Economic outcomes
Since 1994, the performance of the South African economy has been at best disappointing. The most obvious problem has been the increase in unemployment, which at over 30% is now higher than in any other middle-income country. In addition, the economy has grown only slightly faster than the population, at around 2% a year, and investment remains low.
Faced with these challenges, the economic policy discourse has largely reflected the long-standing debates of development economics, with some new accents around globalisation. The main arguments centre on three hardy perennials: the relationship between growth and redistribution, the relevance of structural factors in underdevelopment and, by extension, the role of the market and the state.
Government economic policy has largely reflected the contention that apartheid depressed growth by repressing markets. This contrasts sharply with the ANC's historic focus on structural inequalities. Government's arguments have underpinned measures to free up markets through deregulation and privatisation, and to encourage foreign investment through conservative fiscal and monetary policies. The state separates anti-poverty measures from its economic policy, treating them purely as assistance for the poor rather than as an integral part of its growth strategy.
The failure of existing policies to bring about growth or create jobs on the necessary scale has led to two responses. In one view, weak outcomes reflect the temporary costs of liberalisation, as less productive enterprises go under. In this view, South Africa is on the verge of ‘turning the corner’, having laid the foundation for rapid growth. By extension, no fundamental shift in economic policy is required. A second view, reflected in the agreements arising out of the Growth and Development Summit in mid-2003, argues that inadequate results so far point to the need for a more interventionist strategy. This approach suggests that the government must do more to restructure the economy toward equitable growth. While it has gained ground since 2000, it remains highly contested within the state.
In the event, the available evidence gives little hope that the ‘tide has turned’. The strategies adopted by key sections of capital in response to the opening of the economy and the end of apartheid have deepened dualism and inequality, rather than supporting broader development. It follows that stronger government leadership is required to address poverty and unemployment.
This paper first explores the main outcomes of the post-apartheid economy, focusing on employment, growth and investment. The second section outlines key policy debates. The final part then evaluates these arguments in light of the strategies capital has followed since 1994.
The following table compares economic outcomes for South Africa and other middle-income countries at the turn of the century. South Africa performed substantially worse than comparable economies in terms of growth, investment and employment. It did improve compared to the deep crisis of the late 1980s and early 1990s, primarily due to capital flight in the face of rising unrest plus the decline in gold mining as Table 1 shows.
| GDP growth 1990–2001 | GDP per capita1 2001 | investment as % of GDP 2001 | unemployment rate 1998–20012 | |
|---|---|---|---|---|
| South Africa | 2.1% | 10,910 | 15% | 23% |
| Middle-income countries of which | 3.4% | 5,390 | 24% | 5% |
| Malaysia | 6.5% | 7,910 | 29% | 3% |
| Chile | 6.3% | 8,840 | 21% | 10% |
| South Korea | 5.7% | 15,060 | 27% | 4% |
| Egypt | 4.5% | 3,560 | 15% | 8% |
| Brazil | 2.8% | 7,070 | 21% | 10% |
Source: World Bank, Development Indicators 2003, Washington, DC. Notes: 1. The GDP per capita is here calculated in terms of purchasing power parity, which seeks to measure actual output taking exchange rate fluctuations into account. 2. The unemployment rate is given for one year between 1998 and 2001.
We here first analyse unemployment, as the most pressing economic challenge, and then growth and investment.
The unemployment crisis
Between 1995 and 2002, unemployment officially climbed from 16% to 30,5%. Figures for early 2003 put the figure at over 31%.1 These data do not include workers too discouraged to seek work. If they were included, the unemployment rate would be over 40%.
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Source: Figures calculated from StatsSA, South Africa in Transition (Pretoria, 2001) for 1995–1999, and from StatsSA, Labour Force Survey, September 2002, electronic database. Note: The official definition of unemployment, used here, reports workers too discouraged to seek work as outside the labour force, rather than as unemployed.
Unemployment in South Africa is extraordinarily high by world standards. According to the World Bank, in the early 2000s the unemployment rate in middle-income countries as a group averaged well under 10% (World Bank, 2003). The discrepancy does not seem to reflect data problems. Many middle-income countries, like South Africa, use household-based labour force surveys based on definitions and methodologies endorsed by international institutions. Moreover, the 2000 time-use survey supports the unemployment figures (Wittenberg, 2002).
Rising unemployment is associated with a shift into informal work and falling remuneration. Between 1995 and 2002, the share of the informal sector in total employment climbed from 17% to 20%. The percentage of workers earning under R1,000 a month rose from 36% to 39% (calculated from StatsSA, 1995, 2002a). In this period, inflation cut the purchasing power of 1,000 rand by almost half.
Unemployment is highest for young people, blacks and women. In 2002, people aged under 30 made up 24% of formal employment, but 55% of the unemployed. These figures include only those who would take a job immediately, excluding students. The unemployment rate for people under 30 was 61%. Overall, unemployment for Africans came to 47%, compared to 8% for whites. It was 53% for African women (calculated from StatsSA, 2002a).
The data do not give a clear picture of the implications of these trends for overall inequality. In the early 2000s, Statistics South Africa – the official central statistical agency – released a comparison of household survey data pointing to a sharp fall in incomes for African households, and improvements for whites (StatsSA, 2002b). A few months later, its 2001 Census claimed that incomes had risen for all groups (StatsSA, 2003b). In neither of these studies did the income figures correspond to changes in GDP per capita reported in the national accounts. Certainly, however, rising unemployment has been associated with a falling share for labour in the national income. In 2002, remuneration accounted for around 51% of national income, the lowest level in any year since records began in 1946 except for 1980 (which saw a soaring gold price). Labour's share fell particularly sharply in 1999–2002. In this period, profits rose from 29% to 34% of national income (calculated from SARB, 2003).
Growth & investment
Overall, since 1994 GDP has grown only slightly faster than the population, so that GDP per capita remains almost unchanged. Growth was particularly slow in the late 1990s, but picked up somewhat in the early 2000s. In 2003, however, it declined to 1.9%, largely because rapid appreciation in the rand cut into exports while encouraging imports (National Treasury 2004:26). Slow growth has been associated with very low investment. Most economists agree a country must invest between 20% and 25% of the GDP to maintain growth. In the late 1990s, however, investment in South Africa fell to around 15% of the GDP, and it had not recovered by 2003. As Table 5 shows, a substantial increase in foreign investment in the late 1990s, almost entirely in the form of short-term portfolio inflows, did little to stem the decline in total capital formation.
A rapid decline in government investment largely explained the fall in total capital formation. The state's share in total investment dropped from 36% in 1990 to 25% in 2002 – the lowest level since 1946, when the available figures start. State investment relative to GDP was also lower in 2002 than at any time since 1946. The decline mostly reflected commercialisation of the national parastatals plus budget cuts in the late 1990. Almost invariably, reductions in real government expenditure lead to sharper falls in investment, since it is easier to end projects that cut back on established delivery systems.
| Period | Average annual growth |
|---|---|
| 1990–1994 | 0.3% |
| 1994–1997 | 3.4% |
| 1997–2000 | 2.1% |
| 2000–2002 | 2.9% |
| 2003 | 1.9% |
Source: Calculated from SARB, long-term data on national accounts StatsSA, GDP figures, downloaded from www.statssa.gov.za December 2003. GDP at market prices, constant 1995 rand; downloaded July 2003. www.resbank.co.za; Statistics South Africa.
In sum, the post-apartheid economy has been characterised by soaring unemployment, slow growth and an extremely low rate of investment. The next section outlines debates about the causes of this situation.
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Source: Calculated from SARB, time series on the balance of payments; downloaded July 2002. www.resbank.co.za. Note: 1. The increase in foreign direct investment and decrease in foreign portfolio investment in 2001 reflected the restructuring of Anglo American and De Beers. This restructuring led to an exchange of shares and was associated with the movement of Anglo American's headquarters to London.
Debates on economic policy
Since the late 1980s, at least, debates on economic policy in South Africa have revolved around the relationship between growth, inequality and economic structure. In essence, the main points of contention remain:
- 1.
Whether or not rapid growth can be achieved without strong measures to address South Africa's unusually large inequalities in income and wealth; and
- 2.
Whether or not mass unemployment arises principally because of inequalities in access to productive assets and the structure of production; or the restructuring of the public sector; or the low skill levels left by apartheid.
From the mid-1990s, government policy2 seemed largely predicated on the argument that apartheid repressed markets for labour, international trade and capital flows, particularly in agriculture and the financial sector. As a result, the economy could not benefit from the globalised division of labour that arose especially from the late 1980s. Inefficient producers survived with little pressure to raise productivity.
Following from this analysis, the government essentially adopted a competitiveness strategy. That is, it generally sought to improve productivity without guiding investment toward particular industries or activities, although it did provide special incentives for the motor industry and substantial funding for some large-scale refineries. In contrast to this type of competitiveness approach, a development strategy generally aims to restructure the economy to achieve greater equity and employment and to build domestic value chains. The competitiveness strategy supported three kinds of intervention by the state:
| % of gross fixed capital formation (investment) | total investment as % of GDP | ||
|---|---|---|---|
| Private | General government & parastatals | ||
| 1970 | 56% | 44% | 24.3% |
| 1980 | 50% | 50% | 25.9% |
| 1990 | 64% | 36% | 19.1% |
| 1994 | 73% | 28% | 15.2% |
| 1998 | 67% | 32% | 17.0% |
| 2000 | 74% | 26% | 14.8% |
| 2002 | 75% | 25% | 15.1% |
Source: Calculated from, SARB, data series on national accounts; downloaded July 2003. www.resbank.co.za.
1) Freeing up markets through deregulation and privatisation. This approach was pursued most rapidly in agriculture, but also extended to aspects of the financial sector, telecommunications and transport, amongst others.
2) Ending subsidies on production and reducing tariffs, but expanding government support for increased productivity, especially for exports. This type of support, which is allowed by WTO rules, includes assistance with work re-organisation, improved infrastructure, and skills development. It does not target particular sectors, but rather provides assistance on demand from companies. In this vein, the Department of Trade and Industry (DTI) provided a variety of ‘supply-side measures’ to assist exporters. In 2003 the government announced large new investments in trade-related infrastructure, especially the ports and rail. From the late 1990s, the Department of Labour initiated a large-scale skills development strategy, which has unfortunately tended to bog down in bureaucracy.
3) Following conservative fiscal and monetary policies in an effort to attract foreign investment. Government cut its spending by around 1% a year in real terms in the late 1990s. It let nominal interest rates rise above 20% in the late 1990s. In 2003, real interest hovered over 4%.
From the standpoint of a competitiveness strategy, falling employment and slow growth are unavoidable consequences of restructuring – the shake-out that results from opening markets which disciplines unproductive firms. The pain forms the unavoidable precondition for establishing more productive enterprises to drive rapid growth in future. The date of the turnaround may be uncertain, but it will inevitably follow, as competitive industries and enterprises adapt.
In this strategy, anti-poverty measures may cushion the poor against restructuring. But they are an add on, not an integral part of the growth strategy. Thus, there are virtually no linkages between government's main social programmes and the economic departments.3
When the government adopted this approach to development, it certainly did not anticipate the soaring unemployment and slow growth of the past nine years. Its Growth, Employment and Redistribution (GEAR) strategy set ambitious economic goals for 1996–2000, but virtually none were met. The main exceptions were targets for policy instruments – the government deficit and average tariffs – as well as inflation. Supporters of the strategy argue that, despite the unhappy record so far, the turnaround is just around the corner. They suggest that it has been delayed by:
- 1.
The new dispensation for the labour market, which is seen as causing labour market rigidities. In effect, while the rest of the economy has been deregulated, the state introduced modern labour relations, which required considerable intervention to overturn apartheid practices;
- 2.
Low skill levels amongst Africans as a result of apartheid;
- 3.
Unfair international trade rules, with continued protectionism by the EU and the US. In response, government pursued a range of bilateral trade agreements, including with the EU, the US and Mercosur;
- 4.
Investors' perceptions that any investment in Africa is risky. This view, in turn, has led to NEPAD and other initiatives seeking to stabilise the continent.
- 1.
A closed system for capital, although not for trade in goods and services, and
- 2.
Good information flows about innovative investment opportunities.
| Annual average, 1996–99 | ||
|---|---|---|
| Projected in GEAR | Actual | |
| Intermediate targets | ||
| Fiscal deficit as percentage of GDP | 3.7% | 3.1% |
| Average tariff as % of imports | 7.6% | 4.4% |
| Real bank ratea | 4.4% | 12.3% |
| Real private sector investment growth | 11.7% | 1.2% |
| Real non-gold export growthb | 8.4% | 6.7% |
| Economic outcomes | ||
| GDP growth | 4.2% | 2.4% |
| Inflation (CPI) | 8.2% | 6.6% |
| Annual change in formal, non-agricultural employmentc | 270,000 | −125,200 |
Sources: COSATU, Secretariat Report to the Seventh National Congress, 2000. www.cosatu.org.za. Calculated by Fiona Tregenna from South African Reserve Bank, Quarterly Bulletin, June 2000; Department of Finance, Budget Review 2000; Department of Trade and Industry, Economics Database.Notes: a) for actuals, residential bond rate less CPI. b) for actuals, real non-mining export growth. c) figures for 1996 to 2000.
The competitiveness model adopted by government contrasts with the more traditional development strategy that guided the Reconstruction and Development Programme (RDP), which the ANC adopted in 1994 (ANC, 1994). In this document, the inequalities and dualism entrenched by apartheid in themselves are seen as the central obstacle to equitable growth and employment. On the one hand, they reduce the ability of the poor to generate incomes for themselves outside the formal sector. On the other, they dampen domestic demand especially for basic goods and services which are relatively labour intensive.
The RDP analysis pointed to the importance of production for the domestic market both to build productive capacity and to support greater equity. Export industries, while an important component of any development strategy, by themselves would not create adequate employment or meet the needs of the majority. Instead, government should use large-scale anti-poverty programmes while expanding domestic demand and skills.5 The RDP therefore emphasised land reform and support for co-operatives and micro enterprise, as well as a massive expansion in basic infrastructure, housing, education, welfare and health care for poor communities.
This strategy has important implications for the formal sector (a subject on which the RDP itself was markedly unclear). In particular, it requires a re-orientation to meet growing domestic demand for basic goods and services for the poor, for instance housing, basic infrastructure, education and healthcare. Much of this demand would be funded through the state. In addition, the developmental approach generally necessitates a shift to more labour-intensive production as the basis for job creation and viable small-scale enterprise. In South Africa, that implies in particular a move from heavy industry – mining and refining minerals and petrochemicals – to services and light industry (clothing, food processing and consumer equipment) as well as further fabrication of metal products (see COSATU, 2003b).
This approach places relatively heavy demands on the state. Above all, it requires an ability to integrate social and economic development strategies. Moreover, the state needs to define ways to build economically viable industries that can also create jobs. Finally, the state must have the capacity to drive programmes to increase the assets and incomes of the poor and to restructure formal production. Achieving these aims requires substantial changes in the inherited institutional structures. In particular, national government departments now enjoy considerable independence from overall control, and no authority is responsible for ensuring the economy supports equity or employment. More fundamentally, the structure of decison making on economic policy favours business rather than the ANC's historic constituencies. The poor remain largely excluded from policy-making processes. In contrast, government officials interact consistently with business and generally rely heavily on consultants for information and ideas. That in itself militates against a strong development strategy.
The next section explores the response of different sectors of big business to the changes in South Africa since 1994. In the event, the available evidence suggests that liberalisation is not about to bring a turnaround toward equitable or job-creating growth.
Globalisation & restructuring class formation
Apartheid left behind a profound dualism in the economy and the society (see, amongst others, COSATU, 2003b; Terreblanche, 2003). On the one hand, the colonial and then the apartheid state essentially stopped the majority from engaging in the formal economy except as underpaid labour, depriving most Africans of high-level training, land, mineral rights and, in the cities, industrial and retail infrastructure. It also hindered their interactions with formal financial and retail institutions. Extensive un- and underemployment resulted, especially in the so-called homelands. On the other hand, a modern economy was built up around mineral exports, strategic industries (arms and energy) and the production of relative luxuries for the high-income (white) group. Here, too, the state played a central role by providing cheap, largely migrant labour, low-cost energy and transport and an industrial strategy backed by tariffs and an extensive network of parastatals.
After 1994, government anti-poverty efforts aimed to improve living standards in African communities, rather than to help the poor earn higher incomes. Restrictions on government spending, especially since GEAR's fiscal targets led to budget cuts in the late 1990s, limited these programmes, which revolved around provision of housing and infrastructure, support for small and micro enterprise, skills development and transformation of the financial sector. Government substantially improved access to basic infrastructure and housing after 1994 but the services were often at a low level and relatively high cost. As a result, they generally did not fulfil the RDP's expectation that they would help the poor develop new productive activities. Thus, almost all new housing was still located far from city centres and economic opportunities. They improved access to household infrastructure, but not to employment. Similarly, relatively high tariffs and low levels of supply meant poor households often could not use water or electricity for home-based production.6
Land reform and other programmes to support small and micro enterprise remained very limited. Government essentially gave up on the RDP target of redistributing 30% of farm land. Most studies found that the programmes to support small and micro enterprise were not very effective.
In the late 1990s, government introduced a new skills development strategy based on sectoral co-ordination and ‘learnerships’, which resembled low-level apprenticeships. The new training system established an extensive new bureaucracy at sectoral level, which in many sectors moved only slowly to expand opportunities for skills development. In addition, the general education system remained highly inequitable and largely unable to provide relevant skills. Virtually all young people had access to some schooling but African children, especially in rural areas, mostly had worse facilities and were more likely to drop out. In September 2002, 34% of Africans under 30 had less than eight years education, compared to 17% of non-Africans – and 45% of Africans over 30 (calculated from StatsSA, 2002a). In 2000, almost 43% of schools, mostly in the former homelands, still had no electricity. Only 12% – almost all in historically white areas – provided computers for learners (Department of Education, 2000).
In the early 2000s, under pressure from COSATU and the Communist Party in particular, government agreed that the financial sector had to do more to serve the poor. That, in turn, required amendments to banking legislation to permit formation of savings unions and other third-tier institutions. Although government formally agreed to introduce these amendments at a Financial Sector Summit in August 2002, a year later it had not made any visible progress.
In short, government undertook substantial efforts to transform government services to poor communities. But it focused on improvements in living standards without doing much to enhance access to economic opportunities. As a result, the first decade of democracy did little to transform the highly inequitable structure of ownership and control inherited from apartheid, and the associated economic and spatial dualism.
The response of the formal sector
We can understand the response of the formal sector to government's competitiveness strategy in terms of changes in the structure of production and ownership. With the opening of the economy combined with cuts in government spending, growth has largely resulted from rising productivity rather than expanded demand and output. These trends have led to a decline in formal employment, even in sectors that have raised exports substantially. In this context, current policies on black economic empowerment seem unlikely to broaden ownership and control significantly.
The main shifts in the production structure, all of which are associated with job losses, include:
- 1.
A move from gold to platinum in export earnings and – largely due to government support – continued growth in aluminium refining;
- 2.
In manufacturing, aggressive export growth in a few sectors, combined with rising import penetration overall;
- 3.
Increasing productivity in manufacturing, agriculture and services, including government, combined with only modest increases in output;
- 4.
Stagnation in construction, as government investment lagged behind the expectations raised by the RDP.
Minerals accounted for half of all exports in the early 2000s. Shifts between sectors, however, meant declining employment. By the early 2000s, platinum rivalled gold as South Africa's main export but it employed far fewer people. Government used IDC support to encourage minerals refining, particularly for aluminium and iron, apparently to raise the value added of exports. Refining is highly capital intensive, however, and created few jobs at a huge cost. The aluminium smelter planned for Coega will cost US$2 billion, but directly create only a few hundred jobs. Downstream industries, producing manufactures based on refined minerals, are far more labour intensive – but very few have emerged in the past decade. The only large exception was the production of catalytic converters using platinum, mostly for export.
The aluminium refineries moved to South Africa to take advantage of cheap electricity. Electricity prices are, however, expected to increase in the next ten years, due to commercialisation and the need to build new power plants. In the case of the Coega smelter, it appears that the government guaranteed low electricity prices nonetheless, which means other electricity consumers will likely end up subsidising the project.7
In manufacturing, the opening of the economy from 1989 led to rising competition for domestic and regional markets. As Table 9 (over) shows, imports actually grew more rapidly than exports for the period as a whole, although both fluctuated greatly.
Given low incomes and slow growth in South Africa, rising imports and foreign investment largely displaced local producers, leading to a loss of capacity and jobs. The problems were particularly marked in production of consumer equipment, dairy, pharmaceuticals and clothing (COSATU, 2002). Some local producers sought export markets, largely in southern Africa, to compensate for stagnant domestic sales. To compete on increasingly contested domestic and foreign markets, producers had to raise productivity just to maintain sales. To do that, many slashed employment. Even sectors that enjoyed substantial growth in exports, such as the motor industry, saw job losses from 1996 after rapid growth in 1994–96. As a whole, manufacturing experienced slow output growth combined with downsizing.
Given domestic producers' growing reliance on export sales, the strong fluctuations in the value of the rand in 2000–03 had a substantial impact on manufacturing. The 40% decline in the rand in late 2001 led to a spurt in exports and employment since it made South African exports cheaper on world markets. Unfortunately, the subsequent strong recovery from mid-2002 had the opposite effect. As the world price of South African exports rose, some manufacturing companies – mostly in clothing and equipment – had to cancel contracts and laid off workers.
From 1990, agriculture experienced a rapid shift to a free market after decades of strong state regulation and support. The democratic government argued that state support for white farmers under apartheid had raised the price of food while undermining efficiency. It rapidly terminated most subsidies to white farms and privatised the big farmers' co-operatives, which were essentially taken over by the white farmers themselves.
| all mining | gold mining | non-gold | gold as % of total | |
|---|---|---|---|---|
| 1987 | 763,003 | 560,924 | 202,079 | 74% |
| 1994 | 607,688 | 392,846 | 214,842 | 65% |
| 2000 | 416,131 | 217,885 | 198,246 | 52% |
| 2002 | 402,515 | 194,168 | 208,347 | 48% |
| Change in numbers | ||||
| 1987–1994 | (155,315) | (168,078) | 12,763 | |
| 1994–2000 | (191,557) | (174,961) | (16,596) | |
| 2000–2002 | (13,616) | (23,717) | 10,101 | |
| % change | ||||
| 1987–1994 | −20% | −30% | 6% | |
| 1994–2000 | −32% | −45% | −8% | |
| 2000–2002 | −3% | −11% | 5% |
Source: Calculated from, Statistics South Africa, Survey of Employment and Earnings. Long-term data series. www.statssa.gov.za. Downloaded July 2003.
| Time periods | Exports | Imports | Formal manufacturing employment |
|---|---|---|---|
| 1985–1990 | 2.4% | 4.8% | 1.5% |
| 1990–1993 | 3.0% | 3.1% | −2.5% |
| 1993–1996 | 10.1% | 15.3% | 0.7% |
| 1996–1999 | 1.2% | −2.1% | −3.4% |
| 1999–2002 | 1.8% | 3.3% | −1.4% |
Source: Calculated from, South African Reserve Bank. 2002. Electronic data bases on national accounts and international capital flows. www.resbank.co.za; Statistics South Africa. 2003. Survey of Employment and Earnings. Electronic database. Downloaded March 2003.
Unfortunately, government does not report on the number of farms or ownership in agriculture. Still, it appears that the shift to a free-market led to a classical shake-out. A number of smaller estates went under, leading to increased concentration of ownership and control. The surviving farms rapidly reduced employment and investment. Thus, investment and employment fell through the late 1990s, with virtually unchanged production. Investment fell by a third, but output dropped only 5% (calculated from SARB, 2003). In 2000–02 investment recovered, but according to the Labour Force Survey heavy job losses persisted amongst farmworkers (StatsSA, 2000; 2002a).
Public sector employment dropped precipitously from the mid-1990s, becoming the main cause of overall formal job losses (Altman, 2003; Bhorat, 2002). On the one hand, the public service responded to falling budgets after 1996 by freezing vacancies. As a result, it lost close to 150,000 jobs in the past ten years, and half as many again between 2000 and 2002. On the other hand, the big parastatals responded to commercialisation and growing private competition by shedding tens of thousands of jobs.
Downsizing in the public service had a particularly negative impact on African women. Traditionally, jobs as teachers and nurses formed the main professional career available to them. But this option is increasingly closed, as government essentially froze these occupations, with virtually no new intake of staff. Thus, 24% of employed African women over 30 work in community services – mostly in government – compared to only 15% for those under 30. In 1995, government employment accounted for over half of employment for African women (calculated from StatsSA, 1996, Table 2.1, and 2002a).8
The RDP expected government spending on infrastructure to make construction a major source of employment as well as growing the asset base of the poor. With cuts in government spending under GEAR, however, state construction investment dropped rapidly in the late 1990s. Although it had picked up somewhat since 2000 in real terms, by 2002, state investment in construction was lower as a percentage of GDP than at any time since data collections started in 1946. This situation was associated with a dramatic decline in construction employment, which fell by 30% from 1998 (when the data series start) to 2002 (calculated from StatsSA, 2003a).
Class formation
Changes in the production structure were associated with a transformation of ownership and control in the wake of the transition to democracy and the opening of the economy. Local business remains heavily concentrated, almost entirely in white hands. But it has been increasingly reintegrated into international capital in ways that constrain local investment and employment. This section analyses the development of mining-finance capital, foreign investment, commercial agriculture and state-owned enterprise.
Mining and finance capital historically formed the backbone of the South African economy. From the early days of mining, it was characterised by heavy foreign investment funnelled through mostly locally-controlled firms, dominated byAnglo American. The big mining companies worked closely with foreign-owned banks, especially Barclays (now FirstBank) and Standard. Under apartheid, sanctions and exchange controls limited the ability of the mining and finance companies to invest outside southern Africa. They therefore increased their holdings in local manufacturing and services.
With the transition to democracy, they found new opportunities abroad. Today, the dominant mining and finance companies apparently view themselves as part of global mining capital, rather than as South African. They see core growth areas as being abroad. They also pick the most profitable of the new minerals opportunities in South Africa, notably in platinum production.
| Average annual growth, 1994 to 2002 | % of total, 2002 | |||||
|---|---|---|---|---|---|---|
| formal gross formal | gross exports | output | formal employment | exports | gross output | |
| Sector | ||||||
| Agriculture, forestry & fishing | −2.1% | 3.2% | 2.4% | 9.9% | 4% | 3.8% |
| Gold & uranium ore mining | −8.3% | −3.4% | −4.6% | 2.6% | 12% | 2.0% |
| Other mining & metals | 0.0% | 2.7% | 4.3% | 5.0% | 31% | 10.1% |
| Light industry | −1.0% | 2.2% | 1.3% | 9.4% | 13% | 13.1% |
| Heavy chemicals | −3.6% | 8.2% | 4.8% | 2.1% | 13% | 7.3% |
| Motor vehicles, parts & accessories | 0.7% | 19.3% | 6.7% | 1.0% | 8% | 3.4% |
| Other machinery & equipment | −1.2% | 12.6% | 2.7% | 2.4% | 8% | 2.9% |
| Electricity & water supply | −0.8% | 4.5% | 3.8% | 1.0% | 0% | 2.3% |
| Construction | −6.8% | −7.1% | 2.5% | 2.8% | 0% | 4.6% |
| Wholesale & retail trade | 2.1% | 10.0% | 3.2% | 11.5% | 4% | 10.3% |
| Communications, finance & insurance | −0.9% | 14.2% | 11.4% | 3.7% | 3% | 10.2% |
| Other private services | 0.7% | 6.6% | 3.5% | 29.1% | 6% | 19.2% |
| General government services | −1.0% | 0.0% | 0.9% | 19.5% | 0% | 10.8% |
Source: Calculated from TIPS EasyData. Downloaded March 2004. Note: 1. Data on employment derive from the official survey of large formal companies, the Survey of Total Employment and Earnings, which undercounts small and new companies.
The result has been that key mining and finance companies, notably the top-ten firms Anglo American, Old Mutual, SA Breweries and Liberty Life, have moved their financial operations to London. This, in turn, has led to a massive increase in outflows of capital and profits from South Africa, contributing to stagnant investment. Since the mid-1990s, dividend payments abroad have multiplied tenfold, from R2 billion in 1995 and 1996 to R22 billion in 2001 and 2002. Dividends and interest payments together rose from around R10 billion in the mid-1990s to over R40 billion in the early 2000s. In 1995, the outflow of profits came to 2.3% of the GDP. It was 5% in 2001, and 4.1% in 2002 (calculated from SARB, 2003). As a result, net inflows shrank considerably, although they remained positive.
With the opening of the economy in the early 1990s, foreign direct investment has generally centred on manufacturing and the financial sector and has been associated with the re-integration of South Africa into the international division of labour of multinational corporations. In the financial sector, the result has been increased competition for company accounts and a tendency to cut down on less profitable activities in poor communities. The closure of branches has led to large job losses. In manufacturing, multinational companies have frequently re-asserted their control over local subsidiaries, while new investors have bought up or forced out local producers. This trend was particularly marked for the dairy, consumer equipment, clothing, pharmaceuticals and capital goods industries. The loss of basic productive capacity and expertise in pharmaceuticals and capital equipment, in particular, could have a long-term impact on development prospects.
The motor industry represents an important exception. The major car companies are virtually entirely foreign owned, although producers of components are often local. In the late 1990s, the value of auto exports rose by close to 30% a year. The fastest growing sectors were reportedly catalytic converters and leather car seats. Government has tended to point to auto's export success as a model for other sectors, arguing that it demonstrates the export potential of South African manufacturing. But the motor industry has two unique factors: its exports fit into the division of labour of multinational, especially German, car companies; and it enjoyed substantial tariff incentives from government under the Motor Industry Development Programme (MIDP). In any case, despite export growth, the auto industry shed jobs over the past decade.
As noted above, the rapid deregulation of commercial agriculture apparently increased concentration in land ownership, crop storage and trading. Weaker farmers went under while larger ones entrenched themselves. The combination of concentrated ownership and deregulation fuelled profiteering in basic foods. From the end of 2001, the maize price doubled, causing immense hardship and pushing up inflation and ultimately interest rates. The available evidence points to speculation as the main cause. In late 2002, the amount of maize in storage was 25% higher than in the equivalent period in 2001 (SAGIS, 2003). That was enough to have a substantial impact on the price. Moreover, traders report that a single company was responsible for most of maize deals on the futures market in this period.9
Finally, state capital – the ownership of productive assets by the state – has seen very extensive restructuring since 1994. The main driver has been the government's emphasis on deregulation and commercialisation. In addition, government has argued that it should support only infrastructure, not productive activities. These strategies have resulted in massive job shedding and rising infrastructure costs, especially for low-income communities, together with support for the small new black capitalist class. State capital has always played a central role in the economy. Historically, it led the way in developing infrastructure and basic manufacturing. The Development Bank of South Africa (DBSA) and the Industrial Development Corporation (IDC) were critical in guiding private investment into new activities, including clothing and other light industry in the '50s and '60s, iron and steel exports in the '70s, petrochemicals and aluminium in the '80s. In addition, most of the former homelands had parastatals to support manufacturing and agriculture. The apartheid state reduced and commercialised parastatal activities from the mid1980s. Even so, in the early 1990s, parastatals still accounted for 16% of total investment, down from a peak of 25% in 1980.
Soon after 1994, provincial governments simply closed down most of the smaller homeland enterprises, on the grounds that government should not subsidise production directly. This policy led to heavy social and economic costs in remote rural regions that had depended on government development projects.
From 1994, the democratic government intensified the commercialisation of the big parastatals. It partially privatised Telkom and sections of Transnet, and now plans to privatise 30% of Eskom. It also opened up sectors of infrastructure to private competition – notably through cellphones and privatised transport. While government argues that it will regulate prices to ensure affordability, it has actually loosened controls on parastatal pricing. As a rule, government officials argue that as far as possible, tariffs for services should reflect the costs of production. In line with these policies, the big parastatals have increasingly required that households pay a market price for basic services. The result, as discussed above, has been soaring user charges for poor households and rural areas.
Meanwhile, the share of parastatals in total investment has fallen to 11%. That is lower than any time since the early 1970s (calculated from SARB, 2003). Moreover, the parastatals have begun to rely on imported inputs, sometimes with a devastating impact on local employment. At the same time, the big parastatals have seen the installation of black boards and senior management. In effect, they represent the only area where a new black ruling class exercises great economic power.
In short, the ten years since 1994 have seen a substantial restructuring of capital, without broadening its base. This restructuring has been associated with increased concentration in agriculture, growing foreign ownership and imports in manufacturing, and the movement abroad of major companies. In this context, the role of state capital has been largely reduced to a springboard for big black capital. Taken together, these trends form the basis for low investment and job losses.
Black economic empowerment (BEE)
Outside the big parastatals, the restructuring of capital since 1994 has done little to open new opportunities for black entrepreneurs. Ownership remains highly concentrated, and slow growth means there are few opportunities for new businesses. At the same time, a few relatively educated black people have benefited greatly from new opportunities as a result of democracy. This situation has led to a growing demand from the black upper class that government do more to help them penetrate big business. The new black upper class effectively comprises:
- 1.
Leaders and managers in the public sector, including the national and provincial public service, local government and the parastatals;
- 2.
Senior black management in the dominant private companies. While this group has grown rapidly in the past eight years, it remains small and largely concentrated in public relations and personnel;
- 3.
Various independent entrepreneurs, especially in the financial sector, many of whom have taken advantage of union investment companies and pension investments;
- 4.
Black professionals in the media, academia and other occupations.
| Women | African | Coloured/Asian | White | Total | |
|---|---|---|---|---|---|
| senior management & professionals | |||||
| 1995 | 28% | 32% | 11% | 56% | 100% |
| 2002 | 34% | 35% | 15% | 50% | 100% |
| technical & associate professionals (mostly nurses and teachers) | |||||
| 1995 | 52% | 52% | 11% | 37% | 100% |
| 2002 | 54% | 56% | 17% | 27% | 100% |
| clerks, service & sales workers | |||||
| 1995 | 53% | 51% | 17% | 33% | 100% |
| 2002 | 56% | 58% | 21% | 21% | 100% |
| skilled production | |||||
| 1995 | 12% | 62% | 17% | 21% | 100% |
| 2002 | 19% | 77% | 15% | 9% | 100% |
| domestic plus elementary | |||||
| 1995 | 47% | 83% | 16% | 1% | 100% |
| 2002 | 59% | 78% | 21% | 1% | 100% |
| total employees | |||||
| 1995 | 38% | 62% | 16% | 23% | 100% |
| 2002 | 44% | 68% | 18% | 14% | 100% |
| Population, 2001 | |||||
| 52% | 79% | 11% | 10% | 100% |
Source: Calculated from, StatsSA. 1996. October Household Survey 1995, Table 2.2; 2003. Labour Force Survey September 2002.
The structure of income reflected Africans' subordinate position in terms of ownership and control. In 2000, according to Statistics South Africa's Income and Expenditure Survey, half of all white households earned over R8000 a month, compared to 3% of African households. In the high-income group, Africans earned half as much as whites from investment income, reflecting their lack of assets. The state has four main instruments to increase the opportunities available to the black upper class.
- 1.
The senior levels of the state bureaucracy pay more than many officials could earn elsewhere. In the longer run, these positions give access to senior jobs in private companies.
- 2.
Government can bias regulation and government procurement to promote black interests. Although it has taken some steps in this direction, black companies still complain that procurement favours established white companies.
- 3.
Government can sell state assets relatively cheaply to black buyers, and outsource its activities to private black providers.
- 4.
Government can encourage business to adopt codes supporting black ownership and control.
Toward a development strategy?
Analysis of business responses to globalisation in the context of government's competitiveness strategy points to serious problems. South Africa has seen a rising outflow of capital, loss of some industrial capacity, and increased speculation in basic foods. At the same time, the shrinkage in the public sector has fuelled declining investment and employment. While job losses may bottom out or even begin a slow rise, there is little evidence that investment will recover in the present policy environment.
Largely in response to this crisis, the past three years have seen important, although still limited, reforms in government policy. Above all, because of extraordinarily high unemployment, sections of both government and big business now see that the conventional free-market approach is socially and politically unsustainable. As a result, they are willing to discuss a stronger role for government to bring about equity and create jobs. The new approach manifests itself in:
- 1.
Rising government spending, which has accelerated delivery of basic services and housing since 2000. Government has also done more to implement its policy – adopted under union pressure in 2000 – of providing free basic services for poor households. Moreover, it has encouraged lower interest rates compared to the late 1990s;
- 2.
Increased emphasis on job creation and equity in economic policy, particularly through sectoral strategies and BEE;
- 3.
A renewed stress on planning and co-ordination, particularly at local level, and a greater recognition of the need for stakeholder support of and mobilisation around major policies;
- 4.
Greater support for co-operatives.