20th century AD

Social Research, Fall, 2005 by Vishnu Padayachee

1. INTRODUCTION

Various perspectives emerge from the flood of official government reviews, academic and union conference proceedings, books, and special issues of journals that review South Africa's economic performance during its first decade of democracy. (1) Some are supportive of government economic policy, others are more reflexive and critical, and a few are openly hostile. This paper focuses on a narrow range of issues within the broad theme of economic policy and performance. These include macroeconomic stability and performance, developments in the labor market, and trends in poverty and inequality. A number of clearly important areas, including black economic empowerment, industrial policy, South Africa's re-insertion into the global economy, are not addressed, given the constraints of our mandate. Although the paper ends with some ideas about the kind of policy approaches government could consider to address the continuing challenges of reducing unemployment, inequality and poverty, no comprehensive model is proposed to achieve this.

Sections 2 through 4 set out the initial conditions of the economy at the time of the transition, examines the policy options that emerged (within the dominant African National Congress alliance), and then review the country's decade-long economic record in some detail. Section 5 looks at the same issues from a broader and more impressionistic angle to capture the core of the problems, as we see them. Aspects of the current response of government are set out in section 6, before a brief conclusion.

Our argument is straightforward. Despite notable success in the area of macroeconomic management, improved and continuous output growth in the second half of this period, and not inconsiderable success in delivery of social and physical infrastructure, significant problems continue to exist in addressing the very issues that were at the heart of the government's economic thinking in the early 1990s. Specifically, the formal labor market does not appear to be able to absorb new entrants in sufficient numbers to bring down the unemployment rate, and few signs that suggest that poverty and inequality are being effectively addressed.

2. THE SOUTH AFRICAN ECONOMY IN 1993-1994

South Africa entered the transition period with some advantages in relation to global economic developments at that time. Its manufacturing sector was relatively large and diversified; it had been open to inflows of foreign direct investment and technology for many decades; it had a not insignificant physical, banking, and human resource base; it had developed a globally competitive edge in some complex activities (metallurgy, mining equipment, chemicals and paper), albeit behind high protective barriers (Lall, 1993: 3); and in "sheer economic terms South Africa [seemed] to fit the profile of the kinds of countries that have indeed been able to take advantage of changed investor sentiment to re-enter international capital markets in a major way" (Krugman, 1993: 46).

However, in its last years in office, the National Party, for reasons of political opportunism and economic profligacy, presided over a rapid growth in government debt as a proportion of GDP. The budget deficit rose from 0.9 percent of GDP in 1989-1990 to 9.2 percent in 1992-1993 and 10.8 percent in 1993-1994. This was exacerbated by cyclical factors, since government revenues were affected by the downturn in overall economic activity (Gibson and van Seventer, 1995: 2). Despite the growth in the budget deficits, the ratio of total national debt to GDP (including the debt of the homeland governments) stood at 52.5 percent in March 1994, which was not high by international standards. (Under the European Union's Maastricht Treaty, for example, anything below 60 percent was deemed acceptable.) However, there is little doubt that servicing this level of debt was going to have negative implications for social spending in the postapartheid era and was not therefore a sustainable position.

Tight monetary policy, including high positive real interest rates, had forced the underlying annual average inflation rate down from a peak of 15 percent in 1991 to around 8 percent at the time of the 1994 election. One reason for this tight policy approach at the time stemmed from the difficulties that South Africa faced in accessing foreign finance. Total net capital outflows increased to 16.3 billion rand (R) in 1993, or 5 percent of GDP, the highest since the debt crisis of 1985. Some 90 percent of these outflows were short term, a major proportion of which consisted of what the South African Reserve Bank (SARB) classified as "non-monetary private sector outflows," essentially capital flight. Total cumulative capital outflows since 1985 were estimated to be some $20 billion. In 1993 net capital outflows far exceeded the current account surplus (which the authorities had been forced to induce each year since 1985) and led to a sharp reduction in gold and foreign exchange reserves (IBCA, 1994: 22-3).