South Africans had high hopes for the country after the dismantling of apartheid. And, for many years, the country looked like it was on an unstoppable journey to being a success story on the African continent. But it has lost its position as the largest African economy. Income inequality remains and it has a reputation for high crime, poor education and labour unrest. Big business is increasingly looking beyond South Africa for opportunities. Prof PDF Strydom, a political analyst, examines the country’s economic policy-making to shed light on why South Africa has turned out to be such a disappointment. – JC
By Prof PDF Strydom*
The transition of South Africa from an authoritarian regime to a democratic country in 1994 raised expectations about a new democratic constitutional framework capable of achieving economic progress.
The envisaged rainbow nation expected relatively high economic growth rates (i.e. in excess of the historic 3.5% p.a.). Such growth, together with government policies supporting human development and allocation of resources towards other developmental aims, was expected to secure the transformation of the country towards a more equal society.
Twenty years after transition, the progress towards these goals appears to be disappointing as measured against the original expectations and also what could have been expected by a reasonable person.
Disappointing statistics in this regard indicate that South Africa has lost its position as the largest African economy. Income inequality is among the highest in the world. Education outcomes rank among the worst in the world. Official unemployment at 25.5% (and inclusive unemployment of 33%) qualifies for the record books. The real GDP growth rate is gradually stagnating just above one percent per annum.
There is more than one explanation for these measures of failure. This essay is an attempt to explain failure in terms of contradictory policy making in this country.
Policy framework contradiction
Economic policy conduct in South Africa is about micro- and macroeconomic policies. We distinguish three categories of economic policies.
Microeconomic policies are formulated in terms of the National Industrial Policy Action Plans (2010, 2014) and the South African Trade Policy and Strategy Framework (2010).
Generally, one would classify trade policies as part of macroeconomic policy but the South African approach is primarily focused on microeconomic matters. Trade policy is supporting industrial policy. It is part and parcel of microeconomic policy.
The microeconomic policies listed above are primarily of an interventionist nature and not market friendly. Industrial policy is by nature interventionist, particularly if the state arbitrarily selects winning industries as is the case in this country.
In similar vein trade policies are aimed at supporting industrial policy in an interventionist way. Tariff regimes are determined by the state and trade agreements are concluded within the bureaucratic domain.
In addition, we distinguish two macroeconomic policy frameworks.
The first is the new Growth Path which could be described as a product of new collectivism. It is interventionist by nature and propagates the significance of the developmental state in policy making.
The second is the National Development Plan (NDP) as authored by the National Planning Commission. This suggests a market friendly policy approach without adhering to ideological preferences. It suggests prudent macroeconomic policy with flexible inflation targeting in respect of monetary policy and a fiscal policy that is driven by redistribution policy objectives but constrained by budget prudency.
In short, the NDP proposes monetary and fiscal policy making in terms of international best practice procedures.
The first contradiction in the conduct of economic policy is that Government has accepted all these different policy documents simultaneously to guide its policy making activity (running on parallel tracks as it were).
Yet these policy documents contradict each other in various respects. The majority of them are interventionist by nature, market unfriendly and supportive of a developmental state. In contrast, the NDP is very different since it is ideological neutral, market friendly while emphasising the imperative of an effective and efficient delivery state.
As these different policy documents are contradictory in terms of their policy approach, they cannot be implemented simultaneously without causing problems.
The impression in the market place is that the NDP, which could be regarded as the most extensive and coherent policy document, is a dust-collecting document on the policy shelf.
Instead, Government is opting in favour of interventionist, market unfriendly policies in conducting economic policy. Moreover, government is behaving within the framework of a developmental state. Policy delivery cannot be effective within such a contradictory framework.
Contradictory policy coherence
The second contradiction in the conduct of economic policy is a lack of policy coherence.
The NDP established a framework of policy coherence in the sense that it emphasises the interaction between microeconomic and macroeconomic policies together with the significance of quality education in securing quality human capital as well as effective infrastructure.
This coherence is absent in the other policy proposals which, necessarily, leads to contradictions and policy failure.
The industrial and trade policies make proposals about industrial development without recognising the deficiency in electricity supply in this country. Similarly the industrial policy favours switching from commodity trading to localised resource beneficiation without taking cognisance of the energy intensive nature of such processes.
Surely, these policy proposals contradict the shortage in electricity supply? Similar contradictions are evident in other areas of deficient infrastructure.
Industrial development is, as a rule, dependent on the service profile of a metropolitan area. The industrial policy proposals do not consider these constraints in the South African context of dysfunctional municipalities.
Industrial policy proposals within the South African context where an aggressive labour force sets factories on fire and viciously attack working staff during industrial actions are unlikely to encourage entrepreneurial activity to expand local manufacturing.
The South African labour market is, apparently, unaware of the fact that in a globally integrated world unskilled and semi-skilled wages are determined in Asia.
The extensive participation in world trade by China and other Asian countries during recent years has added a massive supply of unskilled and semi-skilled labour to the global labour market. Unskilled wages are in fact determined in Beijing.
Policy makers in South Africa are quick to identify possibilities of upgrading in manufacturing along the production value chain but do not account for the fact that upgrading requires quality human capital.
The dysfunctional education system in this country cannot supply the human capital required for such upgrading.
The industrial and trade policies in South Africa do not only lack domestic coherence but compare unfavourably with international practices, particularly in the area of global value chains.
The following table illustrates these discrepancies between South Africa and other emerging market countries in terms of data selected from Gereffi and Sturgeon (2013).
International Industrial incentives and priorities versus those in South Africa
Industrial policy in South Africa is based on the controversial position of Government selecting industry/sector “winners”.
The so-called industry clusters selected by the DTI carry no motivation or defence. Research reported by Viviers and Steenkamp (2012) confirm that only two of the thirteen industrial clusters identified by the DTI show export potential.
The winning industry clusters that have been selected by the authorities do not appear to be able to maintain their position in the market place without extensive protectionist measures.
Some of the selected winners are typical of industries in low wage countries such as clothing and footwear. South Africa’s rigid and aggressive labour market is unlikely to be able to compete with these low wage countries.
At the other extreme we observe industries that rely on highly skilled people and advanced technologies. Such industries appear to contradict the excess supply of unskilled workers on the domestic market and a dysfunctional education system that cannot supply skills in order to match international competition.
In contrast to the recommendations of the NDP, the Government’s industrial policy action plan does recommend the development of a nuclear industry structure. This high-maintenance intensive and expensive energy source appears to contradict the poor delivery and appalling maintenance record of the government. This could possibly even run into a Chernobyl-like disaster, particularly now that the state is cutting maintenance expenditure at the Koeberg nuclear power station.
Policy makers in South Africa overemphasise the value added by fabrication.
This confirms that the policies are inspired by 20th century international trade patterns that are becoming less important in the modern world.
Present trade patterns, where global value chains are dominant, show that the value added features of pre-fabrication and post-fabrication services are far in in excess of that of fabrication.
South African policies do not match present conditions in international trade and production and are merely wasting tax payer’s money.
In similar vein the authorities are in a position, in terms of legislation, to identify certain industries as “strategic”. Domestic industries are compelled to source inputs from these strategic industries. This policy contradicts the fact that the production of these firms is constrained by electricity consumption caps. Such limitations have spill over effects along the entire production chain. Moreover, such policies contradict the principles of global value chains where domestic firms source inputs at competitive conditions from international counterparts.
Contradictory developments in income distribution
The international debate on income distribution has gained substantial interest during recent years.
The international debate emphasises several reasons for a rising unequal income distribution such as important historical events e.g. the Second World War, corporate governance, the prominence of extracting institutions that are designed to extract resources from the public to benefit the political elites (à la Acemoglu and Robinson 2012), technological developments, globalisation, tax regimes and education.
These different aspects all carry a certain weight in explaining rising patterns of international income inequality that differ from country to country. They will not be discussed here.
South Africa’s rising income inequality is not independent of the factors listed above but the country is distinguished by particular features that require a closer analysis.
Recently Visagie (2012) gave an interesting analysis of the South African distribution across different income groups while concentrating on the position of the middle class.
The author distinguished two measures of middle income. The one refers to the middle of the income distribution while the other refers to an absolute threshold income or affluence.
Both these definitions are helpful in understanding aspects of income distribution. Importantly, the two definitions lead to different policy aspects regarding income distribution.
The different middle income categories are defined as individuals residing in households with an after tax per capita monthly revenue of R1400 to R10 000 at 2008 prices. The middle class as the middle-income strata is defined as households falling within 50% to 150% of the median household income in per capital household income distribution.
The analysis of the affluent middle class shows that, in the post-apartheid South Africa, the total size of the middle class expanded roughly in line with the population growth (that is, stagnant in structural terms).
This relatively stagnant pattern is explained by low economic growth, and limited shifts in activity and productivity patterns, even though absorbing substantial race-based changes in the size of the middle class.
The occupational structure shows significant shifts of blacks into high professional occupations alongside a fall in the participation of whites. This transformation is primarily the outcome of government employment policies that are aimed at racial employment transformation together with an emigration of whites.
It appears that the race-based divisions in the apartheid South Africa are replaced by class-based divisions in the post-apartheid era. The racial profile of the upper income class (income in excess of R10 000 per month) became more representative of the population composition after 1994 so that within the top of the income distribution there is evidence of greater racial equity.
Looking at the middle-class income strata, it is evident that a falling portion of income is coming to this category while the upper strata, particularly the top income decile, experience a rising portion of income.
At the lower end of the distribution pattern the poor experiences significant income growth owing to a meaningful growth in social grants.
The outcome is a middle-class squeeze over the period 1993 to 2008. It is clear how declining poverty rates were accompanied by rising income inequality in South Africa.
These distortive developments were enhanced by affirmative action employment and black economic empowerment policies.
Instead of reversing fundamental issues of income inequality these policies created a very affluent black elite class. The rising proportion of income being allocated to this category further verifies the squeeze on the middle class.
The redistribution policies of government are in actual fact encouraging unequal income distribution patterns while they have adverse effects on the middle class.
These adverse effects do not serve economic development effectively because economic development is carried by the middle income class since members of this class invest in education to enhance the supply of quality people. They participate in capital markets to finance investment and economic growth. Yet government is committed to continue these policies with more enthusiasm in the future despite their negative effects on the middle class, as argued by Donaldson (2014).
Conclusion
The failure of government economic policies in fighting poverty, in generating sustained economic growth, addressing unemployment and correcting unequal income distribution is weighing heavily on society. We have demonstrated how this failure could be explained in terms of contradictory policy procedures. Moreover, instead of correcting these contradictions government appears to be steamrolling ahead by enhancing errors as opposed to correcting them. The de-industrialising pattern in South Africa should not come as a surprise. In fact it is likely to gain momentum.
References
Acemoglu, D. and Robinson, J.A. (2012) Why Nations Fail: The Origins of Power, Prosperity, and Poverty, New York: Crown Business.
ANC (2012) The Second Transition? Building a National Democratic Society and the Balance of Forces in 2012.
Atkinson, A.B., Piketty, T. and Saez, E. (2011) Top Incomes in the Long Run of History, Journal of Economic Literature, 49(1):3-71.
DTI (2010) A South African Trade Policy and Strategy Framework: Pretoria: dti Campus.
DTI (2010) Industrial Policy Action Plan (IPAP) 2012/13-2014/15, Pretoria: dti Campus.
DTI (2014) Industrial Policy Action Plan Economic Sectors and Employment Clusters IPAP 2014/15-2016/17,Pretoria: dti Campus.
Donaldson, A. (2014) Redistribution is Part of the Toolkit to Promote Growth, www.econ3x3.org
Economic Development Department (2010) The New Growth Path.
Gereffi, G. and Sturgeon, T. (2013) Global Value Chain-oriented Industrial Policy: The Role of Emerging Economies, In Elms, D. and Low, P. Global Value Chains in a Changing World, Lausanne: WTO:329-360.
Laubscher, J. (no date) An Evaluation of South Africa’s Industrial Policy, Sanlam, www.sanlam.co.za
NPC (2011) National Development Plan, National Planning Commission.
Visagie, J. (2012) The Development of the Middle Class in South Africa Since the Transition to Democracy, PhD Thesis University of Kwazulu-Natal.
Viviers, W. and Steenkamp. E. (2012) The Identification of Realistic Export Opportunities for South Africa: Special Reference to the IPAP-2 Clusters, In Bruggemans, C. and Loots, E. Economic Perspectives: Ruiterbos Essays in Honour of Peet Strydom, Bloemfontein: Sun Media:129-138.
