Mandela helped South Africans find their way to political freedom. But they still haven’t managed to overcome the economic legacy of the old regime.
- By Robert LooneyRobert Looney teaches economics at the Naval Postgraduate School in Monterey, California.
There was a time when news from South Africa regularly painted a refreshing picture of hope for the future. The 1994 fall of the racially segregated system of apartheid, combined with the establishment of democratic institutions anchored in one of the most progressive constitutions worldwide, gave hope that it was possible to move from a system of exclusion and inequality to one of inclusive participation and equality. And for a while, the country’s mineral-based economy provided respectable economic growth that — even if not spectacular by East Asian Tiger standards of 8-10 percent per year — was still able to support rising standards of living for broad segments of the population.
Now the bloom is off. The past year has seen a troubling rise in fighting and strike-related activities reminiscent of the violent clashes between miners and police during the apartheid era. In August 2012, labor unrest at the Marikana platinum mine left 34 protesters dead at the hands of police forces. For some, this incident represented a telling erosion of the 1994 "grand bargain" between the (predominantly white) Nationalist party and the (predominantly black) liberation movements. For others, the subsequent labor strife has brought to light serious weaknesses in the economy that the African National Congress (ANC)-led government seems powerless to confront.
Since then, labor unrest has spread from the platinum mines to gold, iron-ore, chrome, and coal producers. Farm workers and truck drivers have joined the protests. Mining strikes alone caused more than 1 billion dollars in lost output, and by the first quarter of 2013 the economy had slowed to a 0.9 percent rate of growth (sharply down from the 2.6-3.1 percent rates achieved during 2010-2012). With the country’s currency, the rand, falling to its lowest value since the early days of the global financial crisis, the economy appears to be spiraling downward and out of control. By mid-May, South Africa’s president, finance minister, and top central banker had each acknowledged the nation’s darkening economic prospects and urged workers and employers to end the vicious circle of unauthorized strikes and excessive pay-raise demands.
How has it come to this? While the country has made remarkable progress in dismantling the political and social remnants of apartheid, many of that system’s economic institutions, practices, and mindsets remain largely intact. As Anne Applebaum has observed, apartheid was, among other things, an elaborate system of job protection for poorer whites, guaranteeing them high wages and benefits. Some aspects of that system now live on — but with black interest groups privileged where white ones were before. It exists in powerful trade unions (now black rather than white) aligned closely with the dominant political party (ANC rather than the Nationalist Party), and crony capitalism assuring vast fortunes to political insiders. The all-important mining sector is still controlled by a small group of investors, including a new black elite empowered by the country’s controversial affirmative action program, that are more interested in profits than working conditions. This isn’t to say that whites don’t retain considerable economic power in some sectors, though. The largely white-dominated commercial agricultural system remains largely unchanged, preventing it from absorbing many of the unemployed who are ordinarily found on smaller farms and plots of land.
Under white rule, apartheid’s economic institutions produced an initial period of high investment and economic growth in the 1960s and into the 1970s. However, its economic institutions prevented the channeling of resources into their most productive uses, and the economy stagnated as a result. (Sanctions helped, of course). Ironically, a similar process is playing out today in South Africa.
The signs are apparent everywhere. By one standard measure of inequality, the Gini coefficient, South Africa stands as one of the most unequal countries in the world. The top 10 percent of the population accounts for 58 percent of the country’s income, while the bottom 10 percent accounts for 0.5 percent. The bottom half of South Africans own less than 8 percent.
Also contributing to the country’s glaring income disparities is the economy’s seeming inability to create sufficient jobs. The unemployment rate has exceeded 20 percent for more than 15 years, and is currently around 25 percent. Young people (aged 15-34, mostly black Africans, and mixed-race persons) dominate the unemployed, accounting for around 70 percent of the total. Youth unemployment is around 51 percent.
Chronic unemployment has made it almost impossible to reduce the country’s rate of poverty. While overall income poverty has fallen slightly, it persists at acute levels for the black and non-white racial groups. Poverty in urban areas actually increased in the 10 years following the fall of apartheid.
The harsh reality is that South Africa operates as a dual economy: In some ways it is strongly positioned globally with its world class companies competing in finance, engineering, construction and synthetic fuels. Yet the country’s educational system is not providing workers with the skills and expertise to compete with workers in China and India in many labor intensive areas.
No doubt some of the skill shortage can be attributed to the deliberate exclusion of black people from the educational system and from skilled occupations under apartheid. During apartheid, education was strictly segregated; spending on white students was ten times higher than for black students. Today, though all groups theoretically have equal access to education, the families of poorer black families cannot afford the tuition charged by the better schools. Furthermore, the quality of education freely available to the poorer segments of South African society is regularly ranked as one of the worst in the world by organizations such as the World Economic Forum. The result is increased polarization with rising incomes for the educated, formal sector workers. The undereducated, burdened by stagnant wages and low productivity, are forced to take refuge in the informal economy.
But there’s another equally persuasive explanation for the country’s dual economy, one that has become increasingly topical since the onset of labor strife. That is South Africa’s industrial relations structure, another (albeit indirect) remnant of the apartheid era. While many developing countries have a nascent union movement, South Africa’s unions under apartheid developed along more advanced industrial country lines. Their strong adherence to minimum wage laws in the post-1994 era has stifled the development of many low-cost, labor-intensive industries that would normally employ large numbers of semiskilled and unskilled workers.
Union power, together with the government’s attempts to respond to the demands of its "working poor" constituencies, have resulted in a pattern of wage increases that are above the rate of inflation and unrelated to productivity. With labor costs rising faster than productivity, many smaller labor-intensive firms that are facing competition from low-cost imports have found themselves compelled to go out of business or risk the chance of prosecution for non-compliance. Many have been shut down by the authorities.
With productivity’s role diminished in the determination of wages, factors such as labor market imperfections (price and wage rigidities, entry restrictions, employment protection legislation) have combined with the collective bargaining framework to reduce labor mobility and thus job creation.
But rather than focus on labor-market reforms to better link wages with productivity and reduce job entry impediments, the government has approached the problem through broad sweeping plans that are strong on vision but weak on details and means of implementation. In 2010 the New Growth Path (NGP) was introduced with the 2020 target of reducing the unemployment rate from 25 percent to 15 percent, via the creation of 5 million new "decent" jobs.
Though most of the jobs will be in the private sector, the private sector has been highly skeptical of the plan, claiming that it lacks credibility. Specifically, to create five million jobs by 2020, South Africa would have needed a growth rate of at least 5 percent per year just to make a dent in current levels of unemployment, and considerably more to meet the plan job creation targets. The likelihood of that being achieved is pretty low; according to the International Monetary Fund, South Africa’s GDP is projected to stay well under 4 percent until 2018.
One hears little today of the NGP. Instead the government has moved on to a new plan, the National Deployment Plan (NDP), with similar grandiose promises of full employment — this time by 2030. This effort would require the creation of 11 million extra jobs, again a hardly feasible goal.
Why the diversion of attention from proven labor market reforms to questionable massive state intervention to solve the country’s economic problems? One possible explanation harks back to mindsets formed during the apartheid days. South Africa under apartheid fancied itself as a developmental state, one that aspired to use government planning and focused public policy to accelerate economic growth along the lines successfully implemented at the time in many of the successful East Asian countries.
Many of apartheid’s key development state agencies are still in place, including the Industrial Development Corporation, the Land Bank, and the Southern African Development Bank. Many in the government think that they can use these agencies to power a new developmental state — now embedded in a democratic, non-racial framework — that can succeed where the apartheid variant failed.
There is little reason to believe they’re right — even though conditions are indeed different this time around. The apartheid developmental state was unsustainable because it was premised on excluding the black majority, leaving the apartheid state virtually bankrupt by the late 1980s. The developmental states of East Asia achieved their rapid industrialization during the post-war pre-oil crisis era of the Bretton Woods international economic order which for a generation delivered unprecedented sustained non-inflationary growth in the world economy, accompanied by a tolerance of tariff and non-tariff barriers. The contemporary world economy of highly competitive export markets, one marked by lower overall world economic growth, calls for open liberalized markets. By moving in the opposite direction, the developmental state is not a suitable or feasible path for South Africa to take at this time.
Will the post-apartheid dream of freedom, equity, tolerance, multi-racial harmony, and a more prosperous South African existence come to an end, undermined by a failed economy unable to eliminate the vestiges of apartheid? Or will the government muster up the courage to effectively confront the many problems it faces. One hopes it will, but to date the authorities are providing little cause for optimism. As one wise observer put it in the spirit of Nelson Mandela:
As a country, what we are called upon to do is to think and act collectively… and most important of all, change our national political behavior in ways that are properly aligned to our national strategic goals.
How wonderful it would be if the country could return to Mandela’s dream.