POLITICAL ECONOMY

South Africa

One cannot separate the social and economic challenges confronting South Africa today. Not surprisingly, these challenges are also inherently political. Having vanquished the demon of Apartheid, South Africa faces rising crime rates, the rapid spread of HIV/AIDS, and a growing brain drain of skilled young white professionals. These social problems in turn are rooted in declining rates of economic growth and foreign investment, rising unemployment, growing income inequality within ethnic groups, and persistent poverty among South Africa's poorest.

The ANC government must adopt policies that can both ameliorate these problems without alienating its broad and disparate constituencies and preserve South Africa's nascent democracy and fragile civil liberties. Moreover, successful democratic transition has not guaranteed the economic transformation of South Africa. In fact, it has in some ways hindered its growth as issues of equality have taken on more significance.

To its credit, the government has made real strides in improving the economy by curtailing debt, reversing inflation, and expanding exports. It has also improved employment opportunities and income for the growing black middle class and, for South Africa's poor, greatly expanded access to basic necessities such as water, electricity, and housing. By African standards, the South African economy is highly developed, accounting for some 40 percent of all African economic activity. Its economy is also highly diversified, although still fairly dependent on the country's large mineral resources, particularly gold and diamonds.

"Brain Drain"

A final issue worth noting is the loss of human resources through the emigration of skilled workers. This "brain drain" is sometimes dubbed "white flight," since a large portion of those leaving are young white professionals who are increasingly skeptical and fearful about their future prospects in South Africa. It is estimated that 40,000 skilled workers emigrated from South Africa from 1994 to 1997. The figure for 1999 alone was 9,000, a number that-while seemingly large-likely understates the actual total.

Political Economic Model

Historically, both British- and Afrikaner-controlled governments sponsored political economic systems that favored their own. In the early twentieth century, government policy facilitated English ownership and control of mines and other industries, even in Afrikaner-dominated regions of the country. Afrikaners soon found themselves squeezed by wealthier and more highly skilled English from above and cheaper black labor from below. They began to seek political power in large part to redress what they felt was economic oppression.

With this power, the Nationalist Party upheld mercantilist policies of import substitution to promote local, and more specifically Afrikaner, industry. By the 1970s, the economic sanctions placed on South Africa (in protest of Apartheid) left the state little option but to depend on internal markets and production. During its tenure, the Nationalist Party government intervened extensively in the marketplace, imposing high tariffs and other trade barriers on imports, bestowing lucrative government contracts on favored firms, establishing state-owned enterprises (SOE) in key industries such as steel and energy production, and using oligopolist profits from gold and diamond exports to fuel industrialization.

Throughout the 1970s, the South African economy thrived and Afrikaners prospered. At the same time, the absence of economic opportunity for black Africans and the prohibition against black trade unions kept black labor costs artificially low. This sparked the interest of foreign investors eager to take advantage of the cheap labor and relative stability that authoritarian South Africa could promise. However, during the 1980s, foreign firms and countries faced growing moral and legal pressures to divest their South African interests. At the same time, multi-racial trade unions (including the powerful Congress of South African Trade Unions, which is still affiliated with the ANC) were legalized in South Africa and began demanding higher wages for their workers. These pressures dealt severe, and some would say ultimately fatal, economic blows to the Apartheid state.

Given the history of policies benefiting the English and Afrikaners, many expected that the victorious ANC would adopt interventionist policies to redress the discrimination and exclusion blacks had experienced for generations. Not only did such policies promise to be popular with the ANC's majority black constituency, but this kind of progressive state intervention designed to redistribute wealth and promote greater equality was also in harmony with the long-standing socialist ideological heritage of the ANC. This, then, would be state manipulation of the market from the left not the right-but state intervention all the same.

Economic Policies and Issues

Such intervention was partially realized with the ANC's Reconstruction and Development Plan (RDP), announced soon after Nelson Mandela came to office in 1994. The RDP placed priority on state provision of basic human needs to South Africans who were living in poverty. The ANC argued that safe drinking water, housing, electricity, jobs, affordable health care, and a safe living environment had to take precedence over economic growth.

Within two years, however, the ANC government recognized that the huge administrative costs of the RDP were unsustainable in the absence of substantial foreign investment and more rapid economic growth. In addition, the failure of communism in Eastern Europe and the Soviet Union and the increasing popularity of neoliberal market solutions in other parts of the world also encouraged the ANC to turn away from its socialist roots. In 1996, the government adopted a liberalization plan of macroeconomic structural adjustment known as the Growth, Employment, and Redistribution Program (GEAR). GEAR called for opening trade, privatizing the SOEs, and otherwise limiting the role of the state in the marketplace in an effort to stimulate growth and attract foreign investment.

Not surprisingly, this dramatic shift in redistributive priorities and interventionist policies has angered the ANC's longtime allies on the left-both COSATU and the South African Communist Party. In labor protests against GEAR, COSATU leaders have warned of devastating consequences for South Africa's working poor and labeled the GEAR privatization of the SOEs "born-again Apartheid." In danger of alienating its most loyal constituency, the ANC has not yet reaped the intended economic benefits of liberalization. In what may be a self-fulfilling prophecy, investors, who are the key to renewed growth, fear that rising levels of unemployment and disillusionment with ANC policy will lead to social unrest and force the government to return to more popular programs of redistribution. The government finds itself in the position of being praised by the IMF for promoting GEAR privatization but under attack from its erstwhile anti-Apartheid allies, COSATU and SACP.

Facing this Catch-22 situation, the government is trying to please all sides. On the one hand, it has not abandoned efforts to pursue more equality. The ANC government remains committed to programs of land reform and basic health care and continues to fund state programs providing water, electricity, phones, and subsidized home purchases to the poor. In a 2002 study, some 50 percent of rural households are electrified, compared to 17 percent in 1994. Water is now piped to 76 percent of households, up from 68 percent in 1994. The government has also built more than 1 million houses for the poor. Though it is making genuine efforts to move toward greater equality by increasing employment opportunities for the black majority, unemployment rose to nearly 30 percent in 2002, nearly twice the levels of 1995.

The government has successfully continued to woo foreign investment by cutting inflation to single digits, lowering taxes, and keeping a lid on its own spending. It has also targeted key industries and manufacturing sectors, offering low-interest loans and other incentives for investment, particularly local black investment. As in other developing economies, the government has also promoted microcredit or small loan initiatives designed to assist the very poorest in starting businesses. The question now is whether or not the government's best efforts and delicate balancing act can sufficiently overcome the confluence of challenges it now faces, many of which are out of its control and some even beyond its borders.

Chief among these challenges is persistent income inequality. Despite the ANC government's affirmative action efforts and the emergence of a small but growing black middle class, the white minority still dominates the South African economy. In fact, as of 1999, South Africa had the greatest income inequality of any developing country. And while the rising incomes of some blacks and the government's redistribution efforts have led to a decline in inequality between races, overall inequality continues to increase. While the wealth of the top one-fifth of most prosperous black households has grown, the wealth of the bottom two-fifths has declined.

And yet, despite all this, South Africa continues to befuddle the naysayers. As little as two decades ago, no one would have believed a peaceful end to Apartheid possible. Since then, many have predicted economic chaos if not outright collapse. Why has this not occurred?

Scholars note several important reasons for this national resilience and the prospect of a brighter economic future. ¹ First is the broad network of industries and services that make up South Africa's bustling informal economy. Essential to black livelihood under Apartheid, this gray economy of unregulated businesses in transportation, distribution, communications, finance, and currency exchange has continued to thrive under the ANC. This unofficial system offers efficient service and essential employment to many and provides a buffer against social unrest and economic crisis.

A second force for economic stability and hope has been the emergence and expansion of the black middle class and the growth of purchasing power even among poor blacks. As of 1998, blacks outnumbered whites for the first time in the upper- and middle-income groups, with over one-fifth of all black adults falling in the group of "middle-class consumers." Not only is this new black middle class a political force for stability, but it also offers the prospect of social mobility and greater prosperity for the poor majority. Combined with increased consumer demand among the poor, this newfound black wealth offers the best hope for driving the South African economy.

Finally, the ANC government's determination to stand by its neoliberal economic policies and to maintain political openness have regained the confidence of both foreign investment and most South Africans. Despite the clamor of left-leaning labor support, Mbeki and the ANC have remained committed to GEAR. And despite their frustrations with its many shortcomings, most South Africans continue to believe that their new government is at least trying to respond to their needs.