case 9 the south african economy

The South African Economy: Coping with

the Legacy of Apartheid

The South African economy is characterized by extreme income disparity along racial

lines. Many blacks are unemployed and poor, while most whites are better off. This

uneven distribution of wealth is the direct result of the apartheid system that was

followed by the government between 1948 and 1994. The case chronicles the state of

the South African economy from the 1950s, when many apartheid laws were passed,

till the mid-2000s, when the economy was showing good growth. It discusses some of

the policy initiatives taken by the ANC government after coming to power in 1994 and

the implications of these policies for the South African economy.

It also discusses the criticisms against the government's policies. The case ends with a

discussion on the future prospects of the South African economy.

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The South African Economy:

Coping with the Legacy of Apartheid

“It is going to take decades to correct many of the wrongs.”1

- Rev. Motlalepula Chabaku, a legislator in Free State Province.

“The general consensus is that there has not been an improvement in equality,”2

- Matthew Stern, former economist, South Africa Country Office, World Bank,

in 2004.

Introduction

In February 2007, Statistics South Africa3 announced that the real GDP of South

Africa had increased by 5.6% (annualized) in the fourth quarter of 2006, which was

well above market expectations. The South African economy had been growing

continuously since 1998, making it the longest economic upswing in the country‟s

history. Business too was booming, with consumer demand growing at a fast pace.

The country was seeing a rapid increase in the number of inbound tourists as well.

“Having tripled the number of overseas visitors since 1994, it (the tourism industry) is

regarded as being ready for „a second phase of growth,‟”4 said a report in the Financial

Times (Refer Exhibit I for more information on South Africa).

However, the impressive numbers hid some harsh realities. Around 50% of South

Africa‟s population continued to live below the poverty line and the country had an

unemployment rate of more than 25%. The economic disparity between population

groups in South Africa was wide and usually manifested itself along racial lines.

Analysts attributed this disparity to the apartheid system, a race-based discrimination

policy practiced by the government between 1948 and 1994.

South Africa held its first multi-racial election only in 1994. The elections brought the

African National Congress (ANC) to power. The ANC government took several

policy initiatives to achieve its goal of bridging the economic gap between the white

and non-white sections of the population. It initially focused on social issues, with the

launch of the Reconstruction and Development Programme (RDP). However, in 1996,

with the Growth, Employment, And Redistribution (GEAR) policy, the government

decided to concentrate more on wooing foreign investment and on encouraging trade

and industry.

Despite some success in poverty alleviation, the economic disparity between the

population groups was expected to persist for many years to come and many analysts

blamed the government‟s shift in policy for the slow change. Meanwhile, the

government had been unable to contend with the growing menace of HIV/AIDS, with

an estimated 5.5 million5 South Africans infected with the deadly virus. The high

crime rate was another issue that required immediate attention.

1 Ernest Harsch, “South Africa Tackles Social Inequities,” Africa Recovery, www.un.org,

January 2001. 2 Lucky Jones, “Risks Remain for South Africa‟s Economy,” www.bbc.co.uk, April 14, 2004. 3 Statistics South Africa is a government body responsible for collecting, producing, and

disseminating official statistics as well as for conducting of a census of the population. 4 “Good Times in SA: Financial Times,” www.southafrica.info, June 12, 2006. 5 According to UNAIDS estimates (2005).

http://www.un.org/

http://www.southafrica.info/

The South African Economy: Coping with the Legacy of Apartheid

545

Exhibit I

Information on South Africa

The Republic of South Africa is located at the southern tip of the African

continent. It is surrounded by Namibia, Botswana, Zimbabwe, Mozambique, and

Swaziland and the South Atlantic ocean and the Indian Ocean.

South Africa covers an area of 1.2 million sq. kms and has a long coastline

stretching for more than 2,500 kms. While the northwest is arid, the region along

the eastern coast is tropical. Only around 12% of the land is arable. The country is

prone to long droughts.

South Africa has an abundant supply of natural resources. The mining industry is

one of the important industries of the country. Apart from gold and diamonds, the

country is endowed with copper, tin, platinum, chromium, manganese, antimony,

coal, iron ore, and nickel reserves.

The country‟s political system is based on proportional representation. It has a

bicameral parliament consisting of the National Council (upper house) and the

National Assembly (lower house). Elections are held every five years and the

government is formed in the lower house, with the leader of the party in majority

becoming the president.

In 1994, the government replaced the former provinces of Cape, Natal, Transvaal,

and Orange Free State with nine integrated provinces – Northern Cape, Western

Cape, Eastern Cape, North West, Free State, KwaZulu-Natal, Gauteng, Limpopo,

and Mpumalanga.

The country has a population of around 45 million. Blacks form the majority (see

figure below).

% of Blacks, Whites, Indians, and Coloreds in the South African Population

(2001)

Black

79%

White

9%

Colored

9%

Indian

3%

With deaths caused by HIV/AIDS increasing, the net growth rate of the population

has fallen into negative territory (-0.4%). The infant mortality rate is high at 60.6.

The life expectancy too is low at 42.7 years. Literacy, however, is high at around

86%.

Compiled from various sources.

Background Note

According to archeologists, South Africa had been inhabited by humans for thousands

of years. Farming communities began settling along what later came to be called the

Limpopo river as early as in the 2nd

Century. The first records of Europeans reaching

the shores of present day South Africa date back to the 15th

Century. In 1485,

International Business

546

Bartholemeu Dias, a Portuguese explorer who was trying to find a sea route to India,

circumnavigated the South African cape. He named it Cabo do Boa Esperanca or

Cape of Good Hope.

The Dutch East India Company6 set up a provision station in Table Bay (Cape Town)

for passing ships in 1652. Beginning in 1657, the company authorities alloted arable

lands in the region around Cape Town (also referred to as Cape Colony) to some of its

employees who were freed from service to pursue farming. In this period, slaves were

brought from Benin and Sulaweisi (Indonesia) to work on the farms. By the 1700s, the

Dutch farmers (referred to as trekboers) began spreading to the interior regions of

South Africa. As a result, the natives were ousted from their lands. The African

natives, especially the Khoisan (the original inhabitants of South Africa), and the

Xhosa people (immigrants from East Africa), resisted the settlers, which resulted in

bloody conflicts that sometimes lasted for several months. However, the Dutch settlers

were able to eventually overpower the African natives, some of whom fled while

others ended up working for the Dutch settlers as servants. By the mid-1700s, the

Dutch government began encouraging orphans and menial workers from Holland to

migrate to the Cape.

In 1795, the British gained control of the Cape from the Dutch. In 1820, the British

government sent unemployed people from Britain to South Africa, to settle down in

the regions between the Cape and Xhosa-dominated territories.

In 1828, following a wave of anti-slavery sentiment in Britain, the British authorities

in South Africa passed an ordinance guaranteeing equal civil rights to all residents of

the Cape Colony, irrespective of their race. In 1834, Britain proclaimed emancipation

for the slaves in all its colonies. However, the slave-owners in the Cape Colony

opposed the decision. So, the British government provided “compensation money” to

them. The compensation money had a positive impact on the local economy, with

several new business establishments being created with this money in this period.

However, despite their “freedom”, the ex-slaves had no choice but to become wage

laborers in the newly industrializing economy, where they were, more often than not,

exploited.

Some trekboers, however, refused to obey the British ordinance and decided to move

east and live independently, away from British-governed areas. They moved, along

with their slaves, to a region called Natal (now KwaZulu-Natal), which brought them

in confrontation with the Zulu tribes. The trekboers managed to defeat the Zulus,

though skirmishes continued for several months. Meanwhile, the British authorities,

fearing repercussions in the Cape, annexed Natal, which already had a small British

settlement in Durban. The trekboers, however, established two independent republics

– Orange Free State and Transvaal – in the region. By the mid-1850s, almost all of

South Africa was under white domination. In 1853, the Cape Colony was granted a

representative legislature by Britain.

In the late 1860s, deposits of alluvial diamonds were discovered along the Vaal River.

The discovery had a major impact on the South African economy. Port facilities were

upgraded to facilitate diamond mining and consequently, coastal cities such as Cape

Town, Port Elizabeth, East London, and Durban experienced an economic boom. In

1872, the Cape Colony was granted self-governance. Orange Free State, Transvaal,

6 The Dutch East India Company (or Vereenigde Oostindische Compagnie) was established

in 1602 as a trading concern. It is considered one of the first multinational corporations. It

had trading outposts in Persia (now Iran), Siam (now Thailand), Canton (now in China),

Formosa (now Taiwan), Malacca (now in Malaysia), Chinsura, Bengal (in India), and Southern India. It was formally dissolved in 1800.


547

and the waterboers (descendants of European and native Africans) staked a claim to

the diamond-rich regions. However, the British forces took control of the region and

brought it under the Cape Colony.

In the later part of the 19th

Century, the British attempted to annex Zulu-held

territories. Much of Zulu territory was brought under British-ruled Natal by the end of

the century. The British settlers brought people from India to work in the sugarcane

fields in Natal. Many of them stayed on, and went on to form an influential part of

South African society.

The Witwatersrand goldfield in Transvaal was discovered in 1886. The gold attracted

the British, who came in large numbers. The Transvaal region, which had been

granted full internal autonomy by Britain in 1884, had been financially strapped and

the discovery of gold revived its economy.

Toward the end of the 19th

Century, the British attempted to annex the Free States,

which led to the Anglo-Boer wars. The British emerged victors and the whole of

South Africa came under their control. The Union of South Africa came into being in

May 1910. Even under the Union, the black majority was deprived of the right to

franchise in the former Boer republics. Though they had voting rights in the Cape

Colony, they were barred from becoming legislators. The South African Party (SAP),

which came into power, enacted laws that restricted the role of non-whites in the

economy. The Masters and Servants Act (reserving skilled work for whites), the

Native Poll Tax, the Land Act, 1913 (reserving 90% of the land for whites) all served

to keep most non-whites economically weak.

The African National Congress (ANC) was established in Bloemfontein in 1912, with

the goal of eliminating restrictions based on color (Refer Exhibit II for the aims and

objectives of the ANC). In 1914, conservative whites formed the National Party. The

National Party, in alliance with the Labour Party, came to power in 1924. The 1920s

and 1930s saw the government strive to secure greater independence from British

control and greater job security for whites in South Africa. In 1931, South Africa

became a self-governing dominion under the British crown. In 1933, the SAP and the

National Party merged to form the United Party and in the elections that were held

that year, the merged party came to power. However, a breakaway faction consisting

of former National Party members, who represented extreme nationalists, formed a

new National Party (NP). In 1936, the blacks in the Cape were disenfranchised and

they were forced to live in separate areas away from white colonies.

In 1943, the ANC Youth League was formed under the leadership of Anton Lembede,

A.P. Mda, Oliver Tambo, and Nelson Mandela (Mandela).

In 1948, the NP came to power and immediately started implementing an even stricter

race-based policy called apartheid (derived from „apart‟ and „hood‟), which was to

continue till the early 1990s. In 1961, South Africa declared itself a republic. The

1960s, 1970s, and the 1980s saw the South African government committed to

apartheid, even in the face of international opposition and isolation. The 1990s,

however, saw the government deciding to take steps to democratize the country.

South Africa‟s first democratic election was held in April 1994. The ANC won a

majority and came to power, with Mandela as the president. Through negotiations

with other political parties, the ANC wrote out a new constitution, which abolished

apartheid. In the country‟s second democratic election in 1999, the ANC was able to

increase its majority, albeit marginally, and Thabo Mbeki (Mbeki) was made the

president. South Africa‟s third democratic election was held in 2004 and the ANC

returned to power with Mbeki as the president.

http://www.anc.org.za/ancdocs/history/people/tambo_or.html

http://www.anc.org.za/people/mandela/


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Exhibit II

The Aims and Objectives of the ANC

To unite all the people of South Africa, for the complete liberation of the

country from all forms of discrimination and national oppression

To end apartheid in all its forms and transform South Africa as rapidly as

possible into a united, non-racial, non-sexist, and democratic country based on

the principles of the Freedom Charter

To defend the democratic gains of the people and to advance toward a society

in which the government is freely chosen by the people according to the

principles of universal suffrage on a common voter‟s role

To fight for social justice and to eliminate the vast inequalities created by

apartheid and the system of national oppression

To build a South African nation with a common patriotism and loyalty in

which the cultural, linguistic, and religious diversity of the people is

recognized

To promote economic development for the benefit of all

To support and advance the cause of national liberation, women‟s

emancipation, development, world peace, disarmament, and respect of the

environment

To support and promote the struggle for the rights of children

Source: African National Congress Constitution, www.anc.org.za.

The South African Economy in the Apartheid Era

Apartheid was a system of racial segregation. The NP government devised apartheid

as a means for the white minority to control the economic and social system of South

Africa.

In the apartheid era, the government excluded the blacks from the mainstream

economy, with development efforts largely concentrated toward the whites. The early

1950s saw a spate of repressive laws being passed. Among them, the Population

Registration Act (calling for the classification of the population on the basis of race),

the Group Areas Act (leading to the creation of separate residential areas for each

race), the Bantu Building Workers Act (resulting in blacks being prohibited from

performing skilled work in urban areas excepting designated sections), Prevention of

Illegal Squatting Act (removing blacks from public and private lands and establishing

resettlement camps), Pass Laws (restricting the movement of blacks), and the

Reservation of Separate Amenities Act (prohibiting non-whites from using public

amenities such as buses, beaches, post offices, restrooms, etc., meant for whites)

resulted in the complete subjugation of non-whites.

In 1959, the Promotion of Bantu Self-Government Act was passed. This was inspired

by the „divide and rule‟ policy that the British had perfected over the years in their

colonies. It led to the classification of blacks into eight ethnic groups and the creation

of „homelands‟, where each ethnic group was allowed to govern itself independently.

This was also referred to as „separate development‟. The blacks were allotted only

13% of the land even when they formed around 80% of the population. And they had

to secure passes to enter or work in the „white areas‟.


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The Extension of University Education Act prohibited blacks from studying in

“white” universities, and led to the creation of separate educational institutions for the

blacks, coloreds, and Indians. The educational infrastructure and quality for non-

whites were inferior to those for whites with the result that the non-whites were

unable to upgrade their skills.

Despite the social inequalities, the annual average growth rate of the economy in the

1950s was around 4%. However, the laws barring blacks from entering „white South

Africa‟ had a negative impact on industry. Since the passes allotted were fewer than

required, companies had to deal with labor shortages on a regular basis. However,

whenever the labor shortages became particularly acute, white employers „imported‟

laborers from central Africa. This also ensured that the wages for blacks remained

low. The whites, on the other hand, earned incomes that were, on an average, five to

fifteen times the incomes of blacks, which exacerbated the economic disparities.

In the early years of apartheid, there was little opposition from the rest of the world to

South Africa‟s apartheid policies. This was partly due to the importance of South

Africa as a mineral-producing nation and partly because of its strategic location on the

vital trade routes to Asia. Also, many countries saw „white South Africa‟ as a force

against communism in the region. They also felt that engagement was a better option

than isolation. South Africa received foreign capital, especially in the form of loans,

from Canadian, American, European, and Japanese banks, and in the form of

investments from multi-national companies based in the US and in other countries.

In the 1960s, the South African economy rivaled that of Japan, with the average

annual growth touching 6%. Strong growth was observed in the mining and

agriculture sector. Inflation was as low as 3%. However, starting from the 1960s,

South Africa became increasingly isolated at international forums. The country had

significant trade links with other Commonwealth7 states till the early 1960s. However,

owing to severe opposition from some members, it decided to withdraw from the

Commonwealth.

In the 1970s, the manufacturing and agriculture sectors stagnated while the services

sector, especially financial and transport services, showed good growth. In 1973, the

Arab members of OPEC8 instituted an oil embargo

9 on South Africa. The government

then sourced oil from Iran. However, the oil crisis of the mid-1970s led to a recession

in the economy. There was also a sharp rise in prices with average annual inflation in

the mid-1970s crossing 10%. With gold prices increasing in the late 1970s, the

economy recovered but only for a brief while. In this period, several countries ordered

their traders and investors to stop dealing with South Africa. Iran too severed relations

with South Africa in 1979.

7 Commonwealth of Nations or The Commonwealth is a voluntary association of 53 independent

sovereign states all of which were former colonies of the United Kingdom, except for

Mozambique and the UK itself. 8 The Organization of the Petroleum Exporting Countries (OPEC) is a permanent, inter-

governmental organization, established in 1960. OPEC‟s objective is to coordinate and

unify petroleum policies among member countries in order to secure fair and stable prices

for petroleum producers and an efficient, economic, and regular supply of petroleum to

consuming nations. 9 After the Arab-Israeli war, the Arab members of the OPEC along with Egypt and Syria

placed an embargo on crude oil exports to countries that supported Israel in the war, initially

targeting the US and The Netherlands. The embargo was extended to Portugal, Rhodesia (now Zambia and Zimbabwe), and South Africa in November 1973.


550

The late 1970s and 1980s saw many world powers, especially the US and the UK,

starting to put economic pressure on the South African government over its apartheid

policies, which seemed to have become even more repressive over time (Refer

Exhibit III for a comparison of the status of blacks and whites on some

parameters in 1978).

Exhibit III

A Comparison of the Status of Blacks and Whites under

Apartheid in 1978

Source: www-cs-students.stanford.edu.

The Export-Import Bank of the US10

prohibited loans to firms exporting to South

Africa in 1978. The International Monetary Fund (IMF)11

prohibited loans to South

Africa in 1983. The US passed the Comprehensive Anti-apartheid Act in 1986,

imposing economic sanctions on South Africa. The UK followed suit. In 1986, the

European Economic Community (EEC) imposed a ban on trade and investment in

South Africa. The South African economy suffered the most when a group of

international banks, led by Chase Manhattan, decided in 1985 to withdraw short-term

credits. Not only did the banks stop grant of new loans but they also demanded

immediate repayment of all outstanding debts. The result was a severe debt crisis. The

1980s were also a period of intense droughts, with agriculture being severely affected.

These developments had an adverse effect on the economy, which recorded an

average annual growth of 1.5% in the decade. With population outpacing GDP

growth, the per capita income fell by around 10%.

The last years of apartheid were a time of social and political turmoil. Civil unrest and

violence resulted in the government declaring an emergency in June 1986, which

continued till 1990. In the 1990s, the apartheid system finally gave way to the process

of democratization.

10 The Export Import Bank of the US is the official export credit agency of the US. Its mission

is to assist in financing the export of US goods and services to international markets. (Source: www.exim.gov.)

11 The IMF is an organization of 185 countries, working to foster global monetary cooperation,

secure financial stability, facilitate international trade, promote employment and sustainable economic growth, and reduce poverty.

Blacks Whites

Population 19 million 4.5 million

Land allocation 13 percent 87 percent

Share of national income <20 percent 75 percent

Minimum taxable income 360 Rand 750 Rand

Doctors/population 1/44,000 1/400

Infant mortality rate

(per thousand)

20 (urban)

40 (rural)

2.75

Annual expenditure on education per pupil $ 45 $ 696

Teacher/ pupil ratio 1/60 1/22


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While several analysts felt that sanctions and international isolation had led to the

eventual fall of the apartheid system, others felt that the system had collapsed also due

to the inefficiencies it created. While apartheid succeeded in allowing the whites to

subjugate the blacks, the economy, as a whole, suffered. By suppressing the majority

of the population, the government severely hampered the growth of the economy. The

apartheid system limited the size of the markets available to domestic companies,

while the labor market regulations caused the inefficient utilization of human

resources; the distorted education policies caused skill shortages. Further, the

administrative cost of implementing apartheid was a burden on the economy.

The Economy in the Post-Apartheid Era

In 1994, the ANC was elected to power. With political control going out of the hands

of the white minority, the deprived sections of the population were hopeful that their

problems would finally start being addressed. The government was faced with huge

disparities in income and living conditions between the population groups. While the

majority of the whites were well off, most of the blacks lived in penury. The

government, therefore, had on its hands the difficult task of bridging the income gap

between the races, bringing better education, health care, and other amenities to the

deprived people as well as achieving sustained growth.

The ANC government began by assessing the living conditions of the poor. It was estimated that 4.3 million families (most of them black) did not have adequate housing, 12 million people lacked access to clean drinking water, and 4.6 million adults were illiterate. Most schools and hospitals in the black areas did not even have electricity.

The Policy Initiatives

In 1994, the government introduced the Reconstruction and Development Programme (RDP), which primarily aimed to reduce poverty and improve the living conditions of the poor. “Attacking poverty and deprivation will be the first priority of the democratic Government” – declared the white paper on RDP. The document added – “Our income distribution is racially distorted and ranks as one of the most unequal in the world. Women are still subject to innumerable forms of discrimination and bias. Rural people are marginalized. Throughout, a combination of lavish wealth and abject poverty characterizes our society.”

12

The Reconstruction and Development Programme

The RDP was an integrated socio-economic policy framework that sought to gather together the people and the resources of the country to eliminate the inequalities caused by the apartheid system and build a democratic, non-racial, non-sexist republic.

The white paper on RDP identified four key programs. They were:13

Meet the basic needs of every South African

Develop South Africa‟s human resources

Develop a prosperous, balanced regional economy and

Democratize the state and society.

12 “RDP White Paper,” www.anc.org.za, September 1994. 13 Prof. B. C. Chikulo, “Development Policy in South Africa: A Review,” DPMN Bulletin,

Volume X, Number 2, www.dpmf.org, April 2003.


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The government set up a special cabinet committee (SCC) to implement the program. A core committee (CC) was also set up to support the SCC. The CC comprised ministers, deputy ministers, and directors-general of finance and state expenditure, public administration, constitutional development, and public works. The office of the president was also to aid the CC.

A fund, called the RDP Fund, was created to finance the various programs and sub-programs under the RDP. The fund secured finances from various sources. The government reassigned to the fund some part of the budgetary allocations to various government departments. International and domestic grants were also a major source of finance. Revenues from state lotteries as well as from the sale of state assets were diverted to the fund. Also, the fund‟s surplus was invested in investments, the interest on which went back into the fund. The government allocated Rand

14 2.5 billion in the

1994-95 budget to the RDP Fund. In 1995-96, the amount increased to Rand 5 billion. The plan was to increase the allotment up to Rand 12.5 billion in 1998 and beyond.

The RDP fund was to finance projects that would have a long-term effect on society such as housing for the homeless, running water, electricity, and sewerage systems for millions of homes across the country, infrastructure such as roads, and free education. It also aimed to create jobs and redistribute land so as to tackle unemployment and the economic inequalities (Refer Exhibit IV for the socio-economic objectives of the RDP).

Exhibit IV

Socio-Economic Objectives under the RDP

The creation of 2.5 million jobs over a ten-year period;

The building of one million houses by the year 2000;

The connection to the national electricity grid of 2.5 million homes by 2000;

The provision of running water and sewerage to one million households;

The distribution of 30% of agricultural land to emerging black farmers;

The development of a new focus on primary health care;

The provision of ten years of compulsory free education for all children;

The encouragement of massive infrastructural improvements through public

works;

The restructuring of state institutions by 1997 to reflect the broader race, class

and gender composition of society.

Source: Prof. B. C. Chikulo, Development Policy in South Africa: A Review, DPMN

Bulletin, Volume X, Number 2, www.dpmf.org, April 2003.

Despite its good intentions, the implementation of the RDP was far from satisfactory. Ineffective governmental control and lack of inter-departmental coordination resulted in slow progress in 1995 and 1996. Also, the local governments did not have the capacity to successfully implement the RDP.

For the first two years after the ANC government came to power, the economy grew by only around 2.3% (average annual rate). The government was, however, able to bring down the annual inflation rate from around 20% to around 10%. Though the economy in 1996 was in better shape than in 1993, when there had been negative growth and soaring inflation, the government was only too aware that low growth would not help in solving the huge unemployment issue, which had worsened in the

14 Rand is the currency of South Africa. US$ 1 = Rand 6.76 (as of 2006)


553

period. A growing current account deficit and currency depreciation were other factors that were worrying the government. The lower-than-expected performance of the economy also impacted negatively on the implementation of the RDP. The government realized that it would have to create the right environment for the economy to achieve high growth, low deficits, a stable exchange rate, and more jobs. The government announced a new policy in 1996.

The Growth, Employment, and Redistribution Policy (1996-2000)

The Growth, Employment, And Redistribution (GEAR) policy was introduced by Finance Minister Trevor Manuel in June 1996. The policy primarily aimed to achieve a 6% annual growth rate, increase exports by 8% per annum, and create 400,000 new jobs every year by 2000. The policy document stated – “It is Government‟s conviction that we have to mobilize all our energy in a new burst of economic activity. This [would require] breaking current constraints and catapulting the economy to the higher levels of growth, development, and employment needed to provide a better life for all South Africans.”

15 Though the GEAR was a new policy initiative, the

government saw it as a tool that would help achieve the objectives of RDP. It was also to assimilate several important elements from the RDP.

The new policy was to help develop a competitive, fast-growing economy through fiscal and monetary discipline. The government aimed to control the deficit, check depreciation of the currency, and rein in inflation. Despite certain sections demanding nationalization, the ANC government resisted the urge to nationalize and instead decided to privatize several sectors of the economy (See Table 1 for more information on the GEAR policy).

Table I: The Core Elements of the Gear Policy

A renewed focus on budget reform to strengthen the redistributive thrust of expenditure;

A faster fiscal deficit reduction program to contain debt service obligations, counter inflation, and free resources for investment;

An exchange rate policy to keep the real effective rate stable at a competitive level;

A consistent monetary policy to prevent a resurgence of inflation;

A further step in the gradual relaxation of exchange controls;

A reduction in tariffs to contain input prices and facilitate industrial restructuring, compensating partially for the exchange rate depreciation;

Tax incentives to stimulate new investment in competitive and labor absorbing projects;

Speeding up the restructuring of state assets to optimize investment resources;

An expansionary infrastructure program to address service deficiencies and backlogs;

An appropriately structured flexibility within the collective bargaining system;

A strengthened levy system to fund training on a scale commensurate with needs;

An expansion of trade and investment flows in Southern Africa; and

A commitment to the implementation of stable and coordinated policies.

Source: “Growth, Employment, and Redistribution: A Macroeconomic Strategy,” www.treasury.gov.za, June 14, 1996.

15 “Growth, Employment, and Redistribution: A Macroeconomic Strategy,” June 14, 1996.


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Unlike the RDP which put the stress on reducing the economic inqualities between the

races, the GEAR‟s stress was more on job creation. And for creating more jobs, the

government decided to expand the private sector. Therefore, the policy suggested

lowering the interest rate and reducing corporate taxes to stimulate higher private

investment. The government was also to reduce its consumption expenditure, relax

foreign exchange controls16

, and reduce tariffs. GEAR envisaged increasing non-

mineral exports and attracting FDI17

. The government felt that with improving foreign

investor confidence, FDI inflows into South Africa would increase.

The ‘GEAR’ Effect

The ANC-led government promised “a better life for all” when it launched the RDP.

However, in 1996, with the implementation of the GEAR policy, the government

appeared to have shifted its focus from social welfare to fiscal discipline and

liberalization. When asked to respond to criticism regarding government‟s change in

focus from addressing social problems to wooing foreign investment, Pundy Pillay,

head of RDP policy unit within the president‟s office, insisted that the RDP remained

a vital component of government policy. “It (RDP) is not at all incompatible with

GEAR. The two policies require each other to work,”18

he said.

However, irrespective of whether RDP and GEAR were compatible or not, under the

GEAR policy, i.e. between 1996 and 1999, South Africa‟s GDP grew in real terms by

an average of only 2.1 per cent annually, which was even lower than the population

growth rate. Some analysts ascribed this lack of growth to the monetary policy

followed by the South African Reserve Bank (SARB). Chris Stals, the governor of the

SARB, was of the opinion that keeping interest rates high was necessary to control

inflation. Therefore, even when the government had recommended lowering the

interest rates under GEAR so as to boost private investments, the SARB continued to

maintain19

high interest rates.

While the GDP grew at 4.3% in 1996, the growth rate fell to 2.6% in 1997, and further

to 0.5% in 1998. In 1999, the economy recovered (from the Asian crisis) and grew by

2.4%. With the economy posting low growth rates, the unemployment situation in

South Africa worsened. Whatever little growth the country witnessed during the

period was jobless growth (Refer Table II for unemployment figures in the 1990s).

16 The new rules allowed non-resident South Africans to maintain foreign currency denominated

deposits with South African banks. South African corporates were allowed to preserve foreign currency earnings for up to thirty days of accumulation (Earlier, they were allowed to retain them only for up to seven days).

17 Foreign direct investment (FDI) is defined as an investment involving management control of a resident entity in one economy by an enterprise resident in another economy. FDI involves a long-term relationship reflecting an investor‟s lasting interest in a foreign entity.

18 Ernest Harsch, “South Africa Tackles Social Inequities,” Africa Recovery, www.un.org, January 2001.

19 The exchange rate crisis of South Africa in 1996 forced the SARB to sell massive amounts of foreign reserves. The central bank was left with only US$ 942 millions in foreign reserves in 1997. In 1997, the inflation rate was also high, at 8.9 percent. With investors losing confidence in emerging markets following the Asian crisis, the rand depreciated in 1998 (from 4.61 per US $ in 1997 to 5.53 per US $ in 1998). In response to these developments, the central bank raised its repurchase rate (the rate at which the reserve bank charges commercial banks to borrow from it) from 14.8 percent to 22 percent. As the foreign reserve situation stabilized, the Reserve bank later decreased the repurchase rate to 11.75%.

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Table II: Unemployment in South Africa

Year 1993 1994 1996 1998 2000

Broad definition* (%) 31.2 31.5 35.6 38.6 36.9

Narrow definition^ (%) 13.0 20.0 21.0 26.1 25.8

* wanting work, ^ actively searching for jobs

Source: South African Labor and Development Research Unit, University of Cape

Town, and Labor Force Survey, Statistics South Africa.

Though foreign exchange reserves increased between 1996 and 2000, the FDI inflows were not satisfactory. Despite some successes, with a few big businesses such as BMW and Mercedes setting up automobile manufacturing plants in South Africa, the GEAR period did not see FDI levels increasing. On the other hand, analysts such as Padraig Carmady, Professor, University of Vermont, criticized the South African government‟s view of considering FDI as a panacea for the ills plaguing the South African economy. Also, a closer look at the FDI that did come in revealed that much of it went toward acquiring existing assets rather than building new plants or creating new jobs resulting, in most cases, in displacing domestic manufacturers. Under GEAR, the South African economy became even more dependent on natural resources such as metals, diamonds, and gold rather than on „new economy‟ industries.

However, the government was able to control the budgetary deficit, which also was one of the objectives of the GEAR policy. The deficit went down from 4.6% of GDP in 1996, to 2.4% of GDP in 1999. Inflation too was brought under control. In 1999, the inflation rate was around 5%, down from 7.4% in 1996 (Refer Exhibit V for major economic

indicators between 1995 and 1999).

Exhibit V

South Africa: Main Economic Indicators (1995-2000)

Year 1995 1996 1997 1998 1999 2000

Exchange rate

(Rands per US$)

3.63 4.29 4.61 5.53 6.11 6.93

Inflation 8.8% 7.4% 8.9% 6.9% 5.2% 5.3%

Current account

(US$ millions)

-2,205 -1,180 -2,273 -2,157 -640 -575

Exports* 30,701 30,263 30,171 29,264 28,267 31,630

Imports -27,404 -27,508 -29,848 -27,208 -24,554 -27,320

Foreign reserves

(US$ millions)

2,820 942 4,799 4,357 6,353 6,083

GDP at market

price (R bn)

548.1 617.9 685.7 783.9 800.6 888.1

* Major export items include Platinum, pig iron, gold, and copper.

Source: International Monetary Fund, International Financial Statistics, and South

Africa Central Bank.


556

However, some analysts were of the view that the GEAR policy brought about macroeconomic stability at the expense of growth. And without growth, the government was unable to reduce poverty or income disparities. They argued that by cutting down on expenditure, and reducing corporate taxes, the government was in fact excarberating the economic inequalities in the population. A COSATU

20 policy

document in 2000 concluded, “The GEAR brought about deep cuts in government spending between 1996 and 1999. As a result, efforts to improve services to the poor suffered, despite the continued reprioritization of spending from the rich to the poor.”

21

Felicity Gibbs, national manager of Operation Hunger22

said, “I worry about GEAR…it appears to enrich the already rich. The way it is being implemented possibly, the poor people are remaining where they are, and in fact are getting worse.”

23 A WEFA

24 report on South Africa in January 2001 also had something

similar to say – “The poor did not enjoy any benefits of the redistributed wealth. In fact they are even worse off.”

25 Official statistics released by the government also

clearly indicated that the whites continued to remain a majority among high income earners and that very few blacks were able to enter the high-income group (Refer

Exhibit VI for the break-up of high-income and low-income earners according to race in 2001).

Exhibit VI

A Comparison of Incomes (in 2001)

White

21%

Indian

3%

Colore

d

9%

Black

67%

Individual Monthly Income Less Than Rand

200 by Race Group*

Indian

4%

White

84%

Color

ed

2%

Black

10%

Individual Monthly Income More

Than Rand 30,000 by Race Group

* Amongst the employed aged 15-65 years

Source: www.statssa.gov.za.

20 COSATU or Congress of South African Trade Unions, established in 1985, is a union of

trade unions. It has a membership of around two million workers. Its objectives include improving the material conditions of its members, organizing the unorganized, and ensuring worker participation in the struggle for peace and democracy.

21 Richard Knight, “South Africa: Economic Policy and Development,” http://southernafrica. homestead.com, July 2001.

22 Operation Hunger is a South Africa registered not-for-profit organization which is concerned with the problems of chronic malnutrition and poverty.


24 Wharton Econometric Forecasting Associates or WEFA was founded in 1963 by Lawrence R. Klein, a Nobel Laureate in Economics, under the Economic Research Unit at the University of Pennsylvania to provide forecasting services. It became part of Global Insight, Inc. in 2001.


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557

Several analysts criticized the government‟s moves to privatize public utilities such as

water, electricity, etc. According to Trevor Ngwane, an organizer in the Anti

Privatization Forum (APF)26

said, “The ANC has bought into the idea that the best

way forward for economic development is to let the private sector take over services and assets that prior to this were controlled by the government.”

27

Subsequent Policy Initiatives

By 2000, the government was able to achieve many of the goals set under the RDP

(Refer Exhibit VII for achievements of the RDP between 1994 and 2000);

however, unemployment and poverty continued to remain high and threatened to

negate the progress made.

Exhibit VII

RDP Achievements between 1994 and 2000

Water 4 million more people given access to clean running water

Housing 900,000 units completed, 1.1 million housing subsidies

allocated

Electrification 1.5 million new connections

Telephones 4.2 million new connections

Poverty relief Rand 3 billion allocated

Health 600 new clinics, free health care for pregnant women and

children under 6

Public works 1,500 kilometers of roads built

Land 68,000 families resettled on farming land

Source: RDP Development Monitor.

While a majority of whites continued to live in prosperity, a large section of the blacks

remained below the poverty line. In fact, in 2001, it was estimated that 57% of the

blacks in South Africa lived below the poverty line, while only 2.1% of the whites

were poor. In other words, the economic disparities had not lessened significantly

from the apartheid era. A Finance Ministry budget review document, released along

with the 2000-01 budget in February stated – “South Africa remains one of the most

unequal countries in the world, with the poorest 40 per cent of households still living

below the minimum household subsistence level.”28

Also, under the RDP, the government had promised to redistribute 30 percent of all

land seized during the apartheid period. However, even a decade after the dismantling

of apartheid, only two percent of the land had been returned to the blacks.

26 The APF was established in July 2000 in Cape Town. The APF‟s role is to unite struggles

against privatization in South Africa. 27 “Poverty in Post Apartheid South Africa,” www.waronwant.org, July 23, 2003. 28 Ernest Harsch, “South Africa Tackles Social Inequities,” Africa Recovery, www.un.org,

January 2001.

http://www.waronwant.org/Supporting+New+Grassroots+Organisations+in+South+Africa+2534.twl

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558

With economic inequalities along racial lines remaining very much a part of South

African society, the government passed the Broad Based Black29

Economic

Empowerment Act, 2003, which came into effect in April 2004. The document said:

“Unless further steps are taken to increase the effective participation of the majority of

South Africans in the economy, the stability and prosperity of the economy in the

future may be undermined to the detriment of all South Africans, irrespective of

race.”30

The Act empowered the minister of trade and industry to issue codes of good

practice31

and to publish transformation charters to promote black economic

empowerment in South Africa. The legislation also resulted in the establishment of the

Black Economic Empowerment Advisory Council (BEEAC).

Around this period, the government introduced the Black Business Supplier

Development Programme (BBSDP). The BBSDP was an 80:20 cost-sharing cash

grant incentive scheme, which offered support to black-owned enterprises in South

Africa. In 2005, the government assisted 577 black-owned businesses with grants of

around Rand 29 million.

The main policy objectives were:

A substantial increase in the number of black people who had ownership and

control of existing and new enterprises

A significant increase in the number of black empowered and black-engendered

enterprises

A significant increase in the number of black people in executive and senior

management positions.

The minister of trade and industry issued the codes of good practice. For example,

Code 100 (Ownership Scorecard) required that blacks should own at least a 25% stake

(+ 1 vote) in a company. Code 200 (or Management Scorecard) was concerned with

black representation at senior executive levels (40% in the top management and 50%

in the Board) and Code 300 (Employment Equity Scorecard) dealt with the

representation of blacks at all levels of management – senior management, middle

management, and junior management. Code 400 required companies to spend 3% of

their payroll on improving the skills of blacks. Similarly, Code 500, Code 600, and

Code 700 referred to Preferential Procurement, Enterprise Development (which

encouraged corporates to support initiatives that facilitated access to loans, seed

capital, training), and Socio-Economic Development (which measured the socio-

economic contributions of entities) respectively. Enterprises which followed these

codes were eligible for licenses and concessions.

Despite these programs, the unemployment levels among the blacks remained high.

And more than any other factor, this was due to the low levels of growth in the

economy. David Cowan, economist, Economist Intelligence Unit, said in 2004,

“Three per cent is not the worst rate by African standards. But 3% is not big enough

to generate jobs. It just about keeps you where you are. The question now is whether

the government can boost the rate.”32

29 Black here referred to Africans, coloreds, and Indians.(Source: www.bwasa.co.za) 30 “Broad Based Black Economic Empowerment Act 1953 of 2003,” http://bee.sabinet.co.za. 31 The codes referred to qualification criteria for preferential purposes of procurement and any

other economic activity, indicators to measure broad-based black economic empowerment and weighting to be attached to these indicators, etc.

32 Lucy Jones, “Risks Remain for South Africa‟s Economy,” www.bbc.co.uk, April 14, 2004.


559

The government too realized that accelerating the economic growth should be its

priority. Therefore, in July 2005, Mbeki launched the Accelerated and Shared Growth

Initiative – South Africa (ASGISA). The ASGISA document said, “…we need to

ensure that the fruits of growth are shared in such a way that poverty comes as close

as possible to being eliminated, and that the severe inequalities that still plague our

country are considerably reduced. Our vision of our development path is a vigorous

and inclusive economy where products and services are diverse, more value is added

to our products and services, costs of production and distribution are reduced, labor is

readily absorbed into sustainable employment, and new businesses are encouraged to

proliferate and expand.”33

The primary goal of the ASGISA was to halve unemployment and poverty by 2014.

Under the ASGISA, the government targeted a growth rate of at least 4.5% between

2005 and 2009, and above 6% between 2010 and 2014. The government also

identified areas where improvement would have to be made in order for the economy

to achieve the set targets. For example, the volatility of the currency, the poor

infrastructure, the shortage of skilled labor, limited investment opportunities, the

regulatory environment, and deficiencies in state organization were listed as binding

constraints. The government then developed initiatives under six categories –

Macroeconomic issues; Infrastructure programs; Sector investment strategies; Skills

and education initiatives, Second economy34

interventions; and Public administration

issues.

Deputy President Phumzile Mlambo-Ngcuka (Ngcuka) said, “We believe that we have

built the basis for a national program of shared economic growth. With this program

we can achieve our social objectives, and we can more than meet the Millennium

Development Goals35

.”36

Outlook

South Africa was a unique country in many ways. While some regions in the country

had infrastructure and prosperity levels comparable to those of developed countries,

other regions were worse off than the least developed countries. There were extreme

disparities in income and wealth among the race groups, as a consequence of the

apartheid system. However, even thirteen years after the death of apartheid, these

disparities remained as glaring as ever. Though in 2005 and 2006, South Africa‟s

economy grew by around 5%, poverty and unemployment rates were still at high

levels. As of March 2006, the unemployment rate was at 25.6% (Refer Exhibit VIII

for major economic indicators and unemployment levels in the 2000s).

33 Media Briefing by Deputy President Phumzile Mlambo-Ngcuka, Background Document,

“A Catalyst for Accelerated and Shared Growth - South Africa,” www.pmg.org.za, February 06, 2006.

34 „Second economy‟ here refers to the informal economy of South Africa. 35 The Millennium Development Goals (MDGs), which included eradicating extreme poverty

and hunger, achieving universal primary education, promoting gender equality, reducing

child mortality, improving maternal health, combating HIV/AIDS, malaria, and other

diseases, ensuring environmental sustainability, and developing global partnership for

development, were agreed on at the United Nations Millennium Summit in September 2000.

Nearly 190 countries have subsequently signed up to them as a blueprint for building a better world in the 21st century.

36 Media Briefing by Deputy President Phumzile Mlambo-Ngcuka, Background Document,

“A Catalyst for Accelerated and Shared Growth South Africa,” www.pmg.org.za,

February 06, 2006.


560

Exhibit VIII

Economic Indicators in the 2000s

S.

No.

Economic Indicators 2001 2002 2003 2004 2005 2006

1 Real GDP growth (%) 2.7 3.6 2.8 3.7 4.3 4.5

2 CPI* 5.7 9.2 5.8 1.4 3.9 5.4

3 National Debt

(% GDP)

41.4 37.1 35.7 35.8 35.1 32.8

4 External current

account balance (%

GDP)

0.1 0.7 -1.5 -3.2 -3.7 -4.9

5 US$ exchange rate

(in rands)

12.13 8.64 6.64 5.64 6.33 7

6 Unemployment (in %) - 30.5 - 26.2 26.7 25.6

* Consumer price index

Source: IMF Country Report and other sources.

An EPI37

economic snapshot in 2006 showed that South Africa‟s Gini coefficient38

had actually worsened in the period between 1994 and 2002. South Africa had

become the most unequal country in the world in terms of income distribution in the

early 1990s, surpassing Brazil, which had held the dubious distinction till then (Refer

Exhibit IX for the Gini coefficients of South Africa and Brazil). The snapshot

concluded – “Both Brazil and South Africa have a long way to go to reduce the

extreme inequality in their societies, but one country (Brazil) seems headed in the

right direction while the other (South Africa) is headed in the wrong one.”39

The wide prevalence of HIV/AIDS was a major threat to the economic growth and

development of South Africa. The country had one of the highest numbers of HIV

positive people in the world about five million out of a population of 45 million

(Refer Exhibit X for HIV/AIDS prevalence in South Africa and some other

countries). Though different estimates cited different figures, it was feared that

around 10 per cent of all young people were infected. As a result, the average life

expectancy of South Africans was predicted to fall further by 2008. South Africa‟s

general health system too was inadequate, ranking40

175th

among the 191 UN member

states. The poor health infrastructure was expected to exacerbate the situation.

37 The Economic Policy Institute (EPI) is a non-profit, non-partisan think tank that seeks to

broaden the public debate about strategies to achieve a prosperous and fair economy.

(Source: www.epi.org) 38 The Gini coefficient, developed by Italian statistician Corrado Gini, is a measure of inequality

of a distribution. It is defined as a ratio with values between 0 and 1. It is usually used as an

income inequality metric, with 0 corresponding to perfect income equality and 1 corresponding to perfect income inequality.

39 Tony Avirgan, “South Africa‟s Economic Gap Grows Wider While Brazil‟s Narrows Slightly,” www.epi.org, April 19, 2006.

40 According to the World Health Organization.


561

Exhibit IX

GINI Coefficients for South Africa and Brazil, 1995-2002

Source: www.naledi.org.za, www.dieese.org.br.

Exhibit X

Ranking of Countries on the Basis of Number of People Living with

HIV/Aids

Rank Country People living with HIV/AIDS

(as of 2003)

Prevalence

Rate^

1 South Africa 5,300,000 21.5%

2 India* 5,100,000 0.9%

3 Nigeria 3,600,000 5.4%

4 Zimbabwe* 1,800,000 24.6%

5 Tanzania 1,600,000 8.8%

6 Ethiopia 1,500,000 4.4%

7 Mozambique 1,300,000 12.2%

8 Kenya 1,200,000 6.7%

9 Congo 1,100,000 4.9%

10 USA 950,000 0.6%

* 2001 data, ^ among adults (15-59)

Source: www.cia.gov.


562

Crime was also a serious concern (Refer Exhibit XI for crime rates in South Africa

and some other countries). Since 1994, large numbers of immigrants had been

arriving from other African countries, seeking employment and a better life in South

Africa. However, with local unemployment at high levels, there were fears of civil

unrest and of crime rising further.

Exhibit XI

Murders*

Rank Country Murders per

1000 people

1 Columbia 0.617

2 South Africa 0.496

3 Jamaica 0.324

4 Venezuela 0.316

5 Russia 0.201

Robberies*

Rank Country Robberies per

1000 people

1 Spain 12.32

2 Chile 6.92

3 Costa Rica 4.79

4 South Africa 4.44

5 Estonia 3.56

* UN Survey 1998-2000

Source: www.nationmaster.com

The government was aware that its first priority was reducing poverty and creating

new jobs. “None of the great social problems we have to solve is capable of resolution

outside the context of the creation of jobs and the alleviation and eradication of

poverty,”41

said President Mbeki. The government was quite optimistic that it would

be able to halve unemployment and poverty by 2015. “Our second decade of freedom

will be the decade in which we radically reduce inequality, and virtually eliminate

poverty. We know now that we can do it…,”42

said Ngcuka.

41 Ernest Harsch “South Africa Marks a Decade of Freedom,” Africa Renewal, www.un.org.

July 2004. 42 “Asgi-SA: Accelerated Growth for All,” www.southafrica.info, 2006.

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563

References and Suggested Readings:

1. Background Note: South Africa, Bureau of African Affairs, www.state.gov, April

2007.

2. Mary Alexander, South Africa: Black Economic Empowerment, www.allafrica.com,

March 23, 2007.

3. Economic Policy and South Africa’s Growth Strategy, www.treasury.gov.za, March 19,

2007.

4. Dani Rodrik, Understanding South Africa’s Economic Puzzles, Working Papers,

Center for International Development at Harvard University, www.cid.harvard.edu,

August 2006.

5. Josep Maria, Resistance to Neo-liberalism, www.alternatives-international.net, July 24, 2006.

6. Good Times in SA, Financial Times, www.southafrica.info, June 12, 2006.

7. Tony Avirgan, South Africa’s economic gap grows wider while Brazil’s narrows

slightly, www.epi.org, April 19, 2006.

8. Asgi-SA: Accelerated Growth for All, www.southafrica.info, 2006.

9. Lynne Thomas and Jonathan Leape, Foreign Direct Investment in South Africa,

CREFSA, London School of Economics, www.lse.ac.uk, October 2005.

10. Edmond J. Keller, The Challenge of Enduring and Deepening Poverty in the New

South Africa, www.international.ucla.edu, May 2005.

11. Ernest Harsch, South Africa Marks a Decade of Freedom, Africa Renewal,

www.un.org, July 2004.

12. Poverty in Post Apartheid South Africa, www.waronwant.org, July 23, 2003.

13. Prof. B. C. Chikulo, Development Policy in South Africa: A Review, DPMN Bulletin,

Volume X, Number 2, www.dpmf.org, April 2003.

14. Tim Bucknell, Hannah Lee, Patty Skuster and Mary Thornton, Changing Gears: South

Africa and the Growth Employment and Redistribution Strategy of 1996, www-

personal.umich.edu, April 15, 2002.

15. Ernest Harsch, South Africa Tackles Social Inequities, Africa Recovery, www.un.org,

January 2001.

16. Ernesto Hernandez-Cata, Sub-Saharan Africa Economic Policy and Outlook for

Growth, Volume 36, Number 1, www.imf.org, March 1999.

17. IMF Concludes Article IV Consultation with South Africa, www.imf.org, September, 1998.

18. Reconstruction and Development Programme (RDP) White Paper, University of

Pennsylvania-African Studies Centre, www.africa.upenn.edu, September 1994.

19. African National Congress Constitution, www.anc.org.za.

20. www.stassa.gov.za.

21. www.southafrica.info.

22. www.reservebank.co.za.

23. www.mbendi.co.za.

24. www.cia.gov.

25. www-cs-students.stanford.edu.

26. www.nationsencyclopedia.com.

http://www.statssa.gov.za/

case 9 the south african economy

Documents