No democratic government can survive in South Africa if it fails to address the huge economic and social inequities left by apartheid. But the leaders of the new majority also know that a significant and sustainable program to redress inequity will require rapid economic growth. To meet this dual challenge, the government is attempting to strike a balance by implementing programs that will gain it the continued support of the voting poor without bankrupting the country or precipitating the flight of the white minority, who retain the bulk of South Africa's technical skills and capital. When the government assumed power, it acquired a vast array of economic assets, compared to the rest of Africa, but these assets were clearly insufficient to overcome the legacy of apartheid quickly.
The South African Economy13
South Africa's economy, with a gross domestic product in 1995 of approximately $120 billion, ranks twenty-seventh in the world and is by far the best developed and largest in Africa. South Africa is also twenty-seventh in population, at around 42 million, about the size of Poland or Spain. The U.S. Department of Commerce has designated South Africa as one of the world's ten "Big Emerging Markets" because of the pent-up consumer demand among the majority of the population, which under apartheid was largely excluded from the formal economy, and because of the country's potential as the primary economic engine for an underdeveloped Southern Africa region with a population of more than 120 million.
The country has an increasingly diversified economy. It has a modern transportation and communications infrastructure, financial institutions, and a strong core of well-trained and internationally engaged professionals in law, finance, engineering, higher education, and the media. South Africa can still rely on a treasure trove of minerals that includes major proportions of the world's total reserves (for example, South Africa accounts for 40 percent of the world's gold, 66 percent of platinum group metals, 24 percent of diamonds, 54 percent of chrome, 83 percent of manganese, and 33 percent of vanadium); together, minerals contribute $12 billion annually to the balance of payments. As a proportion of South Africa's gdp, however, the minerals sector contributes less than 9 percent. Of far greater importance has been the growth of manufacturing since 1950. It now accounts for nearly 24 percent of gdp and is the largest source of employment after the government. Three other sectors, finance, wholesale and retail trade, and government each account for between 15 percent and 17 percent of the country's economic activity. Agriculture, until 1920 the economy's largest sector, today contributes less than 5 percent to the gdp, but it remains a large export earner. Despite South Africa's obvious economic advantages, an overhang of apartheid economic structures and policies will make the new government's goal of rapid growth with greater equity very difficult to achieve.
Overcoming apartheid's entrenched inequities remains a much greater challenge than altering macroeconomic policies to stimulate growth. Throughout most of this century, a combination of land dispossession and influx control laws forced blacks into the labor market but channeled them primarily to low-wage mine and farm work. Those not able to work were sent into the impoverished "homelands" that occupied the least productive 13 percent of the country's territory. During the 1970s the system began to crack as more and more workers were needed to help run white enterprises. But whites continue to enjoy a per capita income almost twelve times higher than that of blacks, and they own over 80 percent of the land. Forty percent of the nation's households--94 percent of them black--are living below the poverty line of less than $200 a month for a family of five. The earnings of this 40 percent of South African households, 64 percent of which are in poor rural areas, account for only 6 percent of the national income. The richest 10 percent of households, most of them white, claim over half of the national income. Reinforcing these income gaps are huge disparities in access to education, housing, health care, and employment opportunities.
As the ANC assumed political power, however, its policies on how best to achieve these objectives have changed. Until four years ago, ANC leaders advocated a broad socialist approach, as outlined in its Freedom Charter, including nationalization of the private oligopolies that control 80 percent of the companies that trade on the Johannesburg stock exchange. Shortly after taking office, the Mandela administration issued a Reconstruction and Development Plan. While there was no longer any suggestion of nationalization, the plan did not indicate how the government would pay for its long list of social objectives, including such ambitious targets as the construction of one million low-income houses by 2000.
Reducing unemployment is the strategy's linch-pin, and making significant progress on this issue looms as one of the government's biggest political, economic and social challenges. In 1994 unemployment was estimated by the Central Statistical Service to be 32.6 percent. The rate among blacks, the country's newly enfranchised majority, was over 40 percent, compared to 6.4 percent for whites. Since the end of apartheid and the lifting of economic sanctions, the economy has begun to grow at a consistent annual rate of about 3.5 percent, slightly more than the increase in population. Government analysts have concluded that at this rate only about 100,000 new jobs will be generated annually. By 2000 the unemployment rate would rise another 5 percent to around 37 percent, a figure that would not bode well for the next national elections, in 1999.
The rate of growth also has to accelerate if the government wishes to increase public spending on improved social services for the poor, including employment-intensive programs to build low-cost housing, improve community water and municipal infrastructure, and pay for land reform. South Africa's budget deficit had already reached 9 percent of gdp by 1992-93, and higher fiscal deficits would lead to higher inflation and higher interest rates, risking renewed recession and a capital outflow that could cause a balance-of-payments crisis. Therefore, the government has sought to reduce the budget deficit which is expected to be only 5.1 percent of gdp in 1996-97.
Despite these fiscal realities, the government has adopted ambitious targets. It aims to raise the rate of economic growth from 3.1 percent in 1996 to 6 percent by the end of the decade while simultaneously creating 833,000 jobs; its goal is to create at least 400,000 jobs annually after 2000. Whereas the ANC had previously held that rapid increases in government spending would provide both the stimulus for economic growth and means to reduce inequities, their new strategy is strikingly similar to those now widely prescribed by the World Bank for other countries in transition from authoritarianism, central planning, and underdevelopment. South Africa's comprehensive plan to transform the economy includes
Economically, success of the strategy will hinge on greater engagement in the global economy: ". . . the central thrust of trade and industrial policy has to be the pursuit of employment-creating international competitiveness." This will entail a fundamental shift away from demand-side interventions, such as tariffs and subsidies to help producers, to supply-side measures aimed at lowering unit costs and spurring economic expansion all along the value chain. By focusing on creating a macroeconomic environment in which private fixed investment can flourish, the government hopes to set off a virtuous circle of employment-generating growth.
Politically, voters demand improvements in basic services. While the government cannot afford the huge home-building program once envisioned, large investments in roads, sewerage, and electrification are being made. By the end of 1997, the government estimates that 640,000 households will have gained access to clean drinking water--its most popular program. Major advances also include rural electrification, free primary health care for children and pregnant women, and the redistribution of nearly two million hectares of land. The government hopes that providing such help will lead local communities to commit their own labor and resources to building new housing.
On more contentious aspects of the plan, such as the need for wage and price restraints, the macroeconomic plan proposes that a broad national agreement be negotiated among the interested parties in order to prevent renewed social conflict.
The immediate objective of the agreement would be to ensure that the recent depreciation of the currency does not translate into a vicious circle of wage and price increases leading to instability in the financial markets and decline in competitive advantage. For this reason it is important that wage and salary increases do not rise more than productivity growth. It is equally important that price restraint should be maintained, facilitated through an effective competition policy and continued trade liberalization.14
The macroeconomic strategy, which was developed by a team of fifteen economists, bankers and other financial experts drawn from government, universities, and development banks at the direction of the Ministry of Finance, was backed by a special multipartisan council of political leaders appointed by President Mandela. This is just one more example of Mandela's strategic leadership in helping to forge a national consensus to support the tough choices inherent in the strategy and to avoid debilitating conflicts over the plan's feasibility and fairness.
The plan's proponents hope to emulate the rapid economic growth and greater social equity of the newly industrializing countries (nics) of Asia, or the more recent economic advances of several Latin American countries, notably Chile. The Asian "tigers," however, have benefited from much higher levels of investment in capital equipment and education than exist in South Africa. Currently, East Asia's savings and investment rates are roughly seven times those of South Africa; these nations have huge pools of low-cost skilled labor that will not be duplicated in South Africa for at least another generation. Furthermore, South Africa's modern sector remains saddled by senior managers who have never known real competition. While trade unions remain powerful and are often cited by economists as another source of inefficiency, they played such a crucial role in undermining apartheid and facilitating its peaceful overthrow that it will be very difficult for any freely elected government to challenge or ignore them, as has occurred in other rapidly industrializing countries.
There is also a fundamental political difference between the economic transformations in East Asia, or in Chile, and that of South Africa. In moving decisively to democracy before restructuring the economy, South Africans are challenging the political judgment of Asian leaders such as former Singapore prime minister Lee Kwan Yu, who condemned Gorbachev for failing to put "perestroika" ahead of "glasnost." But in South Africa there was much less political leeway for overcoming unpopular economic policies than in the more authoritarian Big Emerging Markets, because the overwhelming problem of apartheid had to be resolved before any significant economic reform was possible.
When the macroeconomic strategy was finally introduced to parliament and the nation, all of the ANC's political leadership, including current and former members of the South African Communist Party, lined up to endorse the plan publicly. This unity is yet another tribute to Mandela's leadership, because there had been strong differences within the party over all the key provisions, and these were heatedly debated right up to the plan's release. To help sell the plan at home, the government secured immediate and strong endorsements from the World Bank and the imf, and a large ministerial delegation was sent on a much-publicized trip to Cannes, where the plan was enthusiastically received at a meeting of European Union bankers and finance ministers.
Economic pundits in the South African media have offered more qualified endorsements, pointing to the obvious political and social difficulties in meeting strategic targets. Cutting the budget deficit to 5.1 percent in 1997 and to 4 percent in 1998, as called for in the plan, will mean less money for improving life in the black townships, for police and educational reform, and for a host of other needs.
Cutting tariffs to spark foreign direct investment will cause a further drop in revenues, adding to pressure on the deficit. But no one knows whether foreign capital will flow in fast enough to offset these losses, help bring down interest rates, and begin generating sufficient growth to finance the social programs that cannot be financed internally without incurring huge new deficits, inflation, and sharply higher interest rates.
Selling off parastatals and publicly owned assets is, of course, one major way to raise money to meet social and other needs. And the privatization potential in South Africa is enormous, perhaps amounting to half of the country's capital stock. But privatization is also a political minefield, as it would introduce market forces that could lead to protests among more affluent consumers who are accustomed to paying subsidized prices for services, and among poor households in overcrowded black townships where during the apartheid era the government was either unable or unwilling to collect fees for basic services such as electricity and water. Privatization could also arouse new fears over job and wage security among organized labor. Tensions between the government and South Africa's trade union movement over the macroeconomic strategy has been growing and could become a major obstacle to consensus-building on a range of issues.
cosatu leaders naturally are most concerned with protecting the security and benefits of their members. They do not reject the macroeconomic strategy, but they want to slow it down. No one disputes the need for massive job creation, but COSATU would like to start with immediate and major government programs, not deficit reduction. They note that South Africa's deficit as a proportion of gdp is 25 percent below the OECD average, and they claim that the government can afford to spend much more on labor-intensive projects, including major public works programs, especially in poor rural areas. Organized labor also supports major new investments in education and training. But on trade liberalization, privatization, and other elements in the strategy, labor's position is best described as favoring a "go slow policy." Government programs to train and employ the poor would, in their view, help to narrow the wage distribution and gradually increase competition within labor markets and thereby help productivity.
While a COSATU-like approach worked during the postwar boom in Europe to facilitate structural adjustment and overcome certain economic inequities, the circumstances in South Africa and the global economy today are quite different. South Africa cannot afford to fund the job creation programs or the social safety net that was politically necessary in Europe to accommodate the eventual restructuring of labor markets. Furthermore, South Africa's decision to seek rapid economic growth by expanding international trade and by attracting foreign direct investment means the South African labor markets will no longer be isolated from changes in labor markets globally. Nicoli Nattrass, a professor of economics at the University of Cape Town, points out that as South Africa proceeds with trade liberalization and experiences growing competition (particularly from lower-wage economies), there will be pressure on unskilled wages. At the same time, there will be a rising demand for highly skilled workers (particularly if their skills are internationally transferable), and employers will have to pay much higher wages to keep them in South Africa.
Narrowing the Income Gap:
Labor market reforms since the late apartheid era have primarily benefited organized labor, which has become an enclave of regulated and protected employment. Unless the employment base can be broadened, the major political fault lines among South African workers will no longer be between COSATU and the small and still largely white elite that sits on the top rungs of the economic ladder. Rising inequalities between organized labor and the huge pool of workers who are either beginning to gain access to the unregulated, informal, subcontracted, or "out-sourced" labor markets, or are still among the unemployed, could present new political problems for the government. While racial income inequality had begun to narrow in South Africa, class inequality appears to be growing. Between 1975 and 1991 the poorest 40 percent of blacks became 40 percent poorer, while the top 20 percent became 40 percent richer. Inequality among blacks was 90 percent as wide as overall inequality among all the population groups.
Macroeconomics and the Labor Market
Under the macroeconomic strategy, economic growth will contribute only about a third of the 833,000 new jobs to be created by the year 2000. Thirty percent will come from reforms of the labor market, introducing greater flexibility in the hiring and retaining of workers and providing new opportunities for the unemployed. Much of the remaining job creation is expected to come from government programs, mainly accelerated labor-based infrastructural development and maintenance of public works in urban and rural areas. Given the tight budgets and likely resistance from trade unionists, it is doubtful these targets will be met by the end of the decade, but the government appears determined to try.
There are no easy answers for dealing with a widening income gap between the employed and unemployed in South Africa. Creating millions of low-wage jobs to draw unemployed workers into the formal economy through reform of the labor market and new government public works programs will be an essential first step in promoting greater equity and political stability; so, too, is economic expansion through enhanced international competitiveness if South Africa is to generate the economic surpluses to pay for public spending. Many more high-skill, high-wage workers and low-wage, low-skill jobs will be needed. Widening rather than diminishing inequities may result during the lengthy transition to a more balanced and fully developed economy. Resolving conflicts among labor, business, and government during this process will be one of South Africa's biggest political challenges.
To begin to deal with these issues, the government established a special Labor Market Commission that ran parallel to the work of the macroeconomic team; it released its report a few days after the new macroeconomic strategy was released. The commission has sought a consensus formula for reconciling South Africa's extreme income inequalities and high unemployment with low levels of output and productivity while trying to hold wages and prices in check. The thrust of the Commission's report was to recommend yet another consultative process to broaden traditional labor-management bargaining by including government representatives. The aim would be to reach a new social accord on the terms for promoting employment and growth within the framework of the macroeconomic strategy. A key element in this process would be the reform and strengthening of the National Economic Development and Labor Council (nedlac), a trilateral negotiating forum established under Labor Relations Act 66 of 1995. The government would present its plans for public works programs, tax policies, industrial and trade policies, and macroeconomic policy interventions. Business's contribution would be commitments to negotiating profit-sharing arrangements, to corporate governance mechanisms to include labor, to moderation in setting managerial salaries, and to expanded training programs at lower levels of the workforce. Labor would contribute commitments on wage restraints and greater flexibility in allowing companies to employ unorganized workers at lower wage scales.
It is too early to know whether it is possible to coordinate macroeconomic policy and labor market policy to produce more rapid expansion of employment. But in South Africa's difficult and potentially contentious economic transition, at least the forum would permit labor, business, and the government to understand each other's concerns better, and to explore options for reducing the risk of debilitating conflict. Traditionally, unions and employers could not negotiate real wages because of the volatility of prices and the severe economic distortions caused by the government's apartheid policies. But today, with prices and politics more stable, the government faces a new challenge to reassure unionized workers about the likely impact on real wages of programs to promote employment among the poor, international economic policies, and other dimensions of the macroeconomic strategy.
Economic policy, after all, must do more than promote growth and employment; it must also promote equity so that the poor will have the means and opportunity to participate actively in civil society and the rich will not become so powerful and insular that they feel no need or obligation to do so. For example, one key factor in long-term employment generation and in undoing the inequities of apartheid will be the government's investment in improving education for the poor, especially at the primary and secondary levels. This is a need that must be addressed by business and labor as well as government.
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