The dividend of democracy: 20 years of economic growth
South Africa’s 20 years of freedom have seen inflation dropping significantly, while the economy’s gross domestic product has enjoyed sustained and unprecedented growth.
The transformation of South Africa’s economy over the past two decades, from apartheid-era isolation to openness and growth, was the subject of a Twenty Year Review discussion hosted by Brand South Africa and the Department of Trade and Industry at Constitution Hill on Wednesday 23 April.
Speaking to a group of foreign correspondents, trade and industry minister Rob Davies said over the past two decades his department has had to respond to profound changes in the global economy and realign South Africa to shifting world economic power and influence. “The domestic economy has been impacted by these changes and had also developed adynamic of its own, which, if left unchecked, would have done little to create they type of inclusive growth that many ordinary South Africans hope for,” he said.
In 1994 South Africa’s first democratically elected government inherited an economy with deep structural flaws, after lurching through varying degrees of crisis for more than a decade. International isolation, economic sanctions and the apartheid state’s resulting import-substitution approach to industrialisation had created an insular economy. This was made worse by the corrupt relationship between business and the apartheid state, with the private sector having massive power over ministers, public officials and state agencies.
“Where we come from as the touchstone we have a good story to tell, but there are enormous challenges ahead, and we will deal with them,” said trade and industry minister Rob Davies.
Short-term apartheid interests
“In a number of areas such as competition, industrial and labour market policy, the private sector steered government policy in order to maximise its short-term business interests with little concern for the long-term stability of the economy or the human rights abuses of the apartheid state,” Davies said. “There was no empowerment and no inclusion.”
The migrant worker system was encouraged, and wages kept low as the private sector benefited from poorly designed but generous investment and export incentives, and the intricate schemes of a feeble competition board.
“As a result, the economy in 1994 was characterised by an extended period of negative growth rates, falling per capita incomes, ballooning fiscal deficit, double digit inflation rates, negative rates of fixed investment, rising unemployment, low rates of firm-level R&D, declining gold production coupled with a low gold price, and adversarial labour relations at shop-floor level.
“At the industrial level concentration was extremely high, with more than 80% of all the Johannesburg Stock Exchange-listed companies owned by just six diversified conglomerates,” Davies said. “Exports were highly concentrated around mining and mineral products, mainly exported to Europe and the United States.”
International isolation ensured industrial policy was heavily focused on strategic investments to ensure self-sufficiency, while the “separate development” policy of apartheid meant relatively small-scale production of consumer goods for a small market of affluent white consumers. Economic sanctions imposed to pressure the government to end apartheid resulted in little state support for sustainable exports and a low level of competitiveness in domestic industry. Desperate attempts to make the “homelands” system work caused a highly distorted investment environment, as the government sought to encourage investment outside South Africa’s metropolitan areas.
Sustained economic growth
Over two decades of freedom much work has gone into revitalising the moribund economy bequeathed by apartheid.
“Between 1994 and 2013, the South African economy experienced positive growth in every quarter except for two of the 78 quarters,” Davies said. “In both instances where the South African economy experienced negative economic growth,international crises precipitated the contraction.
“In 1998, the East Asian financial crisis led to a significant slowdown in the world economy, while the 2008 global financial crisis led to a global recession from which South Africa was not fully insulated,” said Davies.
The country’s 76 quarters of growth have been the longest continuous economic expansion since the South African Reserve Bank first started keeping records.
“South Africa’s economic growth performance compares favourably with a number of countries at similar levels of development,” Davies said. “The nature of South Africa’s growth dynamic is an important explanatory factor for South Africa’s poor job creation performance as well as the unbalanced trade performance over the two decades for 1994.
“There are a number of important trends to be noted. The service sector has grown substantially faster than any other sector. The primary sectors – which include agriculture and mining – have been in long tern decline. The contribution of the manufacturing sector has declined and the contribution of the government has remained largely static.”
Bringing black South Africans into the economy
Since 1994 a wide range of policies – including broad-based black economic empowerment (B-BBEE) and employment equity – have allowed black South Africans to participate meaningfully in the economy. “Government’s approach to empowerment has been a multi-pronged strategy encompassing the full spectrum of economic and social activities,” Davies said, “including access to government services such as social grants, business incentives, procurement, the stick market, employment opportunities across all sectors and the eradication of all discriminatory policies, programmes and practices.”
In the past 20 years a number of organisations and initiatives were set up to support economic transformation, by providing financial and other support to black businesses. “It is important to note that government’s empowerment programmes are not only based on the need for post-apartheid economic redress,” Davies said.
“From an economic policy perspective the expansion of the entrepreneurial, investor, consumer and taxpayer base as a result of governments B-BBEE policies has been substantial and has contributed positively to the growth of the South African economy.”
Davies said a major thrust of the work of the first democratic administration elected in 1994 was to inject new life into the South African economy. The redesign of the country’s competition policy and the introduction of focused small business support programmes topped the list.
“One measure of industry competitiveness is exports,” he said. “Data proves that competitiveness in the manufacturing sector over the last two decades has improved. Given that South Africa does not have any export incentives of any real significance and that the exchange rate was over-valued and volatile for large parts of the period 1994 to 2013, it is probable that South Africa’s industry competitiveness has improved overall, although there remains pockets of relatively low levels of competitiveness.”
Strategic trade repositioning and diversification
“In 1994 South Africa was an international pariah with limited international trade possible under international sanctions and the manufacturing sector poorly positioned to trade,” Davies said. “South Africa’s trade performance has increased progressively over the two decades with both imports and exports growing particularly rapidly in the period up to 2008. However, the growing gap between imports and exports has led to a significant and growing trade deficit, which is cause for concern.”
While South Africa has successfully diversified away from the relatively slow-growing EU and US regions and towards the faster growing regions of Asia and Africa, this has come at a cost. South Africa’s trade with Asia is increasingly dominated by mining and mineral exports to China, and rapidly rising imports of value-added and increasingly sophisticated consumer and electronic goods.
An important success story is the growth in South African exports to the rest of Africa as well as the fundamental changes in the trade profile of products exported into Africa compared to South African exports to the world.
A downward spiral avoided
“The first democratically elected government inherited an economy which was composed of a business sector which had been insulated from international competition, had become accustomed to generous cash and tax incentives from government and enjoyed a close relationship with the previous government and its key agencies such as the then board on tariffs and trade, and the competition board,” Davies said.
“As the limits of economic development premised on self-sufficiency (accompanied by international isolation) low wages, and a small captive consumer market became apparent, the South African economy in 1994 could very easily have entered a downward spiral of company closures and capital flight or a period of sustained under-investment leading to de-industrialisation and the erosion of South Africa’s manufacturing capabilities.
“Predictably, challenges remain. Job creation has been disappointing and has contributed to the relatively low alleviation of poverty and inequality. The risk of the industrial sector reverting to a capital- intensive minerals-based growth path and over-reliance on traditional export markets which are forecast to grow slowly over the next decade pose significant risks to South Africa’s economic growth potential.
“Nevertheless, the economy is increasingly well-positioned for another period of sustained growth. The key challenge will be to ensure that the progress made in deepening and widening industrial development is accelerated and that this translates to more job-creating and inclusive economy in the next decade.”
“Where we come from as the touchstone we have a good story to tell, but there are enormous challenges ahead, and we will deal with them.”