Next Step : South Africa’s Economic Dreams Are Deferred by Many Barriers : Labor unrest, tariffs and poor schools discourage long-term foreign investors.

On a clear, sunny morning recently, several thousand demonstrators, most of them blacks, some brandishing spears and axes, converged on the busy international airport on the outskirts of Johannesburg.

They sang Zulu freedom songs and hummed the tune of “We Got the Power.”

Their anger was summed up by a large white poster: “Away with Foreign Merchant Banks. Down With Privatization!”

Most of the marchers were members of the South African Railway and Harbors Workers Union--one of the country’s strongest. And the target of their ire was state-owned South African Airways, where many work.

Some claimed that they were denied promotions because they are black. Others feared losing their jobs if the national airline gets placed on the auction block.

“If privatization is going to get rid of our members for the sake of others, we’re not going to stand for it,” warned the union’s regional secretary, Johnson Gamede.

“It’s a new South Africa, but we still feel like we’re living in the old South Africa because of the apartheid in our workplaces,” added one of the protesters.

Throughout South Africa, a wave of labor unrest has battered the economy as it struggles to recover from years of economic sanctions, capital flight, civil strife and war.

Auto workers, miners, hospital workers, university employees and police have struck for better wages and working conditions in recent months. Violence has marred several demonstrations.

Such problems are critical as President Nelson Mandela wraps up his first year in office. Although the economy is expected to grow by 3% to 3.5% this year, the highest growth in years, major challenges remain, not the least of which is attracting long-term foreign investment.

Both critics and supporters of Mandela cite huge, home-grown barriers to outside investment. Labor is expensive and militant. Tariffs and other protections shield lucrative sectors such as mining. Education remains dismal, crime is surging and millions are jobless--and expecting improvements.

“These are very strong red-light signals to long-term foreign investment,” said Roger Crawford, outgoing chairman of the American Chamber of Commerce in Johannesburg.

The government’s new budget, announced last month, should ease some of those fears. Despite increased spending on housing, education and health care, the government expects to cut the fiscal deficit from 6.4% of gross domestic product to 5.8%.

Two other positive steps were the government’s decision to scrap the non-resident shareholder’s tax--which levied a higher tax on foreign investors than local investors--and the surcharge on importing luxury goods into the country.

Most important, however, was last month’s abolition of the so-called financial rand, or finrand, an investor’s currency distinct from the commercial rand, the legal tender of the average South African. The two currencies were part of a dual exchange rate system established in 1985 to prevent massive amounts of money from flowing out of the country during the apartheid years, when the white-led government was battling international campaigns for disinvestment and economic sanctions.

Foreigners who wanted to take their money out of South Africa had to find buyers willing to exchange dollars for finrands. But the system’s complexity, as well as the political stigma of dealing with the pariah regime, was enough to turn off many investors. Now any investor can freely repatriate capital.

Still, the most important tax deterrent to growth went untouched in the new budget: the secondary tax on companies. It tacks a maximum 25% tax on stock dividends, in addition to a maximum 35% corporate income tax.

Given the fierce competition for scarce global capital, such policies may put South Africa at a disadvantage, economists fear.

The dilemma for foreign investors is when to enter South Africa. Should they take the plunge now and deal with labor unrest and other problems? Or should they wait for more stability and risk getting aboard late on what is still Africa’s largest and fastest-growing economy?

Azai Jammine, executive director of Econometrix, a Johannesburg consulting firm, said the government ultimately must move toward privatizing key industries--including the national airline.

“The government will find its interests lie with the 6 million people who are unemployed rather than the 1.5 million who belong to the trade unions,” Jammine said. “The (unions) don’t have much voting power.”

But they do have the power to create disorder.

When Gamede, the railway union official, was asked what would happen if the airline was privatized, he said two words no investor--foreign or domestic--likes to hear: “national strike.”

“We’re gradually moving in the right direction, but we’re still not really where we’d like to be,” Reserve Bank Gov. Chris Stals said. “We have to take into consideration the needs of all South Africans.”

Redressing the inequalities left by apartheid is Mandela’s greatest task.

Official figures show that while 9% of whites are jobless, 37% of blacks, 24% of coloreds (mixed-race South Africans) and 17% of Asians remain unemployed.

“The unrealized expectations of the masses is one of the biggest challenges facing the government,” said William Mallory, incoming chairman of the American Chamber of Commerce.

Since the end of sanctions in 1993, about 150 U.S. companies have made direct investments here, more than any other nation. But only a handful, such as Ford and Pepsi-Cola, have made large investments in the $100-million range.

That may change. In February, the Clinton Administration identified South Africa as crucial to Washington’s national interest as one of the world’s top emerging markets. The others are the regions that include China, Taiwan and Hong Kong and South Korea, Indonesia, India, Mexico, Brazil, Argentina, Poland and Turkey.

Unlike those countries, however, South Africa has the advantage of a top-level commission launched March 1 by Vice President Al Gore and South African Deputy President Thabo Mbeki.

The bilateral panel will oversee trade and investment between the two nations, as well as technology, environment and other key issues. Russia is the only other country with a similar arrangement with Washington.

In a recent speech, Mbeki said he hopes that the commission will help turn South Africa into an African economic “lion,” able to jump-start the economies of other nations in the region and to compete head to head against Asia’s booming economies.

To do so, Crawford, the outgoing American Chamber official, argued that South Africa should follow other emerging market nations and provide tax breaks and other incentives to lure more investors from abroad. Local officials do not agree.

“South Africa can be attractive enough without giving special treatment to foreign investors and discriminating against local investors,” bank official Stals said.

A recent independent survey commissioned by the government, however, claims that local firms will need to make “radical and painful” changes to compete globally. In virtually every South African industry, the survey found that similar products are produced more cheaply and of higher quality in other nations.

One worry, Stals admitted, is attracting the wrong type of foreign investments, namely too much short-term portfolio capital.

No one here has forgotten January’s meltdown in Mexico, when major investors suddenly withdrew billions of dollars and caused chaos in the national economy and turmoil in world markets.

With the finrand gone, “we are now vulnerable to huge capital outflow at any hint of political instability or lack of confidence in the economy,” warned Mike Holland, an economist with First National Bank in Johannesburg.

And unlike Mexico, South Africa cannot rely on the United States to launch a bailout attempt if its economy collapses.

“The fact is that we don’t have a big brother like Mexico does,” said Roy Andersen, president of the Johannesburg Stock Exchange.