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The South African economy in the 1990s by STUART JONES & JON INGGS University of South Africa

1. INTRODUCTION Private enterprise has been the driving force behind the growth of the South African economy ever since sustained growth began in the early nineteenth century. This was still the case in the 1990s although there was increasing state interference and threats to the security of property rights were growing. These unfavourable developments restricted the freedom of market forces to generate adequate economic growth at a time when the population was increasing rapidly and gold production was falling. In the 1990s real capita GDP fell by 0,4 per cent a year.1 This economic decline was deep rooted. It began in 1976 when the Soweto riots frightened the business community and led to an immediate fall in foreign investment. The events of 1976 consequently determined the timing of the decline – they were not its prime cause. The population explosion was the major cause of the long-term decline in real per capita GDP. There was a real threat of a Malthusian crisis. This threat, moreover, was not confined to the southern tip of Africa. It was a continent-wide phenomenon. Until 1976, a growing economy in South Africa, supported by increasing gold output, was able to keep pace with population growth. But not so in the countries north of the Limpopo where long-term decline had already set in.

1.

SARB, Quarterly Bulletins

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2 After 1976 the costs of increasing government interference in the South African economy because of the massive mis-allocation of resources required by apartheid policies, combined with a growing and very wasteful military expenditure, brought growth to a halt, save for a couple of years at the height of the gold price boom in 1979 and 1980. This was the situation in 1990, when talk of a new political dispensation was in the air. Riots throughout the country, together with Nedbank’s foolish borrowing policies in New York, had led to the suspension of foreign investment and the country’s partial bankruptcy in 1985 that thereafter forced the authorities in Pretoria to maintain a large balance on the current account at the cost of a rapidly depreciating currency. The first four years of the 1990s saw macro-economic conditions that were hostile to any significant economic growth. Things should have changed after 1994 with the installation of the ANC government. But, they did not. The population explosion continued to flood the job market with new entrants, most of whom were poorly qualified because of apartheid education policies and the ANC’s own "liberation before education" campaign that led to the destruction of so many schools. As a result, whereas in the 1970s 75 per cent of new entrants to the labour market could hope to find jobs, by 1990 this had fallen to below eight per cent. The economy had stopped absorbing new entrants as employment contracted by 1,5 per cent a year by 19962 when an economic growth rate of 8,8 per cent was needed to prevent unemployment from rising. But this could not be achieved because labour was not prepared to accept the increasing elasticities in wages. Government policies may be held responsible for much of the increasing unemployment. Government interference in the workings of the market increased with its very damaging labour laws, its affirmative action policies and its

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Article by Simon Barber, Business Day, 22 May 1996.

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3 equity legislation which has been described as a form of legalised theft from pension funds. Senior executives in South African companies have in fact displayed a remarkable fondness for giving away other people’s money, either to themselves, or to meet the demands of the new equity legislation. Bank executives in particular have managed to combine giving themselves billions of rand of stock options, while trumpeting the value of affirmative action and Black equity ownership. This combination of harmful labour legislation, government interference and the threat to property rights at a time of population explosion was the reason why real per capita GDP in 2000 was lower than it was in 1990 and why most Blacks were worse off in 2000 than they had been 10 years earlier. Admittedly, this situation was made worse by the falling output of the gold mines at the same time the gold price was declining. Yet this collapse of the mainstay of the South African economy was to a considerable extent replaced by the rise of the platinum mining industry. The value of platinum production overtook gold in 2000. Platinum could cushion the balance of payments, but, it could not replace the labour employed by the gold mines. Gold production had propelled South Africa into the ranks of the world economic powers – its decline had the reverse effect. As a result, in the 1990s, the country steadily became less important to the international economy. South Africa could not remain immune to the movements of the global business cycle. Information technology and the rise of Microsoft captured the imagination of the media and it was argued that the "new economy" had been born. On the international stock exchanges technology and media shares led the way upwards. The South African boom only really got underway in mid-1995 but then it really took off and for five years South Africans experienced massive paper wealth creation on the JSE. In America it also gave birth to unparalleled greed as top executives scrambled for stock options. This culminated in Cisco Systems’ executives granting themselves four billion dollars of stock options in 1999 while proclaiming an annual profit of only a billion dollars! Had they

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4 accounted for this generosity to themselves, their one billion dollar profit would have been converted into a three billion dollar loss. By comparison, the South African technology companies were moderate in their use of stock options. This, however, could not be said of the financial companies listed on the JSE. Indeed, at a time the shares of many of them were less than half the level at their peak, executives of the five leading banks were granting themselves stock option of increasing value. In 2003 these had risen to R1,25 billion.3 None of them were accounted for in their balance sheets. Banking profits have been consistently overstated for some time in the "new" South Africa and the value of pension funds are that much smaller. It is easy for company executives to give away other people’s money, especially if they are the beneficiaries. Even Oppenheimer’s support for the new equity legislation is primarily at the expense of the pension funds. Finally, before coming to the sectoral analysis, it is necessary to say a word about the statistics. These, regrettably, are in danger of being "East Germanised". In the year 2000, the South African Reserve Bank in its Quarterly Bulletin, changed the GDP figures for the year 1998 upwards by 17,9 per cent. This occurred when the bank changed its category GDP by "kind of activity" to "gross value added by kind of activity". The bank’s source is Statistics SA. The figures were adjusted back to 1992 when computerisation took place in a wide range of government departments. As a result of this "slight of hand", real per capita GDP figures, which had been showing a continuous decline throughout the decade, now showed a rise from when the ANC government took office in 1994. The reasons for this creative use of statistics is said to be the underrecording of the GDP in the old statistics as a result of not recognising the impact of the new economy of the 1990s. While a rush of new financial institutions confused the Johannesburg stock exchange, the new economy, as elsewhere, primarily focused on developments in in-

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Moneyweb in Citizen Business,The Citizen, 10 January 2004

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5 formation technology and, to a lesser extent, the media and telecommunications. However, it is doubtful whether much wealth was created. In 1994, for example, at the beginning of the boom in IT shares on the JSE, they had a market capitalisation of R9 355,3 billion. Five years later, at the end of 1999, this figure had risen to R69 817,0 billion, a ten-fold increase. But, by December 2000, they were back to R9 653,0 billion, which in real terms was lower than in December 1994.4 Two years later they were much lower still. Little real wealth had been created in the later 1990s and the accuracy of the changed statistics must therefore be questioned. For the purpose of citing meaningful growth rates over the whole decade, 17,9 per cent has been deducted from the 1999 and 2000 figures in the articles on mining, banking and external trade when referring to GDP. Adjusting the government statistics back to the 1998 level shows a continuous decline in real per capita GDP throughout the 1990s and confirms the widespread impression that, beneath the glitz and glamour of the new South Africa, the economy was merely ticking over amidst rising unemployment and a growing number of small businesses struggling to survive in a shrinking market.

2. A SECTORAL BREAKDOWN OF SECTORS AND POLICY Philip Mohr5 gives an elegant overview the South African economy in the 1990s. He provides a brief account of GDP growth in the first section, followed by an excellent summary of how policy changed, beginning with De Klerk’s dramatic speech on 2 February 1990 and concluding with the adoption of GEAR, the growth, employment and redistribution strategy that was to be the basis of the ANC government’s economic policy. Arguably this was the most revolutionary change that occurred because it embraced the abandonment of both the former government’s autarkic policies and the new government’s Stalinist

4. 5.

Financial Mail, December 1994, 1999 and 2000 Philip Mohr, "An overview of the South African economy in the 1990s", pp 16-30

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6 command economy type of policy. Indeed, the new government, dominated by communists that had congregated around Mbeki in London, even proclaimed its belief in the virtues of the market, at least when talking to western bankers. In his third section, Professor Mohr6 provides an account of how the main policies were implemented, with monetary policy leading to the Reserve Bank being freed from day-to-day control by politicians, with fiscal policy focusing on growth rather than on redistribution and with trade policy leading to membership of the World Trade Organisation along with a reduction in tariffs. The macro-economic framework seemed sound, yet aggressive affirmative action policies and the new equity legislation threatened both the security of property rights and long-term economic growth. Already, by 2000, the gap was widening between the stated policies of the government and their implementation. Effective implementation of policy by nepotistic and inexperienced bureaucrats was weak. Moreover, the effective rate of tariff protection is still very high notwithstanding the sharp decline in nominal tariffs. The overall impression of economic policy is that it was moving in the right direction during the presidency of Mandela but then stalled in the later 1990s as the will to reform weakened. The next three articles examine monetary7, fiscal8 and trade9 policy and show how market forces led to a major break with the dirigist policies of the National Party governments and eventually to the independence of the Reserve Bank. However, for six years of the decade Stals remained governor and, as Andrie Schoombee points out,10 he was at odds with his deputy, Meijer, over policy. The governor supported a supply side policy and Meijer a demand side approach. Not

6. 7. 8. 9.

pp 25-30 Andrie Schoombee, "The Stals era of monetary policy in South Africa", pp 31-49 Estian Calitz & Krige Siebrits, "Fiscal policy in the 1990s", pp 50-57 Rashad Cassim, "The pace, nature and impact of trade policy in South Africa in the 1990s", pp 76-95 10. p 40

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7 surprisingly, M3 growth was always in excess of the published guidelines. M1, M2 and M3 all grew at a faster rate after 1994 than they had done before then. The Reserve Bank also applied pressure to the banking system to no longer accept bankers’s acceptances as liquid assets. The full impact of market forces, though, was limited by the government’s failure to abolish exchange controls. Estian Calitz & Krige Siebrits11 detail almost equally impressive changes in fiscal policy as the long-term expansion of the public sector came to an end. Dissaving by the government was drastically reduced. Inland Revenue and Customs and Excise were combined into the South African Revenue Service and an emphasis placed on increasing efficiency, especially in the collection of taxes. Yet in a country, proclaimed as Third World by its government, the burden of personal income tax on lower and middle incomes increased. This occurred because the government rejected the advice of experts to increase VAT. Reform made its greatest gains in the field of trade policy where the ending of financial and trade sanctions enabled market forces to push the government into joining the World Trade Organisation. This brought with it the obligation to reduce the protectionist tariffs that had for so long cosseted the South African economy. Rashad Cassim12 analyses the reforms and shows how the move to lowering tariffs ground to a halt during the later 1990s. In the middle of the decade, from 1993 to 1996, the anti-export bias in the economy actually increased because the introduction of lower tariffs did not compensate fully for the withdrawal of previous export incentives. Even more importantly, he shows how effective tariffs still remained high at the end of the decade, especially for vehicles and their components. The textile and boot and shoe industries were less successful in retaining protection and these industries suffered accordingly. Reform in trade policy made a break with seven decades of creeping protection and the industrial inefficiency that accompanied it. But in the short-term, it had little effect upon employment or poverty alleviation.

11. pp 50-57 12. pp 76-95

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8 In direct production – agriculture, mining and manufacturing – market forces made great strides in the 1990s. Nick Vink & Johann Kirsten13 provide a macro-economic survey of the changes that took place in agriculture as the government’s grip on the maize price was loosened and markets opened up in Europe leading to an expansion in citrus and wine production and a more efficient use of labour on maize farms. Progress in agriculture, however, was held up by a backward and undercapitalised subsistence sector in the former homelands, by the growing threat of property rights, the new labour legislation in the modernised sector and by the incompetence of provincial departments of agriculture that were unable to provide support services to farmers. The commercial farmers turned to the private sector for services. Government intervention in the land, water and labour markets impacted negatively upon investor confidence and by the end of the decade the value of capital invested in farms was falling as farms increasingly became unsaleable. The deteriorating situation in Zimbabwe showed how fragile the modernised farming sector was in what was, until recently, one of the breadbaskets of Africa. In mining14 the impact of market forces was more dramatic. The old mining finance houses began to break up under the pressure of greater competition, while the threat to property rights was not sufficient to prevent considerable capital investment. Though, as Stuart Jones15 shows, this declined in real terms – see Table 4.16 In the 1990s, the decline of the gold mines continued with serious implications for both the balance of payments and the fiscus. To an extent, the rise of the platinum mining industry offset the decline. However, platinum mining was not as labour intensive as gold mining and this inevitably led to a decline in the demand for labour in the mining industry.

13. Nick Vink & Johann Kirsten, "Policy successes and policy failures in agriculture and land reform in South Africa", pp 96-117 14. Stuart Jones, "Mining in the 1990s", pp 118-58 15. pp 118-58 16. p 125

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9 The two articles on the manufacturing industry look at the sector in different ways. Colin McCarthy17 provides a macro-economic analysis while Grietjie Verhoef18 adopts a micro-economic approach with an account of the double transformation of Sasol from a petroleum producing firm based on coal as its feedstock into one based on natural gas, at the same time establishing itself as a major chemical producer. Overall, though, the outstanding development was the relative decline of the manufacturing sector in the total economy. Its proportion of GDP fell from 25,3 per cent in 1990 to 18,8 per cent in 2000 – the opposite of what might be expected in a developing economy. In an economy experiencing rapidly rising unemployment, this suggests that there is something seriously wrong in macro-economic policy. In a globalising world economy, South African wage levels are too high in relation to productivity. In Asia, Latin America and historically in Europe and North America, the manufacturing industry spearheaded economic growth. This did not happen in South Africa in the 1990s, nor did it seem to worry the government which was more concerned with ownership of existing enterprises than the development of new ones. Colin McCarthy19 highlights some the consequences of this development. Capital intensity increased with the capital-labour ratio 63 per cent higher in 2000 than in 1990 as firms sought to mitigate the effects of the government’s labour legislation by mechanisation and capital investment. Yet even here, there was decline as the productivity of capital fell by 23 per cent. Paradoxically, this happened at a time when the contribution of manufacturing to exports rose from 39,5 per cent in 1990 to 56,2 per cent in 2000 and import penetration ratios had risen for almost all manufactured products.

17. Colin McCarthy, "Manufacturing during the 1990s: Facing up to trade liberalisation", pp 159-87 18. Grietjie Verhoef, "Innovation for globalisation or globalisation of innovation: Sasol in the chemical industry during the 1990s", pp 188-212 19. pp 159-87

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10 Grietjie Verhoef’s20 study of Sasol outlines the operational transformation of the company in the 1990s as it achieved absolute growth but relative decline after 1995. In these years the prior investment in research was yielding results. But it was government policy that drove Sasol to diversify and move overseas. Private enterprise, freed from its former mercantilist constraints, enabled Sasol to become both a major international chemical firm and a synfuel producer using natural gas as its feedstock. Trevor Jones21 presents an acute analysis of the freight transport sector. While many long standing problems came to a head in the 1990s, little capital investment took place to remedy the defects with the result that the service provided deteriorated. This was particularly true of the container ports. The bulk goods ports, by contrast, operated efficiently and provided a first class service to exporters thereby enabling South Africa’s coal exports to compete with Australia and Canada. In the later 1990s the growth in the volume of traffic slowed down considerably, a trend, which, if it should continue, would remove the need for a new container port on the east coast. The ANC government’s failure to privatise the ports, or to provide them with adequate new investment, coincided with a radical change in worldwide shipping routes as shipowners belatedly followed the example of the airlines and developed a series of hubs that served their surrounding regions. Durban should have been one of these hubs – it could still be one – but in the 1990s it literally missed the boat as a result of government incompetence. The railways were probably more inept in their management than the ports and harbours section of the creaking public body that managed them both. Pricing was erratic and service poor apart from the two lines built for bulk export to Richards Bay and Saldanha Bay. South Africa’s ability to compete internationally in general cargo products

20. pp 188-212 21. Trevor Jones, "The freight transport sector in the 1990s", pp 213-37

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11 consequently depended on road transport which mushroomed, along with the size of the vehicles, after the ending of the permit system in 1989. In the words of Trevor Jones the history of road freight transport "is a story of regulation, its relaxation, and its mismanagement".22 This judgement could be applied to all the components of Transnet, the state holding company which owns the railways, the ports and harbours, the airlines and the pipeline from Durban to the Witwatersrand and is in urgent need of privatisation. The financial sector23 was the star performer of the 1990s, increasing its contribution to GDP from 14,4 per sent in 1990 to 20,3 per cent in 2000. This was a development one would expect from a developed economy and not a developing economy. Private enterprise was the driving force behind the expansion of the banking sector as foreign banks moved into the country as new financial institutions were formed within South Africa and as amalgamations among the established banks radically altered the shape of the sector. Standard Bank escaped from the clutches of Liberty Life but two of the other three big commercial banks remained controlled by life insurance companies. In 2000 the hoped for gains from bankassurance had not yet been achieved. The global threat to banking posed by the lack of innovation passed unnoticed in South Africa whose importance to the global economy was much less than it importance to the media. Yet, even in South Africa, the return on assets was not increasing as rapidly as the growth of assets. Exchange controls continued to distort investment patterns as the old building societies disappeared and the traditional distinction between commercial banking and merchant banking also passed into history. Banking remained the strongest component of the financial sector.

22. pp231-32 23. Stuart Jones, "The banking sector in the 1990s", pp 238-74

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12 Robert Vivian and Paul Benfield24 analyse the changes that took place in the insurance industry, one of the stable sectors of the economy and one for which South Africa has long been noted. With turmoil spreading throughout much of Africa north of the Limpopo, the solidity of South Africa’s insurance companies stood out in even greater clarity than in earlier decades. Yet there was some cause for anxiety. In the long-term sector withdrawals were running ahead of payments into the industry, which, if it continues, will lead to a major crisis. In the shortterm sector there was little fundamental change in the nature of the business but the withdrawal of foreign firms, save Lloyds syndicates, suggests a weakening of international confidence in the future of the South African economy. The public sector, that is succinctly and thoughtfully analysed by Brian Dollery & Jen Snowball25, is South Africa’s Achilles heel. It was bloated and inefficient in 1990 and the situation got worse as a result of Mandela’s politically motivated, but economically unwise, decision to guarantee the continued employment of all public servants. As a result, the new state in 1994 inherited all the former homeland employees, most of whom owed their jobs to patronage rather than their ability. This explains why both expenditure and employment at the provincial level increased rapidly after 1994 and why it was accompanied by an increasing incapacity to implement policy. The authors describe the propaganda supporting the government’s reconstruction and development policy as ethereal rhetoric. In the event, the public sector’s inability to execute it coincided with the ANC’s move away from its earlier commitment to Marxist policies and to the production of its new growth strategy. Its affirmative action policies have, however, continued to exert a debilitating effect upon the the public sector’s ability to perform. Expanding the role of the state, while si-

24. Brian C. Benfield & Robert W. Vivian, "Insurance in the 1990s: A. The longterm insurance market 1990-2000", pp 275-88; Robert W. Vivian, Insurance in the 1990s: B. The short-term insurance market 1990-2000", pp 289-309 25. Brian Dollery & Jen Snowball, "Government failure and state incapacity: The South African public sector in the 1990s", pp 310-31

South African Journal of Economic History

13 multaneously reducing state capacity to produce, was, in the words of Dollery and Snowball,26 "the worst possible model" of development. The last two articles in the volume look at external trade27 and the balance of payments28. Major changes occurred in the former, while more traditional patterns returned to the latter in the post-1994 sanctionsfree environment. External trade was stimulated by the ending of sanction, by an inflow of foreign money and bankers and by the global boom associated with information technology and telecommunications. For the first time its history, the country experienced export-led growth. This in turn was accompanied by import-led growth. Unfortunately this trade-led growth was not a sign of dynamic growth but of sluggishness in the domestic economy and the relative decline that was taking place. Both markets and sources of supply changed considerably. New markets opened in south, southeast and east Asia in India, Indonesia and China and trade with Africa, hitherto not revealed, could now be published openly. Europe’s importance as a market experienced a sharp decline. The source of imports also widened considerably, with the growth in imports from the Persian Gulf region overtaking the growth in imports from the other parts of Asia. By 2000 South Africa’s external trade was more geographically balanced but less balanced with individual countries such as the United Kingdom, the former leading trading partner, bought roughly the same value of goods from South Africa as she sold to South Africa. The Persian Gulf countries were not large markets for South African goods. Germany, Japan and France traditionally sold more goods to South Africa than they bought from her, a path that China seemed to be following.

26. p 330 27. Stuart Jones, "External trade in the 1990s", pp 332-65 28. Philip Mohr, "The South African balance of payments in the 1990s", pp 366-95

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14 In the last article, Philip Mohr29 provides us with a thorough analysis of the changes that occurred to the balance of payments. In the first four years of the decade, there was a R27 billion net outflow of capital that was converted into a net flow of R84 billion in the next five years. The normalisation of South Africa’s international economic relations brought significant benefits to the country but at the price of a much greater degree of volatility in the markets. Especially useful is the section on the new accounting framework that was introduced in response to the IMF’s manual of 1993. The balance of payments was to be broken down into five sections: the current account, the capital transfer account, the financial account, the unrecorded transactions account and the official reserves account. Professor Mohr then explains how this affected the existing Reserve Bank presentation of the balance of payments. The meat of the article lies in the next two sections dealing with the trade account and the financial account component of the current account. Overseas borrowing was renewed in 1991. But throughout the decade direct investment was mostly negative. This was, however, counterbalanced by portfolio investment, which boomed after the abolition of the dual exchange rate in 1995. Greater fluctuations in the value of the rand and the flow of capital into and out of South Africa was the price paid for for re-entering the global economy.

3. CONCLUSION The importance of the market and private enterprise was highlighted by developments in the 1990s. The private sector showed dynamism across a broad front: in mining, manufacturing and the financial services. This was in marked contrast to the public sector which continued to retard development. Not only were costs raised by underinvestment in the general cargo ports and railways while the hand of

29. pp 365-95

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15 the state retained its grip on them, throughout the country the public sector at the provincial and municipal levels was revealing an increasing inability to provide the services expected from it. Corruption flourished in an environment in which race and party membership determined appointments from the very top of the civil service and the central bank to the thousands of minor public employees throughout the country. Private enterprise increasingly had to battle with a thicket of regulations and controls – the continuation of harmful exchange controls, a weakening infrastructure and the absence of significant privatisation by a government wedded to patronage in the public sector. Meanwhile the population explosion continued to wreak havoc upon the fortunes of first time entrants to the job market. The government has no population policy preferring to blame apartheid for all its problems at a time when its own minimum wage policies effectively prevented youngsters coming into the job market from finding employment. The challenge, therefore, at the end of the century was to release the productive forces of private enterprise to bring about real growth in the economy. For this to occur, the South African economy needed sustained capital investment, but, this did not take place. Internally the savings rate had collapsed to 0,4 per cent of disposable incomes in 2000 making it impossible to obtain the capital from within South Africa. Foreign investment was essential but in the 1990s direct foreign investment dwindled away to almost nothing. Admittedly it was replaced by portfolio investment which was good for the balance of payments but did little for economic growth. The collapse of foreign direct investment reinforced the notion of a loss of confidence in the future of the economy under the ANC government. A notion which had already been suggested by the withdrawal of foreign banks and insurance companies from the country, by the declining investment in mining and by the government’s own fatuous policies towards the Aids pandemic and Zimbabwe.

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