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Crying for South Africa

by robert looney
 

bob looney teaches economics at the Naval Postgraduate School in California.

Published June 18, 2019

 

When black South Africans assumed political power with the fall of apartheid in 1994, they inherited a failing economy purpose-built to preserve the perquisites of the former white ruling elite. The African National Congress, the dominant political party, swept away the legal framework of apartheid, but stopped short of any serious effort at redistributing white-held wealth.

Indeed, in order to attract desperately needed foreign investment, the ANC pursued orthodox economic policies that effectively replaced legal racial discrimination with institutions that hardened the status quo. A quarter century later, with the economy in crisis — unemployment rose from an already high 16.5 percent in 1995 to an intolerable 27.5 percent in 2018 — the opposition Economic Freedom Fighters Party is pressing the government to directly address inequality. Their solution: radical reforms aimed at wealth redistribution, including a constitutional amendment that would allow uncompensated expropriation of white farmers’ land.

Daunting Barriers

While EFF’s proposed fix seems extreme, the problem is extreme. South Africa currently has the greatest wealth disparity of any country in Africa (and perhaps in the world), with 10 percent of its population (the old white elite and the new black one) controlling 90 percent of the nation’s wealth. The poverty rate (over 50 percent) is the third highest on the continent.

Nor is it a secret why the EFF is focusing on land: to paraphrase bank robber Willie Sutton, that’s where the money is. Most of South Africa’s better rural land is still concentrated in large plots cultivated by whites, who control more than 70 percent of the country’s agricultural holdings. Even if land were available, the bootstraps, equal-opportunity model of self-improvement is hardly practical: Barely one black South African in five owns assets that could qualify as loan collateral.

Numbers, Please

Initially, the ANC’s orthodox economic approach seemed to be working, generating investment and jobs. But malaise set in around 2009 with the international financial crisis and election of President Jacob Zuma, who was especially tolerant of corruption in a country long blighted by it. Economic growth, which averaged 3.6 percent annually from 1994 to 2008, fell to 1.5 percent from 2009 to 2018. The pace of growth in labor productivity slipped to just 0.4 percent annually, while manufacturing growth slowed to a mere 0.3 percent. Most troubling, total factor productivity, the economist’s go-to yardstick for long-term prosperity potential, has actually contracted since 2009.

The economy’s doldrums are most apparent in exports, where growth fell from an average of 4.7 percent annually in the early post-revolution years to 0.8 percent since the financial crisis. Standard and Poor’s now rates South Africa’s foreign-currency debt, which rose from just 22 percent of GDP in 2008 to 50 percent in 2018, at two steps below “junk.”

 
The broad pattern of underperformance can in part be traced to institutions and practices left over from the apartheid era coupled with rampant corruption and an overall deterioration in the quality of governance.
 

Some of South Africa’s difficulties stem from circumstances beyond its control, among them the global commodity price collapse, drought woes and the ongoing stagnation of the European Union economy (where most South African exports end up). However, the broad pattern of underperformance can in part be traced to institutions and practices left over from the apartheid era coupled with rampant corruption and an overall deterioration in the quality of governance.

Blasts from the Past

Not only does South Africa’s skew in wealth trace back to the apartheid era, so do a variety of other problems plaguing the economy. In some cases, the mess can be directly linked to the evils of apartheid. In others, the inefficiency follows ironically from post-revolution efforts to erase the abuses of apartheid. Either way, the result is an environment that undermines growth and economic mobility.

Consider South Africa’s numerous state-owned enterprises, notably Eskom (the power utility), Transnet and Prasa (the freight and passenger rail groups), and South African Airways. The SOEs were fashioned by apartheid-era governments with the primary goal of national self-sufficiency at a time when the global boycott on trade with South Africa was beginning to bite. But rather than privatizing the SOEs and trusting the market to force efficiency gains, the ANC hoped to transform them into the centerpiece of a giant-enterprise-dominated developmental state similar to South Korea’s.

The plan was a nonstarter from the get-go. And the SOEs, which were inefficient even at their best, have been hemorrhaging cash in recent years. In some cases, the losses stemmed from simple mismanagement. In others, the SOEs (including Eskom and Transnet) fell victim to elaborate state capture schemes. In exchange for a piece of the take, members of the Zuma administration arranged for control of the SOEs to shift to a pair of brothers who looted their assets. In early 2019 it was estimated that Eskom alone would require a $4.9 billion government bailout over the next three years to service its debt and keep the nation’s lights on.

Wait; the story gets grimmer. The ANC inherited a pattern of housing from the apartheid era in which black ghettos — the euphemism was “township” — were established on scrub lands far from the main areas of economic activity. The ANC initially planned to break the system by constructing low-income housing closer to transportation routes and job markets. But the cash-strapped government settled for upgrading existing units and purchasing more cheap land away from major cities when it came time to build new ones. This pattern of housing reinforces social and income disparity while creating a drag on growth.

Education is hardly in better shape. Before 1994, schools in the townships focused exclusively on rudimentary skills. Although the situation has improved somewhat, most blacks living in the townships still attend inadequate schools. The World Economic Forum’s Global Competitiveness Report 2017-18 rated South Africa’s state schools 114th out of 137 countries for overall quality (behind, among others, Burundi, Madagascar and Cambodia) and 128th in math and science. Whites and the black ruling elite have insulated themselves by enrolling their children in high-quality private schools.

While part of South Africa’s rising unemployment can be traced to substandard education, much of the problem stems from labor market policies originally designed to address apartheid-era injustices. Among them are job and wage protection so extreme that in 2018 the World Economic Forum ranked South Africa 137th out of 137 counties for cooperation in labor-employer relations, 132nd in the flexibility of wage determination and 125th in hiring and firing practices. High minimum wages combined with union rules that make it nearly impossible to fire low-productivity workers make South African firms understandably reluctant to take on new hires.

• • •

South Africa’s new president, Cyril Ramaphosa, claims he can revive the country’s struggling economy. To do so, however, would require more than redistributing farmland. Ramaphosa (a former union leader turned business tycoon) would need to remove the range of economic obstacles left over from apartheid, even as he addresses post-apartheid corruption and gets a handle on government debt. All this while retaining support of the ANC party, many of whose members have a strong interest in maintaining the status quo.

One wishes him well. But wishing may not make much difference in an economy that is dragging so much baggage from its colonial and racist past.

main topic: Africa
related topics: Economic Growth