The Bear's Lair: No sunshine in S. Africa

By MARTIN HUTCHINSON, UPI Business and Economics Editor  |  May 5, 2003 at 6:42 PM
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WASHINGTON, May 5 (UPI) -- A country with a heavy natural resource base, a basic illiteracy rate of 15 percent, higher than the Latin American average, a GINI (inequality) coefficient of 0.59, equal to Brazil's, and corruption equal to that of Belarus is unlikely to be a success story. Add in a race-based government motivated by retribution, and one of the world's worst AIDS problems, and you have South Africa today.

Economically speaking, South Africa has never been a well-run country. Nineteenth century Transvaal president Paul Kruger's attitude to the opening up of the country following the discovery of the Transvaal gold deposits was one of implacable opposition to the immigrants and the wealth and economic development they brought. It was Kruger's economic policies, not his anti-British attitudes or his fierce racism, that caused the Transvaal "uitlanders" to support first the 1895 Jameson raid and then the Boer War.

On the other side, Cecil Rhodes and the gold barons exhibited the worst symptoms of bubble economics, suborning the government to their ends, acting solely in the interests of their short-term profits, and doing nothing whatever to produce long-term stability and prosperity in the country they were looting. They might have been 1999 Internet stock promoters!

Needless to say matters did not improve under the apartheid regime of the National Party, from 1948 to 1994. While an oligarchic regime is not necessarily bad for economic development -- the British oligarchy of 1688-1832 and the Argentine oligarchy of 1860-1930 were notably successful in this respect -- it is essential for success that 85 percent of the workforce is not cut off from the fruits of economic growth. Add a paranoia about national security and a "corporate state" view of economic development led by the public sector, and you have an economy that is unlikely to succeed.

Basically Argentine policies (of the post-1945 variety) led to an Argentine level of failure. South Africa's GDP per capita in 1985 prices grew from $1,932 in 1950 only to $3,073 in 1992, a rate of growth of 1.1 percent per annum, with economic growth ceasing altogether after 1970. (Argentina's economic growth per capita over the same period was even worse, at 0.4 percent per annum, but not by very much. Even India, throughout the 1950-1992 period under the dead socialist hand of the Congress Party, did better, with per capita GDP growth of 1.9 percent per annum.)

In principle, once the African National Congress government took power in 1994, things might have been expected to improve. There is, after all, nothing distinctively African about socialism. All pre-industrial societies attempted to improve people's lot by government meddling, whether it was the British Statute of Artificers of 1565, the French dirigisme of Jean-Baptiste Colbert, or the myriad local customs regulations of pre-industrial China and India. In terms of ethics, too, capitalism is a recent and fragile blossom on the intellectual tree -- with the partial exception of Buddhism (anti-materialist but individualistic) all the world's major religions preach a level of interference with private economic activity that, if taken seriously, would make a modern industrial economy unworkable.

Like other agricultural societies, pre-colonial Africa held much of its land and other property in common, and paid little regard to such matters as property rights and freedom of contract. However, South Africa has been an advanced economy for more than a century, and hence it could be hoped in 1994 that the incoming government would follow more or less free-market policies that could bring economic growth.

Regrettably, the circumstances of the ANC's rise to power militated against this. Since South Africa had for many years been a staunch ally of the West in the cold war, the ANC had received considerable support from the Soviet Union, and like many other African leaders of the post-independence generation, its leaders regarded Soviet Communism as a viable economic model for the future.

Thabo Mbeki, South Africa's current prime minister, joined the South African Communist Party in 1962, and appears never fully to have rejected the Marx and Lenin he studied so assiduously in his youth. Nelson Mandela, the ANC's first leader, was not a Communist but even at the time of the ANC's accession to power, Communists held 10 of the 26 seats on its governing body. There is indeed a tradition of socialism/communism in the South African government, but it has little or nothing to do with traditional African mores.

As is well known, the South African government has some unpleasant friends, notably Robert Mugabe, Zimbabwe's dictator, whose country has recently been allowed to run up $115 million in unpaid electricity bills from South Africa's ESCOM, according to the Economist.

Yet Zimbabwe's progress in the 1980s was eerily parallel to South Africa's since 1994. Mugabe was elected in a wholly free election in 1980, which disregarded his Communist background, in a system in which his own ZANU party was almost assured of a substantial recurring majority.

Throughout the 1980s and early 1990s, articles appeared in Western media celebrating the good economic progress Zimbabwe was making under the Mugabe government, and the tolerance of the international lending institutions was repeatedly given to further tranches of money whose purpose was largely unclear.

During the 1990s, the situation deteriorated, the democratic credentials of the regime were abandoned, and outright expropriation of the remaining white settlers was undertaken. The result, as is well known, has been economic and political collapse.

South Africa's position currently is akin to that of Zimbabwe in the late 1980s or early 1990s, with removal of the ANC as the main factor in government being about as unlikely as it was in Mugabe's Zimbabwe.

Admittedly, South Africa has the advantage of its immense mineral resources and a substantial base of internationally respected companies, but on the other hand, it has AIDS -- only a minor problem in late 1980s' Zimbabwe, but already by 2000 in South Africa infecting an estimated 20 percent of adults and responsible for 300,000 deaths. Perhaps the most positive factor about South Africa today is that the government now appears to be taking AIDS seriously, as has that of Uganda, so that with the enormous financial and technical help available from the charities and aid agencies of the West, the tragedy may be brought under control going forward.

Given the world economic boom since 1994, progress has been unimpressive. South Africa's gross domestic product at constant 1995 prices grew by 2.7 percent per annum in the eight years 1994-2002, or 1.1 percent per annum in GDP per capita -- just about the level of the preceding four decades, in other words, with the opening of the country to new investment having had no positive effect at all.

The currency has been thoroughly unstable, falling to South African Rand 13.84 = $1 in December 2001, then rebounding to SAR 7.18 = $1 Monday. Inflation has remained reasonably under control, however, at 11.2 percent on an annual basis in the latest month -- with such a sharp rise in the currency one would expect this not to be a problem in the next year or so. Government spending, at 28 percent of GDP (excluding local government) has always been high by emerging market standards and has moved upward in the last decade, although public sector deficits have been modest and government debt is only about 40 percent of GDP.

Of more concern is South Africa's recent reinforcement of exchange controls, not on capital coming in (which controls are to some extent favored by informed international opinion such as the Economist and the International Monetary Fund) but on money leaving the country, now more or less unanimously opposed by economists.

South Africa instituted exchange controls at the outset of World War II, along with other (then) British Commonwealth countries, and kept them during the apartheid period, rendering them ever more Draconian. At one point the financial (free market) rand stood at a discount of 75 percent to the official rand exchange rate.

The new government abolished the financial rand and relaxed exchange controls after 1994, but the fall in the rand's exchange rate in 2000-2001 caused controls, never entirely abandoned, to be re-imposed with Draconian rigor -- just in time for the rand to almost double in value from December 2001 on. Foreign residents, who had been encouraged to come to South Africa in the early years after apartheid's fall, have recently been hit with new regulations by the South African Revenue Service (SARS, amusingly enough), including substantial forced deposits in a government account.

As the South African Reserve Bank's Exchange Control manual says, the purpose of exchange control is to "prevent the loss of foreign currency resources through the transfer abroad of real or financial capital assets held in South Africa." For a country with the world's largest gold reserves, this is mercantilism at its worst. In South Africa's political circumstances, it is also an open invitation to oppression of the wealthier members of the white community.

Finally, there's inequality. The GINI coefficient measures the level of inequality in an economy. A fair amount of inequality is no bad thing; as I have written in previous articles, the optimum for economic growth is a GINI coefficient in the range between 0.32 and 0.40 (the United States is 0.40, having risen during the 1990s from about 0.36). Low GINI coefficients, such as those around 0.23 to 0.25 in Scandinavia, tend to produce economic sluggishness, with incentives for entrepreneurship being lacking.

As has been demonstrated pretty conclusively over and over again in Latin America, very high GINI coefficients are equally bad for economic growth, at least in a democratic system. Countries such as Argentina (GINI of 0.49 between the recent crisis) or Brazil (0.59, the world's highest substantial economy) tend to adopt counterproductive policies, that cement the living standards of entrenched interests (typically in the public sector or large state owned enterprises) at the expense of the living standards of the poorest, who remain marginalized.

Depending on how you calculate it, South Africa has a GINI coefficient of 0.59, as high as Brazil or even, by some calculations, slightly higher. If South Africa were ethnically homogenous, with a government without an ideological commitment to socialism, or that alternated between parties, the outlook for its economic future would still be pretty unpleasant, with populist demagogues tending to stifle good policy and much of its population marginalized. As it is, absent a major political upheaval, the economic outlook for South Africa must be even grimmer than for Latin America, which is saying something.

(The Bear's Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that, in the long '90s boom, the proportion of "sell" recommendations put out by Wall Street houses declined from 9 percent of all research reports to 1 percent and has only modestly rebounded since. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)

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