity.

South Africa does stand out, relative to the BRIC nations, in one category: worker unrest, with strong political overtones. That discourages much-needed foreign investment.

The recent global rise in long-term interest rates has tightened funding for many emerging markets, causing substantial economic anxiety in India and Brazil. South Africa's high deficits make it especially vulnerable to this tightening. It badly needs a new growth model to survive a true credit crunch.