SOUTH AFRICA AFTER APARTHEID: A CASE STUDY KURT MANZ* I. INTRODUCTION In 1993, former South African President Nelson Mandela declared that the primary motivation of the African National Congress's economic policies was to place South Africa on the path of rapid economic development, with a view to address three key problem areas: slow growth, severe poverty, and extreme inequalities in living standards (Handley and Mills, 1996). The intention of this paper is to study the economic and social consequences of apartheid that are still plaguing the South African economy and restricting its economic development. Section II of this paper compares South Africa's geographic, social and economic indicators to those of its neighbors and to other middle-income countries. Section III provides a brief historical overview of South African development, while Section IV outlines some prevailing problems in South African society and relates these problems to the economic challenges that can be expected in the years ahead. In Section V we consider policies needed to bring about social development in South Africa. Section VI summarizes the findings in this paper. II. STATISTICAL AND COMPARATIVE ANALYSIS OF SOUTH AFRICA South Africa is the largest country in Southern Africa. With 1.22 million square kilometers, it has the largest population of 42.8 million people (see table 1). Comparable to Mozambique and Namibia population growth rates, South Africa's was 2.23% per annum in 2000. Based on its real gross domestic product (GDP), South Africa has been classified as a middle income country. The rich endowment of mineral resources had allowed for significant growth in South Africa's real GDP in the early years. However, with the exception of short periods of gold market booms, the South African economy has grown very slowly since the early 1970s. Annual GDP growth declined from approximately six percent in the 1960s to below four percent the following decade, and has barely reached one percent during the 1980s. The economy contracted sharply during the recession-bound 1990s, and in all but one of the past 12 years per capita incomes have declined (Handley and Mills, 1996). * Kurt Manz is an Undergraduate Student in Economics at the University of Saskatchewan, Canada

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SASKATCHEWAN ECONOMICS JOURNAL TABLE 1: SOUTH AFRICAN REGIONAL PERSPECTIVE Area (sq k m)

Population (m)

Population Growth

600,400 30,400 823,100 390,600 801,600 1,220,000

1.6 2.04 1.76 12.6 17.7 42.8

0.87 1.32 2.23 1.91 2.24 2.23

Botswana Lesotho Namibia Zimbabwe Mozambique South Africa

Source: Lachman & Bercuson (1992)

TABLE 2:COMPARATIVE ECONOMIC INDICATORS FOR SOUTH AFRICA AND LOW MIDDLE-INCOME COUNTRIES (2000) GDP (U.S. dollars) (million)

South Africa Algeria China Egypt Russian Federation Turkey

128,000 53,300 1,080,000 98,800 260,000 199,000

Life Expectancy

47.8 71 70.3 67.5 65.3 70

Infant Morality (per 1,000)

62.8 33.3 32 41.8 16.2 34.5

Source: World Bank

Although, South Africa is considered to be a low-to-middle income country, the development status of South Africa shows the country to be decidedly inferior to other low-middle income countries. In other countries the life expectancy indicator ranges from Russia's 65.3 years to Algeria's 71.0 years, whereas South Africa's is a mere 47.8 years (see Table 2). In comparing infant mortality rate, South Africa's is 62.8% whereas for most of the low-middle income countries infant mortality is in the 30th percentile. These observations suggest that South Africa is more suitably classified with its low- income African neighbors. Referring to Table 3, one can see that South Africa's life expectancy, infant mortality rate, and adult literacy are all comparable to other Southern African countries.

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SOUTH AFRICA AFTER APARTHEID TABLE 3: COMPARATIVE ECONOMIC INDICATORS FOR SOUTH AFRICA NEIGHBORS

AND ITS

GDP (U.S. dollars) (million) 2000 South Africa Botswana Lesotho Mozambique Namibia Zimbabwe

128,000 5,290 899 3,810 3,480 7,200

Per Capita Daily Calorie Life Supply Expectancy 1988 2000 3,035 2,269 2,307 1,632 1,889 2,232

47.8 40 44 42.4 47.2 40

Infant Morality (per 1,000) 2000 62.8 58.1 44 129.3 62.5 69

Adult Literacy (15+, in percent) 1985 85 70 72.6 27.6 73 62.3

Source: World Bank

TABLE 4: HDI RANKING ACCORDING TO THE HUMAN DEVELOPMENT REPORT South Africa HDI ranking Life expectancy at birth (years) (1992) Adult Literacy rate (%) Mean year of schooling Literary Index Schooling Index Educational attainment (1992) Real GDP per capita (PPS$) (1992) HDI (1992)

Canada

Guinea

93 62.2

1 77.2

173 43.9

80.0 3.9 0.80 0.26 1.86

99.0 12.2 0.99 0.82 2.80

26.9 0.9 0.27 0.06 0.06

3,885

19,320

500

0.650

0.932

0.191

Source Handley & Mills (1996)

Table 4 shows human development as ranked by the United Nations. South Africa's human development is 93 out of 173. Canada is ranked number 1 and Guinea is ranked at 173 (Handley and Mills, 1996). III. STAGES OF DEVELOPMENT The early discovery of diamonds in the Kimberley region and gold in the Witwatersrand gave South Africa hope. It was the location of these resources in South Africa's interior, however, which fueled the rapid economic growth. The extraction and the processing of the ore required heavy equipment, power supplies, and large forces of organized labor. These factors were responsible for the establishment of a

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rail system, the opening up of the coal fields for generation of electricity, the establishment of urban concentrations, commercial farming and manufacturing interests of the interior (Abedian, 1992). At the Union of 1910, the economy was based mainly on farming and mining, but both these sectors suffered setbacks during the buildup towards the Great Depression of 1929. Since that time agriculture has decreased in importance domestically, and contributed only 6.21 per cent to overall GDP in 1990. In the manufacturing sector, the political victory of the Pact government (a coalition comprising of Afrikaner nationalists and representatives of immigrant labour) in 1925 replaced the laissez-faire economic philosophy with the subsequent promotion of manufacturing by the state. This state intervention in the economy eventually resulted in the implementation of import substitution policies. The coming of power of the Nationalist government in 1948 marked the beginning of the apartheid. The apartheid was the Nationalists' program for reshaping the economy and the society along racial lines to ensure the prosperity of the white Afrikaners. Apartheid imposed restrictions on the rights of blacks to own or occupy property in designated “white” areas as well as regulations preventing direct labor market competition between blacks and whites (Lowenberg, 1997). The Population Registration Act (1950), which required that each person's race be identified, was the first piece of legislation that would initiate the classification and separation of the races in South Africa. Other pieces of legislation followed, which would have dire economic and political consequences on the future of South Africa, such as the Bantu Education Act (1952). This act instituted state control of education for Africans and established a new curriculum designed to prepare them for a lower place in the economy and society (Lewis, 1990). Twenty years later, apartheid policies had resulted in South Africa having one of the most skewed distributions of income in the world. By 1985, the homelands, representing 33 per cent of the population, produced only 2.5 percent of South Africa's total GDP. Per capita urban income, by contrast, was nearly thirty times greater than that of the homelands. However, two important changes in the labor market contributed to a narrowing of the wage gap. First, a dramatic increase in wages paid to labor in the gold mines increased the workers' real wage over 160 per cent between 1970 and 1975. The wage increases were large enough to affect the rest of the economy, and wages in manufacturing also increased. The second important change was the legalization of black trade unions following the

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Wiehahn recommendations. This paved the way for black labor cohesion and further helped reduce the wage gap (Abedian, 1992). South Africa's apartheid system eventually became to costly to maintain and ultimately collapsed in 1994. The demise of the system was largely a result of the inefficiencies caused by the apartheid policies on South Africa's weak economic structure. Labor market regulation and industrial decentralization policy inhibited efficient resource utilization, especially as the manufacturing sector became more prominent in national output. In addition, apartheid educational policies generated skill shortages. An import substitution strategy distorted trade patterns, exacerbated dependence on foreign capital inflows, and created chronic balance of payments difficulties. These internal weaknesses enhanced South Africa's vulnerability to capital flight, changes in world prices and business cycle conditions, and political changes abroad. The collapse culminated with the system being completely dismantled, the legalization of the ANC, and the democratic election of a black majority government. (Lowenberg, 1997). IV. SOCIAL CHALLENGES IN SOUTH AFRICA FOLLOWING APARTHEID The legacy of the apartheid is that South Africa, a member of the semi-industrialized economies as classified by the World Bank, continues to perform like a typical low-income country when social indicators are considered (Luiz, 1996). Even though expenditure on social services compare very well with international norms, South Africa's human development index was 0.65 in 1992 (see Table 4 of the previous section). The consequences of the racially discriminatory policies and unequal distribution of income are also apparent in the inability of the health and educational systems to meet the needs of the South African population as well as in the rapid growth of unemployment and the spread of poverty. Despite the end of apartheid, South Africa continues to display extreme inequalities in the distribution of wealth. From 1991 to 1996, as apartheid was being dismantled, the poorest 40 percent of black households experienced a decline in income of 20 percent. In 1996, the income of the richest 20% of households is some 45 times that of the poorest 20% (Handley and Mills, 1996). Over the years income inequality has increased significantly, the Gini Coefficient rising from 0.55 in 1960 to 0.68 in 1994 (see table 5). In 2000, average per capita disposable income for black South Africans was only 14.9 per cent of that of white citizens (Ho and Schneider, 2002).

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However, John Luiz (1996) TABLE 5: GINI COEFFICIENT states that inequality is no longer ASSUMING INCOME EQUALITY simply a racial issue, as inequal- WITHIN RACIAL GROUPS ity within the black population is estimated by a coefficient of Year Gini Coefficient 0.62 (a sharp increase from 1975 Personal Income when it was 0.47). Among whites this measure has risen 1960 0.55 1965 0.56 from 0.36 to 0.46. Of income 1970 0.53 differences, 75 per cent can thus 1975 0.49 be attributed to intra-group dis1980 0.5 parities while only 25 per cent 1985 0.51 represents the black-white gap. 1987 0.48 1994 0.68 This implies that inequality between races has diminished and yet South Africans of all Source:Handley & Mills (1996) races are worse off then they were two decades ago. The poor quality of health care that was available to blacks during apartheid continues today. Even though government expenditure on health has been about 3 per cent of GNP, an appropriate or expected proportion given South Africa's current stage of development, the country's health indicators are among the worst for the upper-middle income countries. In 2001, South Africa's health care system ranked 151st out of 191 countries in health attainment (Ho and Schneider, 2002). The low ranking is due to South Africa's poor utilization of its economic resources in meeting health needs. Regression results performed by Van der Berg (1990) indicate that South Africa's actual health performance compares poorly with its expected performance given its level of income, medical personnel and overall food supply. The results also show that anticipated life expectancy is 66 years compared to 61 years in actuality, while infant mortality should have been 47 (per 1,000 births), a predicted value that represents only 35 per cent of the actual infant mortality recorded (Luiz, 1996). In addition to these indicators, South Africa's poor health system has been reflected in a number of epidemics, most notably a massive cholera outbreak that infected more than 80,000 people. As well, the AIDS pandemic has only exacerbated the poor quality of health in the country (Ho and Schneider, 2002). A similar picture emerges in the education sector. South Africa's expenditure on education is comparatively high by international standards; the average proportion spent on education in industrialized countries is 5 per cent of GDP compared to 5.2 per cent of South

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Africa's GDP in 1983. Nevertheless, it is widely held that education in South Africa is in a crisis. The matric pass rate has consistently hovered around 40 per cent, while the average educational attainment of the adult population is only seven years of schooling (Luiz, 1996). In 2000, South African students had among the worst numeracy, literacy, and life skills in Africa (Ho and Schneider, 2002) - 12.5 million South Africans (30% of the population) are said to be illiterate (Handley and Mills, 1996). The main problem is that approximately 90 per cent of schools are still racially homogenous, with vast quality differences associated with the racial composition of students. In 1989, per capita expenditures in education was 3,082 Rand for whites and only 765 Rand for blacks (Luiz, 1996). Finally, an important measure of social and economic stability is a country's level of employment. In South Africa, the unemployment problem has worsened since the fall of apartheid with the loss of 500,000 jobs during the neo-liberal reforms. According to the reform policy of the ANC, 126,000 jobs should have been created in 1996, but instead the number of formal sector jobs fell by more than 100,000 (Michie and Padayachee, 1998). In 2000, the official black unemployment rate of 31.6 per cent was 4.6 times greater than the white unemployment rate. At current rates of growth (the population is predicted to rise to 58 million in 2010 and 73 million in 2025), it is predicted that jobs will be found for only 7% of new entrants into the labor market compared to an absorption rate of 80-85% between 1965-70. Almost half of the unemployed people are younger than 30, and almost 90% of them do not possess any skills or training suitable for the jobs available (Handley and Mills, 1996) V. THE PROBLEM WITH ANC'S GEAR STRATEGY AND THE NEED FOR POLICY REFORMS Inequality, poor health care, poor education, and unemployment have all lead to high levels of crime and low levels of productivity, undermining South Africa's economic growth potential. The ANC, under the supervision of the IMF and the World Bank, instituted a variety of neo-liberal reforms aimed at reversing the stagnant performance of the South African economy. These policy reforms were part of the “Growth, Employment, and Redistribution” (GEAR) strategy in June 1996. These policies possessed a heavy deflationary bias, marked by a rapidly falling fiscal deficit, lowering of import tariffs, tax breaks for the corporate sector, the elimination of exchange controls and positive real interest rates supported by generally tight credit conditions (Handley and Mills, 1996). The economic logic of

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GEAR was that prioritizing the interests of capital was necessary for growth and in the long-term interests of the poor and the unemployed, promoting equity in the long run (Michie and Padayachee, 1998). However, social and economic instability, brought on by low levels of productivity, and crime, have prevented the neoliberal policies from attracting the levels of investment necessary to make those policies work. In fact, neoliberal policies actually hastened the economic decline by making it easier to take money out of South Africa and easier for educated South Africans to leave the country (Ho and Schneider, 2002) The circular connection between economic and social stability and long-run development implies that a laissez-faire approach alone cannot be relied upon to lift South Africa out of its trap of underdevelopment. Policy reforms that are directly focused on redistributing incomes through educational and health systems must also be implemented to bring about socio-economic development. To begin with, an appropriate policy goal relating to community health is to shift resources from tertiary and secondary health care to primary health care. Increasing proportional expenditure on primary health care clinics in relation to provincial and academic hospitals is said to be more effective in achieving better health outcomes, as it is more efficient and accessible to dispersed populations (Human Development Report, 2000). In redistributing resources to the primary health care system, this will ensure that children, especially poor children, will be treated for diseases such as tuberculosis, measles, typhoid and diarrhea. A preliminary step in the direction of achieving quality education in South Africa is to remove the racial and geographic disparities in the system. To achieve this goal, the first ten years of schooling should be made free and compulsory to all children. The provision of more non-formal education services should be initiated as well; i.e. adult education, early childhood development, and special school education (Human Development Report, 2000). In doing so, underresourced provinces with poor educational indicators would have the opportunity to catch up to the rich provinces in educational attainment. In addition, labor skills could be upgraded at a “high, but feasible rate,” which, according to the World Bank, would more than double the long term growth rate of the economy (from 2.4% to 5.9% per annum) (Handley and Mills, 1996). Finally, the expansion of the export sector must continually be promoted and, to some extent, protected by subsidies. This allows for further expansion of “traditional lines” but also for diversification into manufacturing (Ho and Schneider, 2002). In attracting multinationals to the South African export sector, financial incentives, such as tax

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breaks and low interest rates on credit, and non-financial incentives, such as establishing Special Economic Zones that are free from labor and environmental regulation, could all be employed. Given the magnitude of unemployment, even increased employment in multinational corporations, which are usually characterized as low skilled, low productivity jobs, would add significantly to average labor productivity. In the process absolute poverty and income inequality would be dramatically reduced (Handley and Mills, 1996). VI. CONCLUSION The racial discrimination and segregation of apartheid in South Africa subjected the black majority to a poorer standard of living than the white minority. Great inequalities in health and education have led to instability and low levels of productivity, undermining South Africa's economic performance. With the election of the ANC party in 1994 came the promise of addressing and rectifying the policies of apartheid and redeveloping South Africa. However, it is becoming apparent that a program truly designed to reconstruct and to develop the South African economy and society will require something very different from the sort of economic orthodoxy implemented by the ANC in its GEAR strategy. South Africa cannot wait patiently to allow the ‘trickle-down’ effect from high growth rates to raise the incomes of the poor and the unemployed. Policies must be developed to directly redistribute incomes by promoting the export sector as well as to remove the racial bias in the health and educational systems. In doing so, South Africa's economic position will regain the potential to become as bright as the gold and diamonds that began its economic development more than a hundred years ago. REFERENCES Abedian, Iraj and Barry Standish. (1992). “The South African economy: an historical overview.” In Abedian, Iraj and Barry Standish, editors. Economic Growth in South Africa: Selected Policy Issues. Oxford: Oxford University Press. Abedian, Iraj and Barry Standish. (1992). “The way forward: policy guidelines for the 1990s.” In Abedian, Iraj and Barry Standish, editors. Economic Growth in South Africa: Selected Policy Issues. Oxford: Oxford University Press. Handley, Antoinette and Greg Mills. (1996). From Isolation to Integration? The South African Economy in the 1990s. South African Institute of International affairs (SAIIA), Chapters 2 and 8

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Ho, P Sai-wing and Geoffrey Schneider. (2002). “African drama: Myrdal and progres sive institutional change in South Africa.” Journal of Economic Issues, v36 (June): 507- 515. Lachman, Desmond and Kenneth Bercuson. (1992). Economic Policies for a New South Africa. Washington: International Monetary Fund (IMF) publication, Chapter 2. Lewis, Stephen R. (1990). The Economics of Apartheid. New York: Council of Foreign Relations Press, Chapter 1. Lowenberg, Anton D. (1997). “Why South Africa's apartheid economy failed.” Contemporary Economic Policy, v15 n3 (July): 62-72. Luiz, John M. (1996). “The socio-economic restructuring of a post-apartheid South Africa.” International Journal of Social Economics, v23 n10-11 (November): 137-150. Michie, Jonathan and Vishnu Padayachee. (1998). “Three years after apartheid: growth, employment and redistribution?” Cambridge Journal of Economics, v22: 623-635. UNDP (2000). South African Human Development Report. United Nations. (website: www. undp.org.za/sahdr2000/sahdr20002.html) World Bank Group. (2000). World Development Indicators Database. (website: www.worldbank.org/data/countrydata/countrydata.html)