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The Political Economy of South Africa’s Transition Policy Perspectives in the Late 1990s

This book is dedicated to Ramsamy Nadarajah Padayachie in memory of his courage, compassion and integrity

The Political Economy of South Africa’s Transition Policy Perspectives in the Late 1990s

Edited by

Jonathan Michie The Judge Institute of Management Studies, University of Cambridge, UK and

Vishnu Padayachee University of Durban-Westville, South Africa

®) The Dryden Press Harcourt Brace & Company Limited London Fort Worth NewYork Orlando San Diego Toronto Sydney Tokyo


The Dryden Press 24/28 Oval Road, London NW1 7DX

Copyright ©

1997 by Harcourt Brace & Company, Limited

All rights reserved No part of this book may be reproduced in any form by photostat, microfilm or other means, without permission from the publishers. A catalogue record for this book is available from the British Library ISBN 0—03-—099-088-2

Typeset by LaserScript, Mitcham, Surrey Printed and bound in Great Britain by WBC Bridgend, Mid Glamorgan

Book Manufacturers Ltd,



Contributors Foreword

Preface and Acknowledgements


Introduction Fonathan Michie and Vishnu Padayachee

Part I: The Global Context 1. South Africa’s Transition: The Policy Agenda Jonathan Michie and Vishnu Padayachee 2. The Evolution of South Affrica’s International Financial Relations and Policy: 1985-95 Vishnu Padayachee 3. Regional Integration Policies in Southern Africa Harry Zarenda 4. Trade Policy Trevor Bell

27 55 71

Part Il: Restructuring the South African Economy 5. Economic Objectives and Macroeconomic Constraints Laurence Harris 6. South Africa’s Monetary and Foreign Exchange Rate Policy Vella Pillay 7. Industrial and Energy Policy Ben Fine 8. Developing the Institutional Framework: Employment and Labour Market Policies Jonathan Michie

91 101 125


Part Ill: Policy Formulation and Implementation 9. Growth, Demand

and Redistribution: Economic

Rhetoric and Some Food for Thought Martn Wittenberg 10. Modelling the South African Economy Asghar Adelzadeh 11. The South African Policy Debate Resumes Jonathan Michie and Vishnu Padayachee Index


175 195 223



Asghar Adelzadeh Trevor Bell Merton Dagut Ben


Laurence Harris Jonathan Michie Vishnu Padayachee Vella Pillay Martin Wittenberg Harry Zarenda

University of the Witwatersrand and the National Instutute for Economic Policy, Johannesburg Professor, Institute for Social and Economic Research, University of Durban-Westville Dean of the Faculty of Commerce,

University of the

Witwatersrand Professor of Economics, SOAS, University of London Professor of Economics, SOAS, University of London Fudge Institute of Management Studies and Robinson College, University of Cambridge Research Professor, Centre for Social and Development Studies, University of Natal, Durban Bank of China Department of Economics, University of the Witwatersrand Associate Professor, Department of Economics, University of the Witwatersrand


Some bring change about, some watch it occur, some ask later ‘what happened?’. This perhaps is always so. But during the past ten years it has been especially and paradoxically true in South Africa. We have seen a miracle of negotiated political transition. The awesome power of an apparently invincible ruling party was reduced, initially to junior membership of a government of national unity and then to a voice on the opposition bench. Correspondingly the degree of influence of those who were, or would have liked to have been, proactive in the formulation of economic or business policy, gyrated. Influence was largely, quickly and sometimes idiosyncratically, redistributed. Fresh faces and views brought with them fossilized doctrinaire statements but also a concerned altruism, enthusiasm and an urgent call that too much time had already been lost. Sadly, though, arrogance and greed for power soon followed and with these came frustration and anger. The rainbow blew away and re-revealed grey shades of poverty, joblessness and inequities in income distribution in a sluggish and slowing economy. The daunting size of the economic problem and the complexities of the political issues cause tensions to increase and give a strident tone to the public policy debate. Policy proposals and demands — ranging from broad framework philosophies to the narrow detailed lists of special interest groups — are declared from the outset to be ‘non negotiable’. Postures, adopted sometimes as knee jerk defences, are presented as if they were carefully chosen tactical positions. Even when of little, or no, strategic value, they are attacked and defended with phy-

sical robustness. The metaphor ts the ‘playing field’. Participants describe themselves as ‘players’, and the objectives they set as ‘goal posts’. The editors and contributors in this volume do not barge and shout to ‘crowd in’ their views. They work as economists, concentrating on economic matters, and not attempting analysis of political aspects however important in their own right. Refreshing rigorous re-examination characterizes their argument. The contributors have each been involved through the period of transition in seeking to contribute ideas and information which would help inform political economy decisions. They are academic expert eyewitnesses. Their informed testimony its a significant input to the ongoing debate. The evidence they offer is based upon original academic research and careful educated observation. But however fair minded economists attempt to be, the judicial ideal of impartiality cannot be attained. This, when recognized as it is in this volume, is a strength. The collection has coherence because the editors and authors share broadly a political conception of the nature of economic arrangements appropriate for a democratic, just and equitable society.


The Political Economy of South Africas Transition

For this reason they contributed unselfishly to supporting the work of the democratic movement in South Africa from the late 1980s, during the transition negotiations, and through the 1994 election. A nucleus of members of the team first came together in March 1991 at the Wits Economics Initiative Conference which marked the ending of the academic isolation of South Africa. A large core group participated later in the collaborative enterprise known as the Macroeconomic Research Group (MERG) which was hosted by the Department of Economics at the University of the Witwatersrand. MERG’s task was to help build the economic policy-making capacity of those disadvantaged by apartheid and to seeK to assist decision-makers in the democratic movement as they prepared to assume government responsibilities. As they did so and other mentors came forward, Wits University stepped aside when MERG transformed itself into the National Institute of Economic Policy (NIEP), a pressure group and voice in opposition to the hegemonic orthodoxy. The Foreword to the document which reported in 1993 on the conclusion of the MERG exercise, told that the new government, if it were indeed to make democracy work, would have to respond to a whole range of inherited problems that have plunged the economy of the country into the gravest crisis in its history. Disturbing levels of unemployment, the mass of people living in absolute squalor and deprivation, the crisis in education and in the provision of other social services, aggravated more recently by a stagnation in the growth in output, are all the inevitable legacies of close to fifty years of the abhorrent apartheid system. The removal of this regime and its replacement by a democratic government represents a necessary but by no means

sufficient condition for alleviating the crisis. The democratic government will have to create an economic system that has as its core objective, not only the rectifying of

past mistakes, but also the continued and sustained provision of employment, shelter, education and training, food and health services, as well as other factors

essential to an acceptable quality of life. (Making Democracy Work, p. xiii)

Progress unfortunately has been slow. A contributing reason is the blurring, on political platforms and in the media, of the two distinct and separate elements which together make up the policy issues of political economy. It may seem pedantic to point out that despite the similarity of names, ‘public policy on economic matters’ is not the same as ‘economic policy’. While neither is part of the other, the effect of uncertainty about public policy on economic matters (e.g. issues like the nature of industrial policy, privatization, reparation and property rights, the right to strike and to lockout) on outcomes which reflect the effect of economic policy (e.g. the savings rate, the size of the public debt, the growth rate and composition of GDP) has been misunderstood, underestimated, if not recklessly disregarded, in South Africa in the 1990s. The two, and interactions between them, are conflated often in comments about ‘confidence’. However, a

closer look at confidence or its lack proves not to be helpful to an understanding of the





is not




Attempts at analysis often degenerate into pejorative statements about loyalty/ disloyalty, faith/bad faith, and cooperation/derailing. A disingenuous puzzlement is expressed at the lack of effect of economic policy when in reality the use of



economic policy (except for narrow exercises in monetary policy and fiscal targeting) has barely been attempted. In South Africa’s 1990s transitional issues there are echoes of Hungary’s pathbreaking struggle to find a strategy to achieve structural reform some 20 to 25 years before. In a pragmatic manner the Hungarian economists were careful to recall the differences between the two elements of political economy. ‘Economic systems’, in the words of the doyen Janos Kornai, ‘are not only “grand” systems like “capitalism” or “socialism”’ (Viston and Reality, Market and State, p. 102). Economic systems are shaped by myriad public policy choices. They are made up of many intertwined elements which include the ‘rules of the game’, especially those relating to contract, ownership of assets and the distribution of rewards/penalties for success/failure; the nature of the organizations within the economy, its households, firms, enterprises, non-profit organizations;

the role of political organs, of government itself, and of the trade union movement; the information structure; the distribution of decision-making power. ‘Economic policy’, by contrast 1s action or inaction within the framework of a given system which seeks to influence outcomes, e.g. the creation of new housing units, net jobs created, primary health care provided, new schools opened etc. While the political economy debate in South Africa continues the framework could scarcely be taken as ‘given’. Thus an impossibly large burden has been placed on the monetary and fiscal policy elements of economic policy. Public policy discussion about desired improvements to the system drew attention away from the need for a coherent and purposeful current overall economic strategy policy. Non-delivery, brought about in large part by the non-use of economic policy instruments, fuels disappointment and fear. In the absence of effective economic policy the South African economy slowed further and grew becalmed. Wise policy choices (and action) are needed to navigate back to the trade winds which bring growth. For this reason the volume is warmly commended to South Africa’s political leaders, their advisers and their constituents. It is commended also to the academic community: an understanding of the challenges posed by the political economy of South Africa’s transition has relevance wider than the problems of a particular country and region. This book ts a complex case study of an economy which has lost its flywheel (the once preeminent position of South Africa’s gold mining industry) while gaining a political focus (a determination to meet the needs of all of its people). The jury 1s still out; the expert testimony 1s instructive and compelling reading. Dean, Faculty of Commerce,

Merton Dagut University of the Witwatersrand, Johannesburg

Preface and Acknowledgements

All the following chapters were commissioned specifically for this book and our

thanks therefore go to the authors for undertaking the work and for the speedy incorporation of points made

on their draft chapters. The bulk of the editing

work was done first of all in Cambridge while Padayachee was a Bye-Fellow at Robinson

College and an Academic Visitor to the Judge Institute of Manage-

ment Studies, University of Cambridge. He is grateful for the hospitality of both institutions as well as for comments received at a Judge Institute seminar where

some of the ideas in this book were first presented. The work was then completed while Michie was a Visiting Professor at the University of the Witwatersrand and he would therefore like to express his gratitude to Wits and especially











particularly grateful to Ghaleb Cachalia, Fuad Cassim, David Dickinson, Evan Gilbert, John Grieve Smith, Geoff Harcourt, Marina


Kiki Prosalendis

and Simon Roberts. We are grateful to Helen Dagut for help with the manuscript; to Maggie Smith of Dryden Press for the speedy turnround of the manuscript; and to Merton Dagut for contributing the Foreword. Our personal thanks for putting up with weekend editing as well as absence from the country go respectively to Carolyn, seven-year-old Alex and one-year-old Duncan,

and to Nishi.

Fonathan Michie Vishnu Padayachee

Introduction Jonathan Michie and Vishnu Padayachee The global context


Restructuring the South Africaneconomy Policy formulation andimplementation 4 Conclusion 6


The context for this book 1s set out admirably in the Foreword to which we would not wish to add. Our own substantive views on the political economy of South Africa’s transition are set out in detail within our own chapters below. The purpose of this brief introduction is therefore limited to signalling the key points which each of the chapters of this volume tackles.

THE GLOBAL CONTEXT We start in Chapter 1 with an overview of the state in which the South African economy and society were left by apartheid, and the additional constraints which the outgoing regime placed on the first democratic government in the form of the so-called sunset clauses. It 1s within this context that we report on the economic record during the three years following the May 1994 general elections. There is little doubt that the delivery of social and physical infrastructure has been slow. Reasons for this include capacity problems, a reluctance of the private financial sector to support government efforts (for example their failure to extend loans to lower-income blacks), and lack of commitment from within the state bureaucracy. One of the key reasons for lack of progress has, however, been an ideological one, namely the widespread acceptance of economic orthodoxy, from stabilization to trade liberalization and privatization. Taken together, these forces have resulted in an absence of any coherent industrial policy; the lack of any clear strategy for Southern African regional integration; a failure to implement progressive reforms in the financial sector; and the virtual abandonment of interventions in support of rural development and food security issues. These contentions are argued through and supported in detail by the subsequent ten chapters. In Chapter 2 Vishnu Padayachee then sets the above developments, over the 1985-95





of South




relations and policy. Having summarized the key developments in South Africa’s international financial relations both pre- and post-1990, Padayachee identifies changes in the way in which key South African policy-makers and political players have related the role of international finance and foreign capital to South Africa’s


The Political Economy of South Africas Transition

need for reconstruction and development. The chapter details the way in which between 1990 and 1995 African National Congress (ANC) international financial policy and strategy was stripped of all commitments to the regulation or shaping of the nature and character of South Affica’s relations with the international financial institutions and foreign investors. The reasons for this policy retreat are seen as firstly, the lack of any tradition of substantive economic policy debate within the ANC. Secondly and consequently, the existence of different and conflicting policy positions within the ANC facilitated the entry of the International Monetary Fund (IMF) and World Bank’s neo-liberal philosophy. Thirdly, the ANC’s partners tended to subsume their own positions on economic policy issues to that of the ANC during the 1994 election period, and the Congress of South African Trade Unions (COSATV) also lost much of its leadership personnel to government and state positions; together these weakened what had been important voices. Fourthly,











international financial agencies and Western diplomatic representatives, waged a relentless and effective campaign to win over the ANC leadership to neo-liberal economic ideas. Finally, a number of appointments to Key economics portfolios in the first cabinet facilitated the above processes. Harry Zarenda in Chapter 3 argues that from a strictly economic perspective, South Africa cannot afford an inequitable growth pattern within the Southern African region with a thriving core and disintegrating periphery that would further intensify and exacerbate regional tensions. Yet this is precisely the direction which the current ad hoc policy agenda could lead to. Such ‘ad hockery’ risks leading to the signing of trade liberalization accords which could obliterate viable industries and add to the chronic unemployment problem throughout the region. The policy need is therefore to reject the neo-liberal approach to integration and instead to build a regulatory, supranational structure to develop regional integration initiatives. Trade policy reform in the period from 1992 to the end of 1995 is described in Chapter 4 by Trevor Bell. As an essential background for explaining these developments he first sets out the trade policy reforms over the previous twenty years. While the trade liberalization witnessed over this period continued unabated over the years 1992-95, by contrast with the period up to 1992 it has since taken the form mainly of import liberalization through tariff reductions and, in the case of agricultural commodities, the substitution of tariffs for quantitative import restrictions. As in Chapter 2, it is found that South Africa’s trade policy reforms have entailed a good deal of unilateral import liberalization which goes beyond the commitments entered into 1n trade negotiations. South African trade policy is thus apparently being determined by the economic philosophy of the country’s own policy-makers rather than by such negotiated commitments. Several possible explanations are set out to explain this seeming acceptance of the ‘Washington consensus’. The key one appears to be the belief that global financial markets and international investors would reward South Africa for such an acceptance. Certainly no case has been made for import liberalization based on proper economic analysis.








In Chapter 5 Laurence Harris discusses the economic objectives and macroeconomic constraints facing South Africa. The objectives must include improved housing, education, health care and employment opportunities. The conventional approach 1s to identify macroeconomic constraints and argue that the objectives must be adjusted downwards to match those constraints. Thus in South Africa’s case the conclusion would be that the Reconstruction and Development Programme (RDP) would have to be restricted both 1n financial terms and in how far it was to break from free-market arrangements. And socially the main task would be to reduce people’s expectations to match what little was achievable given the constraints. The alternative approach which Harris explores is to start from the objectives and consider how the constraints can be changed to enable the objectives to be achieved. South Africa’s monetary and foreign exchange policy is analysed by Vella Pillay in Chapter 6. On the status of the Reserve Bank, Pillay draws attention to the noteworthy if not prophetic conclusion of Professor Jan Lombard, a leading member of the De Kock Commission on the ‘Inquiry into the Monetary System and Monetary Policy in South Africa’ which deliberated for four years and delivered its final report in 1985. In a separate comment on the conclusions of the Commission, Lombard advanced a critical reservation that ‘the independence of the Reserve Bank within the political structure of South Africa will in future have to be more definitely secured than was necessary in the past’. This was because ‘the problems of political policy, including those of determining the priorities in economic affairs, [will] become increasingly complex in the years to come, and hence the maintenance of monetary neutrality under all circumstances becomes of paramount importance’. Although Lombard’s suggestion of removing monetary policy from democratic control was unsuccessful, Pillay documents what has nevertheless been an orthodox policy stance from the Reserve Bank, regardless of the RDP. Instead, Pillay argues, monetary policy needs to take more account of the real economy and its crying need for economic growth, higher employment, and steady and visible improvements in the standard of living for the majority of the people. How industrial and energy policy could be used to help reconstruct and develop the real economy is considered by Ben Fine in Chapter 7. He reviews three established approaches to industrial policy that have been highly influential in South Africa, those from the World Bank, the Industrial Strategy Project and

the Monitor Group, finding that each of these has misjudged the structure and dynamic of the South African economy and each places undue optimism in policies that are liable to have limited impact in generating employment and meeting basic needs. Fine then sets out his alternative assessment of the South African economy as a minerals—energy complex. He argues that institutional reform is desperately needed in order that coherent and effective industrial policy can be made. Such policy should pursue economies of scale and scope by diversifying forward from South Africa’s mineral—energy complex into capital and


The Political Economy of South Africas Transition

intermediate goods. South Africa’s considerable infrastructural capacity needs to be extended not only as a means of meeting basic needs in public utilities but also as part of a broader strategy to generate industrial employment. There is also an urgent need to reform the South African financial system to finance expanded government expenditure at the lowest possible cost; to provide for industrial investment, and to forge a closer relationship between industry and finance; and to subordinate financial policy to the goals of economic and industrial policy rather than to those dictated by an elusive business confidence. The political and economic power of large-scale corporate capital has to be confronted directly so that 1t can be drawn into industrial policy-making. Whilst apparently an aggressive

step, it is more likely to lead to ‘crowding in’ of private through public investment, and to be conducive to long-term business confidence, than wili rhetorical assaults on big business in the name of black advancement. Starting from the peculiar nature of the South African economy as detailed in Fine’s




in MERG,







Michie in Chapter 8 analyses what the required institutional reform might consist of in terms of employment and labour market policies. In particular the need to create employment is discussed in relation to the development of ‘tripartite’ or corporatist institutional arrangements. South Africa’s economic and developmental needs, and the constraints it faces, are compared to the policy responses of the South African government prior to the 1994 election through to the 1996 policy documents from both business and government. The arguments of the pre-1994 government and of the South African Foundation (1996) that wage bargaining should be either decentralized or restricted is considered in the context of corporatism and state—market arrangements. It is argued that while the National Economic, Development and Labour Council (NEDLAC) and other institutional developments could be seen as providing a potential mechanism for organized labour to advance policy demands which could force through the reconstruction and development of the South African economy, so far any such potential has remained untapped, with business interests by and large continuing to pursue their own agenda unconstrained. It could and has been objected that in a country like South Africa with a relatively small percentage of its population in trade unions, the mass of unemployed and poorly organized workers would lose out if organized labour was guiding policy. However, Michie argues that the opposite is more likely to be the case: with organized labour limited to negotiating wage levels, there 1s little scope for the interests of the unorganized to be encompassed; it is only if labour is able to secure action on a broader policy front that the interests of the unemployed — and the poorly organized — can be meaningfully represented.





In Chapter 9 Martin Wittenberg reviews the economic policy debates within the academic literature that have formed the backdrop to the policy interventions



from South African business, labour and government. One of the striking features of some of the contributions to this debate is that they draw extensively on international evidence without addressing the peculiarities of the South African situation. After analysing some of the rhetorical devices at play in these debates, Wittenberg goes on to investigate the actual nature of the South African economy on which the possibility of achieving both growth and redistribution would depend. He finds firstly that the ‘Verdoorn effect’ seems to be widespread in South African manufacturing, whereby fast growing regions or industries also exhibit fast growth in labour productivity. This provides support for the view that stimulating the economy can have the effects of the ‘virtuous cycle’ that the heterodox literature suggests, with increased output leading to productivity gains which in turn makes production more profitable thus fuelling further growth. And secondly he finds that it appears to be output growth which drives employment growth rather than vice versa. This suggests that it is the level of effective demand rather than relative input prices which is the key to determining output and employment levels. Demand growth can induce growth in output and employment, and there are important dynamic gains to be had from this virtuous circle. The nature of the South African economy its discussed further by Asghar Adelzadeh in Chapter 10 1n his description and comparison of some of the main attempts to model the South African economy —- by the World Bank, the Industrial Development Corporation, the Development Bank of Southern Africa and the National Institute for Economic Policy (the successor to the Macroeconomic Research Group). The four models are described and compared in terms of their analytical structures. The use of the four models for policy analysis in South Africa is then analysed. Adelzadeh notes that the 1996 government document on Growth, Employment and Redistribution (Ministry of Finance, 1996) itself indicated that government officials in charge of macroeconomic policy are increasingly utilizing models to formulate and quantitatively assess policy proposals. However, he argues that underlying the results presented in the 1996 government document is a modelling exercise which is fundamentally problematic since firstly, the main model used — namely that of the Reserve Bank — has never been made public and thus has never been the subject of independent scrutiny, and secondly, according to the government document itself the model cannot provide information on the income distribution effects of policies,

1s unable







1s unable


incorporate the effects of restructuring government expenditures on growth, employment and income distribution. Finally, in Chapter 11 we review the renewed economic debate. For two years or so after April 1994, the ‘South African miracle’ was celebrated, with the transfer of political power to the black majority government having been unexpectedly smooth. A broad consensus appeared to take shape around the Government’s Reconstruction and Development Programme. However, the RDP was no more than a broad statement and vision of the economic manifesto of the ANC, as was the RDP White Paper in relation to the government. Much


The Political Economy of South Africas Transition

work needed to be done in putting in the required detail and little progress along these lines occurred for over a year after the publication of the RDP White Paper. In the meantime the economy itself was not performing strongly enough to deflect attention away from the voices of frustration and discontent which gradually began to be raised from various fronts. Grassroots communities, in both urban and rural areas, began to complain about the lack of delivery, especially of physical and social infrastructure. Business complained about the absence of a clear macroeconomic framework from government. Trade unions became increasingly concerned about the continuation of racist practices on the factory floor, about the effects of the government’s trade liberalization policies on employment in certain industries, and about the state’s privatization moves. Alarmingly, for all sections of South African society, the levels of criminality and criminal violence began to reach near-anarchic proportions, further threatening investment and development. We review the policy response to this situation and find much of it sadly wanting. But this state of affairs was after all the motivation for producing the present book.

CONCLUSION It 1s increasingly clear that academic economic analysis and debate needs to move on to the development of a detailed and far-reaching policy agenda capable of tackling the inheritance of apartheid, radical enough to really turn around the South African economy. A programme to truly reconstruct and develop the South African economy and society will need to go beyond the acceptance of economic textbook orthodoxy. To make economic and social progress into the next century will require government and others to start not from the premise of ‘what will international money markets allow’ but rather what are the real development needs of the people of South Africa and the Southern African region. In the long run that will prove the only sustainable approach. Of course, it will require rather different policy work than will be forthcoming from either South African business or the international agencies. It is in recognition of this need for independent policy analysis that this book has been produced.

REFERENCES Fine B and Rustomjee Z (1997): South Africa’s Politcal Economy: From Minerals—Energy

Complex to Industriahsanon? Hurst, London. Macroeconomic Research Group (MERG) (1993): Making Democracy Work: A Framework for Macroeconomic Policy in South Africa. Oxford University Press, Cape Town. Ministry of Finance (1996): Growth, Employment and Redistribution — A Macroeconomic Strategy. Department of Finance, Pretoria. South African Foundation (1996): Growth For All — An Economic Strategy for South Africa. South Africa Foundation, Johannesburg.


The Global Context

South Africa’s Transition: The Policy Agenda Jonathan Michie and Vishnu Padayachee Introduction 9 Constraints on formulating economic policy imposed by the political settlement — || The economy at the beginning of the transition 12 The economy three years after the elections —_|7

Contextualizing recenteconomic policy Responses to recenteconomic policy

19 23

INTRODUCTION Although the first democratic elections were held in 1994, it would be wrong to refer to South Africa’s transition to democracy in the past tense; even in parliamentary terms, the present government ts not simply the result of an electoral outcome, but is rather the product of — or at least heavily conditioned by — the negotiations conducted under the old apartheid regime, which demanded and got various agreements to be adhered to, post election, regardless of the will of the electorate or the views of their elected representatives. And this transition to democracy is occurring in difficult economic conditions. Inauspicious domestic circumstances are compounded by the state of the global economy. Global economic growth rates during this period have been rather subdued, with fiscal and monetary orthodoxy dominating most of the globe. Intensified international competition and the growth of protectionist measures among some of the major industrialized countries have combined to make entry into external markets difficult, while at the same time developing countries such as South Africa were being forced, under the General Agreement on Tariffs and Trade (GATT) and other trade arrangements, to open up their own domestic markets to imports.’ Competition was also increasingly based on non-price factors such as product quality, variety, differentiation, design and the speed of innovation (Joffe et al., 1993: 91; MERG, 1993: 1). Among developed countries, trade in manufactures outpaced trade in primary commodities, and an increasing amount of trade took place along intra-industry lines. In developing countries too, the most successful were those mainly in Asia and Latin America where manufactured exports had become dominant. Flows


The Political Economy of South Africas Transition

of foreign direct investment (FDI) (especially in services) had increased in the second half of the 1980s, but this was mainly among developed countries. Developing countries received only a minor share of FDI flows, and these were concentrated among the emerging economies in Asia and Latin America. By the 1990s there occurred large capital flows to a few developing countries, most notably Mexico and Argentina, and these took the form of a mix of a small amount of direct investment and flows into emerging stock, bond and property markets (Lawrence, 1993; Krugman, 1993). South Africa entered the period of the transition with some advantages in relation to these global developments: its manufacturing sector was relatively large and diversified; it had been open to inflows of foreign direct investment and technology for many decades; it had a not insignificant physical, banking and human resource base; it had developed a globally competitive edge in some complex activities (metallurgy, mining equipment, chemicals and paper), albeit behind high protective barriers (Lall, 1993: 3); and in ‘sheer economic terms South Africa seems to fit the profile of the kinds of countries that have indeed been able to take advantage of changed investor sentiment to re-enter international capital markets in a major way’ (Krugman, 1993: 46). As Lall observes: . . . despite these achievements, large areas of South African industry are neither competitive nor technologically dynamic. Its manufactured exports are about onetenth of those of similar-sized East Asian Newly Industrialising Economies. . . like South Korea or Taiwan. . . . In comparison to these relative newcomers to industry, South Africa shows particular weaknesses in advanced engineering activities (especially electronics) as well as in mature labour-intensive products like garments and footwear. Its productivity growth over the past two decades has been disappointing . . . far lower than [that] recorded in East Asia. (Lall, 1993: 50)

However, the East Asian experience has also demonstrated that ‘close integration’ into the world economy should not be sought or practised by developing countries in the belief that this is a precondition for growth and development. As pointed out by Ajit Singh, Japan, South Korea and Taiwan ‘integrated into the world economy in the direction and extent to which it was useful for them to do so’ (Singh, 1994: 57). Serious ‘irreversible losses’ may indeed occur ‘if the wrong kind of openness is attempted or the timing and sequence are incorrect. The East Asian experience of “strategic” rather than “close” integration with the world economy makes perfect sense [in this context] ...» (Singh, 1994: 52). The challenge for South Africa is to develop an economic strategy that could enable the country to meet and overcome pressing domestic demands and deficits, while enabling it wherever appropriate and strategic to compete internationally.

South Africas Transition: The Policy Agenda




. . . the main issue over the entire period prior to April 1994 was whether the ANC was dealing from a position of strength, or whether the leaders continually, systematically even, blunted their own weapons. (Bond, 1995: 26)

We would argue that in the process of negotiations, certain concessions were made by the ANC in respect of economic issues which, however important they may have been to the political settlement, did serve to blunt the movement’s economic weapons, close down certain policy options, and slow down the process of transforming the institutions, structures and personnel so crucial to a successful economic transition. Some of these stem from the constitution itself,

others from what may be termed the ‘culture of compromise and reconciliation’ which characterized political negotiations. Of course, the most important of those in the first category was the decision to entrench in the interim constitution the independence of the South African Reserve Bank (SARB) (Sections 166:2; 167:1 and Constitutional Principle

XXIX).? Although directly responsible for only monetary and interest rate policy, the South African Reserve Bank also has an influence over exchange rate policy, and interest rate policy in turn impacts on fiscal and industrial policies, as well as on the state of the economy and popular well-being more generally (as discussed more fully in Harris and Michie, 1997). South African Reserve Bank independence therefore means that democratic parliamentary control over these critical areas of economic policy has been either removed altogether or at least potentially undermined. (This issue 1s discussed in greater detail by Vella Pillay in Chapter 6.) The interim constitution effectively entrenched multi-party power-sharing and a (proportional) multi-party Cabinet for five years (Section 80). The constitution made it a requirement that some non-majority party miunisters be appointed to Cabinet (one for every 20 seats the non-majority party holds in the National Assembly) (Section 80:2). As it turned out, key economics ministries, including Finance and Mineral and Energy Affairs (which dealt with South Africa’s important mining industry) were allocated to National Party members. Power-sharing also made ‘compromise politics’ and the reaching of consensus ‘on all its decisions’ at Cabinet level the watchword of the new government (Section 81:2). But secondly there were other aspects of the political settlement, not directly stemming from the requirements of the interim constitution, which had the potential to constrain the new government’s policy options and instruments. One such issue relates to the transformation of the public service and state institutions. Nowhere in the constitution (and despite many reports to the contrary) is there a guarantee that apartheid civil servants would have been assured of a job for the rest of their lives. The excruciatingly slow pace of change


The Political Economy of South Africas Transition

in the public service therefore can only be attributed to bureaucratic inefficiency and to the fact that the ANC-led Government of National Unity has been treading very carefully over this issue for fear of alienating the old public service, both the mainly white bureaucrats in Pretoria and elsewhere and the mainly black bureaucrats who administered the former ‘independent’ homelands and bantustans. The structures, powers and functions of the old state institutions have been left intact, partly (it would appear) because the ANC did not want to be seen to be too radical in its approach to institutional restructuring. The result 1s that the public service and state institutions have remained virtually untouched by the political transition. Phillip Dexter, an ANC MP and former public sector unionist, gave one example of how this has impacted directly on the formulation and implementation of economic policy: Key departments, such as the Central Economic Advisory Service, which advises the government on economic policy are stull staffed and run by the same personnel as under the apartheid regime. As a result, advice given on economic matters is almost exactly the same as under the National Party (NP) regime. (Dexter,

1995: 58)

In our view the role of state institutions and the public service need to be linked conceptually to the country’s economic, social and political developments, promoting those developments, but renewing itself in the process. It needs to play an active development role rather than a mere regulatory one (see Chapter 8). (In Chapter 7, Ben Fine discusses the implications of the slow pace of transformation in the state institutions responsible for industrial policy coordination and implementation.) The point of this section is to show that both the letter of the interim consttution and the climate of compromise and reconciliation politics which surrounded its making, did in some important ways proscribe and restrict the power and capacity of the new government in respect of economic policy. With hindsight it could be argued even at this early stage that the costs in terms of economic transformation may have been too high.



In this section we briefly examine the key features of the South African economy before the general election in 1994, focusing on the late 1980s and early 1990s. First let us look at the key macroeconomic variables. Economic growth which had been declining since the early 1970s dropped below population growth rates by the mid-1980s: the average annual real growth of GDP over the two business cycles from 1982-83 to 1993-94 was 0.9 per cent against population growth of 2.4 per cent. After five years of recession, including negative growth rates between 1989 and 1993, the economy did recover marginally, beginning in the second half of 1993, recording an annualized real GDP growth rate of 1.2 per

South Africas Transition: The Policy Agenda


cent. However, this recovery was short-lived and a combination of economic and political factors (electoral uncertainty, accelerated capital outflows and industrial

unrest) resulted in an annualized growth of —3.5 per cent in the first quarter of 1994 (IBCA,

1994: 3, 19; SARB,



In the recession of 1989-93 the contributions of both the primary sector (agriculture and mining) and the secondary sector (manufacturing, construction and electricity) fell in real terms, and only the tertiary sector (trade and finance in the main) recorded a marginal improvement (SARB, 1995a: S-93). However, manufacturing still contributed the largest share of GDP in 1993, at some 23.5 per cent, compared to the mining sector (8.7 per cent), trade, catering and accommodation (16 per cent), financial services (16 per cent), and general











However, as Fine and Rustomjee (1997) have pointed out, the contribution of mining is greater than the 8.7 per cent figure suggests, as there is a large amount of economic activity related to mining which falls into other categories (particularly into manufacturing). Gross domestic expenditure declined in real terms in this recession, the most dramatic fall being in gross domestic fixed investment. Investment had in fact been on the decline since around 1981. Domestic investment as a proportion of GDP declined from 27 per cent to 15 per cent over the decade 1983-93. Domestic savings fell from an average of 23.5 per cent of GDP in the 1980s to 17 per cent in 1993, ‘the 2 per cent margin over investment reflecting the need to run a current account surplus to service external debt’ (IBCA, 1994: 3, 20). However, as the MERG

research showed:

private sector financial surpluses (in gross terms) are high and have been rising

since 1988. The solution is to improve the investment climate directly. There appears to be a wide consensus (from the World Bank to democratic movement economists) that the two major stimulants to private sector economic activity are higher levels of economic activity, and the ‘crowding-in’ effect of public sector investment, particularly on physical infrastructure. (MERG, 1993: 6)

By the early 1990s, some 40—45 per cent of the economically active population were found outside the formal economy. Labour absorption into formal sector employment over the period from the mid-1970s until 1994 plummeted from 60 per cent to under 40 per cent. In addition, net job creation (amounting to 440 000 over this period) ‘paled in comparison to the growth in the economically active population, a figure of over 5 million. This implies that less than 1 in every 10 new entrants into the economically active population was being absorbed into employment in the formal sector’ (Padayachee and Zarenda, 1996). While private sector employment declined in all major industrial categories (excluding agriculture), employment by the public authorities increased persistently (SARB, 1995b: 15). There is evidence that since 1980 the average rate of growth of real wages for African workers has declined. In manufacturing it fell to 0.6 per cent in 1986-89


The Political Economy of South Africas Transition

compared to 4.6 per cent over the entire period 1971-89. In the agricultural sector, real wages by 1987 had fallen to below 1975 levels, and significant falls in real wages also occurred in the transport and communication sectors (MERG,


150; Padayachee and Zarenda, 1996). It is not surprising therefore that the 1980s and early 1990s were characterized by high levels of industrial unrest. Income distribution in South Africa had steadily deteriorated over the decades to become one of the most unequal in the world, a situation complicated by racial factors. The in-depth 1994 study by McGrath and Whiteford showed that while the modest redistribution of income from whites to blacks, which






in the





income between population groups has had a negligible effect on the overall extent of inequality of income among households’ (McGrath and Whiteford, 1994: 29). They attribute this to the fact that: almost all the increased incomes accruing to the black population has flowed to the richest 20% of black households. Simultaneously the economic position of the remaining 80% of black households has worsened and in real terms they were poorer in 1991 than in 1975. (McGrath and Whiteford, 1994: 29)

In its last years in office, the National Party, for reasons of political opportunism and economic profligacy, presided over a rapid growth in government debt as a proportion of GDP. The budget deficit rose from 0.9 per cent of GDP in 1989-90 to 9.2 per cent in 1992-93 and 10.8 per cent in 1993-94. This was exacerbated by cyclical factors, as government revenues were affected by the downturn in overall economic activity (Gibson and Seventer, 1995: 2). However, despite the growth in the budget deficits, total national debt to GDP (including the debt of the homeland governments) stood at 52.5 per cent in March 1994, which was not high by international standards (IBCA, 1994: 15/ 16). In the European Union’s Maastricht Treaty, for example, anything below 60 per cent was regarded as being acceptable. Tight monetary policy, including high positive real interest rates, had forced the underlying annual average inflation rate down from a peak of 15 per cent in 1991 to around 8 per cent at the ume of the election. One reason for this tight policy approach at the time stemmed from the difficulties which South Africa faced in its external economic relations. Total net capital outflows increased to R16.3 billion in 1993, or 5 per cent of GDP, the highest since the debt crisis of 1985. Some 90 per cent of these outflows were short-term, a major proportion of which consisted of what the SARB classifies as ‘non-monetary private sector outflows’, essentially capital flight. Total cumulative capital outflows since 1985 were estimated to be some $20 billion. In 1993 net capital outflows far exceeded the current account surplus (which the authorities had been forced to induce each year since 1985) and led to a sharp reduction in gold and foreign exchange reserves (IBCA, 1994: 22/3). Through a series of debt rescheduling agreements after the 1985 debt crisis, South Africa had succeeded by the end of 1993 in reducing its total foreign debt

South Africas Transition: The Policy Agenda


to some $16.7 billion. This was not high in comparison with other indebted middle-income countries and represented a potential positive legacy to be inherited by the new government. South Affrica’s foreign debt to GDP ratio stood at just 14.8 per cent at the end of 1993 compared to an average ratio of 45.8 per cent for severely indebted middle-income countries and 35.2 per cent for moderately indebted middle-income countries (IBCA, 1994: 24/5). However, this situation had been achieved at the expense of a decade of domestic economic and employment stagnation, as the apartheid regime had to operate a recessionary domestic economic policy in order to maintain a current account surplus to service the debt. But South Africa’s economy around the period of the transition must also be viewed from a second critical perspective, that of the state of the provision of basic needs — housing, health, education, and water and electricity supply — in both urban and rural areas. The legacy of apartheid in each of these areas for the majority of the population was truly appalling. In both the MERG report and the Reconstruction and Development Programme (RDP, Base Document), securing a ‘rapid improvement in the quality of life of the poorest, most oppressed and disadvantaged people’ was made the ‘first priority’ of the new government and placed at the very centre of their strategy for South Africa’s economic reconstruction and development (MERG,

1993: 2; ANC,

1994: 7).

MERG’s policy recommendations in some of these areas of social and physical infrastructure are indicative of the magnitude and scale of the deficits at the beginning of 1994: a housing programme of 350000 per annum (with special attention to the needs of the rural population); a water supply programme of R1 billion per annum with recurrent expenditure rising to R600 million per annum within 10 years; an access and feeder road-building programme of R3.2 billion per annum; some R17 billion per annum to provide 10 years of universal education; an electrification programme rising to at least 400 000 new connections per year; and a health programme which among other goals would fund 2000 clinics at a capital cost of R300 million and a recurrent cost of R1.5 million per annum (MERG, 1993, Chapter 4). A critical point of departure for both MERG and the RDP (Base Document) was that they envisaged the promotion of economic growth and the provision of basic needs as part of a single, integrated development strategy. The RDP integrates growth, development, reconstruction and redistribution into a unified programme. The key to this link is an infrastructural programme that will provide access to modern and effective services like electricity, water, telecommuni-

cations, transport, health, education and training for all our people (ANC, 1994: 6).

Let us summarize this discussion in other terms. Compared to high growth rates in the 1960s and early 1970s, the two decades from 1973 were for South Africa ones of declining economic growth, falling net investment, rising unemployment, falling average real wage rates, and unacceptably high levels of poverty and income inequality. The levels of provision of physical and social


The Political Economy of South Africas Transition

infrastructure (housing, health, education etc.) for the majority population were totally inadequate. However, a tight monetary regime ensured that the inflation rate was relatively low; although the national debt had risen since around 1989 it was sull not unacceptable even by Western standards, and foreign debt, due to special circumstances, had been reduced to very low levels as compared to other indebted middle-income developing countries. Although domestic savings were declining (as a percentage of GDP), the MERG research revealed that private sector financial surpluses were not only relatively high, but had been rising since 1988, suggesting that capital shortage was not the major constraint that many believed it to be. That research also revealed considerable excess capacity of both capital and labour in the economy (MERG, 1993, Chapter 1). The real macroeconomic problem lay in the external account, where the apartheid regime since 1985 had been forced to run trade account surpluses to meet debt repayments and to compensate for large net capital outflows. With inflation under control, and with both the budget and foreign debts at acceptably low levels, the initial conditions of the South African economy in 1994, viewed from a macroeconomic balance perspective, were not those of extreme instability of the kind which had characterized some developing countries at the point of their economic and political transition. Haggard and Kaufman (1995) pointed out (on the basis of a study of 12 Latin American and Asian countries) that in those countries which had achieved a ‘modicum of macroeconomic stability’ at the beginning of their economic and political reform, policy options other than orthodox, neo-liberal ones ‘ought to command greater attention’ (1995: 310-16).° In terms even of this logic — which focuses on debt levels and other financial indicators rather than on real economic activity, let alone on people’s actual wellbeing — the focus of the economic policy of South Africa’s first democratic government ought not to have been on trying to force down inflation and the national debt to even lower levels. It ought rather to have been to manage and maintain these latter balances within acceptable levels for a country in South Africa’s position, while at the same time raising the rate of economic growth and investment (including in public investment), and doing this in a way that improved social and physical infrastructure for the most disadvantaged sections of the population and reduced poverty and income inequality. Unlocking domestic financial surpluses, generating higher domestic savings and attracting long-term foreign capital would all have been easier — and more likely to be sustained — in the context of a growing economy. None of this is to imply that the economic problems inherited by the first democratic South African government were simple to address. But few countries would have been able to command as much international goodwill and such a groundswell of local popular support as the government when it took office in May 1994. The RDP, though understandably short on detail, represented a vision and framework for the democratic transformation of the economy and society. At least at the level of rhetoric, the RDP also soon

South Africas Transition: The Policy Agenda


received support from virtually every quarter and constituency in the country. The task then was to make democracy work in the new South Africa.






Because the period since May 1994 is relatively short, it is not possible to obtain a fully meaningful set of macroeconomic data which could enable one to make an accurate assessment of the economic performance of the democratic government. However, the information and data which are available do suggest certain trends and point to both continuities and discontinuities with the economic policy framework of the previous government. It is important that these be examined and critiqued even at this early stage. The growth rate of real GDP recovered from minus 2.2 per cent in 1992 to plus 1.3 per cent in 1993, before increasing to 2.7 per cent in 1994 and 3.3 per cent in 1995. Because 1995 growth exceeded the population growth rate, real GDP per capita increased marginally for the first time in many years. However, this growth rate is still too low and inconsistent given the requirements and pressures of a democratic South Africa. The average real income per capita of R6700 (at 1990 prices) in the first half of 1995, for example, was more or less equal to levels already reached in the early 1970s. Furthermore, a sustained real growth rate of at least 7-8 per cent would be needed to absorb new entrants into the labour market and make inroads into the pool of the currently unemployed population. The economic upturn, such as it was, was particularly evident in the secondary and tertiary sectors, the increase in manufacturing output being the result of marginally improved global demand and the normalization of South Africa’s






3; SARB,



Fixed investment growth developed some momentum during 1994, with total gross domestic fixed investment in real terms rising by almost 9 per cent and in 1995 by a further 10 per cent. Gross domestic savings was 16.5 per cent of GDP in 1995 (Stals, 1996). Despite the moderate upturn in the economy which began 1n the second half of 1993, employment in 1994 was 0.6 per cent lower than in 1993, the fifth consecutive annual decline in aggregate employment, with 1995 seeing the first annual increase in employment since 1989, albeit of only 0.6 per cent. With an increase in the economically active population of 2.5 per cent per annum, the number of unemployed South Africans increased substantially. Central Statistical Services (CSS) figures revealed that in October 1994 43 out of every 100 economically active persons were either unemployed or subsisted in the informal sector (SARB, 1995a: 7). The number of people employed in the private sector was about 41000

less than at the end of the recession of 1989-93.

employment in the public sector continued to grow (SARB, After

a downward


for much

of the



in most


15). sectors, real

remuneration per worker began to pick up in 1994, with a real year-on-year rise


The Political Economy of South Africas Transition

of 0.5 per cent in the first quarter of 1994 followed by increases of 4.7 per cent and 3.7 per cent in the next two quarters, but with only 1 per cent growth in 1995. At the same time productivity growth tapered off and labour unrest became widespread

(EIU, 3qr, 1995:


The underlying inflation rate which stood at just under 8 per cent at the time of the election, rose to 9 per cent in June 1995 (SARB, 1995b: 18). By August 1995 it was heading down again, and reached 7.5 per cent in September, one of the lowest levels in more than 20 years (Southscan, 13.10.95), averaging 8.7 per cent over 1995 as a whole. The current account of the balance of payments slipped into deficit in the third quarter of 1994. For the calendar year 1994, the deficit was R2.2 billion. Although (non-gold) merchandise exports increased noticeably in late 1993 and 1994, merchandise imports (as one might expect) rose even more sharply. In the first half of 1995 the current account deficit widened substantially, leading to a deficit over the year as a whole of R12.7 billion. The capital account switched from a record net outflow of R15 billion in 1993 to a net inflow of R5.2 billion in 1994. Over the 18 months from July 1994 to December 1995 a net amount of more than R30 billion flowed into South Africa from the rest of the world. However, most of this has been short-term and volatile. In the first half of 1996 a sudden outflow of foreign capital precipitated a fall in the rand despite the Reserve Bank’s net foreign reserves declining by R6.6 billion from the end of January to the end of April 1996. The rand, which had appreciated by 5.5 per cent from the end of May 1995 to the middle of February 1996, depreciated by more than 15 per cent in the subsequent two and a half months. The delivery of social and physical infrastructure, the second major prism through which economic life in the new South Africa must be viewed, had become a major source of concern within a year. It has not proved easy to obtain accurate data on the number of houses, clinics and schools built since May 1994. This is in part due to the reluctance of ministers to provide such data to the public. Housing Minister Sankie Mthembi-Nkondo, whose department has been the main target for criticism at slow delivery on RDP electoral promises (of one million homes in five years), admitted that the delivery of houses ‘should be speeded up, but this should be done without constant reference to figures’ (Southscan, 8.9.95).* The most notable successes have been achieved in electrification where more than 300000 new household connections per annum have been achieved by the state corporation, Eskom (Fine and Stoneman, 1996: 27). Significant progress has also been made in water provision, where some 300 projects taking water to 4 million people is scheduled for completion within 18 months (Financtal Times, 21.11.95). In general, however, progress in these areas has been painfully slow. A variety of reasons for slow delivery in the provision of houses, health and education facilities and the like have been put forward: these include difficulties in the budgetary process, inertia and lack of commitment in the state bureaucracy, capacity problems (which were exacerbated by the difficulties in incorporating South Africa’s non-governmental organizations (NGOs) and community-

South Africas Transition: The Policy Agenda


building organizations (CBQs) into the delivery process), and reluctance of the private financial sector to support government efforts (in extending loans to lower-income blacks, for example). Policy differences among, and competition between, some key social service departments and the RDP Offfice, as well as poor inter-departmental coordination, have also contributed to slowing delivery. Thus, for example, the Housing Minister’s ‘populist’ plan to build complete, top level four-room houses (rather than the less ambitious and financially more prudent scheme proposed by her late predecessor, Joe Slovo), was strongly opposed by the RDP Office on the grounds that ‘that sort of investment over 10 years will crowd out other investments including schools and clinics’ and bankrupt government within five years (Southscan, 18.8.95). Furthermore, the absence of any RDP liaison mechanism or structure within many of the provinces, and communication and liaison difficulties between Pretoria and the provinces, have added to the delivery problem. The fact that legitimate metropolitan and local government structures were not in place in most areas until November 1995 was a further complication. Finally, it has also to be admitted that some RDP social and physical infrastructural projects collapsed because of alleged corruption, the President’s R500 million feeding scheme being one such example (Southscan, 18.8.95).





The preceding paragraphs present only a skeletal picture of the current state of, and trends in, some of the key macroeconomic variables and indicators between 1994 and 1995. But how could one characterize the overall economic policy of the ANC-led government in this period? What were its policy priorities? Just six months after the election the UK credit-rating agency IBCA described ANC policy in the following way: . .. It is fair to say that the mainstream of the ANC

its now centre-left on the

European model. Indeed there is a substantial element which is even more marketoriented, advocating a New Zealand-style independent central bank and other reforms. However, the economic liberals have not yet managed to convince Presi-

dent Mandela of the desirability of privatisation. That is not, though, to be ruled out. (IBCA, 1994: 7)

Six months later, at its National Conference the ANC formally endorsed various new economic policies, which suggested that the “economic liberals’ or ‘pragmatists’ were indeed winning the battle within the democratic alliance. These policies included: . . . the idea of investment incentives for foreign investors — a notion once anathema

to the party —. . . and [it] endorsed privatisation in principle, although it stressed


The Political Economy of South Africas Transition that ‘the on-going re-evaluation of state assets’, the current euphemism of choice for the process, should produce concrete benefits for ordinary people and help create small and medium-sized business. (EIU, lqr 1995: 14/15)

The IMF was pleased with the shifts in ANC economic thinking. In their latest Annual Report they comment on ANC/government economic policy as follows: It was clear by late 1993 that the most immediate problems facing South Africa were confidence related. Consequently, the African National Congress, even before

it was elected to government in April 1994, voiced its commitment to eschewing policies perceived to imperil confidence — interventionist regulation, excessive fiscal and monetary spending and confiscatory tax policies — and to strengthen market forces . . . [but] the most telling signal of the new government’s economic ideology has been its broad advocacy of free trade. (IMF, 1995: 89/90)?

The chapters which follow discuss and critique the context and content of many of the specific economic policy changes which occurred in the first two years of the democratic government. But at this point it may be useful to set out very briefly the key policy issues which, in our view, dominated policy implementation and the policy agenda during this period. These policies included an emphasis and preoccupation with the following objectives.

Maintaining an orthodox economic stabilization package Monetary and fiscal conservatism was employed to bring down even further the inflation rate, government spending and the deficit to GDP ratio (in accordance with IMF dictates). The EIU 1995 Country Profile made the point that the government appeared ‘to accept the previous government’s emphasis on low inflation over rapid growth and job creation .. .” (1995: 15).

Rapid trade liberalization New proposals announced in June 1995 for the motor and textile industries, for example, proposed major tariff cuts by the year 2003, giving manufacturers just eight years to adjust to such a free trade environment but with little or no state support for the necessary restructuring, rather than the 12 years agreed to by the World Trade Organization (WTO) and GATT.

Restoring industrial peace and labour market stability The new Labour Relations Bill absorbed an enormous amount of the energy and negotiations skills of Labour Minister Tito Mboweni and his team for a year, and was hailed by some as ‘the most important piece of legislation since the inauguration of the President .. . [it] should go a long way to smoothing the resolution of future disputes and has a high symbolic value in a country with a bad reputation for labour confrontations’

(EIU, 3qr, 1995:


South Africas Transition: The Policy Agenda


Competition policy This initially included a bewilderingly confusing and complex set of sub-issues related to the promotion of small and medium-sized business, affirmative action, black economic empowerment, and an attack on the major South African conglomerates for not doing more to encourage foreign investment and strengthen local black business.° However, the 1995 draft paper on competition advised that competition policy should not be used to break up the conglomerates

as one means

of advancing black economic

interests (EIU,


1995: 13), implying that black empowerment and the ‘unbundling’ of the conglomerates may have to be pursued via separate policy mechanisms. An unshakeable faith in the capacity of small and medium-sized enterprises to resolve a variety of South Africa’s economic ills (including unemployment) was a major feature of the government’s economic policy.

Privatization Long regarded as strong opponents of privatization, the ANC, despite continuing objections from its trade union allies, appeared for reasons that are not altogether clear, to have decided that privatization may deliver major benefits, including possibly the use of the proceeds to fund the RDP (for a critique of this view, see Fine, 1995). Internal debate about what state assets would be privatized, how this would be done, and for whose benefit (black business, foreign investors, the state) continued, even though at its 1995 conference the ANC came to accept the need for privatization ‘in principle’. There have been marked silences and inconsistencies in a number of other important policy areas suggested either in the MERG Report or in the RDP or both. These include the absence of a coherent industrial policy; the lack of a clear strategy for Southern African regional integration; failure to implement progressive reforms 1n the financial sector; and the virtual abandonment of interventions in support of rural development and food security issues. Proposals in respect of active labour market policies and the treatment of foreign investors, for example, have been characterized by confusion and contradictions. The particular clutch of policy measures which have been implemented and debated by policy-makers do not (in our view) constitute the essential building blocks of a macroeconomic framework that would support the realization of the vision, principles, strategy and goals of the RDP. This contention 1s argued through and supported in detail by the chapters which follow. This shift from the integrated development strategy of MERG and the RDP to an orthodox growth model was reflected by the President’s announcement in late July 1995 that the government must ‘abandon its obsession with grand plans and make economic growth its top priority’ (Sunday Times, 30.7.95). The EIU commented on this development as follows: A special cabinet committee, headed by the President himself [and including National Party leader FW

de Klerk and Inkatha leader MG

Buthelezi] has been

given the task of preparing a ‘battle order’ list of actions which must be taken to


The Political Economy of South Africas Transition stimulate growth. The list is expected to include tariff cuts, privatisation, invest-

ment incentives, job creation and action against unfair monopolies. The announcement (NEC) that the Reconstruction concentrating on

followed conclusions by the ANC’s National Executive Committee government’s focus on delivering basic services, as outlined in the and Development Programme (RDP), would not succeed without first stimulanng growth. (EIU, 3 qr 1995: 11, our emphasis)

The evidence suggests that the key economic authorities in South Africa believe that tight monetary and fiscal policies are prerequisites for growth (and thus for development and redistribution, insofar as these are referred to). Finance Minister Liebenberg put it thus: ‘I certainly believe in the successful completion of the RDP, provided we have fiscal and monetary discipline, which I believe in very strongly’.’ The Reserve Bank appeared to be obsessed with driving down the inflation rate by maintaining high interest rates. The Governor of the Bank


of the ‘battle’ — indeed,

the ‘crusade’

—- to bring inflation

below 5 per cent, so as to be in line with the average inflation rate among South Africa’s major trading partners (Financial Times, 21.11.95). In June 1995 the Reserve Bank raised the bank rate by a full percentage point to 15 per cent, the third increase in 10 months, prompting the Economist Intelligence Unit to comment that this may: .

. have been designed to contradict the growing perception that the SARB was

either subject to political pressure (always strenuously denied) or more ltkely that it

was no longer as singularly focused on reducing inflation and was increasingly trying to manage a ‘growth objective’ as well. (EIU, 3qr, 1995: 15, our emphasis)

Cambridge economist Brian Reddaway has set out the ‘logic’ of this kind of assertion/obsession as follows: ‘If the country is not prepared to face the temporary hardships involved in getting inflation down, any acceleration in growth (e.g. produced by a budget deficit) could only be temporary, and would worsen the inflation problems’ (1996: 10). Reddaway’s response to this orthodox assertion is as follows: If one takes the World Development Report (published by the World Bank) and selects the Latin American countries which show high inflaton rates over the last 25

years or so (typically 20 per cent per annum or more), very few fail to show reasonable growth in GDP (measured at constant prices, and taken as an average for 5 years or more). . . [have seen no convincing inter-country correlation calculation between the growth rate and the inflation rate for medium term periods which gave a convincing negative answer, as the assertion [above] would suggest (1996: 11/12).

Reddaway also cites Stanners (1993) who: came persistently to the conclusion that there was no significant inter-country

correlation between low inflation and high growth. This applied whatever grouping

South Africas Transition: The Policy Agenda


of countries was adopted . . . and also to all the periods considered. In effect, people who believe the assertion do so in spite of the statistical evidence, and not because of it (1996:


Smithin has argued that the explanation for the focus on low or zero inflation policies in the industrialized countries: both in rhetorical discussion of macroeconomic policy and actual decision-making in recent years can . . . be explained in terms of a political shift away from both labour and [productive] business and in favour of finance . . . the symptom of this shift can be seen everywhere in contemporary discourse . . . [and] include the

arguments in favour of the ‘independence’ of central banks from the control of democratically elected governments.


1996: 96/7).

In Chapter 6 Vella Pillay suggests that this kind of shift to financial or rentier interests may also have occurred in South Africa (beginning in the early 1980s) although this tendency is obscured by the concentrated market and ownership structure of South African business.




There has been a slow, but gradual escalation in the critical response of progressive constituencies both within the ANC alliance and outside to perceived shifts in the economic philosophy of the movement and the government: this has usually and understandably to date taken the form of a defence of RDP principles and policies and a direct attack on non-ANC ministers and bureaucrats. There have, however, been exceptions to this and ANC







Pallo Jordan




others, have been singled out for criticism on matters related to their

respective portfolios (Star, 7.4.95; African Communist,



The South African Communist Party and COSATU have implicitly criticized the government for beginning to embrace a neo-liberal economic policy framework (African Communist, 1995, lqr; Natal Mercury, 4.8.95). Both organizations have also criticized specific policies of the government: in April COSATU ‘slammed the government for yielding to World Bank pressure on privatisation and the reduction of trade tariffs [and] criticised the scrapping of the financial rand’; and the SACP announced that it would campaign for the ‘democratization’ of the Reserve Bank (Szar, 7.4.95; Natal Mercury, 4.8.95). ANC MP Phillip Dexter criticized both business and the government for a narrow preoccupation on the importance of being globally competitive when he observed that ‘through the dictates of imaginary international investors we are making a fetish of competitiveness’, and he went on to warn that ‘the possibility of structural adjustment being forced on us by stealth is a real one’ (1995: 59, our emphasis). Even sections of business were not happy with the trade liberalization policy stance


The Political Economy of South Africas Transition

of the government. The chief executive officer of Anglo-American’s industrial division (AMIC), characterized government trade policy as ‘being holier than GATT”. The 1995 budget came in for both bouquets and brickbats from the ANC alliance. COSATU directed its main attack on general issues such as the topdown and closed procedure by which the budget was drawn up as well as specific issues such as high defence and intelligence spending. Even ANC MPs spoke out openly about issues such as capacity and logistical problems in the tax department, taxation policy, and the extent to which the budget reflected RDP priorities (Weekly Mail, 31.3.95). In commenting on the budget debate the Weekly Mail made the following editorial comment: . . . It 1s becoming a regular annual event to promise that the next Budget will reflect RDP priorities. The truth is. . . that the Minister of Finance made very little effort to show that reallocations within departments had started to show new priorities. If this is not happening, then the government will be unable to deliver on improved social services — and we are headed for political instability. (31.03.95)

However relevant and accurate these and other criticisms may have been at the time, they remained largely piecemeal, fragmented and cautious. Progressive constituencies did not appear to have developed new ideas and proposals and the necessary organizational and mobilization strategies to challenge this policy drift in the very different political and economic context of the 1990s. Their approach appeared rooted in the ideas, strategies and tactics of the 1980s, which when employed in the second half of the 1990s, forced them into

essentially defensive and reactive positions. The response to recent economic policy shifts within the unions, civics and the ANC parliamentary caucus and rank and file (among other constituencies) may be crucial to the future trajectory of the new government’s policy. South African policy-makers need to be persuaded to abandon their increasing focus on an exclusive and narrow emphasis on nominal and financial variables. Policy-makers (as Smithin has suggested even in industrialized countries) should instead ‘pay more attention to commonsense policies designed to improve performance in terms of the real economic variables which are relevant to the welfare of their constituents; real interest rates, employment, output, and

real incomes’. (Smithin, 1996: 140) The consequences of a failure to reverse the government’s macroeconomic policy framework will, for the majority of the population, be catastrophic. As Fine and Stoneman point out: It is not too far-fetched, even at so early a stage, to see the current transition as one that will accommodate an incipient black bourgeoisie, a story too familiar elsewhere

in Africa to bear repetition here. Suffice it to observe that such an accommodation has even been eased with the transition to majority rule. (1996: 14).

South Africas Transition: The Policy Agenda



(1994): Reconstruction and Development Programme (RDP, Base Document). Umanyano Publications, Johannesburg. Bond P (1995): Fly-Fishing, A Review of Allister Sparks’ Jomorrow ts another Country. Southern African Review of Books, May/June. Economic Intelligence Unit (EIU): Various quarterly and annual country reports and profiles, 1993/4/5. London. Dexter P (1995): The RDP. South African Labour Bulletin, September 1995. Fine B (1995): Privatisation and the RDP. Transformation, 26. Fine B and Rustomjee Z (1997): South Africa’s Politcal Economy: From Mineral—Energy

Complex to Industrialisation? London, Hurst. Fine B and Stoneman C (1996): State and development,

an introduction. Journal of

Southern African Studies, 21(4), December.

Gibson B and Seventer D (1995): Towards a Growth Strategy for the South African Economy. Unpublished paper, Halfway House, Mid-Rand. Haggard S and Kaufman RR (1995): The Political Economy of Democranc Transitions. Princeton University Press, New Jersey. Harris L and Michie J (1997): The Effects of Globalization on policy-formation in South

Africa. Paper for the EPI conference on Globalization and Progressive Economic Policy, Washington DC.

IBCA (1994): South African Overview. A private UK credit-rating report. International Monetary Fund (1995): Annual Economic Report. Washington DC. Joffe A, Kaplan D, Kaplinsky R and Lewis D (1993): Meeting the global challenge, a framework













W Krafchik (eds.) South Africa and the World Economy in the 1990s, pp. 91-126. David Philip, Cape Town; Brookings Institution, Washington DC. Kitson, M and Michie J (1995): Conflict, cooperation and change: the political economy of trade and trade policy. Review of International Political Economy, 2(4): 632-57. Krugman P (1993): Changes in Capital Markets for Developing Countries. In P Baker, A Boraine and W

Krafchik (eds.) South Africa and the World Economy in the 1990s,

pp. 32-48. David Philip, Cape Town; Brookings Institution, Washington DC. Lall S (1993): What

will make

South Africa Competitive? In P Baker, A Boraine


W Krafchik (eds.) South Africa and the World Economy in the 1990s, pp. 50-70. David Philip, Cape Town; Brookings Institution, Washington DC. Lawrence R (1993): Trends in World Trade and Foreign Direct Investment. In P Baker, A Boraine and W Krafchik (eds.) South Africa and the World Economy in the 1990s,

pp. 2—31. David Philip, Cape Town; Bookings Institution, Washington DC. McGrath M and Whiteford A (1994): Inequality in the Size Distribution of Income in South Africa. Occasional Paper No. 10, Stellenbosch University. MERG (1993): Making Democracy Work, A Framework for Macroeconomtc Policy in South

Africa. Centre for Development Studies, Belville, Cape. Padayachee

V and Zarenda




and labour market policies for

employment generation in South Africa. Metroeconomica: The International Review of Economics, 47(2).

Reddaway WB (1996): The changing significance of inflation. In G Harcourt (ed.) A Second Edition of Keynes, General Theory. Routledge, London.


The Political Economy of South Africa's Transition


of South Africa



White Paper: Discusston Document.



Printers, Cape Town. Republic of South Africa (1994b): Interim Constitution. Government Printer, Pretoria.

Sender J (1994): Economic restructuring in South Africa, reactionary rhetoric prevails. Fournal of Southern African Studies, 20(4): December. Singh A (1994): State intervention and the ‘market-friendly’ approach to development: a critical analysis of the World Bank thesis. In A K Dutt, K S Kim and A Singh (eds.) The State, Markets and Development: Beyond the Neo-classtcal Dichotomy, Edward Elgar, Aldershot. Smithin JN



Policy and the Future of Capitalism.



Aldershot. South African Communist Party (SACP) (1994): Strengthening and Deepening a Clear Left Perspective on the RDP. SACP Discussion Paper, Johannesburg. South






Quarterly Bullen,



Pretoria. South African Reserve (AER), Pretoria.

Stals C (1996)



South Africa: What


to Expect.





to a conference


arranged by

Department of Economics, 2nd Oct., Washington DC. Stanners W (1993): Is low inflation an important condition for high growth? Cambridge Journal of Economics, 17(1).

ENDNOTES 1. For a critique of this simple minded pursuit of free trade, see Kitson and Michie (1995). 2. The Interim Constitution referred to here is the one dated 17 November 1993 and headed ‘(Draft) CONSTITUTION OF THE REPUBLIC OF SOUTH AFRICA’. 3. Haggard and Kaufman (1995) make a detailed study of these issues of economic reform and democratic consolidation, which includes a careful analysis and critique of

the contents of economic American


policy reform packages

in transition.

appropriateness of orthodox and initial macroeconomic conditions 4. According to The Economist of 10 in the period since the elections. 5. For a critique of this view on the



in a variety of Asian and Latin among

other issues, to assess the

heterodox policy options in terms of the different which were to be found in these countries. November 1995, only 10000 houses had been built importance of business confidence in South African

development, see Sender (1994), and on free trade see Kitson and Michie (1995).


6. It has been suggested in some quarters that ANC economic policy had by 1994 been reduced to that of affirmative action and ant-trust policy. . Quoted from SACP

(1994: 4).

8. See also on this point an article in The Economist of 13 May 1995, entitled “The costs of inflation’.

The Evolution of South Africa’s International Financial Relations

and Policy: 1985-95 Vishnu Padayachee Introduction 2/7 Key developments in South Africas international financial relations before l990 28 Key developments in South Africas international financial relations since 1990 30 Analysis of South Africas balance of payments, and especially

foreign capital flows between 1985 and1995 38 Changing perspectives on relations with international financial institutions and foreign investors


The domestic mediation of South Africas international financial relations and policy since l|990


INTRODUCTION This chapter focuses on South Africa’s international financial relations in the period 1985-95, a decade characterized by dramatic changes at the global and national levels, both in politics and in economic relations. The first section of the chapter summarizes the key developments in South Africa’s international financial relations before 1990, concentrating on the country’s interactions with the International Monetary Fund (IMP), the World Bank, flows of foreign direct

(FDI) and indirect (portfolio or equity) investment, its borrowing from private international banks, its international capital market operations, as well as capital outflows from South Africa to the rest of the world. The next section deals with these same set of issues 1n the period after 1990, and this is followed by an analysis of South Africa’s balance of payments, especially in respect of capital account transactions. The final two sections attempt to trace changes 1n the way in which key South African policy-makers and political players have understood the role of international finance and

28 foreign capital in and to examine macroeconomic actions with, the

The Political Economy of South Africas Transition South Africa’s programme of reconstruction and development, whether, how and why the formulation of South Africa’s policy came to be influenced by developments in, and interglobal financial institutions.



The International Monetary Fund South Africa received its first loan from the IMF in 1957/58. Like the UK’s stand-bys of 1957 and 1958 these arrangements were agreed to without conditionality or phased disbursals, which even in those early formative years of IMF lending were being imposed on other borrowers, most notably the Latin Americans (Gisselquist, 1981: 206). This example typifies the rather close and cosy relationship which characterized South Africa’s dealings with the Fund virtually throughout the post-war period. This relationship was cemented by geo-political and strategic interests in the context of the Cold War. The IMF provided South Africa with credits of special drawing rights (SDR) 91.2 million in 1975,


million in 1976



million in 1977.

These mid-1970 borrowings were, according to South Africa and IMF sources, in support of the South Africa government programme to strengthen the country’s balance of payments position (IMF Survey, 15 November 1976). While the gold price was indeed falling, this was also for the apartheid regime a period of great political instability, both internally (the Soweto uprising, intensified worker action) and externally (the ill-fated raid deep into Angolan terrority). In 1980 the IMF classified South Affica as a ‘non-oil, developing country’. Within this category South Africa was placed in a subgroup of ten countries classified as ‘major exporters of manufactures’. In 1981 with the gold price declining sharply and imports surging, South Africa once again ran up a deficit on the current account of the balance of payment in the order of a massive $4380 million. By mid-1982, South Africa approached the IMF for a stand-by loan of $1.1 billion which was regarded by the South African authorities as being important to prop up their credibility in international financial circles (CIP, 1983: 1). This loan was repaid by the end of 1987 (Padayachee, 1992: 16-20). Though by the end of 1982 South Africa’s status and borrowing rights at the IMF remained secure, this ‘special relationship’ did not survive intact for much longer. A 1983 US law (the Gramm amendment) required that the US Executive Director at the IMF oppose loans to South Africa, unless the Secretary of the Treasury certifies in person before the US Senate and House Banking Committees that the loan would ‘reduce the distortions caused by apartheid’.’ South Africa received no more IMF loans for a decade thereafter.

South Africas International Financial Relations: 1985-95


The World Bank South Africa was a founder member of the World Bank. The first World Bank mission visited South Africa in 1949/50 in order to undertake a survey of the economy and of investment opportunities (IBRD Annual Reports, 1949/50; 1950/ 51). The country received large project loans from the World Bank in the 1950s and early 1960s (Ovenden and Cole, 1989: 104). Over the period 1946 to June 1967 South Africa received 11 loans totalling $241.8 million from the IBRD. Seven of these loans were in support of the development of South Africa’s transportation system and the remaining four were to Eskom, for improvements and extensions to the electricity grid and network. The country has not qualified for some time for a loan from the Bank’s concessionary International Development Agency (IDA) facility, which is reserved for the poorest developing countries. In fact, South Africa subscribes capital to the IDA but cannot borrow from this facility (Business Day, 24.9.90). The country 1s classified as a higher-income developing country, albeit one at the lower end of this category. South Africa has not received any project loans or other World Bank support since the mid-1960s. South Africa repaid and discharged all its loan obligations from the World Bank in 1976. However, as we shall see below, the Bank’s re-engagement with South Africa at some levels resumed again in the early 1990s following the dramatic political developments of February 1990.

Foreign Direct Investment, Portfolio Investment and Syndicated Bank Loans South Africa received large amounts of portfolio investment (mainly British) since its early industrialization, and large inflows of foreign direct investment (FDI, mainly from the United States) in the boom years of the 1960s and early 1970s. Syndicated bank loans and bonds raised in the international capital markets contributed the bulk of foreign capital investment between 1976 and 1985. Compared to the three decades after World War II, South Africa experienced in the period around 1975 both a shift in the dominant form of foreign capital (from FDI and portfolio investment to bank loans) and a shift in the maturity structure of its foreign liabilities (from long-term to short-term). Economic decline and political instability combined to wreak havoc on South Africa’s international economic relations, and forced the South African monetary authorities,


to declare

1985 and 1994 South Africa below), reversing the positive disruptions, for most of South Compared to a net inflow disinvestment amounted

a debt standstill in August



became a net exporter of capital (see Table 1 capital inflows which had prevailed, with minor Africa’s modern economic history. of FDI of $1 billion in the period 1980-84,

to $0.5 billion between

1985 and

1989, with US, UK

and other countries selling off South African holdings. South African companies,


The Political Economy of South Africas Transition

in the political uncertainty of the time, undertook huge direct investments abroad, mainly in Europe (Stoneman and Thompson, 1991: 223). Besides the net outflows of FDI and portfolio investment, the country was ‘completely cut off from access to long-term international debt capital... No syndicated bank loans were extended and no private or public bond issues launched for three years following the imposition of the debt standstill’ (Garner and Leape, 1991: 13). Between 1985 and 1988 most forms of foreign capital inflows dried up altogether.



Since early 1990, and following former President de Klerk’s decision to unban the ANC and other political movements and begin the negotiations process, the regularity of IMF and World Bank visits to South Africa intensified and the nature and content of their work here has changed. One observer has noted that ‘even by World Bank standards’ the Bank’s presence represents ‘an unusually large research effort’ and that, ‘given their resources and access, [the Bank] will gather large amounts of material and arrive at potentially important, if not necessarily correct, conclusions’ (Economic Trends, 1991). Both institutions held consultations with a wide variety of interest groups from the beginning of this new phase in their relations with South Africa, including labour and opposition political organizations, and both have produced major documents and reports, including (in some cases) recommendations on economic policy. Let us look briefly at some of the analysis and policy positions adopted in these reports and discussion papers.

The International Monetary Fund The first major IMF report (Lachmann and Bercuson, 1992) focused on the growth policies needed in the new South Africa and looked at issues such as the poverty profile of the country, sources of saving, the composition of government expenditure, the implications of increases in real wages, and the scope for a more liberal trade and payments system within the context of an outward-looking strategy. The IMF report took the rather dogmatic view that external trade and financial relations should be liberalized as a crucial strategy for eliminating balance of payments deficits, despite the fact that there 1s little international evidence that this would have the desired effect. The potential effect on inflation and on capital flight suggests that typical IMF policy advice on issues such as currency devaluation and the speedy abolition of all exchange controls should be viewed with a great deal of scepticism. Increased exports, foreign investment and credits (which are typically held out by the Fund as the positive outcomes of

South Africas International Financial Relations: 1985-95


such liberalization) either do not materialize (as Sudan discovered in recent years), or are very narrowly focused (as in Venezuela, where in the early 1990s, foreign capital inflows were limited to the buyout of privatized companies and to stock market and exchange rate speculation), or tend to be based significantly on other economic and political considerations. The report was well received by sections of business, as reflected in comments in the business sections of the daily and weekly press, and by the Reserve Bank, which expressed the view that the report ‘says all the right things’ (Tarp, 1993: 46). Most critical commentators noted that while the IMF report appeared to recognize the magnitude of South Africa’s economic problem, its policy conclusions were both predictable and pessimistic. They argued that this was largely a consequence of the Fund’s neoclassical assumption that (given flexible prices) the economy will operate at or close to full capacity. If one assumed an alternative, yet prudent macroeconomic framework, then various interventionist policy options open out which may improve growth, development and redistribution (see MERG, 1993, Chapter 1). Finn Tarp commended the Fund on its efforts, but argued that the policies it proposed to address South Africa’s problems were ‘not very helpful’. He questioned the Fund’s premise that a contraction of public sector expenditure is a precondition for greater private savings and investment;* and he criticized the Fund’s analysis of the constraints on tax revenue for being too static, arguing that it took no account of the impact of future growth on tax revenue. Overall he argued that: It 1s, in fact, quite obvious that a reorientation of fiscal spending priorities will be needed in South Africa. . . but one is left speculating whether the IMF would be prepared to impose conditionalities to ensure this takes place in reality . . . Fiscal moderation may well be advisable . . . , but rigid adherence to a standard IMF model to reach this conclusion is not the most convincing analytical route to follow given the complexity of the situation in South Africa (Tarp, 1993: 47).

Elling Tjonneland concluded that ‘the basic message emerging from the IMF recommendations could be summed up as growth first and redistribution later’ (1992: 61). In their view, according to Tjonneland, economic growth will: trickle down to the poor through employment growth and through an increase in government revenue, permitting greater social spending. The main problem with this prescription is that it underestimates the widespread distribution of poverty and lack of skills which limits access to formal employment. The result will be that while some may benefit marginally from economic growth resulting from the IMF recommendations, this will not be sufficient to change current income patterns and inequalities (1992: 61).

Some of the Fund’s thinking on the South African economy was more specifically set out in later documents. An IMF Compensatory and Contingency


The Political Economy of South Africas Transition

Financing Facility of $850 million was signed by the Transitional Executive Council (TEC), the multi-party body which was set up to ‘advise’ the apartheid government until democratic elections in 1994. The loan was designed (purportedly) to support South Affrica’s balance of payments following the decline in agricultural exports and the increase in agricultural imports caused by the prolonged drought. The IMF claimed that as a condition for the loan it simply wanted ‘an undertaking, by a legitimate body, that the economy would be responsibly managed’. However, the Letter of Intent which accompanied the loan was at pains to point to the dangers of increases in real wages in the private and public sector, stressed the importance of controlling inflation, promised monetary targetting, trade and industrial liberalization, and repeatedly espoused the virtues of ‘market forces’ over ‘regulatory interventions’. The Letter of Intent committed the new government to the following main policies: a reduction within a few years of the government budget deficit to 6 per cent of the GDP; expenditure containment rather than tax increases; containing the civil service wage bill; a continuation of the tight monetary policies of the past 4/5 years, and monetary targetting; policies to ‘couple wage restraint and training to foster investment and promote employment’; maintenance of the financial rand mechanism without the introduction of new exchange control mechanisms; and finally a simplification and rationalization of the tariff system,

and the phasing out of import licensing and non-tariff barriers.

The World Bank The World Bank decided to concentrate its resources in the initial years of its South Africa programme on four areas: macroeconomic policy, employment prospects and their related implications, industrial policy with a special emphasis on employment generation, and public expenditure alternatives. Within this framework which considers a wider set of social and economic development issues than the Fund’s report, the Bank has produced a remarkably large number of working papers on South Africa already. Let us look at some of these earlier papers first. The Bank’s initial assessment of policy options to shift the economy in a way that ‘is both poverty-reducing and sustainable’ and which addresses current inequities





1) represents

a curious


of its usual

prescriptions and some interesting new ideas, even though these remain within the broader ambit of recent Bank thinking. The Bank’s warning about increasing the size of the fiscal deficit, about the need to maintain good fiscal management in order to ensure macroeconomic stability etc., are well-taken. Among the more

familiar views it offers are: opposition to especially in regard to fiscal instruments orientated strategy of development, and appropriately depreciated real exchange investment and the expansion of non-gold

an expansionary role for the state, to stimulate demand, an outwarda preference for maintaining ‘an rate’ in order to stimulate private exports.

South Africas International Financial Relations: 1985-95


Two further World Bank discussion papers, one on the macroeconomy and the other on trade, were published in March

1993 (Fallon et al., 1993; Belli et al.,

1993). The Bank’s framework in these papers remains located within a marketfriendly or market-oriented ‘growth with redistribution’ approach, using the language and rhetoric of its more recently articulated and more sophisticated positions. I would therefore stop short of labelling them ‘departures’ from the Bank’s development thinking.’ Nevertheless, they did contain some interesting, and potentially progressive, proposals. First, the Bank advanced the view that a judicious and targeted public sector investment related to infrastructural development to benefit the poor would be an important element of a growth strategy. The view expressed that such public sector investment may also stimulate private sector investment (crowding in) 1s also notable. However, the Bank’s warning that such investment should not put budgetary targets at risk by raising recurrent government expenditure seemed to ignore inevitable interactions between capital and current expenditure, especially in education, health and related types of social spending. Second, the Bank suggested that import liberalization needed to occur gradually (although it was short on critical detail on this important point); that policies such as Export Processing Zones and the General Export Incentive Scheme may not offer the most productive ways of promoting exports; and that the system of import duties needed to be administered more efficiently and made more transparent. Third, the Bank recommended the promotion of small-scale black agriculture and land reform. This 1s again a significant point, although as Fine and Stoneman (1996: 21) point out ‘South African agriculture has become a playground thing for the World Bank in which it occasionally feels able to let down its hair from the market-friendly ties that normally bind it’. In mid-1994 the World Bank published another report entitled ‘Reducing Poverty in South Africa: Options for Equitable and Sustainable Growth’, which included proposals for land reform (to redistribute about a third of agricultural land), support for small and medium enterprises, an extensive training programme and an increase in state investment expenditure. Although it made the point that union activity pushed up African worker wages by 15 per cent decreasing the number of jobs created by between 200000 and 400000, the Bank argued that the structural factors underlying high unemployment had to be addressed, referring frequently to the similarity between its conclusions and those of the Reconstruction and Development Programme (RDP). The Bank also produced a raft of sectoral studies. However, it 1s not feasible to subject all the Bank’s documents to a detailed critique here. This is a task which Robert Urquhart has attempted, and it 1s his conclusion that: Arguably the [Bank’s] South African documents attempt to present both Keynesian

and Monetarist interventions. But this is not the case: on the whole the South African documents reflect a neo-liberal paradigm: do away with trade tariffs, lower wages and open the economy up to international competition . . . The Keynesian intervention is really about making the environment more friendly for private


The Political Economy of South Africas Transition investment — relying on private investment to be the growth stmulator. This freeing of the market in turn leads the documents away from a concern with trying to

reconcile poverty alleviation with growth and more with a concern for growth (1995: 8-9).

Foreign Direct Investment, Portfolio Investment and Syndicated Loans South Africa gradually regained some access to the international capital markets after 1988, when Swiss banks succeeded in placing a small private bond for the South African government. There followed three similar private placements in 1989. All four issues carried a nominal maturity of three years, but included sixmonth options, reflecting the political instability involved, and effectively transforming them into short-term credits. In 1989 South African borrowers entered the German bond market, and there were more issues (larger amounts,

with longer maturities, though at high borrowing costs) placed in 1990, 1991 and 1992 (Garner and Leape,


18, 23ff; Kahn,

1992: 22-3).

Portfolio (equity) capital to South Africa increased in the 1990s. The primary causes for this were cyclical: the bottoming out of the recession; the strong coinciding rally in gold markets; and significant progress in political negotiations at the tme (CSSAEIF, 1993: 1, 11-12). Net purchases of equities by foreigners on the Johannesburg Stock Exchange amounted to R2.74 billion up to the third quarter of 1993, compared to a disinvestment of R709 million in 1992. The figures rocketed further late in December 1993 and January 1994 (Business Day, 7.12.93; Natal Mercury, 12.1.94). By early 1994 some leading US-based investment firms launched investment funds which targetted the South African market in equities and gilts (Business Day, 7.2.94). This trend in the flow of equity funds to ‘emerging markets’ was in line with global developments and represents short-term investment which can easily be sold off, befitting a country like South Africa, which was still perceived to be risky. Not surpringly therefore, given changing political conditions, flows of such equity capital between January and April 1994 were very erratic. Foreign direct investment in small amounts also resumed around 1988, mainly from the Far East, most of which were destined for the [then] nominally ‘independent states’ such as Ciske1 and the homelands, including KwaZulu. The limited amounts of FDI flows in 1993 and early 1994 were related mainly to marketing and distribution activity, rather than production. Although South Africa regained some access to foreign capital in the late 1980s and early 1990s, these were limited mainly to equity capital and bond issues on the European capital markets, most of which, reflecting economic political uncertainty, are effectively short-term credits at relatively high costs. As Garner and Leape pointed out at the time, any significant improvement in foreign lending and investment to South Africa would depend upon three factors:

South Africas International Financial Relations: 1985-95


a continuation of the current worldwide trend of increased investor interest 1n highyielding assets from ‘emerging market’ countries, a further relaxation of current legal and political restrictions on lending to South Africa, and most important of all, a sustained reduction in the level of political and economic uncertainty in South Africa (Garner and Leape,

1991, in Kahn,

1992: 23).

The nature and pace of South African activity in respect of attracting foreign capital investment accelerated in the months immediately preceding and following democratic elections in April 1994. Early in 1994, the Transitional Executive Council (TEC: the multi-party negotiations forum which supervised the run-up to the April elections) set up a special committee to coordinate South Africa’s international capital market strategy. In February 1994 legislation was passed setting up a Technical Committee of the TEC’s sub-council on Finance. This multi-party “Technical Committee on South Africa’s International Capital Market Approach’ was to manage the process of developing an appropriate international capital market and debt strategy. It was also believed at the trme that the debate about such a strategy would contribute to hastening the process of reaching ‘multi-party consensus’ on an economic policy for the immediate post-apartheid years. In December

1994, South Africa launched a US$750

global bond, following

the awarding two months earlier of sub-investment grade credit ratings by Moody’s (Baaa3) and Standard and Poor (BB with a positive outlook). The split rating (followed by a more positive BBB investment grade Japanese rating in late October) reflected the difficulty that these agencies had in assessing South Africa’s creditworthiness. The global bond price fell sharply in the wake of the recent Mexican currency crisis; nevertheless it was an important first step in a democratic South Africa’s entry into the international capital markets. In May 1995, the South African government successfully entered the Japanese capital market with a Y30 billion (R1.3 billion) five-year Samurai bond issue, intended to finance general government expenditure. The yield to maturity of 5 per cent represented a spread of 197 basic points over the Yen Libor (i.e. the London Interbank offer rate), 215 basic points over Japanese government bonds and 207 basic points over US Libor. This last figure is marginally higher than the spread of between 150 and 200 basic points estimated in October 1994 by the Centre for Research into Economics and Finance in South Africa (CREFSA) as the borrowing cost for a five-year South African bond, although it was lower than the 241 average spread for the five-year Eurobond issued by the apartheid state in early










addition to these sovereign borrowings, several private South Africa companies accessed international capital markets beginning in the second half of 1994. These included a Liberty Life convertible bond 1ssue 1n July, followed by Barlow Rand and Samancor convertible bond issues in October (CREFSA, October 1994: 25). Despite this improved access to the international capital market the expected huge foreign capital inflows did not occur after the democratic elections. Buszness


The Political Economy of South Africas Transition

Day commented six months after the election that ‘while most foreign investors express great interest in South Africa, and voice bullish sentiments about the country and its prospects, the figures tell a different story’ (4.10.94). In these early post-election months some of the cited reasons for this situation included the absence of a credit rating, the maintenance of exchange controls and the financial rand (finrand), unclarity about the new government’s macroeconomic policy, not featuring on the leading indices of emerging markets etc. Following months of speculation about when and under what conditions it would be abolished, and what implications this would have for, among other things, the value of the unified currency, the finrand was in fact abolished with effect from 13 March 1995. The value of the unified currency in fact remained remarkably stable, initially appreciating against all major currencies, most notably the dollar. CREFSA argued, on the basis of their analysis of the volatility of the unified rand, that while the unified rand will have created a more stable

exchange rate regime for foreign investors, ‘the evidence available to date suggests that trade transactions will be subject to greater exchange rate volatility than under the previous commercial rand’ (April, 1995: 3). Further inflows of portfolio (equity) investment through the Johannesburg stock exchange (JSE) occurred, especially in early 1995, although it remained volatile. Foreigners were net buyers of equities and bonds on the JSE to the value of R1.7 billion between 1 January and mid-May 1995. However, the scrapping of the finrand contributed to exposing South Africa to a more volatile pattern of capital flows, the fall of R1.9 billion in April 1995 and the increase of R2.4 billion in May 1995 being clear indications of this (Nedcor, 1995: 5). As competition for long-term foreign direct investment was intensifying globally in the wake of concerns over the huge flights from emerging equity and bond markets after the Mexican crisis, South Africa found it hard to attract such

investment. Since the April elections (to mid-1995) South Africa received some R17-20 billion in net capital inflows but foreign direct investment ‘at this stage constitutes a very small proportion of the total foreign capital flowing into the country’ (Sunday Independent, 16.7.95). With the finrand scrapped, a credit rating secured, and the government pursuing an IMF-type commitment to macroeconomic balance, liberalization and even privatization, the most frequently cited reasons for the continued absence of foreign capital in 1995 were rising criminal activity, political violence, relatively high unit labour costs, labour militancy and high corporate taxes. In responding to this call for further deregulation as a precondition for new foreign investment, ANC MP Rob Davies, observed that the country which was the top investment priority of 57 per cent of major international investors was China, a country whose policy framework was very different from the neo-liberal framework


is often






it would

appear that economic growth and development, generated initially in terms of China’s own domestic development agenda and efforts (involving a dynamic mix of state and market forces), proved to be the crucial spur to foreign investment. In the second half of 1995, the ANC introduced a new explanation for

South Africas International Financial Relations: 1985—95


continued failure to attract foreign investment, when they launched an attack on South Africa’s conglomerates for not doing enough to facilitate foreign investment as well as the expansion of local black businesses (two issues that came to be closely linked with ANC economic thinking in this period). The ANC had been consistently concerned with the power of the South African conglomerates, but this attack appeared to be part of its first attempt as government to take a clear and hardline position on its approach to competition policy. The accusations were strongly denied by some of the conglomerates such as AngloAmerican and signalled the beginning of a deterioration in ANC-—business relations for some time.

Summary Since 1990, South Africa has been a regular destination for delegations from the IMF, World Bank and various potential foreign investors. Although at the level of consultation and discussion relations between the World Bank and the new government appeared to be good, at the time of writing (November 1995) there were still no signs of World Bank loans. This despite the obvious eagerness of the Bank to lend to the new government. Discussion continued about the setting of priorities for World Bank assistance in support of the RDP. A new financing protocol was expected to be signed with the World Bank early in 1996. An IMF facility was negotiated in 1993 and the prospects of a new facility (possibly carrying the higher conditionality usually attached to stand-by facilities) was discussed in some quarters. The IBCA credit rating survey of August 1994 commented that in exploratory talks between the IMF and the government ‘the Fund has indicated that in addition to the normal requirements of fiscal and monetary discipline, some form of social compact with the trade unions and business would be a prerequisite for a standby facility’ (IBCA, 1994: 24), a commitment to wage restraint, one would presume, would be the Key element of such a ‘social compact’. However, there have been conflicting reports about the government’s relations with the IMF. Following the IMF’s 1995 Mission visit, some commentators suggested that the Fund and the government were in general agreement over the management of South Africa’s macroeconomic policy. Other reports imply that the Fund was not so satisfied with the government’s performance, and that it had insisted that the government do more to bring down the fiscal deficit to GDP ratio below the current level of 5.8 per cent. Clearly, any attempt to achieve this simply through holding back public spending would jeopardize the capacity of the government to deliver on its broader objectives of development and redistribution. Significant amounts of official government-to-government aid, from countries such as Japan, have not been accessed (seemingly) because of bureaucratic inertia. The country gradually re-entered the global capital markets since the late 1980s. However, armed with a marginally better-than-average credit rating since


The Political Economy of South Africas Transition

late 1994, several sovereign bond issues were launched in both the US and Japan, and several South African companies also accessed the international capital market. Some amount of equity capital has flowed in via the Johannesburg Stock Exchange, but large and regular amounts of direct foreign investment still appear elusive, and different constituencies have advanced different reasons for this.

ANALYSIS OF SOUTH AFRICA’S BALANCE OF PAYMENTS, AND ESPECIALLY FOREIGN CAPITAL FLOWS BETWEEN 1985 AND 1995 Few would disagree with the contention that ‘South Africa’s achilles heel remains the weakness on the capital account of the balance of payments’ (IBCA, 1994: 25). The MERG macroeconomic projections make out the balance of payments constraint to be relatively mild (especially after the year 2000) on the assumption (among other things) that improved efficiency in production flowing from a successful public investment-driven first growth phase will reduce the net (foreign) debt to GDP ratio to levels well below that of comparable countries, so improving markedly the chances of attracting foreign capital to finance growth thereafter. This view has been challenged, among others by Nicoli Nattrass (1994: 220) who questioned the MERG assumption of improved efficiency. Other have taken a pessimistic view about South Africa’s ability to attract foreign capital at all, in the context of the current economic and political dynamics of the global economy, and of South Africa’s place and importance in the world economy; yet others question the preoccupation with attracting foreign capital on the grounds that this deflects policy and strategy from the more crucial task of mobilizing domestic savings (Padayachee, 1995). All in all the issue of the role of foreign capital in South Africa’s economic performance is therefore a crucial one to come to terms with. Balance of payments difficulties have constrained economic growth 1n South Africa since 1985, following the imposition of financial sanctions by the major Western banks. This forced South Africa to run continuous current account surpluses, and keep a tight rein on growth and imports, so pushing the economy into recession. Some degree of normality in South Affica’s relations with the international financial community was only reached after the final debt rescheduling agreement of September 1993. Table 1 shows that between 1986 and 1993 South Africa largely succeeded in its efforts to run a current account surplus, and that except for 1988 and 1993, the current account surplus exceeded total net capital outflows. In 1993 total net capital outflows soared to over R15 billion (nearly 5 per cent of GDP), the highest outflow since the beginning of the debt crisis in 1985. The fact that the finrand neutralized foreign direct and portfolio transactions meant that for much of this entire period the capital account was dominated by (rescheduled) debt repayments and short-term capital outflows. Net short-term capital outflows have accounted for the major portion of net total capital





a Db

8 487 8116 9035 979\ 12 180 10724 11 543 13043 15047 13269 IS918 14912 15213

71322 82275 85 111 94 463


25 826 28 606 39 408 44 266 43 408 47 385 5! 883 59 869 7608 |



Netservice andtransfer

2598 —5 440 — 6 989 —7836

6 328 6708 3383 3467 5 324 6 187 3940 5 829 —2 089


Current account

— | 647 433 4325 577

—3 162 —1|70I —1173 — 606 — 102 — | 730 —151I —272 | 430


Net longterm capital

—2512 5 565 3299 § 377

— 5208 — 3937 —6 426 — 3436 —1772 —2154 — 3673 — 15021 §210


Total net capital

| 940 2 260 3114 3 439

2068 3181 2074 2096 2 421 2972 2982 26/6 3114


— 847 —1|7 772 1351

| 067 2 682 | 024 597 | 980 2933 2 683 22 722


Reserves (US$ mn)‘

Gross and net foreign reserves of the South African Reserve Bank. Gross reserves less liabilities against reserves. Liabilities against reserves comprises the outstanding foreign loans of the Reserve Bank plus foreign short-term deposits with the Reserve Bank by other central banks and multilateral institutions.

Merchandise exports and imports are measured FOB (free on board).

— 865 5 132 — 1026 4800

— 2046 — 2236 —5253 — 2830 — | 670 — 424 —2 162 — 14749 3 780



Capital Account

Quarterly data on the current account, but not the capital account, are seasonally adjusted and annualized.

Source: CREFSA, July 1995, p.22.

1986 23922 16719 1987 25 607 |7 823 1988 32 125 19 70 1989 38 384 19 140 1990 42735 18.177 1991 44709 19 587 1992 49010 18 356 1993 56512 22229 1994 66 378 22 66| Seasonally adjusted and annualized 94Q2 64017 23 172 24816 67 937 94Q3 94Q4 72954 20 080 20 000 81 840 95Q!

Net gold


Current Account’

Table | The South African balance of payments, 1986-95 (current rand millions, unless otherwise stated)


The Political Economy of South Africas Transition

outflows for much of the period under review (except in 1991). In 1993 this proportion was over 90 per cent. An amount often approaching 75 per cent of this has been categorized by the Reserve Bank as ‘non-monetary private sector outflows’ part of which in turn represents unrecorded capital and current account transactions, being essentially capital flight (IBCA, 1994; CREFSA, April 1995). In this time the Reserve Bank’s efforts to bolster South Affrica’s gold and foreign exchange reserves met with little success. IBCA calculated that the ‘level of foreign exchange reserves has rarely exceeded 0.5 months imports of goods, services












sharply following increased short-term borrowing by the Reserve Bank and the drawing down of the $850 million IMF facility in December of that year. In 1994 this general situation which characterized the period since 1985 turned around and the country ran a current account deficit of R2089 million and experienced total net capital inflows of R5210 million. Significant net longterm capital outflows in the first two quarters of 1994 (mainly the result of uncertainty at a time of political violence surrounding the country’s first democratic elections in April) were offset by strong long-term capital inflows in the last quarter. Net short-term capital flows fluctuated in 1994, inflows of R5132 million in the third quarter being followed by an outflow of R1026 million in the last quarter. Total net capital inflows continued to occur in the first half of 1995, in which period it was estimated that about R11 billion of the approximately R20 billion received since the democratic elections had come into the country. However, a significant proportion of this was short-term credits. Reserve Bank figures on the maturity structure of South Africa’s debt (released in July 1995 for the first time since 1985) showed that debt with an original maturity of less than one year amounted to almost $4.9 billion at the end of 1994 and an estimated $7 billion by end-1995. Although much of this was expected to be rolled over, negotiated or replaced with new facilities, this increasing indebtedness will place constraints on South Africa’s room to manoeuvre in respect of macroeconomic policy, one economist being quoted in Business Day to the effect that ‘South Africa cannot afford to flirt with outlandish ideas’ (3.8.95). However, CREFSA was cautiously optimistic that the strong total capital inflows in the three quarters ending March 1995 offered ‘some confidence that the balance of payments constraint . . . may be sustainable’ (July 1995: 21). As they pointed out, however, the full effects of the abolition of the finrand (towards the end of the first quarter of 1995) would not have been felt by this stage.



South Africas International Financial Relations: I985—95


CHANGING PERSPECTIVES ON RELATIONS WITH INTERNATIONAL FINANCIAL INSTITUTIONS AND FOREIGN INVESTORS I have argued elsewhere that relations between the IMF and the apartheid state in the context of a Cold War global political economy were extremely ‘cosy’ (Padayachee, 1990). Even before the government had made a visible commitment to market-oriented economic reforms (in the late 1970s) its relations with the Fund were indeed close and friendly. In fact in the mid-1970s business supporting media had accused Finance Minister Horwood of letting the ‘IMF gnomes’ take over South Affrica’s credit policy (Financial Mail, 20.8.76). By the early 1990s, however, as the reality of an ANC government had to be faced squarely, any lingering business suspicions about IMF interventions and policy advice were banished; on the contrary South African business was happy to let the IMF gnomes effectively write the country’s economic policy. JSE President Tony Norton, for example, urged that in formulating its economic policy the ANC: must talk to people like competent economists from the IMF. If they go to Washington, they’ll find all of a sudden that they’ll be doing what Nigeria’s doing, and everybody else is doing, which is privatising and reducing the state’s share of the economy. Credible international economists are the ideal people for them to talk to (Interview with Patrick Bond, October


At about this time, relations between business and the apartheid government, ‘always amicable’ became ‘even more effusive’ after the appointment of General Corporation’s (a South African mining conglomerate) Derek Keys to the Cabinet (Kentridge, 1993: 39). By the time the government’s Normative Economic Model (CEAS, 1993) was on the table, government and (most factions of) big business were at one in respect of policy issues related to liberalizing external economic relations and the role of foreign capital in South Afmica’s growth. The importance of macroeconomic discipline and prudent fiscal and labour management (in line with IMF requirements and views) were repeatedly and passionately espoused and defended, as being crucial to the country’s success in attracting foreign capital, in turn held to be vital to the growth process. After 1990 the de Klerk government, private local capital and the international financial institutions came to form an informal ‘triple alliance’, and in those early years they honed in whenever the occasion presented itself to attack and disparage any ‘business unfriendly’ ANC economic ideas and proposals (which they portrayed as naive and indicative of a dangerous commitment to socialism,








pathologies). It would therefore be important to examine how the movement responded to these pressures, especially in policy areas related to international financial relations. In February 1990, shortly before his release from prison, Nelson Mandela


The Political Economy of South Africas Transition

stated that ‘the nationalisation of the mines, banks and monopoly industry 1s the policy of the ANC and change or modification of our views in this regard is inconceivable’ (Kentridge, 1993: 3). Mandela was, in this opening gambit in the economic debate that followed, simply confirming that there had been no change in ANC economic policy since the 1955 Freedom Charter, from where the commitment to nationalization was drawn. On 30 July 1995, the Sunday Times reported that ‘President Mandela frustrated by his [15 month old] government’s failure to deliver on election promises, this week instructed his cabinet to abandon its obsession with grand plans and make economic growth its top priority’. Egregiously misrepresenting the complexity of the ‘East Asian Miracle’, the paper argued that in so doing the President had put South Africa ‘on a course pioneered by the .Asian tigers’ which have turned Third World economies into booming successes. So 1n five short years the shift from a ‘grand programatic approach’ (variously described as socialist, interventionist, development-oriented) to a ‘privatized individual choice approach’ (free market, neo-liberal, growth-oriented) appeared to be complete. Changing perceptions about the role of the foreign sector and the importance of the international financial institutions (which did not even rate a mention in the 1955 Freedom Charter) in South Affrica’s reconstruction and development were to play an important part in this overall and dramatic policy shift. Signifying its approval of this change, the IMF in an article headed ‘Long Walk to Economic Recovery’ described ANC economic policy since coming to power as ‘a study in moderation’ (IMF Survey, 1995). In the mid-1980s it had been COSATU that had supported research into the effects of sanctions on the South African economy and later into the economic crisis itself. It was through this research programme that the importance of the external economic sector was recognized for the first time in progressive economic analysis (see Gelb, 1991). By the early 1990s the question of South Africa’s global competitiveness (and its implications for various sectors, especially in respect of employment, productivity and training), had become a major issue in COSATU (see Joffe et al., 1993). In ANC circles itself little attention was paid to economic policy questions until the early 1990s. Some research centres abroad (most notably Economic Research on South Africa (EROSA) at School of Oriental and African Studies (SOAS), University of London) conducted research into economic 1ssues, but it was only at the Harare Conference in April/May 1990 that the internal (mainly COSATU affiliated) and external (mainly ANC-South African Communist Party (SACP) supporting) research groups and political leaders met to draft economic policy recommendations in the new context of the 1990s. Draft economic policy documents were produced at Harare in May 1990 and September 1990; a draft ANC Economic Manifesto was prepared for (but not adopted by) the 1991 ANC National Conference; and the ANC’s ‘Ready to Govern Document’ (adopted by the May 1992 National Conference) included a section on economic policy. In December 1993 the ANC-—COSATU supported Macroeconomic Research Group (MERG) produced its framework for

South Africas International Financial Relations: 1I985—95


macroeconomic policy in South Africa, which was one of the important inputs into the alliance’s February 1994 Reconstruction and Development Programme (RDP, 1994). In November 1994, just over six months after democratic elections, the government presented its economic framework document in the form of the RDP White Paper (RSA, 1994). Four consistent themes related to South Africa’s external economic relations and policies ran through the first three of these discussion documents (1.e. the two 1990 Harare papers and the 1991 draft ANC Economic Manifesto): ¥ that the global economy had had a destabilizing effect on the South African economy especially after the mid-1970s; ¥ that South Africa’s international linkages had to be transformed in order to increase global competitiveness and develop dynamic markets with domestic industries;

Vv that foreign capital was to be used to supplement domestic savings, the mobilization of which should be the prime focus of efforts to finance reconstruction and development; VY that foreign investment would be encouraged but that legislation or an investment code (or in one document, state-owned financial institutions) would have to be established on order to regulate and direct foreign investment in line with the country’s chosen development path; to ensure that labour standards and environmental balances are not compromised; to ensure that foreign investors re-invest part of their profits to promote continuing growth. No specific mention was made 1n any of these early documents to relations with the IMF and the World Bank, other than a vague note in one to the effect that the country would have to ‘investigate’ the value of membership of international organizations. By the time these proposals and recommendations were formally adopted at the 1992 National Conference, and in the light of significant progress in political negotiations, important changes and qualifications may be detected. On the one hand, specific mention was made about relations with the IMF and World Bank, in which it was stated that such relations ‘will be conducted in such a way as to protect the integrity of domestic policy-formulation ... enhance national sufficiency and enable us to reduce dependence on international financial institutions’ (ANC,


22). On the other hand, and in reference to foreign

investment, no mention was made of legislation, codes or institutions directing or regulating foreign investment. It spoke only of ‘an open approach’ to the entry of foreign investment, and of the importance of political stability, growth and consistent economic policies as being important in promoting such investment. While

a commitment

to national treatment was made,

the document


provision for departures from this principle in respect of domestic borrowing by foreigners and foreign ownership in strategic areas (land and natural resources). However, in a way which renders virtually meaningless the commitment to


The Political Economy of South Africas Transition

national treatment, it also stipulated vaguely that ‘foreign investments that meet defined national growth and development objectives may enjoy specific contractual arrangements’ (ANC, 1992: 24). Nearly two years were to pass before the ANC-led alliance was finally to produce its national strategy document for reconstruction and development (RDP Base Document). The RDP had been debated for some time within the alliance, especially within COSATU, and the parallel (occasionally overlapping) research of MERG and the Economic Trends/Industrial Strategy Product to some extent fed into the seventh and final RDP document published in the first quarter of 1994. As a vision framework document the RDP largely succeeded in integrating and blending an emphasis on meeting basic needs and a state-led infrastructural investment programme and restructuring of financial, labour, land and external relations and institutions (mainly inherited albeit in a watered down form from MERG) with the need to be globally competitive, especially in manufacturing production in the context of a technology-driven world economy (a point made strongly by the ISP). As far as international financial relations are concerned the RDP reaffirmed the 1992 policy in respect of the IMF and the World Bank (almost word for word, RDP: 145-6). Its statement in respect of national treatment for foreign investors was less ambiguous than the 1992 policy — no exemptions were mentioned. The RDP did not refer to other specific measures to attract foreign capital and the point was made that ‘stable, consistent and predictable policies as well as a dynamic economy should create a climate conducive to foreign investment’ (RDP: 93).

The document made no reference to legislation, codes or institutions to direct or regulate foreign investment flows in any way, although there was a weak statement to the effect that foreign investors ‘should abide by our laws and standards’ (especially with respect to labour) (RDP: 93); and a note that policies must be developed to ensure that foreign investment creates ‘as much employment, technological capacity and real knowledge transfer as possible, allowing greater participation by workers in decision-making’ (RDP: 93). Later a commitment was made to use foreign capital ‘only for those elements [of the RDP] that can potentially increase our capacity for earning foreign exchange’ (RDP:


It was on the basis of the RDP (Base Document) that the ANC fought and handsomely won South Africa’s first democratic elections. The ANC-led Government of National Unity published its White Paper (WP) on the RDP some six months later.* The WP which was devoid of any semblance of a macroeconomic or sectoral policy framework placed financial and monetary discipline at the top of its five-pronged ‘strategy’ to achieve the RDP objectives, ahead even of growth and employment creation, and this theme dominated that section of the document which dealt directly with economic policy. As for international financial relations and policy, the WP omitted all references to relations with the IMF and World Bank and the need to protect the sovereignity of domestic policy formulation (except for a passing note in a

South Africas International Financial Relations: 1985—95


section dealing with Southern Africa); there was no reference to any regulation of foreign investment flows or behaviour, not even 1n respect to labour standards. The WP reiterates the RDP Base Document’s view about the importance of stable and consistent macroeconomic policy as a means of attracting foreign investment (and adds political stability to this list). Finally, the WP reaffirmed the principle of national treatment. Like all previous ANC policy documents the WP did not express a view about the imposition of performance requirements, e.g. those related ‘to export at a given level, achieve a given level of domestic content, accord preference to domestic goods or services, relate the volume or value of imports of a foreign investor to Its volume or value of exports, or to restrict sales of goods and services in its own territory’ (Adelzadeh and Padayachee, 1994: 9). Atits 1995 conference the ANC even came to accept *. . . the idea of investment incentives for foreign investors — a notion once anathema to the party... .’ (EIU, Iqr 1995: 14/15). In summary, between 1990 and 1995 ANC international financial policy and strategy was systematically stripped of all commitments, or even significant reference, to the regulation or shaping of the nature and character of South Africa’s relations with the international financial institutions and foreign investors of all kinds, as part of its national development strategy of reconstruction and development in the wake of the political victory over apartheid. Why did this happen?

THE DOMESTIC MEDIATION OF SOUTH AFRICA’S INTERNATIONAL FINANCIAL RELATIONS AND POLICY SINCE 1990 Habib et al. (1995) have argued that global developments, both political and economic, were the principal factors conditioning the transition to democracy in South Africa. These included the impact of developments in Eastern Europe and the former Soviet Union, as well as the acceptance of a strong neo-liberal approach to growth and development among most Western governments and international financial and development institutions. They argue that the views of the international financial institutions (IFIs) and western governments in the economic policy debate in South Africa since the early 1990s were an important vehicle through which this influence was achieved. We believe that there is some validity in this contention. Thus, we share Robert Urquhart’s view that World Bank policy prescriptions for South Africa since the early 1990s did influence the South African economic policy discourse. This is most clearly evident, he argued, in the government’s White Paper on the RDP. The White Paper is more neo-liberal in approach and harks back to some of the sectoral documents of the Bank. It argues for the need to extend the international

competitive edge to selected industries . . . The impression one receives then is a move away from an interventionary RDP to an RDP which will rely more heavily on a freer market to promote growth and generate employment. And it 1s this paradigm


The Political Economy of South Africas Transition of the freer market behind the prescriptions {in the WP] which recalls a similarity in the World Bank documents for South Africa (Urquhart, 1995: 17).

However, in our view, it is still necessary to ask why these ideas were to prove so seductive

to the ANC;

or looked

at in another way, what were

the domestic

forces that facilitated the absorption and infusion of these neo-liberal ideas into the economic thinking of the post-apartheid ANC-led government? Several factors may account for this. Firstly, there had been no tradition of substantive economic policy debate within the ANC virtually throughout its entire history. The economic clauses of the Freedom Charter remained until the 1992 conference the official economic position of the movement. The fact that the ANC had publicly to stand by many of these (understandably) vague ideas in the very different historical context of the 1990s and in the face of the furious assault on ANC economic policy waged by domestic capital, the apartheid state and the IFIs among others, severely weakened the credibility of any new ideas or arguments advanced by ANC spokespersons on economic issues. Many academic economists (from Economic Trends, the Industrial Strategy Project, the Macroeconomic Research Group and elsewhere), had made notable contributions to the development of the democratic movement’s economic policy since the mid-1980s. However, numerous tensions and difficulties between sections of the movement and the policy analysts and advisers, and among the latter themselves, resulted in a great deal of incoherence and unclarity in the movement’s economic policy positions. This was most starkly evidenced in the MERG exercise.” For while the MERG Report, which represented the only systematic, comprehensive and modelled macroeconomic policy framework and set of policy recommendations of the ANC alliance at the tume, did feed into the RDP Base Document to some extent, much of its underlying conceptual framework (which have Keynesian and Kaleckian features) and a large portion of its substance was not accepted even by all those who participated in the process, and was marginalized, disowned and rejected by many in the ANC without any clear justification. In the period 1992-93 several top ANC economics staffers (including some with significant formal training in economics and others without any such training or experience) underwent short executive training programmes and orientation courses at foreign business schools, investment banks, economic policy think-tanks and the World Bank, where they were clearly fed a steady diet of neo-liberal ideas. The effect of this was noticeable in the form of the somewhat different policy positions many adopted on matters such as the independence of the Reserve Bank, trade liberalization, privatization and the reform of the financial sector. These developments all contributed to a situation that meant that by the elections it could still not be claimed that the ANC alliance had a strong, coherent and united position on economic policy, nor an articulated analytical underpinning for the policies which it did in fact assume.

South Africas International Financial Relations: I985—95


Secondly, different, often conflicting, policy positions existed (to some extent still exist) within the movement in respect specifically of interactions with the international financial institutions and the importance of foreign capital. Elsewhere, I have argued that at least four stances could be detected in the movement’s attitude to the IMF and World Bank: ¥ one that broadly agreed with their neo-liberal philosophy, and welcomed their involvement in South Africa;

¥V one that differed strongly with them, and argued that South Africa should have nothing to do with them; ¥ one that differed with them, but believed that an ANC-led government would easily be able to influence and shape their views in respect of policy advice and lending; ¥ one that differed with them, but which recognized that negotiations with them would be complex and should only occur on the basis of a well-formulated, coherent alternative development strategy. The existence of such divergent positions may well have complicated relations with

the IMF

and World




the spaces


facilitated the

absorption of their neo-liberal philosophy into the ongoing South African debate. Thirdly, in the period leading up to the democratic elections in April 1994 the ANC’s partners, including COSATU,

the SACP and the South African National

Civics Organization (SANCO), had all agreed (in terms of their membership of the alliance) to subsume their own positions on economic restructuring to that of the ANC itself. ‘Thus while all sections of the movement fully participated in the formulation

of the RDP

Base Document,

this document

was in all likelihood

itself the outcome of some compromises. Since then these organizations in civil society have struggled to regain lost ground and have not come to terms with the way in which they should respond to the new government’s economic policy. The loss of a significant cadre of COSATU’s leadership to the ANC, both before and again after the elections, undoubtedly weakened its capacity to respond to the changed circumstances of the 1990s with the same strength and effectiveness as it did in the 1980s. The organizational strength of the labour movement, including the level and character of affiliate and branch-level structures, were also somewhat weakened

in the period just after the elections. In addition the unions’ incorporation into formal multi-class bargaining forums such as the National Economic Forum (NEF) in the run-up to the elections, and in the National Economic, Development and Labour Council (NEDLAC) following the elections, has tended to force the union movement into a more accommodationist framework. For whatever the merits of such social compacts, it is not inevitable that the unions















progressive macroeconomic policies onto the national agenda and legislative and administrative programmes.


The Political Economy of South Africas Transition

COSATU (and the progressive trade union movement in general) had strongly supported a programme for a fundamental and radical restructuring of the economy since the mid-1980s. The (undoubted, though understandable) loss of some of its political clout after 1990 (when the ANC, PAC and SACP were unbanned) was a setback for the survival of progressive and radical ideas in the national economic policy debate. Fourthly, South African business, especially the powerful and well-resourced conglomerates,








interpretation of the reasons for the collapse of the Soviet Union and the other East European countries in the late 1980s, and with an equally distorted understanding of the foundations for the economic successes of the East Asian countries (especially South Korea and Malaysia), launched a relentless and highly effective public and private campaign between 1990 and 1994 to persuade the ANC leadership of the correctness of their neo-liberal economic ideas. In this effort they were well supported by most sections of the South African media and by the international financial agencies and (less overtly) by Western diplomatic representatives. All these interests adopted a strong neo-liberal stance; they argued too that foreign capital was indispensable to South Africa’s economic growth and that only by adopting a neo-liberal policy would such capital flows be secured. The resources of South African business and its supporting media were an important factor in exerting and maintaining pressure on ANC economic thinking. Finally, we would argue that a number of appointments to Key economics portfolios in the first Cabinet of the Government itself facilitated the consolidation and spread of neo-liberal thinking at the highest levels. Some key positions in the Cabinet and state bureaucracy were, in terms of the political comprises which characterized the transition to democracy, given to National Party nominees or appointees. These included the Ministries of Finance, and Minerals and Energy Affairs, as well as the Governorship of the South African Reserve Bank. The other economics portfolios went to ANC nominees who were either not, or were only tangentially, involved in the movement’s economic policy debates until the early 1990s. They appeared therefore to be less attracted to, or bound by, the more progressive, interventionist or structuralist economic analysis, ideas and policy recommendations which emerged (mainly from COSATU and Economic Trends) in the 1980s and from within MERG circles in the early 1990s. Phillip Dexter, an ANC MP, summed up the domestic balance of forces in late 1995 in the following way. While admitting that ‘the RDP base document has inevitably been diluted by the Government of National Unity (GNU)’ (1995: 58), he castigated big business for its lethargy, arrogance and lack of commitment, and criticized COSATU for its failure ‘to develop a clear strategy to ensure that it asserts itself in relation to the RDP’ (1995: 60). There were, he argued, two main reasons for COSATU’s failure:

South Africas International Financial Relations: I985—95 The first 1s that the increasing unions and the second is that contradictions that arise from alliance with the GNU. There


levels of corporatism have begun to paralyse the the unions have not found a way to manage the the transition. Part of this is about being in the is a general lack of capacity in the labour movement

and other organisations of civil society to develop policy, strategy and programmes

and to fight for these to be implemented (1995: 60).

These are among the domestic factors, we would contend, which combined to create the incoherence, uncertainty and policy vacuum into which the absorption of the policy ideas and development thinking of the IFIs and other neo-liberal exponents were facilitated. In this way the one developing country which progressive commentators would have backed to buck the global trend to neo-liberalism succumbed with barely a struggle.°

CONCLUSION International finance of all kinds has been an important factor in South African economic development, from the very beginning of the country’s industrialization. In the second half of the 19th century foreign direct investment was crucial to the development of South Africa’s mining industry. In the post World War II period World Bank support for the development of the country’s physical infrastructure (electricity, railways, harbours) was vital to the new apartheid regime’s strategy of industrialization. In the mid-1970s when a combination of worker and student protests, a falling gold price and escalating defence expenditure linked to the regime’s destabilization programme in Southern Africa, all combined to create something of a real crisis for the government, the IMF (with strong US and UK support) stepped in to offer critical financial support, so necessary for the political and risk credibility of the nation. And in the late 1970s, huge amounts of private international bank loans flowed into the South African private and public sector. However, when in the early to mid-1980s a combination of fears instilled by the











international impact of sanctions caused international financial flows to dry up, the effect was to prove problematic indeed for the survival of the apartheid state. In the period of formal negotiatons which led up to the election of a new democratic government in South Africa in April 1994, the IMF, World Bank, and

private and public foreign investors and institutions rapidly returned to engage with the democratic movement, check out the lie of the land, promise financial and other support, and much needed productive investment, provided of course that they were convinced that the new government would deliver political stability and an investor-friendly environment. Despite the concerns that many senior people in the new ANC-dominated government had expressed about the value and relevance of the development philosophy and advice of the international financial institutions (especially given the economic legacy that was being inherited), an interchange of


The Political Economy of South Africas Transition

ideas between them did occur from around 1990, and indeed this was the only sensible and correct response in the context. And four years later, despite many compromises, the RDP (Base Document) could still be said to reflect the development thinking of South Africans themselves, faced with the enormous task of reconstructing and developing their economy and society. However, it was not just the growing power of the Bank and the Fund which, in a post-Cold War global environment, was to ensure that many of their neoliberal ideas gradually thereafter came to dominate the economic policy framework of the ANC and later that of the government itself in areas such as trade, monetary, fiscal and labour policy (as other chapters have demonstrated). A variety of domestic factors and conditions, which have been discussed earlier in this chapter, facilitated their absorption into economic policy-making since 1994. It would appear that freed from immediate electoral pressures, and more distanced from the popular democratic culture which dominated union and antapartheid politics in the 1980s, many new politicians and bureaucrats have quickly joined the old Nationalists to become ardent champions of neo-liberal orthodoxy. While some within government circles would maintain that this shift was necessary in today’s global context, others would vigorously deny any rightward drift in the government’s economic thinking away from the objectives and analytical parameters of the RDP Base Document, contending that some amount of economic ‘stabilization’ was an essential foundation to an expected phase of sustained growth later. The international financial institutions as well as other foreign and domestic proponents of neo-liberalism had impacted on the economic philosophy of the government at an early stage for reasons related to the state of power relations in the post-Cold War global order, as well as to domestic factors. However, by the

mid-1990s there was still little or no direct leverage which the IMF or World Bank could use — the 1993 IMF loan contained its usual policy prescriptions, but it was nevertheless a relatively low conditionality facility, and the World Bank which had not lent anything by that time could rely only on moral authority and suasion. In these circumstances it could well be argued that the government’s economic policy and response in the first 18—24 months in office represented as much a form of self-imposed structural adjustment as anything else. We would argue that a firm commitment on the part of the government (1) to restore and implement a macroeconomic strategy of the kind set out in the MERG Report and the RDP (Base Document), (2) to sell the importance of such an integrated development approach to the Western industrialized nations which still control the IMF and World Bank, and (3) to obtain and retain strong organized support from the trade unions and other mass-based organizations in civil society, are the minimum conditions needed to ensure that any future pressure from the IMF and the World Bank to impose straitjackets on South African economic policy can effectively be resisted. The indications are that, despite the government’s economic policy stance, IMF pressure on issues such as the budget deficit was intensifying by mid-1995, threatening even more the capacity of the government to meet RDP objectives.

South Africas International Financial Relations: 1985-95









of a



Transformation, 25. ANC ANC ANC

(1990a): Discussion Document, Economic Policy. April/May, Harare. (1990b): Discussion Document, Economic Policy. September, Harare. (1991): Draft Resolution on ANC Economic Policy for National Conference.

Johannesburg. ANC (1992): Ready to Govern, ANC Johannesburg.

Policy Guidelines for a Democratic South Africa.

Baker P, Boraine A and Krafchik W (eds.) (1993): South Africa and the World Economy in

the 1990s. David Philip, Cape Town; Brookings Institution, Washington DC. Belli P, Finger M and Ballivan A (1993): South Africa, Review of Trade Policy Issues. Informal Discussion Paper Series, World Bank Southern Africa Department,

Washington DC. Central Economic




(1993): The

Restructuring of the South

African Economy, A Normative Model Approach, Pretoria. Center for International Policy (CIP). Various pamphlets, Washington DC. Centre for the Study of the South African Economy and International


(CSSAEIF), various issues, London School of Economics, London. Centre for Research into Economics and Finance in South Africa (CREFSA), various issues, London School of Economics, London. (Previously known as the Centre for

the Study of the South African Economy and International Finance.) COSATU (1991): Economic Policy. Report of the Economic Policy Conference 27—29 March. Dexter P (1995): The RDP, ensuring transformation through the state and popular transformation. South African Labour Bulletin, 19(4): September. Economic Trends (ET)

(1991): Internal Memorandum.

Economic Intelligence Unit (EIU): Various issues, 1993/5. Fallon

P, Askoy

A, Tsikata

Y, Belli P and



Silva L




Economic Performance and Policy Implications. Informal Discussion Paper on Aspects of the Economy of South Africa. World Bank Southern African Department, Washington DC. Fine B and Stoneman C (1996): Introduction — state and development. Fournal of Southern African Studies, 22(1): 5-26. Garner J and Leape J (1991): South Africa’s borrowings on International Capital Markets: Recent Developments in Historical Perspective. Research Report No. 5. Centre for the Study of the South African Economy and International Finance (CSSAEIF), London School of Economics, London.

Gelb S (1991): South Africa’s Economic Crists. David Philip, Cape Town. Gisselquist D (1981): The Political Economics of International Bank Lending. Praeger, New York.

Habib A, Pillay D and Desai A (1995): The International Dimension in South Africa’s Transition to Democracy. Unpublished paper, University of Durban-Westville, Durban. IBCA (1994): South African Overview. A private credit-rating survey, UK. Photocopy. IBRD (World Bank). Annual reports, various years. IMF Surveys. Various issues.


The Political Economy of South Africas Transition

Joffe A, Kaplan D, Kaplinsky R and Lewis D (1993): Meeting the Global Challenge, A Framework

for Industrial


in South


In P Baker,

A Borane


W Krafchik (eds.) South Africa and the World Economy in the 1990s, pp. 91-126. David Philip and the Brookings Institution, Cape Town and Washington DC. Kahn B (1992): South African Exchange Rate Policy, 1979-1991. Centre for the Study of the South African Economy

and International Finance, Research Paper 7, London

School of Economics. Kentridge M (1993): Turning the Tanker, The Economic Debate in South Africa. Centre for Policy Studies, Social Contract Series, Research Report 32, Johannesburg. Lachmann


and Bercuson K


(1992): Economic Policies for

a New

South Afnica.

International Monetary Fund, Washington DC. Macroeconomic Research Group (MERG) (1993): Making Democracy Work, A Framework for Macroeconomic Policy in South Africa. Centre for Development Studies, Bellville. Nattrass N (1994): Economic Restructuring in South Africa. Third World Quarterly. Nedcor (1995): Nedcor Guide to the Economy, 1st Quarter 1995. Nedcor. Ovenden K and Cole T (1989): Apartheid and Internanonal Finance. Penguin, Australia. Padayachee V (1990): South Africa’s International Financial Relations: History, Crisis and Transformation. Unpublished PhD thesis, University of Natal, Durban.

Padayachee V (1992): The Prospects and Dangers.

IMF and World Bank in post-apartheid South Africa, Economic Trends Working Paper 6, University of Cape


Padayachee V (1993): Development

implications for South Africa of using IMF

World Bank loans and resources. In P Baker, A Boraine and W


Krafchik (eds.) South

Africa and the World Economy in the 1990s, pp. 184—203. David Philip and Brookings Institution, Cape Town and Washington DC. Padayachee V (1995): Foreign capital and economic development in South Africa: recent

developments and post-apartheid prospects. World Development, February. Reconstruction and Development Programme (RDP) (1994): A Policy Document of the ANC Alliance. Umanyano Publications, Johannesburg.

Republic of South Africa (RSA) (1994): Government White Paper on the Reconstruction and Development Programme. Government Printer, Pretoria. Stoneman C and Thompson C (1991): South Africa after Apartheid: Economic Repercussions of a Free South Africa. Africa Recovery Series, Briefing Paper No. 4, United Nations, New York.

Tarp F (1993): South Africa: Background and Posstbilines for Dantsh Traditional Assistance. Danish Foreign Affairs Department, mimeo,


E (1992):


Southern Africa after Apartheid.




Bergen, Norway.

Urquhart R (1995): Creeping World Bankism, The Discourse of Economic Restructuring in South Africa. Paper presented at 1995 conference of the South African Sociological Association, Johannesburg. World Bank, EWP (1991): Economic Work Programme for South Africa. World Bank (1994): Reducing Poverty in South Africa, Options for Equitable and Sustainable Growth. World Bank Southern African Department, Washington DC.

South Africas International Financial Relations: 1985-95


ENDNOTES . For a fuller treatment of the reasons underlying the break in SA-IMF relations see Padayachee (1992). . His argument is that the link between savings and investment is more complex than assumed by the Fund, ‘in particular considering the dramatic reconstruction process that will have to take place in South Africa.’ (1993: p. 47). . The views expressed here on these Bank papers have benefited from discussions with local and international economists who participated in the workshops of the ANC’s


Macroeconomic Research Group (MERG)

in Johannesburg between

13 and 23 April

1993. Opinion among the group differed sharply on the question of the extent to which Bank thinking as set out in these two papers represents a ‘departure’ from its usual policy advice. For a detailed critique of the RDP White Paper see Adelzadeh and Padayachee (1994). For more on this see Padayachee (1995). For a more detailed account of South Affrica’s bargaining strength and weaknesses see Padayachee (1993).

Regional Integration Policies in Southern Africa Harry Zarenda Introduction


Regional institutions in Southern Africa — historical overview 56 Strengths and weaknesses of regional institutions in

Southern Africa


Recent theoretical perspectives on regional integration 64



INTRODUCTION The advent of political democratization in South Africa sparked a vigorous challenge to policy-makers in the country with regard to the issue of regional trade and integration policies. Historically, relationships affecting regional economic integration were broadly guided and governed, inter alia, by colonial and post-colonial trade agreements, the Southern African Customs Union (SACU) agreement (formally stemming back to 1910), inward-looking industrialization strategies and attempts during the more recent isolationist era (the late 1970s and 1980s) to form economic linkages that would reduce the region’s dependence on South Africa. The challenges facing the government with regard to regional economic policy initiatives are enormous. While general consensus exists with regard to the need for closer economic cooperation between the various countries in the region, there exists no clarity whatsoever with regard to the nature and formulation of such cooperation. Much of this lack of clarity 1s attributable to the fact that the two dominant regional institutional organizations, the Preferential Trade Agreement for Eastern and Southern Africa (PTA) and subsequent Common Market for Eastern and Southern Africa (COMESA) on the one hand and the Southern African Development Community (SADC) on the other, were historically beset by a variety of problems — such as overlapping memberships, conflicting objectives and a failure of governments to fulfil respective treaty obligations that induced a strained relationship between these organizations. However, even within narrower subregional entities such as SACU, the lack of


The Political Economy of South Africas Transition

vision and crystallized thinking on the part of policy-makers in South Africa has led to further confusion on the formulation of a coherent and coordinated policy. Policy-makers in South Africa are entwined by centrifugal pressures when considering this important issue. Chronic domestic problems such as poverty, unemployment and low living standards have to be addressed. Further delays in the implementation of the Reconstruction and Development Programme (RDP) are unacceptable. Yet against this there is the realization that South Africa is by far the dominant partner in the region. In addition, it has to bring on board visibly and tangibly countries that were supportive of the liberation struggle. From a strictly economic perspective, the country cannot afford an inequitable growth pattern with a thriving core and disintegrating periphery — a feature that will further intensify and exacerbate regional tensions. Allied to the above concerns are the pressures emanating from multilateral institutions regarding the necessity for broad trade liberalization. This chapter will attempt to explore some of the possible contradictions in the implementation of regional integration policies (RIPs) by relating these to some of the more recent worldwide theoretical debates that have abounded in response to a universal movement to regional integration arrangements. The major theme of this chapter is that the policy of ‘ad hockery’ currently characterizing regional economic policy initiatives in South Africa 1s more a form of crisis management than part of a coherent, coordinated strategy and as such could exacerbate rather than relieve regional tensions. It is the overall contention that the haphazard approach to regional trade policy dominated and characterized by trade liberalization, and a possible injudicious signing of various bilateral trade agreements and accords could severely negatively impact not only on the goals of regional economic integration, but also on crucial domestic economic policy objectives.



The Southern African Customs




The Southern African Customs Union (SACU) agreement represents the longest standing arrangement of regional integration in Southern Africa (and indeed most of the world). Currently comprising South Africa and Botswana, Lesotho, Namibia and Swaziland (BLNS) it has existed for almost a century and SACU’s origins can be traced to 1891 when Basutoland (then under British rule) was included in a customs union which had been formed two years earlier between the Cape Colony and the Orange Free State (Bruwer, 1923; Mayer and Zarenda, 1994). Despite each of the provinces aligning themselves with other protectorates and colonies during the turbulence prior to and following the Anglo Boer War, it was really the Act of Union in 1910 that established the Customs Union Treaty involving all four South African provinces and the three High Commission Territories.

Regional Integration Policies in Southern Africa


The new Customs Union Treaty dealt with customs revenue by stipulating that the South African Treasury collect all revenue from customs and excise duties and pay the High Commission Territories on a quarterly basis. The distribution of these revenues was based on an estimated share of the average over the period 1907-10. A fixed share amounting to 1.31 per cent of the actual collection of customs and excise duties accrued to each of the three minor parties — an arrangement which remained unaltered until the late 1960s (Lundahl and Petersson, 1991: 101). With the independence of Botswana, Lesotho and Swaziland (BLS) during the 1960s, persistent pressure from these countries forced renegotiation of the customs union treaty. The 1969 Agreement involved a complex revenue-sharing formula as well as an enhancement factor (to compensate for trade diversion and polarization) and was administered by the Consolidated Revenue Fund of South Africa. In 1976 a stabilization factor was introduced and payments out of the above fund were exacted with a two-year lag. The net effects of the above renegotiations substantially boosted the BLS countries’ receipts from the revenue pool and in each case from the viewpoint of these peripheral countries served to swell their total government revenue, albeit to different extents (Mayer and Zarenda, 1994: 15-20 and 22). By contrast, South Africa’s share had shrunk — a factor exacerbated by the incorporation of Transkei, Bophuthatswana, Venda

and Ciskei (TBVC) countries in SACU revenue disbursements. In 1990 Namibia, on attaining independence, joined SACU. By 1994 with massive dissatisfaction with the agreement by all parties — issues which will be dealt with later — discussions on the drastic renegotiation of the treaty were set in motion and are scheduled to be implemented in the near future.

The Southern African Development Coordination Conference

(SADCC) and Southern African Development Community (SADC) Originally established in 1980 with one of its explicit prerogatives to decrease member countries’ economic dependence on South Africa, the signatories of the original SADCC agreement included Angola, Botswana, Lesotho, Malawi, Mozambique,

Swaziland, Tanzania,


and Zimbabwe.

In 1990 Namibia

was incorporated and in August 1992 the name and terms of reference were changed to SADC to reflect the essence of a community. South Africa was admitted in 1994 and hosted the SADC conference in 1995 at which Mauritius was formally admitted as the twelfth member of the grouping. As is generally agreed, until recently, SADC(C) has relied heavily on project and sectoral coordination and only from 1992 was there explicit incorporation towards a policy of trade integration (ADB, 1993; Leistner, 1992). SADC has a fairly tightly-knit institutional structure, with its secretariat located in Botswana and various countries allocated sector-coordinating units. South Africa, for example, has been allocated responsibility for the coordination


The Political Economy of South Africas Transition

of finance and investment. The overall coordination of regional cooperation ts vested in the central secretariat.

The Common (COMESA)

Market of Eastern and Southern Africa

The organization was established at the end of 1994 and evolved directly out of the Preferential Trade Area of Eastern and Southern African States (PTA) which had come into operation in 1983. It incorporates some 23 members, including nine Southern African countries (excluding South Africa and Botswana) and has as its primary objective the eventual implementation of free trade and common market status to its members. Its institutional arrangements incorporate a Central Clearing House, a Trade and Development Bank and a Regional Reinsurance Company. It, unlike SADC, has involved the private business sector in its activities (Leistner, 1995: 273). The explicit formation of an African Economic Community remains its overriding objective.

STRENGTHS AND WEAKNESSES OF REGIONAL INSTITUTIONS IN SOUTHERN AFRICA Any broad assessment of the performance of the dominant forms of regional integration arrangements must of necessity be prefaced by the perspective from which these are viewed. Possibly the ultimate test rests on how such organizations have fulfilled their explicit objectives. There is, however, agreement that each of these 1s in a varying state of disarray and in serious need of drastic reform. The more recent debates surrounding respective costs and benefits of the implementation of the SACU agreement illustrate the lack of consensus quite forcefully. As far as the perspective from South Africa is concerned, SACU has enabled producers in the country to take advantage of a captive regional market, through the common external tariff. In addition, exports from South Africa to the remainder of this regional grouping have generated employment, profits and tax revenue for the fiscus. Moreover, the protection granted to South African producers through the existence of the 1969 Secret Memorandum (whereby 60 per cent of the entire region’s market has to be catered for before any tariff protection 1s granted) has proved beneficial to South Africa. Finally, the BLNS countries proved a useful and fruitful conduit for South African exporters during the sanctions era. (See Mayer and Zarenda, 1994, for more detail.) From South Africa’s perspective it must be realized that the SACU arrangement represents a historical and political legacy. There 1s a price to be paid for some form of economic and political stability in these areas and a substantial cost to South Africa reflected itself in escalating fiscal transfers which the former (as well as present) government deemed unsustainable in terms of the country’s

Regional Integration Policies in Southern Africa


growing fiscal deficit and more recently intensive demands for substantial reconstruction and development. An indication of South Africa’s declining share of the revenue pool over time is provided by Department of Trade and Industry statistics for the period 1969/70 to 1992/3. South Africa’s share over this period declined from 97.4 per cent to 66.4 per cent. While Namibia’s independence and separate SACU membership was responsible for some 10 per cent of the share, Botswana (15.0 per cent), Lesotho (6.1 per cent) and Swaziland (4.0 per cent) had all shown substantial increases by 1993. The budgeted payments in terms of Customs Union Agreements for the fiscal year 1995/1996 amount to R3.89 billion. This represents almost a trebling of the payment amounts since 1990 (South African Reserve Bank, 1995: S-50). The Margo Commission (1987) and McCarthy (1985) emphasize the convenience of political subsidization by South Africa dominating the agreement but argue that it has become too generous. Certainly benefits from the arrangement accrue to the smaller partners. The huge reliance on SACU payments is reflected in the following proportions of government revenue from these payments for 1991 (World Bank, 1993): Botswana: Lesotho: Namibia: Swaziland:

13.4 per 51.8 per 37.5 per about 40

cent cent cent per cent.

Furthermore, the fact that these countries did not have to incur costs of revenue

collection (which were administered by South Africa) and had access to a substantial monetary institutional and physical infrastructure — not to mention levels of direct investment higher than other Southern African countries — are not to be scoffed at (Maasdorp and Whiteside, 1993). It was essentially benefits such as these that influenced Namibia on attaining independence to opt for joinng SACU (UNDP, 1993). However, as Mayer and Zarenda (1994), Lundahl and Petersson (1991), Kumar (1991), Davies et al. (1993) all agree, the costs to the BLNS have been substantial, involving inter alia the price raising effects of tariffs and quotas; the loss of industrial development and substantially distorted dispersion and polarization towards South Africa; subjecting themselves to protective policies decided without consultation; the loss of fiscal discretion and possible loss in protective revenue if each country were to impose its own tax and tariff regime. Furthermore, gross dissatisfaction exists with historically unconsultative, undemocratic, unilateral decision-making by the South African government as well as the fact that actual payments are made after a two-year lag. The latter are uncompensated for inflation. Estimated static welfare losses for Botswana resulting from some of these costs showed a rising trend during the 1980s to approximately R167 million by 1988 (Leith, 1992: 1024). Much of the source of dissatisfaction within SACU results from the economic


The Political Economy of South Africas Transition

dependence of the smaller countries on South Africa and the untenability and unsustainability of the historical arrangement from all perspectives. It must be emphasized that SACU has not at any stage in its existence claimed to be a development-focused institution rather than a convenient political arrangement. SADC and its predecessor have also failed to achieve any of their overriding objectives. The move to a democratic order in South Africa indeed placed a question mark on its raison d’etre and levels of dependence on South Africa (as well as the rest of the world) had increased as the organization’s members relied increasingly on South African trade and external donor finance (Leistner, 1995:

272). SADC is widely regarded as inefficient, with a lack of clear lines of authority and accountability — not to mention inefficient management and staff. Furthermore a weak overall political commitment by participants in the organization and problems arising from conflictual objectives through members overlapping with other groupings have all contributed to an organization in crisis (Leistner, 1995: 272). Thus South Africa’s membership was believed to be a turning point in the organization’s future role. As far as the PTA/COMESA is concerned, Leistner (1995) identifies a range of additional problems. Governments have failed to live up to their treaty obligations, with little progress having been made on agreed upon tariff cuts. The geographic spread of membership has also militated against intra-regional trade — a situation aggravated by poor infrastructure. In the cases of both SADC and COMESA intra-trade has remained a minimal proportion of total trade (Leistner, 1995: 273). Several attempts to coordinate and harmonize policies within the two organizations so as to cater for overlapping membership have continually failed, thus militating against expanded intra-regional trade. Given the failures of each of these initiatives up to the time of the mid-1990s to meet stated objectives (or more specifically in SACU’s case to arrive at a mutually workable endurable arrangement) an overwhelming element of scepticism had emerged concerning the viability of any form of successful regional integration arrangement in sub-Saharan Africa. It was precisely as a counter to the growing cynicism that prompted the African Development Bank in its definitive study on Economic Integration in Africa (1993) to emphasize the substantial potential benefits of cooperative integration by merging SADC and PTA into a Southern African bloc and the rest, with a rationalization of activities. The position of SACU renegotiation according to the ADB involves restructuring the agreement in such a way as to enhance rather than compromise longer-term wider subregional integration embracing the whole Southern African region. An indication of the commitment to the need for widespread regional integration from South Africa’s perspective is evident in much of the pre-1992 election rhetoric. There are several sources indicating the priority that the African National Congress (ANC) placed on the issue. While Mills (1995) considers many of these pronouncements to be ‘utopian in outlook’ (p. 23) and ‘debatable whether much . . could practically be implementable’ (p. 231), it 1s

Regional Integration Policies in Southern Africa


worthwhile considering the justification of the ANC’s arguments, if only to express concern at the present lack of any tangible, coherent policy initiatives to address these issues. One of the earlier references envisaged inter alia ‘the development of a prosperous and balanced regional economy in Southern Africa based on the principles of equity and mutual benefit’ (ANC, 1992). The Macroeconomic Research Group (MERG) suggested that South Africa should seek membership of both SADC and the PTA/COMESA ‘as a step towards working as a partner from the inside to develop an appropriate institutional framework for a development-orientated regional programme embracing elements of both sectoral co-operation and integration’ (quoted in Mills, 1995: 230). The issue of integration was given further impetus by the ANC’s Department of International Affairs document on foreign policy in which explicit emphasis was given to South Africa’s role in the region and the subcontinent. This document, as Mills states, identifies ‘a special relationship with the peoples of Southern Africa, all of whom have suffered under apartheid’ (p. 230). The essence of this, together with regional destabilization, formed the basis of the pronounced intentions of the government in the area of foreign policy to be based on three broad principles — —

the collective nature of the construction of a new regional order an ant-militaristic and development-oriented approach to regional security

cooperation South Africa’s renunciation of hegemonic regional ambitions’ (Mills, 1995:


The issues that Mills then focuses on are that regional integration should transform the ‘currently and exploitative undesirable features of the existing regional economy’ and that as the most powerful state in Southern Africa the country will be able to exert a decisive and constructive influence on the destiny of the region (1995: 231). The relevant sections of the Reconstruction and Development Programme (RDP) (ANC, 1994) are even more specific with regard to the economic aspects of regional policy. The section begins by reiterating the need for ‘reconstruction and development in Southern Africa as a whole’ (p. 116, par. 4.9.1) in order to prevent large-scale labour migration to the industrialized areas. Explicit recognition 1s given to the need for the democratic government to ‘negotiate with neighbouring countries to forge an equitable and mutually beneficial programme of increasing co-operation, co-ordination and integration, appropriate to the conditions of the region’ (ANC, 1994: 117). The RDP then refers to the fact that despite the relatively small percentage of total trade with non-SACU Southern Africa members, such trade has grown rapidly and comprises mainly manufactured goods (p. 117, par. 4.9.2). Concern is expressed at the unbalanced trade pattern between South Africa and the subcontinent with regional imports from South Africa exceeding exports to


The Political Economy of South Africas Transition

South Africa by five to one — ‘A democratic government must develop policies in CONSULTATION (own emphasis) with our neighbours to ensure more balanced trade’ (p. 117, par. 4.9.3). The document follows this with a plea for consultation with neighbouring states, to encourage and promote a regional industrial strategy at sectoral and subsectoral level (par. 4.9.4) and in a later paragraph (4.9.6) cites one of the most important elements of any regional strategy — namely that a Southern African Social Charter be established throughout the region, insisting on minimum standards with regard to the rights of workers to organize. “This will allow a process of greater integration to become one of levelling up rights and conditions of workers, rather than levelling them down to the lowest prevailing standard’ (ANC, 1994: 118). The RDP document then concludes with the proposal that reforms in SACU be implemented to enhance democracy and equity and that the capacity of the region as a whole be enhanced to effectively interact with international financial and trade institutions (par. 4.9.8). The arguments raised by the ANC, MERG and the RDP are indeed important and are not necessarily utopian or placatory rhetoric. Reversion back to a hegemonic power relationship will evoke regional tensions, while a highly inequitable growth pattern will nullify many of the short-term gains enjoyed by the expanding core. The relative inertia, which has been the hallmark of recent policies regarding integration, displayed by departments such as Finance and Trade and Industry, is being rationalized in terms of the needs for narrower national development objectives. Yet, in reality, the manner in which domestic economic policies are being pursued indicates an anathema to both national and regional policy objectives. The dominant theme pervading much of the current economic policy debate surrounding regional integration and cooperation programmes as far as the South African perspective is concerned relies heavily on tariff liberalization and reduction measures. This is evidenced by the manner in which (without consultation in SACU) the post-apartheid government has committed itself and its SACU partners to a phased-in liberalization programme with the General Agreement on Tariffs and Trade/World Trade Organisation (GATT/WTO). On a regional level, both SADC and the PTA/COMESA have an overriding objective to phased-in tariff reductions before the end of the century. In addition, the trend towards liberalisation applies to current negotiations with the European Union (EUV) regarding the Lomé convention as well as the feasibility of an Indian Ocean Rim (IOR) currently under preliminary investigation — not to mention ‘unilateral liberalization’ under a Cross-border Initiative Programme. Examples over the past few months have indicated the contradictions and lack of consistency in such policies. These have included the failure to reinstate the Preferential Trade Agreement with Zimbabwe regarding textiles, which would have caused much consternation not only among local textile manufacturers but among textile producers in the rest of SACU as well — leading to accusations regarding ‘unfair’ trade. However, under WTO liberalization South Africa has reduced tariffs on a substantial amount of Far Eastern textiles. There is also

Regional Integration Policies in Southern Africa


enormous concern regarding the possibility that the government will conclude a trade agreement with countries outside the region that could well obstruct the process of regional integration in Southern Afmica. As is argued in the T7rade Monitor (September 1995: 15), if South Africa were to enter a free trade agreement with the EU that involved the country lowering its tariffs as part of a reciprocity agreement with the EU, tariffs would eventually be reduced to zero on both sides. At present, all the SACU members other than South Africa are members of the Lome Convention, which means that they get duty-free access into the EU without having to lower their own tariffs. Furthermore, countries such as Zambia (under its commitment to a World Bank Structural Adjustment Programme) have found that liberalization has brought about a flood of South African manufactured imports that has even further decimated whatever remnants of manufacturing industry had survived the turbulent 1980s. The object of regional integration is not to widen the disparity between South Africa and the rest of the economy. A possible solution to this impasse is an asymmetric free trade agreement allowing the dominant partner to liberalize its economy for the neighbouring countries at a faster pace than some of the smaller and poorer neighbours liberalize. But this would require unselfish collaboration and coordination rather than a free-for-all approach. An interesting feature of the various liberalization initiatives relates to the fact that the signing of the GATT in Marrakesh in 1994 effectively means that South Africa will have to reduce tariff barriers substantially, not only for Southern Africa but for the world as a whole. Apart from the fact that other members of SACU were not consulted on the extent and pace of such liberalization commitments, the lack of vision in relation to its future possible role in the region effectively meant that South Africa’s negotiators with GATT missed out on an ideal opportunity to negotiate a more favourable settlement, as a coherent regional body. It could have used its pivotal role in the region to achieve a more staggered phased-in approach. It is to be hoped that South Africa’s behaviour in this respect was not a reflection of an endorsement of its preference for the future role of world trade at the expense of regional trade. A flooding of South African markets as a result of tariff reductions with cheaper imported consumer goods will further devastate local industry and aggravate joblessness. Similarly, South African produced goods flooding small neighbouring markets could devastate industries in those countries. A delicate balance involving regional specialization is required. In this connection, tariff reductions and liberalization within regional development initiatives could help meet multilateral obligations. As such, their raison d’etre must be extended to involve a careful analysis of those industries which are going to be most affected and possibly devastated by liberalization — rather than a blanket, overall embracing set of arrangements. In its approach to regional integration, it is quite apparent that the present South African government is following a ‘market’ approach to the process — along the lines suggested by the World Bank study on ‘Intra-Regional Trade in Sub-Saharan Africa’ (1991). The overall thrust of this approach emphasizes that


The Political Economy of South Africas Transition

regional cooperation should result in a greater integration of Africa into the world’s trading system. As Van Nieuwkerk argues (1995: 248), World Bank analysts are prepared to countenance regional preferences that are temporary and reasonable, provided they are part of general and significant lowering of external protection. “Thus the World Bank agenda on regional integration is for rapid and extensive liberalisation of economic relations within and between African countries, and between them and the rest of the world’ (1995: 248). In summary, it is worthwhile mentioning that South Africa’s Government of National Unity has delayed formulating a long-term policy initiative regarding cooperation with other countries in the region. In spite of joining SADC, none of the above RDP pronouncements have been forthcoming. Given the enormous complexity in that the government’s major short-to-medium term priorities lie with substantial domestic socio-economic upliftment, some cynics would argue that regional integration issues should be shelved until many of the domestic problems are solved. Some of the latter style arguments are well articulated by Leistner (1995: 267-8). These include the fact that the country’s well-being depends primarily on its ability to compete on world markets, rather than the limited markets of Africa; also that large disparities between South Africa and its neighbours will make it difficult to agree on common objectives. And most importantly, that given urgent prioritarization of the RDP, there will not be any provision for financial and other aid to neighbouring countries on a substantial scale. Yet against these more insular, short-term arguments, one must weigh up the benefits of increased cooperation as enunciated in the RDP. Foremost in these pro-cooperation arguments is that the country has to have economically and politically strong neighbours to prevent and reverse the massive flow of migration (Davies et al., 1993) as well as ensure flows of long-term productive investment. Secondly, the region could represent an important market for agriculture and manufactured exports from South Africa. Thirdly, South Africa could improve its bargaining power in international negotiations through playing an active role in forging closer regional economic linkages. The issues are challenging, but there exists a real danger that the preoccupation with trade liberalization as evidenced thus far as the core of regional integration and cooperation programmes could be damaging from both a national and broader regional perspective.





The shaping of many of the recent debates concerning regional integration has been profoundly influenced by Bhagwati (1992), De Melo and Panagariya (1992), WTO (1995) etc. These have tended to focus on the broader issue as to whether increased economic regionalism conflicts or coincides with world trends to liberalization and hence reduces or increases world welfare in general.

Regional Integration Policies in Southern Africa


Debates on these issues are not entirely conclusive, but the overall theme is that if liberalization is encouraged on a wide scale through regional integration programmes, the tendency would be for welfare to increase. The second strand in the more recent debate suggests that much of the analysis of the effects of regional integration programmes be based on less restrictive assumptions than was the case with earlier regional integration theories and that the sources of a range of non-orthodox set of benefits be identified (Robson, 1994: 171). Srinivasan et al. (1993: 53) along similar lines to Robson argue that the classical Vinerian trade creation/trade diversion framework is not well suited to the study and quantification of more recent regional integration. De Melo et al. (1993: 184) emphasize that any review of the present wave of integration agreements focus on areas where significant externalities and public goods exist rather than purely on trade aspects. Adopting this wider perspective and forsaking the rather static analysis of simply measuring the trade effects of regional integration strategies enables one to consider many other issues pertinent to the debate. These would include issues such as labour standards, uneven geographical development, enhanced regional investment, infrastructural improvements and the like, issues that are forsaken 1n traditional neoclassical frameworks. In fact there is considerable merit in the argument that, given massive historical distortions in development patterns, huge inequities 1n living standards and income opportunities within a particular region (as is the case in subSaharan Africa), the issues of market failure and the related necessity of a supranational, coordinating authority are a more appropriate framework for striving for successful regional integrative schemes. This is an approach adopted by Fine and Yeo (1994) in their innovative analysis on the Common Market providing a guarantor and guardian of a Southern African Regional Scheme. Weeks and Subasat (1995: 4) in their analysis of the potential for agricultural trade integration within COMESA also reject the pure trade approach. They emphasize that trade-facilitating factors such as transport, insurance, marketing channels,

etc., tend to be lacking in intra-regional trade mechanisms


extra-regional mechanisms and these tend to encourage a trade duality with intra-regional trade being forsaken. One of the most devastating critiques to the liberalization approach is provided by Vaitsos (1978: 746). He argues that the effects of substantial trade liberalization within regional groupings are most unlikely to lead to cumulative and comprehensive processes of growth and development. In fact this could prove strongly disintegrative as it would accentuate inter-country polarization effects with new investments and activities gravitating towards zones of those countries which already enjoy the larger markets and more adequately developed physical and human infrastructure. Secondly, complacency could arise (if trade liberalization is considered the be-all and end-all of regional integration) with regard to other essential elements of the regional integration process — elements such

as infrastructure








latter, a strong and credible set of institutional arrangements are a sine qua non.


The Political Economy of South Africas Transition

With the solitary focus on free trade, inequalities among countries will be accentuated and the resulting polarization will increase rather than level distributional differences in both the short and long run. As is convincingly argued by Weeks and Subasat (1995: 5), the problem with the free trade approach is that 1t assumes that all participants are similarly endowed with tradefacilitating factors, 1.e. physical and financial infrastructure, financial facilities, etc. Such an assumption is erroneous and without suitable interventions the status quo with respect to inequalities will be perpetuated. Apart from the polarization arguments presented by Vaitsos and Weeks the general case against a too rapid, all-embracing liberalization approach for a region so beset with problems such as Southern Africa is substantial. The widespread closure of industries within and throughout the region will add substantially to unemployment and immiserization. Private investment will certainly not be forthcoming, while state revenues from diminishing duties will shrink. Given the necessity for fiscal discipline, state expenditure particularly on health, education infrastructure etc., will diminish and severely further aggravate economic conditions in these countries. Furthermore, substantial tariff liberalization at both regional and worldwide levels could induce for the countries concerned a wave of imports that could substantially aggravate balance of payments deficits.

CONCLUSION The above broad survey and analysis of regional integration programmes affecting South Africa, in terms of historical overview, current problems and initiatives as

well as a brief introduction to some of the recent literature, has proved quite revealing. Certainly the Government of National Unity has recognized the multitude of problems emanating from both the almost century-old SACU agreement and its relationship with other countries 1n the region. It is hoped that in its renegotiations with the various SACU members, a mutually beneficial arrangement can be reached with regard to the revenue-sharing formula, the twoyear lag in payments and the establishment of a more consultative and democratic decision-making body than has been the practice of either the apartheid government or the democratic government thus far. The protracted deliberations on this issue should not be stalled 1n the hope that they can be subsumed in wider regional agreements. The smaller members of SACU have legitimate grievances, which if not rectified quickly, will further increase polarization and tensions in the immediate region — not to mention the effects on labour migration. The tendency for even the present government to be a non-consultative ‘bully boy’ is totally unacceptable. However, as of late 1996, prolonged discussions on the renegotiation have yet to lead to concrete proposals acceptable to all parties. With regard to SADC and PTA/COMESA, South Africa has opted for the former and other SADC members believe that it will provide muscle to the arrangement and substantially enhance the organizational capacity of the institution.

Regional Integration Policies in Southern Africa


Thus far, very little has been forthcoming on the latter score with the exception of a regional free trade protocol. In fact the government has tended to focus on the liberalization route in its wider integration programmes at various levels. Decisions have tended to be on an ad hoc basis rather than considered and thoroughly investigated. This applies as well with regard to bilateral trade agreements, provincial governments establishing trade accords with a variety of countries and above all, in the dealings with multilateral institutions including the EU. A lack of coherence, sensitivity and clarity are particularly evident in the manner in which negotiations have been handled regarding a free trade agreement with the EU. The South African government’s approach to such negotiations has been seemingly oblivious to the concerns of other SACU members as well as other members of SADC. Problems surrounding a free trade agreement arise from several sources. Firstly, the smaller members of SACU have historically been granted Lome status — enjoying preferential access to European markets. This privilege will fall away in the event of a free trade accord being accepted. Secondly, the signing of such an accord, implying a reduction of a substantial part of present tariffs to zero (on goods imported from the EV), will have severe implications on the overall revenue pool of SACU members. Equally importantly, free trade with the EU would expose Southern African countries to competition from highly subsidized agricultural goods while South Africa’s agricultural exports would still be subject to CAP (Common Agricultural Policy) protective duties. Given that Namibia and Botswana are major livestock and meat suppliers in the South African market, the consequences for these smaller economies could be devastating. A common theme emerging from some of the more recent literature concerning regional integration programmes 1s that an essential precondition for the success of any such arrangement rests on a powerful institutional framework at the helm of such arrangements. This will ensure consistent, credible and sustainable policy-making in a whole range of fields extending beyond trade issues. What this involves is a form of ‘regulated’ regionalism which will avoid some of the contradictions and inconsistencies which have plagued more recent policy initiatives and go some way to ensuring a more equitable balance in the distribution of benefits of such programmes. The form of this supranational institutional body could be modelled on the EU structures. A Southern African Parliament or Secretariat incorporating formal representation from all members in areas of finance, trade and labour by the respective country representatives could be a starting point. The portfolio would,




to areas


as tourism,




health, transport, environment and energy. The suggestion by Fine and Yeo (1994) that the EU act as a facilitator and coordinator in this venture 1s viable as, apart from having the experience of the EU, this could allay fears of various governments of a loss of political and economic sovereignty. In addition, the support of the Europeans would provide a substantial psychological boost to foreign investors. The initiative could be extended to existing SADC members so


The Political Economy of South Africas Transition

as to Keep it manageable and operate through SADC’s present facilities. Private sector organizations throughout the region could be involved in participation. Simply signing trade-liberalizing accords bilaterally, regionally or multlaterally, will not necessarily evoke sustainable development in the region. Quite the contrary, it could obliterate viable industries and add to the chronic unemployment problem on a widespread basis. This latter conclusion is anuthetical to a neo-liberal approach to integration. ‘Regulated’ regionalism does not conform to global liberalization. Yet, as has been shown, there is little alternative to regulation if countries such as South Africa are seriously committed to such programmes. Indeed, without a regulatory, supranational structure, regional integration initiatives can be buried, with the suitable epitaph — may it rest in peace (RIP).








in Southern


Volume I, Draft.


(1992): Ready to Govern: ANC Policy Guidelines for a Democratc South Africa. May. (1994): The Reconstruction and Development Programme. Umanyano Publications, Johannesburg. Bhagwati J (1992): Regionalism versus multilateralism. The World Economy, 18: 535-555. Bruwer A J (1923): Protection in South Africa. Stellenbosch. PhD Thesis. Davies R, Keet D and Nkuhlu M (1993): Reconstrucung Economic Relanons within the Southern African Region: Issues and Options for a Democranc

South Africa.


Working Paper No. 1. De Melo J and Panagariya A (1992): The New Regionalism in Trade Policy. World Bank, Washington DC. De Melo J and Panagariya A (1993): New Dimensions in Regional Integration, Cambridge, Cambridge University Press. De Melo J, Panagariya A and Roderik D (1993): The new regionalism: A country perspective. In J De Melo and A Panagariya (eds.) New Dimensions in Regional Integration. Cambridge, Cambridge University Press. Fine J and Yeo S (1994): Regional integration in Sub-Saharan Africa: Dead end or fresh start? AERC,


Kumar U (1991): Economic dominance and dependence: The case of the Southern African Customs Union. In O Saasa (ed.) Foining the Future: Economic Integration and Cooperation in Africa. Nairobi, ATCS Press/Africa Centre for Technology Studies. Leistner, E (1992): Issues of Economic Integration in Southern Africa. Paper presented at Workshop on Economic Integration in Southern Africa, arranged by Africa Institute of SA, Pretoria, July.

Leistner E (1995): Considering the methods and effects of regional integration. In G Mills, A Begg and A Van Nieuwkerk (eds.) South Africa in the Global Economy. SAITA, Johannesburg, pp. 265-79. Leith JC (1992): The static welfare economics of a small developing country’s membership in a customs union: Botswana in the Southern African Customs Union. World Development, 20(7): 1021-8.

Regional Integration Policies in Southern Africa


Lundahl M and Petersson L (1991): The Dependent Economy, Lesotho and the Southern African Customs Union. Westview Press, Boulder. Maasdorp G and Whiteside A (1993): Rethinking Economic Cooperation in Southern Africa: Trade and Investment. Occasional Paper. Johannesburg, Konrad Adenauer Foundation. Margo Commission (1987): Republic of South Africa: Report of the Commission of Inquiry into the Tax Structure of the Republic of South Africa. Pretoria, Government Printer, WPC-88. Mayer M and Zarenda H (1994): The Southern African Customs Unwon: A review of costs and benefits. Policy Working Paper No. 19, Development Bank of Southern Africa, Halfway House. McCarthy CL (1985): The Southern African Customs Union. June. Mimeo.

Mills G (1995): The history of regional integration attempts: The way forward? In G Mills, A Begg and A Van Nieuwkerk (eds.) South Africa in the Global Economy. SAITA, Johannesburg, pp. 214-44. Robson P (1994): The new regionalism and developing countries. In S Bulmer and A Scott (eds.) Economic and Political Integration in Europe. Blackwell, Oxford. South African Reserve Bank (1995): Quarterly Bulletin, September. Srinivasan TN, Whalley J and Wooton I (1993): Measuring the effects of regionalism on trade and welfare. In K Anderson and R Blackhurst (eds.) Regional Integration and the Global Trading System. Harvester Press, Geneva.

Trade Monitor (1995): Rethinking economic integration in Southern Africa. By Rashad Cassim. Trade Policy Monitoring Project, University of Cape Town, September. UNDP








membership of the Southern African Customs Union, prepared by E Barandjaran and Y Tsikata. Vaitsos











developing countries: a survey. World Development, 6: 719-69. Van Nieuwkerk A (1995): Big or small, open or closed? A survey of views on regional integration. In G Mills, A Begg and A Van Nieuwkerk (eds.) South Africa in the Global Economy. SAIIA, Johannesburg, pp. 245-64. Weeks, J and Subasat T (1995): Agricultural Trade Integration for Eastern and Southern Africa. Unpublished Research Report to ODA, London. World Bank (1991): Intra-Regional Trade in Sub-Saharan Africa. Economics and Finance

Division Technical Department, Africa Region, Report No. 7685-AFR. World Bank (1993): World Development Report 1993. Oxford University Press, London and New York. World







and the


Trading System.

Trade Policy Trevor Bell

Introduction 7! Trade policy reform: 1972-92 Trade policy reform: 1992-95

7| 74

Understanding the policy reforms


INTRODUCTION The main aim of this chapter is to describe trade policy reform in the period from 1992, early in the process of political transition, to the end of 1995, and so far as possible to understand the motivation for these reforms. As essential background for describing and attempting to explain developments in the period since the beginning of the transition, the next section describes trade policy reforms in the period 1972-92. Developments in the period from 1992, when the National Economic Forum was established, and the ANC


thus became more

directly involved in the process of economic policy-making, to the end of 1995, are then described. The final part of the chapter contains reflections on the process of trade policy reform in this most recent period, with a view to explaining it.




By the beginning of the 1990s, South Africa had made substantial progress towards trade liberalization. Trade liberalization includes any act that would make a trade regime more neutral, in the sense that it reduces the bias towards production for the domestic market and against exports. The four principal attributes of trade liberalization are relaxation of quantitative restrictions (QRs), reduction of tariffs, devaluation and direct export promotion measures. Of these, by 1990 only tariff reductions had been neglected. The first signs of an attempt to switch from South Africa’s traditional strategy of import-substituting industrialization to export-oriented industrialization occur in 1972. The desire for such a change is evident in the report of the Commission of Inquiry into the Export Trade of the Republic of South Africa (Reynders Commission, 1972). The emphasis in the report was on the need for diversification into non-gold exports in general, rather than manufactured exports specifically. By contrast with thinking on trade policy today, there was no suggestion that import liberalization was a necessary condition for accelerated growth of non-gold exports. Rather, as in numerous other developing countries at that time, the emphasis was on export promotion measures.


The Political Economy of South Africas Transition

In 1972, a new export incentive system was introduced, involving a tax allowance for export marketing expenses, but this was very modest compared to later direct export promotion measures. Also in 1972, under pressure from GATT and the IMF, the government reaffirmed its intention, originally stated in 1969, of abandoning the use of QRs, and these were gradually relaxed in the period 1972-76. This was accompanied by some increases in tariffs, but the net result was a reduction 1n levels of protection in this period, since the raised tariffs were lower than the tariffs implicit in the QRs that had been removed. Trade liberalization in 1972—76 was hindered by the substantial real appreciation of the rand during the gold-led boom of 1973-74, but facilitated by the subsequent sharp devaluation in June—September 1975. During the rest of the decade, the real exchange rate appreciated steadily, and this effectively brought the 1972-76 trade liberalization episode to an end. The increase in the gold price in 1979-80, which caused a major real appreciation of the rand, probably represented a substantial reversal of the trade liberalization achieved earlier in the decade. A new, reinforced system of export incentives was introduced in September 1980. This, however, coincided with the appreciation of the rand and the onset of world recession, and was accompanied by declining rather than increasing exports. The dismantling of QRs was resumed in earnest in 1983. The proportion of the value of imports subject to QRs fell from 77 per cent in 1983 to 23 per cent in 1985. In 1985, too, the authorities changed from publishing a ‘positive list’,

which specified the items that could be imported without approval, to a ‘negative list’, which specified the items that could not be imported without approval. Such a change is generally regarded as a major step in the process of trade liberalization. Altogether there was a major reduction in levels of protection of manufactured goods in 1983-85. A further significant aspect of South Africa’s trade liberalization in 1983-85 was the real depreciation of the rand. This began in late 1983 and continued precipitously from mid-1984 to the end of 1985. It was basically due to the substantial decline in exports in 1981-84, particularly to the collapse of the gold price, which culminated in the debt crisis of August 1985. The combination of import liberalization and devaluation in 1983-85 represented a substantial degree of trade liberalization. The timing of the import liberalization of 1983-85 is perhaps, with the benefit of hindsight, anomalous. It came at a time when exports were falling, and shortly before the debt crisis, and may be seen as one aspect of the ‘Dutch Disease’ which afflicted the South African economy at the time. A temporary natural resource boom, due to the higher gold price, was mistaken for a permanent, favourable change in South Africa’s economic fortunes. Like the abolition of the financial rand in February 1983, the removal of QRs was undertaken in a mood of great optimism. The objective circumstances, as distinct from the (perhaps understandable) perceptions of the time, called for a good deal of caution so far as import liberalization was concerned.

Trade Policy


Between 1985 and the early 1990s, there was further relaxation of QRs. The proportion of tariff items subject to QRs fell from 28 per cent in 1985 (IDC, 1990: 36) to less than 15 per cent by September 1992 (GATT, 1993: 74).? By contrast with South Africa, in a number of other developing countries, such as Brazil, QRs were tightened in the wake of the rescheduling of foreign debt. The import liberalizing effect of the removal of QRs in 1983-85 and, thereafter, was partially offset by the introduction of import surcharges. In September 1985, all imported goods not bound by GATT became subject to a 10 per cent surcharge.’ As from 15 August 1988, certain imported goods bound under GATT were also made subject to import surcharges at differentiated rates for different categories of products. As Table 1 shows, these import surcharges were reduced significantly in 1990 and in 1991. So far as export incentives are concerned, there was further progress towards trade liberalization as a result of the implementation of ‘structural adjustment programmes’ for certain industries, notably for motor vehicles and textiles and clothing, which were introduced in March and April 1989 respectively. In that they involved a system of duty-free imports for exports, these programmes also represented shifts towards greater export orientation in these industries. Furthermore, in April 1990, the export incentives of 1980 were replaced by a new and more powerful system of export subsidies, the General Export Incentive Scheme (GEIS). In the period 1990/91-— 1993/94, payments in terms of GEIS as a proportion of the value of exports eligible for subsidy under the scheme averaged about 6.5 per cent.* It might be noted that this rate of export subsidization was low compared to other developing countries in earlier decades (Helleiner, 1994: 16). Taking into account only the further removal of QRs, the structural adjustment




it is clear that, following

the liberalization


1983-85, there was a further significant tendency towards trade liberalization in 1985-92. However, in this period there was probably a partial erosion of import

Table I Import surcharges per product category Rates Product category






Luxury goods





Capital goods




White goods




Abolished 23/6/94 I5%

Abolished {10/95 -

Intermediate goods




Abolished 23/6/94

Abolished {10/95 —

Source: IDC document: ‘The Impact of Import Surcharges on the South African Economy’ (1995).


The Political Economy of South Africas Transition

liberalization protection,

as a result

by means

of an


of ad valorem


in the




of applications after



for the

import surcharges. Nevertheless, the degree of import liberalization in 1992 was probably significantly greater than at the start of the major liberalization episode in 1983. As noted earlier, only tariff reductions had been neglected.




Trade liberalization continued unabated in the period 1992-95. By contrast with the period up to 1992, however, it has since then mainly taken the form of import liberalization through tariff reductions, and, in the case of agricultural commodities, the substitution of tariffs for quantitative import restrictions. In accordance with its participation in the Uruguay Round, South Africa ts required to reduce its tariffs on manufactured goods on average by 33 per cent over the period 1995-99, relative to the levels of tariff protection prevailing in the base period applicable to manufactured goods, 1989. Apart from the reduction in levels of tariff protection, in terms of South Africa’s offer to GATT during the Uruguay Round, there is to be a substanual rationalization of the tariff structure applicable to manufactured goods. The dispersion of tariffs is to be considerably reduced over the five years 1995-99. Tariff lines which have had 80 different tariff levels, between zero and 100 per cent, are being simplified into six standard percentage rates (0, 5, 10, 15, 20 and 30). Furthermore, over 10 000 tariff lines are to be rationalized into 5000 to 6000 lines.”

Agricultural commodities in South Africa have hitherto been protected mainly through a system of QRs. Like all participants in the Uruguay Round, however, South Africa has been obliged to undertake a process of ‘tariffication’ of its protection of agricultural products. This, essentially, has involved estimating the tariff equivalents of the protection provided by QRs 1n the base period applicable to agricultural trade, 1986-88. These estimates established a set of base tariff rates for all agricultural commodities. The maximum or ceiling rates applied by January of the year 2000 are required on average to be 36 per cent lower than these base rates (Bell, 1996). Also, like other participants in the Uruguay Round, South Africa must give market access for foreign produced agricultural commodities equal to at least 3 per cent of domestic consumption; reduce export subsidies on agricultural products by 36 per cent, and the quantity of such subsidized exports by 21 per cent; and cut levels of domestic support to agriculture by 20 per cent (Matona, 1995; see also Bell, 1996). So far as manufactured goods are concerned, South Africa negotiated significant exceptions in the cases of the textiles/clothing and motor vehicle industries. In the textiles/clothing industry a 12-year, rather than the normal fiveyear, adjustment period, and a maximum tariff level of 45 per cent instead of 30 per cent, were allowed. In the case of the motor vehicle industry, an eight-year adjustment period, and a maximum tariff level of 50 per cent were negotiated.

Trade Policy


What will be the full extent of the decline in actual levels of tariff protection on manufactured goods once the process is completed in 1999, taking into account both the reductions in protection from 1989 to the eve of the commencement of the Uruguay Round implementation period, and the reductions during the 1995—99 implementation period? Belli et al. (1993: 13) found that the average nominal rate of protection on manufactured goods was about 30 per cent. According to information provided by the Industrial Development Corporation (IDC), however, in the latter half of 1994, shortly before the commencement of the Uruguay Round implementation period (1 January 1995), the average existing rate of duty on manufactured goods was 15 per cent. The difference between these figures seems to suggest a significant amount of import liberalization between 1989 and the latter half of 1994. To some extent this import liberalization is more apparent than real. Both the Belli et al. (1993) figure of 30 per cent and the IDC’s estimate of 15 per cent

include estimates of the ad valorem equivalents of formula duties. However, it appears that in arriving at the figure of 30 per cent, the highest formula duties, that is, the formula duties applicable to goods derived from the cheapest foreign source, were used. By contrast, the figure of 15 per cent was based on estimates of the ad valorem equivalent of the average level of the formula duties applicable to each product subject to such duties. This difference in the treatment of formula duties evidently accounts for about 5 per cent of the difference between the two estimates. Partly, too, the difference between the two estimates 1s due to the inclusion of import surcharges in the figure of 30 per cent, but their exclusion in arriving at the figure of 15 per cent. This evidently accounts for about 7 per cent of the difference between the two estimates. This, together with the contrasting treatments of formula duties, apparently accounts for most of the difference between the estimates. There nevertheless was some degree of import liberalization between 1989 and the latter half of 1994, partly as a result of reduced import surcharges. As noted earlier, import surcharges were reduced significantly in 1990 and 1991, and in June 1994, shortly after the election of the new government, the 5 per cent surcharges on imports of capital and intermediate goods were abolished altogether (Table 1). It is not clear how significant a contribution to import liberalization was made by these changes in import surcharges between 1989 and the beginning of the Uruguay Round implementation period, but they would probably have reduced the average level of protection inclusive of import surcharges by several percentage points.° The major part of import liberalization through tariff reductions, however, takes place from the beginning of the Uruguay Round implementation period. Table 2 shows, for manufactured consumption goods, intermediate goods, capital goods and manufactured goods as a whole, the average rate of duty on manufactured goods which existed as at the end of 1994, the average tariffs in 1995, the average tariffs scheduled for each succeeding year to the year 2002, and the average GATT bound rates. In the cases of capital goods, intermediate goods and manufactured goods in


The Political Economy of South Africas Transition

Table 2 Actual and scheduled average tariff rates by broad economic category 1994—2002 Average rate (%) of import duty (import 1994 weighted) Final schedule Broad economic classification

Consumption goods Intermediate goods Capital Goods Unclassified goods Total industry






34 8 || l | [5

29 5 8 |3 |2

27 5 7 |2 | |

£428 5 7 lO lO

£24 4 6 lO 10






GAT T binding

23 4 6 8 9

2| 4 6 8 9

20 4 6 8 8

18 4 6 8 8

2/7 lO [5 lO 16

Source: Data supplied by the Industrial Development Corporation.

the aggregate, the average existing rates of duty in 1994, on the eve of the beginning of the Uruguay Round implementation period, were already lower than the average bound rates. It seems therefore that, except for consumption goods, further tariff reductions have largely been within the discretion of the South African authorities. It is evident from comparison of the average rates of duty in 1994 with the average tariffs prevailing in 1995 that the commencement of the Uruguay Round implementation period saw a 20 per cent reduction in the overall average. The overall rate for manufactured goods fell to 12 per cent, four per cent less than the bound rate. Furthermore, though not reflected in Table 2, in October


the import surcharges on luxury goods and white goods were abolished. As Table 2 shows, over the Uruguay Round implementation period as a whole, 1995-99, the scheduled declines in average tariff rates are as follows: consumption goods 34 per cent to 23 per cent; intermediate goods 8 per cent to 4 per cent, capital goods 11 per cent to 6 per cent; and manufactured goods in the aggregate, 15 per cent to 9 per cent. In each case the actual average rate due to apply in 1999 is significantly lower than the bound rate. In the case of consumption goods, partly due to the longer phasing down period permitted in the case of some items, further significant declines are due to take place after 1999, to an average of 18 per cent by the year 2002, compared to an average bound rate for consumption goods of 27 per cent. It appears thus that it is proposed to go well beyond what 1s required by the commitments entered into by South Africa in the Uruguay Round. Significant unilateral import liberalization is also evident in the treatment of particular key industries. Whereas, in the case of the textiles/clothing industry, as noted above, GATT agreed to a 12-year adjustment period and a maximum tariff level of 45 per cent, the South African authorities have in fact decided on an eight-year phase-down period and a 40 per cent terminal tariff. Import duties on built up motor vehicles and on automotive components are to fall to 40 per cent and 30 per cent respectively by 2002.

Trade Policy


In the case of agricultural commodities,

too, South Africa’s actual levels of

tariff protection will apparently be determined primarily by the decisions of the South African authorities rather than by commitments entered into in the Uruguay Round. For various reasons, GATT ceilings do not impose an effective constraint on South Affica’s actual levels of agricultural protection. South Africa’s applied tariffs will in general be much lower than the GATT ceilings. One reason for this 1s related to the great variability of agricultural commodity prices. World prices in the 1986-88 Uruguay Round base period were exceptionally low, and, in estimating the tariff equivalents of QRs, high estimates of domestic prices were used. Thus the estimated levels of protection in 1986-88 were, for both these reasons, exceptionally high. To have set applied tariff levels as high as the GATT ceilings thus would have involved levels of protection considerably in excess of South Africa’s actual levels of protection in normal years. In terms of the country’s own interests this could not have been contemplated. However, there are other considerations, related to the economic philosophy of the South African authorities, which will tend to drive the already relatively low South African tariffs on agricultural commodities (Goldin and van der Mensbrugghe, 1995: 11) lower still. We consider these in the next section. In




is a tendency





liberalization. The tendency for this to reduce anti-export bias, however, will in some measure be offset by a reduction in direct export promotion measures. The incentives provided by GEIS have already been substantially reduced and are due to be phased out altogether by the end of 1997. GEIS 1s evidently in conflict with the Uruguay Round, but is now in any case regarded by the South African authorities as unsustainable for fiscal and other reasons. It 1s proposed to use the resources saved as a result of the phasing out of GEIS for the implementation of supply-side industrial policy measures (Government of South Africa, 1995: iv).




The report of the Industrial Strategy Project (Joffe ez al., 1995: 52—3) states that GATT ‘has effectively imposed a global trade regime as the parameter to which national trade and industrial policies have to conform’; and that one of the elements of their ‘new trade policy’ 1s: ‘A tariff policy, the terms of which are effectively set by our adherence to the GATT”. However, as indicated above, South Africa’s trade policy reforms seem to entail a good deal of unilateral import liberalization, going beyond the commitments entered into in the unilateral trade negotiations. South African trade policy thus is apparently being determined by the economic philosophy of the country’s own policy-makers, rather than by such negotiated commitments. How is this to be understood? Strong support for the view that there should be substantial import liberalization, through a programme of comprehensive tariff reductions, and that this is essential for the successful restructuring of the South African economy, goes


The Political Economy of South Africas Transition

back to the late 1980s and thus predates by several years the change in government in April 1994. The IDC (1990) gave considerable additional support for this view, as did a subsequent World Bank study of South African trade policy (Levy, 1991). Unconvinced, on strictly economic grounds, by this advocacy of comprehensive tariff reductions, Bell (1993a: 120-1) sought to explain it — inter aha — in terms of a political economy type argument. It was noted that Michaely et al. (1991: 49), in their study of trade liberalization episodes in developing countries, found that a change in political regime may result in the implementation of a trade liberalization programme. It was suggested, however, that in the case of South Africa it was perhaps rather the anticipation of a change in the political regime that was giving rise to strong support for further import liberalization. ‘The IDC (1990: 25) had indeed seemed to imply such a political reason when it said: ‘A reduction

of tariffs and export subsidies . .. reduces the government’s ability to interfere directly in industrial development’. There was much uncertainty about the future of South African trade policy, but it was assumed that an ANC-COSATU led government would be more protectionist than the government of the day. There was evidence, too, that import liberalization was regarded by business as a means of curbing the power of trade unions, in an environment of hostile labour relations, and as a useful form of imsurance against disruption of production and supplies to customers. This motivation for import liberalization, it was assumed, would not apply under the new government. This speculation, that the new government would be more protectionist than the old, has turned out to be wide of the mark. As we have seen, rather than

being passive implementers of a tariff policy imposed by GATT, the new South African authorities are apparently pursuing import liberalization through tariff reductions with some zeal. Has there in fact been a change over the past few years in ANC and COSATU thinking on trade policy? In 1992-93 there were some reasons, though perhaps not particularly strong ones, for thinking that the ANC-COSATU alliance would take a more cautious approach to tariff cuts than that proposed by the IDC (1990). The ANC, in a paper presented by its Department of Economic Planning at a meeting in Harare in September 1990, is critical of South Africa’s traditional strategy of import-substituting industmialization. It associates this strategy (p. 3) with an undue orientation towards ‘producing consumer goods for the wealthy minority’, a lack of international competitiveness, and an inadequate contribution to foreign exchange earnings. It proposes (p. 8), thus, that attention ‘should be paid to promoting industrial exports’. However, unlike the IDC and more recent policy recommendations (e.g. Joffe et al., 1995), it also perceives a ‘need to overcome the extreme dependence of the [manufacturing] sector on imported inputs’; and suggests that the “potential to reduce import-intensity. . . needs to be investigated’. (This last point is also made in an earlier ANC paper presented in Harare in April-May 1990.) The Draft Economic Manifesto for the ANC’s first National Conference in July 1991 is non-commital on trade policy, making only passing reference (p. 9)

Trade Policy


to the need to ‘ensure that South Africa emerges as a more significant manufacturing exporter’. The ANC policy guidelines, adopted at its National Conference in May 1992, however, state (p. 28) °. . . we will take a differentiated approach towards trade barriers. In particular, tariffs may, in conjunction with performance requirements, enable domestic and regional producers to develop new branches of production. Trade barriers will be adjusted, within an agreed framework, to prevent the destruction of domestic and regional producers, the loss of jobs, and the exploitation of South African consumers.’ Amongst the ANC-COSATU documents consulted for the present chapter, the first signs of a clearly ant-protectionist position are contained in a paper delivered by COSATU at a conference with its Italian and Brazilian counterparts held in Johannesburg in September 1993. This paper actively supports significant further import liberalization. It notes (p. 9) that the pressures to liberalize are related to the ‘current balance of power in the world economy’. However,













significantly lower levels of protection will be economically beneficial for South Africa, and it is on these grounds that it concludes (p. 9) that it 1s not ‘in fact socio-economically viable to retain high levels of protection’. The recently published ISP report also recommends further import liberalization through tariff reductions. At the time the work for this project was undertaken, most of the members of the research team were attached to universities, and all four authors of the final report are academics. However, the

ISP was closely associated with COSATU and the ANC during the course of the research, and several members of the research team are now in senior policymaking positions. The report, thus, can reasonably be regarded as reflecting a recent position of the ANC-COSATVU alliance. As noted above, the ISP report contends that the terms of South Affica’s tariff policy are effectively set by GATT. However, various statements in this report suggest strongly that their advocacy of comprehensive tariff cuts, like that of the COSATU paper referred to above, in fact rests on a belief in the positive economic virtues of import liberalization (see Bell, 1995: 17). Government, as such, whether pre- or post-April 1994, has not issued a report setting out the motivation for its trade policy reforms. A report submitted by the Department of Trade and Industry to the National Labour and Development Council (NEDLAC) in November 1995, dealing mainly with the government’s proposed supply-side industrial policy measures, however, includes a few remarks on trade policy. It says, under the heading ‘Vision of Future Policy’ (DTI, 1995: 6): ‘South Africa’s transition to democracy and the ending of its isolation, has at last made it possible for the country to adapt its trade and industrial policies so as to realise a better industrial and economic growth and development performance’, and refers to ‘a significant alteration in the philosophy underlying [trade and] industrial policy in South Africa’. Have the transition to democracy, and the ending of South Africa’s isolation, been conducive to trade liberalization, and made for a significant change in the philosophy underlying South African trade and industrial policies? If so, in what


The Political Economy of South Africas Transition

way? So far as trade policy is concerned, as noted above, by the late 1980s and early 1990s there was already strong domestic support for substantial further import liberalization through tariff cuts, represented most notably by the IDC study. Like any counterfactual question, the question of the course that South African trade policy reform would have taken in the absence of political change is very difficult to answer; indeed, is perhaps imponderable. Without the political transition, and the consequent participation of the ANC-COSATU alliance in the formulation of trade policy from quite early in the 1990s, however, the process of import liberalization may well have been more difficult. Though there are strong indications now of their having second thoughts about the matter, import liberalization, as noted above, has had the support of COSATV, which might not have been forthcoming but for the transition to democracy. Indeed, there might otherwise have been more determined opposition to significantly reduced tariff protection (contrary to the speculations of Bell, 1993a). However, the question remains: What has made the ANC-COSATU alliance pursue import liberalization apparently so vigorously? At first glance, there does not seem to be any fundamental difference between the positions taken on trade policy by the IDC in 1990, on the one hand, and by COSATU (1993), Joffe et al. (1995) and the DTI (1995), on the other hand. All take the view that import liberalization through tariff cuts will improve the growth performance of manufacturing and of the economy as a whole. As argued elsewhere (Bell, 1993a and 1995: 17), this view is very questionable, but in so far

as all these documents see import liberalization as economically desirable, the transition to democracy and the ending of South Africa’s isolation would in this respect seem to have made no difference to the philosophy underlying South

African trade policy.’ In what other respects might the political transition nevertheless have made for a change in underlying philosophy, and hence for a greater degree of import liberalization than would otherwise have taken place? Five possibilities are suggested here. The first is that the transition to democracy has resulted in a tendency to give increasing emphasis to what are perceived to be the interests of working class and low-income consumers, and the unemployed. One of the main arguments against protection in the September 1993 COSATU paper is that protection increases the relative price of consumer goods, which creates the potential for a divided working class, because employment can be maintained only at the expense of high prices and consequently lower real wages. And Kaplinsky (1994: 535), elaborating on the ISP position in relation particularly to low wage industries, states: ‘. . . given South Africa’s relative wage levels, it is not possible to compete in a range of low productivity, unskilled labour-intensive industries without high levels of protection which undermine the consumption power of working-class incomes, as well as those of the unemployed . .’. The connection between the transition to democracy and the tendency to give greater weight to the perceived interests of low-income consumers, however, 1s most explicit in the case of agricultural trade. This tendency has been evident for

Trade Policy


some years now, but may have been considerably reinforced by the process of political change. A Land and Agricultural Policy Centre study (LAPC, 1993: 24) states: ‘Under a democratic government it 1s likely that consumer interests, particularly those of low income consumers, will be much more strongly represented than in the past, and policy will need to place much more emphasis on ensuring the cheap availability of basic foods’; and envisages that ‘downward pressure on consumer prices should be sought from. . . new market entry, and from reductions in the level of protection enjoyed by basic food producers’ (LAPC, 1993: v and vi). Concern with the interests of consumers is of course not absent from earlier arguments for import liberalization. Indeed, such interests are fundamental to the conventional case for free trade. The explicit prominence given to consumer interests,



to the


of low-income



would seem to be a new feature of the discussion of South African trade policy. It could be seen as one way in which the ‘transition to democracy’ has changed the philosophy underlying trade policy, and has ‘at last made it possible for the country to adapt’ its trade policies. Whether this is a good argument for import liberalization is another matter. It would seem to involve inter alia the assumption that protection is particularly detrimental,








working class and low-income consumers. There 1s no apparent justification for this assumption. When the likely effect on manufacturing output and employment are taken into account, it seems still more questionable that import liberalization will be especially beneficial to the working class and low income earners. The ISP report (Joffe et al., 1995: 50) states that import liberalization ‘will inevitably result in a substantial increase in manufactured imports’ and ‘will certainly lead to an increase in imports across a wide front’; ‘many local firms may respond .. . by ceasing production altogether’; and that unless ‘accompanied by an immediate improvement in export performance’, this will result in ‘tighter constraints through the balance of payments and inevitable job loss’. The potential for job losses seems particularly significant in the case of the low-wage, unskilled labour-intensive industries to which Kaplinsky refers, and which, as noted earlier 1n this chapter, are likely to be most severely affected by the tariff cuts

(Bell and




are industries, too, in which

some of the poorer regions of South Africa, including ‘industrial development points’ in and near the former ‘homelands’, are relatively specialized. So far as output and employment effects are concerned, the incidence of the effects of the liberalization of manufactured imports, thus, seems likely to be highly regressive. The liberalization of South Africa’s agricultural imports will tend to affect adversely the employment and incomes of farmworkers, who comprise a large and relatively poorly paid part of the country’s labour force.® All in all, while the possibly lower prices resulting from import liberalization will tend to benefit those fortunate enough to keep their jobs, the net effect on the working class is likely to be negative.


The Political Economy of South Africas Transition

A second possible explanation for the shift to a greater degree of import liberalization relates to its perceived effects on business. Coupled with the tendency to see protection as particularly detrimental to the interests of working class and low income consumers 1s the perception that it is beneficial only to business. Hence, the problem of achieving tariff reductions, or preventing increases in protection, is seen by the ISP report simply as requiring the heading off of ‘the still powerful industrial lobbies’, and vested business interests in general (Joffe et al., 1995: 55). This perception is of course by no means either new in South Africa,’ or indeed a peculiarly South African view of protection. As in the ISP report, however, this is now combined with an increased emphasis on the efficiency of South African manufacturing industry, and on the need to curb monopoly power and control the conglomerates. This and the tone of official statements on protection gives the impression that import liberalization may now be seen as one way, amongst various others, of disciplining business, and consequently as one way in which the political transition has ‘at last made it possible for the country to adapt’ its trade policies. Thirdly, there is also a widespread tendency to associate South African protectionism in the past with peculiarly South African political factors, including sanctions against apartheid. This has never been properly argued. The prevalence of protectionism and import-substituting industrialization in many other developing countries worldwide, alone, renders this view questionable. Bell (1993b: 12—14; and 1995: 19) has argued in particular that the evidence does not support the contention that government in its efforts to withstand the threat of sanctions had pursued a ‘semi-autarkic’ strategy (Becker and Pollard, 1990). Such comparative evidence as there is also does not suggest anything extraordinary about the process of import substitution in South Africa.'° This widespread belief about South African protectionism and import substitution in the past may nevertheless be exercising an influence on thinking about South African trade policy today. If protectionism was due to South Africa’s old racial politics and the isolation of the economy in the era of economic sanctions, and if protection has been a major impediment to improved manufacturing performance in the past, then, with the ending of apartheid, and the lifting of sanctions, it may seem to follow that at last it 1s possible to liberalize imports and so realize a better industrial and economic growth performance. Hence, the new political order will be distinguished from the old by a shift from protectionist to neo-liberal trade policies. A fourth factor which possibly has made for a change in the attitude of the ANC-COSATTU alliance towards protectionism is the increased emphasis on supply-side industrial policy measures. While the trade policies are essentially neo-liberal, the current view, as represented by the ISP (1995) and the DTT (1995), differs from the neo-liberal one in that it envisages a comprehensive set of supply-side, industrial policy measures, and hence a shift to what Nattrass (1994: 521) describes as ‘more developmental state-type interventions’. Indeed, as noted

Trade Policy


elsewhere (Bell, 1995: 20), import liberalization appears to be a significant part of the ISP’s justification for its supply-side industrial policy proposals. They say (ISP,


52), for instance,




of national


policy options does focus attention on supply-side interventions: where the hands of domestic policymakers are tied by liberalized commodity and capital markets, supply-side measures take on an added significance in the domestic policy armoury’. In short, these supply side measures are required largely to counteract the likely ill-effects of their proposed trade policy reforms, as described in the remarks from the ISP report quoted above. It seems, indeed, that all that stands

between us and these ill-effects of import liberalization are the ‘productivity enhancing measures’ represented by ‘[their] industrial policy’, an important objective of which, we are told, ‘is to ensure that local manufacturers can compete more effectively with imports for the domestic market’. It is uncertain how effective these supply-side measures will be in enabling South African manufacturers to cope with intensified competition from imports, especially in the short- to medium-term. It may nevertheless be the case that it is the ISP’s confidence in the efficacy of their proposed supply-side measures which makes them take an apparently sanguine view of the likely effects of trade policy reforms, and hence makes them and the present South African authorities more amenable to import liberalization. In so far as several of these supply-side measures would probably not have been contemplated in the absence of political change, can their political feasibility now perhaps be seen as another way in which the transition to democracy has ‘at last made it possible for the country to adapt’ its trade policies? A fifth factor is the emphasis on the role of labour in policy-making institutions



as in the



successor, the Trade and Industry Chamber of NEDLAC.



in its

In response to the

criticisms of Nattrass (1994),'! Kaplinsky (1994: 534) acknowledges that ‘one of the Key distinctive features of both ISP and [the Macroeconomic Research Group] 1s that they recognise the necessity of generating processes in which labour plays an effective role’. He adds (pp. 536--7) that ‘the ISP places central emphasis on the institutional framework [which] begins with the NEF and the existing industrial relations system’, and that one of the three things which the ISP attempts 1s the identification of ‘an institutional framework based on both the principles of process and embeddedness . .’. This ‘central emphasis on the institutional











emphasis on ‘raising productivity’ which is said in the ISP report to be the ‘centre-piece’ of their industrial strategy. This seems to be in accordance with COSATU’s search for a new role in the post-USSR world of the 1990s. In COSATU’s 1993 paper referred to above, it 1s decided (in the course of discussion in which there are several references to the experience of the Soviet Union) that protectionism is no longer viable, and that (p. 17) in the ‘current structural situation it is almost inevitable that wage demands will be increasingly unsuccessful, retrenchments will rise, and capital will restructure through continuous cost-cutting exercises. . .” What then are the remaining options for labour? COSATU states (p. 18): ‘An alternate choice 1s


The Political Economy of South Africas Transition

. . to be a proactive union movement and attempt to restructure the economy’. “The danger’, they say (p. 25), ‘is. . . that the union movement will contribute to the economic process of seizing state power but will not be well placed to contribute to the economic process of transforming the economy where the state will be the sole instrument of transformation’. Much importance, therefore, is attached (p. 28) to participating in ‘negotiating and interactive forums’, with a view inter alia (p. 29) to blocking ‘unilateral restructuring by the state’, and countering strong vested interests. Does this signify a shift in emphasis from the substance of economic policies to the objective of increased involvement in policy-making processes and institutions, virtually as an end in itself? The role which labour has in fact achieved in NEDLAC would seem to have considerably increased its bargaining power in the policy-making process, vis-a-vis both government and business.!? Has this in some way, however, involved a trade-off between a greater role for labour in consultative processes for acquiesence in the government’s programme of trade policy reform?” Some or all of the above factors and forces may explain the process of trade policy reform since the early 1990s. An important fact, however, is that South Africa has been by no means alone amongst developing countries since the late 1980s in pursuing import liberalization. There has been an almost universal acceptance by developing country governments of the ‘Washington consensus’. As Krugman (1995: 29) interprets it, this may roughly be summarized as the belief that free markets and sound money are the key to economic development. Though the details of the political economy and the rhetoric may differ considerably from other developing countries, South Africa may be seen simply as providing yet another illustration of a worldwide phenomenon, considered by Rodrik (1994) and more recently by Krugman (1995). Focusing particularly on trade policy, Krugman (1995: 33-5) points out, what was already well known, that the ‘measurable costs of protectionist policies . . . are not all that large’, and that ‘the widespread belief that moving to free trade and free markets will produce a dramatic acceleration in a developing country’s growth represents a leap of faith, rather than a conclusion based on hard evidence... a hope rather than a well founded expectation’ (p. 35). Also, he argues (p. 33) that ‘it is difficult to pin down large gains from a reduction in the inflation rate from say, 20 per cent to 2 per cent’. The likely effects of the Washington consensus reforms thus (pp. 34—5) did ‘not seem to justify wild enthusiasm’. Yet, as Krugman notes (p. 35), ‘governments eagerly adopted Washington consensus reform packages’. Why? Krugman sees it as a ‘classic speculative bubble. A modest recovery in economic prospects from the dismal 1980s led to large capital gains for those investors who had been willing to put money into Third World stock markets. Their success led other investors to jump in, driving prices up still further’. ‘At the same time’, Krugman suggests (p. 36), ‘. . . a different kind of selfreinforcing process, sociological rather than economic, was taking place in the world of affairs — the endless round of meetings, speeches, and exchanges of

Trade Policy


communiques that occupy much of the time of economic opinion leaders. Such interlocking social groupings tend at any given time to converge on a conventional wisdom, about economics among many other things. People believe certain stories because everyone important tells them, and people tell these stories because everyone important believes them. Indeed, when a conventional wisdom is at its fullest strength, one’s agreement with that conventional wisdom becomes almost a litmus test of one’s suitability to be taken seriously’. Furthermore, says Krugman (p. 36), there was ‘a political economy cycle, in which governments were persuaded to adopt Washington consensus policies because markets so spectacularly rewarded them, and in which markets were willing to supply so much capital because they thought they saw an unstoppable move toward policy reform’. He speaks (pp. 38-9) of the ‘immediate, generous advance on the presumed payoff from free trade and sound money’ offered by the financial markets, which made it ‘easy to make a case for doing the right thing and brush aside all the usual political objections’. All of these elements of the economic, sociological and political economy cycles described by Krugman are readily recognizable in the South African case. No case has been made for import liberalization based on proper economic analysis. The supporting discussions of those advocating further import liberalization through comprehensive tariff reductions, on grounds of their likely










inadequate. This has not lessened the confidence with which import liberalization has been recommended, or the readiness with which government has accepted such recommendations. In the South African case, there have perhaps been some special additional factors contributing to a mood of optimism, and a preparedness on the part of both government and markets to take the leap of faith to which Krugman refers. The relatively successful end to the process of transition to the new South Africa, in April 1994, doubtless contributed something to an improvement in the performance of the economy, and in the confidence of investors, in particular of foreign investors. The perception that since the political change was permanent, so necessarily would be the improvement in the performance of the economy, and in the capital account of the balance of payments, may well in itself have encouraged a confident approach to trade policy reform. Indeed, this may perhaps be seen as another reason that the ‘transition to democracy and the ending of isolation’ was regarded as having ‘at last made it possible for the country to adapt’ its trade policies. For the rest, there seems to be little difference between the South African case and the scenarios described by Krugman. As Krugman (1995: 38) says, ‘such packages did work, and in fact did so astonishingly well — but not necessarily because of their fundamental economic merits’. This too applies to South Africa. Given that South Africa’s trade policy reforms have taken place in the context of grave structural problems in the trade account of the balance payments, and a heavy dependence on capital inflows, there are serious questions about how long this can last, which need to be addressed.


The Political Economy of South Africas Transition

REFERENCES African National Congress

(1990): Discussion Document

on Economic

Policy. ANC

Department of Economic Planning Workshop, Harare, September.

African National Congress (1991): Draft ANC Economic Manifesto. ANC National Conference, July. African National Congress (1992): Ready to Govern: ANC Policy Guidelines for a Democratic South Africa. ANC National Conference, May. African National Congress and COSATU (1990): Recommendations on post-apartheid Economic Policy. Workshop on economic policy for post-apartheid South Africa. Harare, April/May. Becker CM

and Pollard PM

(1990): The vulnerability of the South African economy to

economic sanctions. In The Impact of Sanctions on South Africa: Part 1, The Economy. Investor Responsibility Research Center, Washington DC. Bell T (1993a): Should South Africa further liberalise its foreign trade? In M Lipton and C Simkins (eds.) State and Market tn Post Aparthed South Africa. Witwatersrand University Press, Johannesburg,

and Westview

Press, Boulder,

San Francisco and

Oxford. Bell T (1993b): The impact of sanctions on South Africa. Journal of Contemporary African Studies, 12(1).

Bell T (1995): Improving manufacturing performance in South Africa: a contrary view. Transformation, 28. Bell T (1996): Creating rural livelihoods in the western




related and policy factors. In: M Lipton, M de Klerk and M Lipton (eds.) Land, Labour and Livelthoods in Rural South Africa, Vol. 1. Indicator Press, Durban. Bell T and Cattaneo N (1997): Foreign Trade and Employment in South African Manufacturing Industry. International Labour Office, Geneva.

(In press).

Belli P, Finger M and Ballivan A (1993): South Africa: A Review of Trade Policies. The World Bank Southern African Department, Internal Discussion Paper on Aspects of the Economy of South Africa, No 4. Washington DC. Congress of South African Trade Unions (COSATV)

(1993): Trade Unions, Economic

Development and Industrial Policy. Conference on constitutional change, economic development and industrial democracy, 2nd Seminar; CQIL, Italy, COSATU, South Africa, and CUT, Brazil. Johannesburg, September. Department of Trade and Industry (DTT) (1995): Support Measures for the Enhancement

of the International Competitiveness of South Afmica’s Industrial Sector. Submitted by the Department of Trade and Industry to the Trade and Industry Chamber of the National Economic Development and Labour Council, November. General











Mechanism: The Republic of South Africa. Report by the GATT Secretariat. Goldin I and van der Mensbrugghe D (1995): The Uruguay Round: An Assessment of Economywide and Agricultural Reforms. Draft paper prepared for the World Bank Conference on the Uruguay Round, January. Helleiner GK (ed.) (1994): Trade Policy and Industrialisation in Turbulent Times. Routledge,

London. Industrial Development Corporation of South Africa (IDC)

(1990): Modification of the

Application of Protection Policy. Policy Document. Joffe A, Kaplan D, Kaplinsky R and Lewis R (1995): Improving Manufacturing Performance

Trade Policy


in South Africa: Report of the Industrial Strategy Project. University of Cape Town Press, for the Industrial Strategy Project and the International Development Research Centre. Kaplinsky





in South


the debate


a response. Journal of Southern African Studies, 20(4). Krugman P (1995): Dutch tulips and emerging markets. Foreign Affairs, July/August. Land and Agricultural Policy Centre (LAPC) (1993): Agricultural Marketing and Pricing in

a Democratic South Africa, LAPC

Policy Paper No. 2, Johannesburg.

Levy B (1991): How can South African Manufacturing Efficiently create Employment? An Analysis of the Impact of Trade and Industrial Policy. World Bank Informal Discussion Papers on Aspects of the Economy of South Africa, No 1. Washington DC. Matona T (1995): The External Trading Regime and National Trade Policy: Diplomatic

Aspects of Trade Reform. Paper delivered at a conference of the African Economic Research Consortium, The National Institute for Economic Policy, the Office of the Reconstruction








Johannesburg, November/December. Michaely M, Papageorgiou D and Choksi AM (1991): Leberalizing Foreign Trade, Vol 7, Lessons of Experience in the Developing World. Basil Blackwell, Oxford. Nattrass N (1992): Profits and Wages: the South African Economic Challenge. Penguin Forum

Series, Johannesburg.

Nattrass N (1994): Economic restructuring in South Africa: the debate continues. Journal of Southern African Studies, 20(4).

Reynders Commission (1972) Report of the Commission of Inquiry into the Export Trade of the Republic of South Africa, RP 69/1972. Government Printer, Pretoria. Rodrik D (1994): The rush to free trade in the developing world: Why so late? And why now? Will it last? In S Haggard and S B Webb (eds.) Vonng for Reform; the Politics of Adjustment in New Democracies. Oxford, New York.

ENDNOTES 1. This section essentially provides a summary of the account of trade policy changes in South Africa, from the early 1970s to the early 1990s, contained in Bell (1993a), with some additional information and comments. 2. According to GATT (1993: 75), at this stage QRs applied to 74 per cent of tariff lines in agriculture, over 90 per cent in the beverages, tobacco and rubber sectors, over 85

per cent in the food sector, and almost 60 per cent in clothing. No import controls were in force in leather, footwear, furniture, plastics, pottery, glass and other nonmetallic mineral products, motor vehicles and other transport equipment.

3. This measure had been used twice before during the previous eight years (30 March 1977 to 27 March

1980, and

11 February

1982 to 29 November

1983) at rates that

varied between 5 per cent and 15 per cent on all imported goods. 4. It showed a tendency to rise over this period (from 6.0 to 6.9 per cent), as did the proportion of exports eligible for the subsidy (from 31 to 34 per cent). The latter trend however is evident before 1990/91, so that it cannot simply be attributed to GEIS. Similarly, an increase in the share of the product categories subject to the highest percentage rates of subsidization is evident before 1990/91.

The Political Economy of South Africas Transition


. Matona (1995). This goes a long way towards meeting one of the main criticisms of South Africa’s tariff structure, namely, its complexity. Belli et a/. (1993: 7) found that

South Africa had more tariff lines than any of the 32 countries for which the World Bank had comparable data. Its range of tariffs was the widest, and the coefficient of variation













equivalents, and the four import surcharge rates added another level of complexity. According to the IDC, in 1994 some 31.7 per cent of total mmports were subject to surcharges: 0.9 per cent were subject to a 40 per cent surcharge; 6.8 per cent to a 15 per cent surcharge; and 24.0 per cent to a surcharge of 5 per cent. Indeed,

the case for this view is stated more

fully and forcefully

(albeit no more

convincingly) by the IDC than in any of the other documents referred to above. . It might be noted that, according to Goldin and van der Mensbrugghe (1995: 29) the Uruguay Round will have a negative impact on South Africa’s real GNP. . A fairly typical view, which has become

something of a South African tradition, is

exemplified by the statement by Nattrass (1992: 21) that ‘the truth of the matter is that South African industrialists are over-protected, far from innovative and hamstrung by poor (often racist) management. The pickings have been too good for too long from the domestic and patronage networks within the state’. 10. See Bell (1995: 19) on trends in South Africa and Mexico between the late 1920s and the late 1980s.

11. According

to Nattrass


521), the ISP approach



the Latin

American vision in so far as a greater consultative role for labour is envisaged, and in

that more developmental-state-type interventions are proposed’. 12. In dealing with the criticisms by Nattrass (1994), Kaplinsky (1994: 536) characterizes her policy agenda as one which ‘leads to a fall in wages, a maintenance of existing corporate power and a state which does little to correct for market failure’; and which envisages that ‘capital should be allowed to operate as it has in the past’, and (in Nattrass’s own words) that ‘capital has to be courted rather than coerced’. He rejects this policy agenda, thus seeming to imply that the aim of the proposed institutions


and processes is to strengthen the bargaining power of labour, weaken that of business, and, if necessary, coerce capital into cooperating in the implementation of interventionist industrial policies. It is noteworthy, however, that since early 1995 labour has increasingly expressed its

concern about the effects of import liberalization, perhaps signalling a shift in emphasis to substantive trade policy issues. Can this be explained, partly, by the fact that the promised supply-side measures have not been forthcoming?

Restructuring the South African Economy

Economic Objectives and Macroeconomic

Constraints Laurence Harris

Introduction 9 The basis of macroeconomic constraints Investment and growth 93 Supply-side constraints on growth



Macroeconomic constraints are afinancing problem The importance of market confidence 97


INTRODUCTION What ts the overriding economic problem South Africa has to solve? One answer is that South Affica’s great needs, summarized as raising the majority’s living standards by investing in housing, education and health, cannot be achieved because no country can ignore macroeconomic constraints. At their minimum these require that, for a long-run steady state without growing proportions of government debt and foreign debt in investors’ portfolios, neither government budget deficits (public sector dissaving) nor external current account deficits can be sustained continually at levels higher than the rate of growth of wealth. A cruder version, relating to immediate policy, is that the government should not permit expansion of the budget deficit or a decline in the current account surplus on the balance of payments. Those macroeconomic constraints prevent any radical transformation of the economic conditions of life. If that is the economic problem, the task of the economist is to demonstrate that, as a result of basic economic laws, the country faces inescapable macroeconomic constraints which determine what is possible. This chapter argues that such a perspective, although universally influential, is too simple. To introduce the argument, let me start elsewhere with a view put forward by a remarkable engineer. In a 1992 address Peter Rice stated, to paraphrase: “The engineer is often seen as Iago. Iago, who coldly employed pure reason and hard logic to destroy Desdemona’s dreams. While architects dream, producing the romance of beautiful edifices, the engineer’s task is to show the architect the constraints imposed by the laws of physics which, by their logic, bring the design down to earth.’ Pausing briefly he went on: ‘It doesn’t have to be like that’. Rice was perfectly


The Political Economy of South Africas Transition

qualified to make that visionary claim. The extraordinary dream of architect Jorn Utzon, the soaring billowing sail-inspired wings of the Sydney Opera House, appeared to be technically impossible according to engineering conventions, but instead of being abandoned it was eventually built as, according to some, the eighth wonder of the world. It was made possible when Ove Arup engineering consultancy took it on as their job 112, and Peter Rice, their top structural engineer, showed how, instead of being mere constraints, engineering principles could be made to serve the dream. South Africa’s dreams, expressed in the discourse of the country’s first democratic election, in 1994, turn on housing, education, health care and jobs.

Can economic principles serve that dream or only show their impossibility? The conventional approach is to identify macroeconomic constraints and argue that objectives must be adjusted to them; financially, the budget of the Reconstruction and Development Programme had to be modest and, socially, the main task has been to reduce people’s expectations. An alternative approach, which I explore here, is to start from the objectives and consider how the constraints can be influenced to enable them to be achieved. In examining the nature of the constraints I argue that an important foundation for the growth and redistribution policy South Africans choose has to be the maintenance of market confidence although that, itself, is an elusive task.




The basic, general framework of macroeconomic constraints is provided by national income identities. Underlying all reconstruction programmes from the British government’s 1941 budget (inspired by John Maynard Keynes’s How to Pay for the War) to today’s ‘Washington consensus’ on structural adjustment programmes

is the identty:

J —

S = M


(I, investment;

S, saving; M,

imports; X, exports). Since the public sector budget is at the centre of policy, the separation of S and I into private and government saving (dissaving) and

investment focuses attention on the public sector budget deficit (J, — S,) and the levels of private sector saving and investment:

I-S,+1,—-S,=M—X where subscripts p and g indicate private and government, respectively. Both before and after the 1994 elections, South African policy has been shaped by a rigid interpretation of these identities as constraints. Initially taking a surplus on the current account of the balance of payments as a target, and assuming effectively no change in private saving and investment behaviour, the public sector deficit was targeted at 5.8 per cent of gross domestic product (GDP). But for several reasons the identities should be only one input into economic policy-making, not an overriding constraint. First, the identities, being concerned with realized outcomes, always hold.

Economic Objectives and Macroeconomic Constraints


They only become the basis of macroeconomic constraints on planned or policyinduced behaviour by making specific assumptions about, for example, the balance of payments outcomes that could be financed. Second, they are framed in terms of aggregate demand balances with no attention given to the conditions of supply, whereas, in fact, a fundamental problem 1s how to change production capabilities; how to develop a high productivity manufacturing sector, for example. Third, in determining policy the outcomes it seeks to induce are subject to real constraints at the microeconomic level; if more schools are to be built, how can the constraints imposed by low productivity or high material costs in the building industry, or by shortage of qualified teachers or of textbooks, be addressed? Fourth, since national income identities relate to a single period, taking them as the constraint framework focuses attention on static conditions; equally important are the processes of adjustment within a period that enable those identities to be satisfied and more important are the long-term dynamic processes of growth that stretch beyond a single period. In the following sections I relate microeconomic constraints and supply-side policies to the dynamic processes analysed in endogenous growth theory.



South Africa’s aggregate economic growth since the early 1980s has been below the rate of growth of population. At an annual average rate of growth of GDP of 0.9 per cent between 1982-83 and 1993-94, it was also below the rates of growth of OECD industrialized countries and far below the rates experienced by

the newly industrialized countries of Asia.’ Annual GDP growth of less than 3 per cent is too low to raise income per person and 1s below the 6 per cent which is estimated to be the prerequisite for reducing unemployment. Goals of improved housing, education and health are not sustainable unless South Africa’s growth rate is transformed and positive real growth of income per person is achieved; therefore the starting point for discussing policy goals must be policy to promote growth. The South African policy problem is often seen as a choice between redistribution and growth, as if one precludes the other, but in that simple form the opposition is not valid. One reason is that significant redistribution, which reduces poverty, requires growth; if national income grew less than population, redistribution would not prevent worsening poverty for some. Another 1s the considerable evidence that countries with high growth also have low measures of inequality (see, for example, Griffin, 1989), unlike South Africa which has had both low growth in recent decades and a highly unequal distribution of income and wealth. The association between low inequality and strong growth could be due to several causes, for example more equal societies may have greater social mobility and, therefore, positive incentive effects, but modern growth theory suggests another possible link. Growth may be promoted by investment 1n social and economic infrastructure, and that investment itself may involve a reduction


The Political Economy of South Africas Transition

in inequality; investment in a system of mass education, for example, may both promote growth and reduce inequality, and investment in housing and health may have a similar dual role. What is the connection between infrastructure investment and growth? The growth theories widely accepted until the 1980s emphasized the role of investment in physical capital and technology advances. In the Solow model, for example, the growth rate of output per person depends positively on the rate of growth of the capital—output ratio and a residual which is often interpreted as technical change. If the residual does represent technical progress growth models until the mid-1980s did not deal with what determines technical progress itself. In the past decade, however, the factors within the system that drive technical progress have become central to growth theory; thus technical progress is conceived as endogenous and in these endogenous growth models knowledge” rather than physical capital becomes the Key to growth and investment in human capital can be the prerequisite for knowledge-based growth (Romer, 1986, 1990; Grossman and Helpman, 1993). Pre-1980s models were generally seen to justify infrastructure investment in physical capital to raise the capital—output ratio, notably in the form of dams, power plants and roads; but if infrastructure investment is to be justified in the context of endogenous growth models its effects on knowledge and human capital growth must be positive.” Three types are intuitively plausible: mvestment in the infrastructure of research and development;

direct investment

in education


increases human


and investment in physical infrastructure which raises human capital through ‘learning by doing’.” The important features of endogenous growth models are those which enable growth to continue, for without continuous technical progress the economy would reach a steady state in which output per person is constant. Technical progress may be generated by several mechanisms but the research and development carried out by profit-seeking firms is central in a capitalist economy. The Key idea is that such innovation yields externalities or spillover effects which stimulate further technical progress throughout the economy by cheapening its cost, thereby generating a continuing process (Grossman and Helpman, 1993). But precisely because there are external benefits the state can have an important role to play by financing more investment in knowledge and human capital than firms would carry out of their own accord. In South Africa, the investment plans associated with the Reconstruction and Development Programme are usually seen only from the perspective of redistribution, but their other side is that, within the endogenous growth framework,

they simultaneously have the potential to contribute to growth (or would have if they were on a sufficiently large scale and were well designed). Mass education is an investment in human capital, creating a labour force with transferable and advanced skills which can reduce firms’ costs of innovation. Investment in housing with associated infrastructure including electricity and telephones facilitates the growth of home-based work 1n which modern machinery 1s used, thereby facilitating the learning-by-doing acquisition of transferable skills, and

Economic Objectives and Macroeconomic Constraints


building that housing infrastructure itself develops skills. Investment in health care and in welfare facilities which support the young and permit women to enter the labour force without the double burden of child care may also foster the development of human capital.




The complementarities between redistribution and growth mean that the two objectives are not necessarily mutually exclusive and they counter the view that, for example, education expenditure must wait until higher growth is achieved. Those complementarities have been discussed in the context of the supply side of endogenous growth models in contrast to the common practice of discussing distribution and growth from an aggregate demand perspective, but for the following reasons the supply-side perspective considered so far can only be part of the story. Important additional factors to be considered on the supply side are the institutional structure and constraints due to sectoral imbalances.

institutional Structure Investment in social and economic infrastructure can only produce long-run growth benefits if enterprises are in a position to profit from the adoption of new technology, for otherwise they will not invest in knowledge production through research and development (R & D) expenditure or hire or reward human capital appropriately. Examples of the latter type of problem are common throughout the world in countries where qualified people, educated to a high level by public investment in education, are unemployed on a large scale or work at unskilled jobs. The ability of firms to profit from the (non-spillover) benefits of technological advance depends on the institutional structure at all levels, on which development economics contains two broad perspectives. The first 1s that competitive, complete markets are a growth-promoting institutional structure; endogenous growth models are constructed on that basis with efficient financial markets playing a key role in determining technical progress, and at the level of policy formulation the rationale for structural adjustment policies is that markets provide a growth inducing institutional framework. The second perspective, which draws on the experience of Japan and South Korea, argues that such a market framework approach is inferior to one in which the state and enterprises develop broad plans for sectors’ growth and construct institutional networks, with appropriate incentives as well as commitments, to support them (Chang, 1994; Yanagihara, 1995). The relative merits of the two approaches are the subject of wide debate, with the World Bank arguing that while the East Asian ‘miracle’ has owed something to the institutional, interventionist approach of Japan and South Korea, elsewhere a greater reliance on competitive markets would be necessary (World


The Political Economy of South Africas Transition

Bank, 1993). Current South African policy appears to be a mixture of the two, combining three elements: (i) institutional networks and interventionism inherited from the old corporatist system built around the mining—industrialfinancial conglomerates; (11) industries operating in competitive conditions or adjusting to liberalization measures; and (iii) initiatives towards new forms of institutional networks to support development objectives. However, South Africa has not yet developed any clear perspective on the future shape of the institutional structure; the post-apartheid state has not seriously attempted to shape itself as a developmental state nor to develop a consistent, credible development policy.



Any investment in social and economic infrastructure is constrained at the microeconomic level by supply conditions in a number of sectors. For example, expenditure on new schools is constrained by the ability of the building industry to meet

the demand

for school buildings,


that, in turn,


on the

building supply industry, the supply of building labour, excess capacity in the building and building supply industries, the technology of those industries, the supply of project management skills, and the availability of finance for those sectors. The same is true of investment to increase the stock of affordable housing, or any other expenditure on social and economic infrastructure. In other words, imbalances arise as expenditure 1s expanded in chosen sectors and that demand can only be met if the supply to those sectors responds with some elasticity. The response may be obtained through market forces alone, even if it requires substantial price changes; alternatively, it can be stimulated by policy interventions to overcome supply constraints, such as rapid training programmes for building workers. Policy interventions to reduce supply constraints for prioritized sectors characterized the institutional approach of countries such as Japan and East Asia. South Africa’s Reconstruction and Development Programme (RDP) illustrates the problem of sectoral imbalances and microeconomic constraints. Although the RDP budget was set at a low level which was believed to be necessary in order to remain within macroeconomic constraints, in fact microeconomic constraints caused even that low budget to be underspent by R2 billion in 1994/5. The experience of the RDP suggests that the supply constraints are varied, ranging from malfunctioning agencies and shortage of project management skills to suppliers having inappropriate financial structures. Whereas Eskom, the electricity parastatal, has succeeded in electrifying townships rapidly as part of the RDP because it had the right combination of management




of materials,




generating capacity and financing, Telkom has failed significantly to increase access to telecommunications, apparently because it has been unable to overcome financial constraints.

Economic Objectives and Macroeconomic Constraints





While infrastructure investment may have positive supply-side effects, it also has a positive impact through effective demand. It directly increases demand for infrastructure investment goods and has a positive effect on other investment if a crowding-in effect exists. The positive effect on aggregate demand is a virtue of infrastructure investment, because it reduces unemployment and acts as a positive shock to GDP. But it is also part of the problem for it returns us directly to the basic statement

of macroeconomic



is formulated


terms of the components of aggregate demand. In J, — S, + I, — S,=M — X,a rise in J, expenditure causes a worsening of the external current account unless other things change. How, then, can we avoid having those constraints destroy the dream? If a strong programme of infrastructure investment can be designed and the microeconomic constraints on it eased, what can be done to ensure the

macro constraints do not bind?

The classic answer is that the rise in J, and J, should be accompanied by a rise in private and government saving; it can be achieved by policies to stimulate private saving and reduce government dissaving. But if we consider what would happen if saving does not rise commensurately, we can see that the macroeconomic constraint is not really a constraint in terms of real resources. Instead, it 1s an aspect of financial management, and, consequently, financing decisions can be changed in order to ensure that infrastructure investment is feasible. If an expansion of infrastructure investment leads to a higher deficit on current account, the task is to manage external liabilities to ensure that the deficit can be financed in a sustainable manner; hence, it is different from the liability management needed in order to finance a cyclical deficit. Seeing macroeconomic constraints as susceptible to management because they are essentially financing problems is relevant even when we move beyond the simple model in which the current account balance was initially seen as the macroeconomic constraint. The public sector’s own budget position 1s also widely seen as a macroeconomic constraint, but it too 1s a financing problem and susceptible to financial management. From a quantity theory perspective a target maximum budget deficit is seen as a constraint because it is assumed that it will be monetized, but that further illustrates the fact that it is essentially a financing problem. Suitable debt management policies can make a wide range of budget deficits sustainable.



Seeing the balance of payments and the public sector deficit as problems of financing, rather than as constraints in terms of real, physical resources, directs our attention to the financial market. And it makes us look not only at whether resources are available — which in terms of the question ‘where are the resources


The Political Economy of South Africas Transition

to come from?’ ts the focus of the discourse on constraints — but also at their price. The issue becomes one of whether large-scale public investment, to the extent that it is not financed by government saving through tax and recurrent spending policies, can be financed on the capital and money markets at a price that is consistent with growth and redistribution policies; the question 1s not whether the finance is available, for South African government debt faces no absolute liquidity constraints either in domestic capital markets or in global financial markets, but the price at which it can be obtained. Interest yields on government paper are a direct measure of that price, and the post-1994 government has experienced high real interest rates, as did the governments of the apartheid regime in the previous decade. On the domestic markets an expansion of public sector investment exerts further upward pressure on them and those higher market yields have indirect effects on growth and distribution additional to those of the investment expenditure. They may exert a depressing influence on private sector investment, creating a ‘financial crowding out effect’ that at least partially offsets a demand-induced ‘real crowding in effect’; and high interest rates ultimately involve a redistribution towards the relatively rich who, through pensions funds or other savings, own investments whose yields will rise. Viewing South Africa in the context of a global market, the cost of financing public sector deficits and external deficits reflects international rates, expectations of changes in exchange rates (and of underlying factors which affect them such as expected inflation), and a risk premium. The last two factors are encapsulated in the phrase ‘market confidence’ which, being intangible, 1s frequently defined as ‘low’ by spokespersons arguing for restrictive policies. The fact that the notion of ‘market confidence’ is, thus, a powerful tool of political persuasion cannot obscure the fact that market expectations concerning fundamentals, and market assessments of risk do have an effect on the cost of finance, and they have ‘hard’ lexicographic and numerical measures in the form of agency ratings and market yield differentials. In that framework, an expansion of government borrowing 1s widely taken as a signal that future exchange rates will fall and that the risk attached to South African portfolio investment is higher, therefore the premium the country has to pay is higher. Because those effects can be both powerful and unpredictable — with changes in market confidence leading to sudden large falls in the exchange rate and rises in interest rates, as occurred in the first half of 1996, the most significant macroeconomic constraint is, in one sense, ‘market confidence’. But that is not

an immutable constraint, for the government itself and South Afficans as a whole can influence it. Indeed states such as Malaysia and South Korea have been able to obtain high confidence ratings on international markets despite or because of having ambitious growth programmes (and, in the former case, redistribution programmes). A credible growth strategy, even one which involves increased borrowing, can permit borrowing to occur at relatively low premiums because confidence in it increases the supply of funds. South Affrica’s growth and redistribution policies, therefore, require a firm foundation in explicit attempts to bolster market confidence in ways that are

Economic Objectives and Macroeconomic Constraints


consistent with the growth and redistribution objectives. In June 1996 the government did bring out a plan, ‘Growth, employment and redistribution: a macroeconomic strategy’, in the form of a spreadsheet analysis demonstrating the possible evolution of the economy and the implications of achieving a 6 per cent rate of growth of GDP by 2000. It was based on an assumption that there would be significant increases in private domestic investment and inflows of foreign capital as well as higher public sector investment. Coming after the sharp depreciation of the rand, by 20 per cent, in preceding months the plan was designed to raise the country’s credibility in international markets. In the short term it did not succeed in stemming the outflow of money market capital, or, according to market insiders, in giving a firm foundation for market confidence (despite the unusual and controversial vote of confidence the IMF managing director gave to the exchange rate), and in the long term the market’s confidence will be determined by what concrete measures are taken to stumulate growth, structural change and profitability, for the plan offered little indication of detailed measures. There are no fixed rules for developing a growth strategy consistent with market confidence. Investors are not concerned with microeconomic policies such as progression of local tax-subsidy systems or the details of job creation strategies (although fears for market confidence are sometimes invoked by pressure groups arguing against, say, policies on minimum wage legislation). They are concerned with a few big macroeconomic and financial variables and policies, but the impact is not predetermined: in some circumstances, for example, confidence may be unfavourably affected by fiscal deficits, in others it may not; similarly abolition of controls on capital outflows can boost market confidence if carried out in a manner which demonstrates the strength of the economy, but weaken it if mismanaged. Despite the absence of any simple, fixed rules, the need to develop and present policies which are consistent with market confidence as well as with the democratically chosen priorities of South Africans is inescapable.

REFERENCES Chang H-J (1994): The Political Economy of Industrial Policy. Macmillan, Basingstoke. Griffin K (1989): Alternanve Strategies for Economic Development. Macmillan, Basingstoke. Grossman H and Helpman A (1993): Innovation and Growth in the Global Economy. MIT Press, Cambridge. Romer P (1986): Increasing returns and long-run growth. Journal of Political Economy. 94:



Romer P (1990): Endogenous technological change. Journal of Political Economy. 98: 71-102. World Bank (1993): The East Astan Miracle. OUP, New York.

Yanagihara T (1995): The role of structural adjustment policy and remaining tasks: in search of a new approach to economic development. Keynote report to the Sixth Economic Cooperation Symposium, Economic Planning Agency, Tokyo. October, mimeo.


The Political Economy of South Africas Transition

ENDNOTES 1. See the growth figures cited in J. Michie and V. Padayachee, ‘South Africa’s Transition: The Policy Agenda’ (this volume, Chapter 1). 2. Knowledge in the sense of a design or technique is different from human capital: the latter is the accumulated ability to use designs and is embodied in the labour force. 3. Formally it is not legitimate to apply conclusions drawn from theoretical growth models directly to an actual economy such as South Africa’s, for the models include several maintained assumptions which do not apply in reality. In particular they assume full employment and adjustment through price signalling rather than quantity constraints. Nevertheless, in several studies the conclusions derived from endogenous growth models do conform with data, and it is possible to discuss actual economies by

treating the simplified model as a first approximation. . 4. And if that increase in human capital increases inventive activity investment in the former may increase knowledge in the sense of the previous footnote. 5. For example, the current programme of electrification is a physical investment which enables people to learn new skills, either as electricians or, indirectly, in tasks such as machining carried out in newly connected homes.

South Africa’s Monetary and Foreign Exchange

Rate Policy’ Vella Pillay Introduction


Western monetary policy formulation inthe 1970s


The de Kock Commissions response to the monetary

debates ofthe 1970s


The status of the Reserve Bank


Monetary policy and the national debt


The overall stance of monetary policy since 1985 110 The crisis ofthe rand = |14 The controversy over Reserve Bank independence in the 1990s 117

Contextualizing approaches to monetary policy after 1990 19 Conclusion


INTRODUCTION Even prior to the collapse of the Bretton Woods system of pegged (but adjustable) exchange rates, South Africa’s monetary policy was constrained by the objective of maintaining its exchange value pegged, first to the pound sterling and then to the US dollar. Monetary policy in support of the exchange rate at the pegged parity was in these terms principally confined to two forms of market intervention — firstly, Reserve Bank purchases and sales of foreign currency (a version of ‘open market operations’ in foreign exchange) and secondly, interest rate variations to influence capital flows — were deployed to defend the exchange rate at the pegged parity. With interest rates largely predetermined by this exchange rate policy the growth of bank assets and liabilities was treated as endogenous. Domestic credit control was managed largely through ‘moral suasion’ which proved workable mainly because the commercial banking system comprised only two banks with a large branch network in the country. However, 1t was the holding


The Political Economy of South Africas Transition

of government paper by the banking sector which served to determine the banks’ liquid assets and hence the scale of bank credit. Over much of the period from 1946 the Reserve Bank sought to relieve downward pressure on domestic interest rates by repaying foreign debts and upward pressure by the issue of loans on overseas markets. The latter in time proved to be an increasingly expensive operation with the international margins for loans rising to abnormal levels until international lending to South Africa came to a complete halt. It can be said that this limited, comfortable and otherwise predictable application of monetary policy broke down in earnest under the weight of the gathering impact of politics — what the regime and its apologists termed ‘local political disturbances’ — on economic policy. The seemingly quiescent second economy governing the life and labour of the African population — the dual to that of the regime, the conglomerates and the white population — exploded in the early 1970s in a series of labour strikes and political struggles which were to dominate South African politics for the next 20 years in a context of widening domestic repression, wars in the Southern African region and the massive expansion of the role of the apartheid state in the management of an increasingly siege economy. Following the Sharpeville massacre (March 1960), the foreign exchange reserves fell sharply in 1960-61 and this despite heavy borrowings from abroad. As part of a set of crisis measures the bank rate was raised and capital and import controls were instututed. The Reserve Bank widened the pattern of rates for government paper and imposed higher liquid asset requirements on the commercial banks. These measures proved far from sufficient; contrary to IMF injunctions, the authorities introduced the mechanism of blocked rands, the proceeds of which came from non-resident sales of assets in the country. These controls were subject to periodic relaxations but overall the 1960s and 1970s were marked by policies of monetary stringency which in large measure remained transfixed by exchange rate and balance of payments crises (Franzsen, 1983). These difficult times were marked by another major problem. In the 1960s the United States instituted a regime called the ‘gold pool’ supported by the UK and France with a view to stabilizing the price of gold around the dollar parity of $35 an ounce. South Africa, the largest gold producer in the world (then accounting for over 70 per cent of newly mined gold), had been campaigning for a rise in the dollar price of gold with a view to increasing the role of gold as a reserve asset and standard. The US studiously ignored this South African interest. In March 1968 the gold pool collapsed and this was followed by the US Treasury setting up a two-tier market for gold — one for central banks at which fixed prices ruled and the other for non-official transactions at market-related prices. Once again the US ignored South Africa. And then in 1971 as the international currency crisis rose to new heights the US suspended the dollar’s converubility into gold, thereby demonetizing gold and introducing a new and highly unstable phase in international monetary relations. For South Africa each upward shift in the gold price was matched by sharp increases in imports generated by a domestic economic expansion, thus opening a long phase of the ‘Dutch Disease’ marked

Monetary and Foreign Exchange Rate Policy


by a cycle of repeated booms and busts during the 1970s and early 1980s and ending in the long recession through to the 1990s. Gold now emerged as a purely speculative metal, largely confined to nonofficial transactions, though there have been instances of central banks trading (or pledging) gold to finance their balance of payments deficits. The trading of South Africa’s newly mined gold was now managed by the Reserve Bank through the Swiss commercial banks. This important development introduced a new and seemingly overriding constraint on monetary and foreign exchange policy. The gold mining industry had now to be protected from the vagaries of the international gold market. This meant that falling dollar prices for gold called for a downward adjustment —- a depreciation — in the exchange rate of the rand independent of other movements in the balance of payments or the domestic economy. This basis for ensuring the viability of the gold mining industry continues today as a fundamental policy: in the past eight years, for example, the US dollar price of gold on the London ‘fixing’ fell on average by 14 per cent (with a number of gyrations in between). In the same period the rand depreciated by 30 per cent against the US dollar and by 44 per cent against a basket of currencies. Thus, over this period the pressure on the rand could be decomposed into firstly, the falling gold price, secondly, the escalation of working costs in the mining industry, and thirdly the flight of capital compounded by adverse movements on the current account. Estimated correlation coefficients for the relationship between the gold price and both the effective nominal and real exchange rates for the period 1982-92 (monthly data) were found to be highly positive, lying between 0.46 and 0.56 (Mainardi, 1994). On the domestic front much was made of the Banks Act of 1965: the liquid asset and cash reserve requirements were extended to all banking institutions (and not only the commercial banks). However, its expected impact on credit expansion proved illusory: the banks simply extended credit to the private sector in the form of trade bills and bankers’ acceptances — the latter being defined as liquid assets. The holding of short-term government paper was another factor providing additional liquid assets for credit expansion. Efforts to restore control through the imposition of credit ceilings proved ineffective in view of the exceptions allowed with respect to strategic industries and agriculture. Other techniques were devised and used but with little success: price instability and exchange rate variability had become the norm as diverse forms of disintermediation between the conglomerates and their respective subsidiaries took place. It became evident to the authorities that the scope for monetary policy in a period of growing political uncertainties had become severely restricted. This provided one reason for the appointment of the ‘Commission of Enquiry into the Monetary System and Monetary Policy in South Africa’ (de Kock Commission, 1985). The other was perhaps a recognition that the conclusions being reached in the 1970s monetary policy debates in Europe and the United States, following the collapse of the system of pegged exchange rates, called upon those managing the country’s monetary policies to be seen to be part of the Western bandwagon (OECD, 1975).


The Political Economy of South Africas Transition




IN THE 1970s”

With the generalized floating of exchange rates following the US suspension (in effect, abolition) of the dollar’s convertibility into gold, coupled with the inflationary impact of rising oil and other commodity prices, the long-simmering debate within academia about adopting some form of objective monetary criteria in macroeconomic modelling exercises now developed into more formal monetarist approaches to economic policy among the major industrial countries. Demand for money functions became the fashion in the wake of the post-oil inflationary boom. In the United States the narrowly defined money supply (M1) was the preferred monetary measure as this was found to be relatively stable; on the other hand, the demand for the broadly defined money supply (M3) was found to be volatile and this was viewed as confirming Milton Friedman’s estimated average lag between monetary growth and inflation. In Britain a redefined sterling M3 had, more by stealth, become the key UK monetary aggregate. Its formal (some say ‘half-hearted’”) adoption in 1976 followed a severe sterling exchange crisis. However, such targets were repeatedly overshot and interest rate rises to counter this overshooting proved ineffective, suggesting that the growth of the money stock (however measured) was insensitive to the cost of funds. This latter experience has some bearing on the conduct of monetary policy in South Africa in recent years, as is considered below.

In South Africa the fixation with rules in the conduct of monetary policy became even sharper as the prospects for political change increased. This, in a sense, was already manifest in the considerations underlying the recommendations

of the







of interest

operational variable for achieving monetary stability with elevated to the primary objective of central bank policy.









The ‘Commission of Inquiry into the Monetary System and Monetary Policy in South Africa’ deliberated for some four years and delivered its final report in 1985. Its findings largely reflected the shifts in international thinking regarding monetary theory and policy in the advanced industrial countries. It sought, and this with some difficulty given the country’s central banking history, to replicate that policy and its underlying theory for South Africa. What is striking is the unreality of the Commission’s analysis. It betrayed a marked lack of relevance to the crisis into which the South African economy had fallen following the rise of the black trade union movement and the impact of the country’s international isolation. It also persisted in viewing the economy, its financial institutions and all its key economic relationships as that of a country somewhere in Europe, predominantly composed of whites.

Monetary and Foreign Exchange Rate Policy


The report acknowledged the gravity of the economic situation but only in terms of unutilized manufacturing capacity, and the inflation and balance of payments pressures driven by the fluctuations in the gold price and the terms of trade. The Commission cited the deficiencies in broad monetary policy in this way: V The growth of the monetary aggregates (M1 to M3) were not adequately stabilized. V Several measures of monetary ‘control’ were applied resulting in abnormal levels of disintermediation and ‘reintermediation’ causing marked fluctuations in the velocity of circulation. ¥ Interest rates were not always allowed to rise to appropriate levels which could have served to limit the growth in bank credit, the money supply and monetary demand. Rather than increase interest rates, the monetary authorities either increased central bank credit creation or imposed direct controls. The structure of interest rates was distorted and thus no longer reflected correct yields, intrinsic quality, liquidity and the maturity of assets. V Following the collapse of the system of pegged exchange rates, the spot and forward exchange rates for the rand currency were not allowed to adjust to levels corresponding to the level of aggregate monetary demand. There was inadequate coordination between the exchange control policy and other policies within the official monetary strategy. The Commission deployed virtually the entire monetarist critique against the demand management framework within which monetary policy was pursued in the major industrial countries to explain the ‘underlying reasons’ for the foregoing deficiences. There was a lack of recognition of the need for ‘marketoriented methods’ in monetary policy and an over-concentration of controls in the management of the cash reserves of the commercial banks, in the latter’s liquid asset requirements, and in credit ceilings, rather than focusing policy on credit, interest and exchange rates and hence on the demand for money. Next, there existed no discernible policy direction over such critical areas as the management of the national debt. The monetary authorities lacked a clearly defined approach to either the monetary aggregates or the term structure of interest rates. The system of exchange control was similarly criticized: the report declared that ‘the notion that exchange control helps to Keep capital in the country and therefore always has a beneficial effect on the balance of payments is clearly fallacious’. The operation of the liquid asset system of commercial bank credit control similarly came under strong attack. What was particularly remarkable was the seeming volte-face in the position of the Commission’s nine members. These were all high officials of the South African establishment, and for long the key policy engineers of what came to be called ‘grand apartheid’. What then explains this policy somersault? Was it perhaps a realization that the increasing ungovernability and the gathering sociopolitical crisis — the domestic revolt, the sanctions pressures, the burdensome costs of apartheid and its wars of destabilization in the southern African region,


The Political Economy of South Africas Transition

the flight of capital and skilled labour — suggested that the apartheid project had run its course, and hence there was a need to depoliticize critical areas of economic policy? This perhaps explained the Commission’s shift of position towards a thoroughly ‘market-related approach to monetary policy’. Only the most perfunctory consideration was given to the structurally skewed nature of the markets for labour, for goods and services, for funds and much else. Nor was there any recognition of the fact that South Africa’s post-war development was grounded on a substantial degree of state intervention in the national economy and that monetary policy had played a close and active supporting role in that exercise. In its references to public debt management the Commission declared that the ‘deficit before borrowing’ or the broader ‘public sector borrowing requirement’ should ‘at all times be restricted to an amount that can be financed without either undue money creation by the banking system or undue upward pressure on interest rates’. Here, again, politics intruded. Among a number of other recommendations, the Commission called for the reintroduction of Bank

rate as the Reserve Bank’s basic discount rate and in this and other respects chose the Anglo-American model of monetary policy compared with the German and Japanese approaches which generally seek to maintain relatively stable financial asset prices and interest rates. It further went on to recommend that ‘priority in general economic policy should be directed to combating inflation’ — not unemployment, poverty and those other legacies of apartheid which constitute such a drag on productivity and economic efficiency. The Commission held back from recommending a completely rigid or overriding ‘money rule’ approach which would have left the exchange and interest rate to find their own level at all ttmes. Monetary targeting, it suggested, should be applied with a ‘fair measure of flexibility’. An element of discretion by the Reserve Bank was accepted in deciding the combination of monetary aggregates, interest rates and the spot and forward exchange rate. The money supply measure to be targeted was otherwise left to the Reserve Bank. With the money supply thus controlled, the Commission recommended that the rand should find its own value, except for Reserve Bank intervention in the foreign exchange market to iron out short-term fluctuations. Essentially, what the Commission recommended was the application of the standard Anglo-American policy instruments: public debt management, Reserve Bank open market operations, Reserve Bank discount and general accommodation policy, and finally, Reserve Bank intervention in the spot and forward exchange markets to smooth out excessive exchange rate movements. At the centre of the Commission’s position stands the proposition that ‘the financial markets function best in the national interest if they are reasonably free, competitive, active and broad and if they produce realistic market-related interest rates’. It is suggested above that this position derives from certain political fears concerning the direction of economic policy in a democratic South Africa. On the other hand the theory of ‘financial repression’ developed by McKinnon (1973) and Shaw (1973) holds that the existence of a greater volume

Monetary and Foreign Exchange Rate Policy


of marketable financial assets and activity is generally associated with higher levels of savings, investment and production, making ‘financial deepening’ good for economic growth. The policy implication of this proposition is that financial repression can only be overcome by deregulating the financial markets, freeing interest rates and the allocation of credit, and thereby increasing the willingness to save and to hold such savings in marketable financial assets. From this follows rising overall efficiency, bringing enterprises under greater financial discipline and improving the quality of their investments. Whatever the substance of this theory, its relevance to South Africa 1s another myth among the many which are held to justify the present set of policies and which largely serve to sustain the status quo in the distribution of wealth and ownership in the country. What we have is a particularly heavy concentration of ownership in the hands of a small group of inside investors and virtually a closed system of interlocking ownership relations between banks and corporations. This hardly provides for consistently healthy enterprise performance and financial stability. Rather these arrangements have resulted in corruption, collusive behaviour,






to the



individual savers and their living standards (UNCTAD, 1994). In South Africa this inefficiency is compounded by the high elasticity of interest rates with respect to what the commercial banks measure as ‘risk’. At the lowest end of the interest-related risk range 1s the prime rate of interest which 1s normally applied to preferred borrowers most of whom are part of the same conglomerate which owns the bank itself. From thereon the interest rate for borrowers rises by leaps and bounds, with the highest rate applied to the small and medium-sized business community and in particular the black population at large. Further, perhaps some one-half of the country’s adult population continue to manage their finances and especially their savings outside the formal financial and banking system because the latter has been effectively closed to them. The Commission’s failure to examine these structural aspects of financial repression in South Africa, despite the underpinnings of much of its analysis and recommendations on the McKinnon-Shaw doctrine, betrays a particular mindset unique to those who have ruled the country for some 300 years. Unfortunately the Commission report stll remains the essential intellectual framework for monetary policy formation by the present unreconstructed Reserve Bank and Ministry of Finance.




For long, the South African Reserve Bank has been the creature of the government in power. It was established in 1920 by Act of Parliament. Its capital stock is held privately with each individual limited to R10000 out of a total capital of R2 million. An Act of Parliament promulgated in 1944 reconstructed the management and its board giving the State President the power to appoint the Governor, the Senior Deputy Governor and two other directors (the remainder


The Political Economy of South Africas Transition

of the other six directors being appointed by the stockholders — the directors were scheduled to be representatives of commerce, banking, agriculture and industry). Despite these provisions in the law, the Reserve Bank’s policies have been and remain structured on agreements and understandings with the Treasury over monetary policy which in large measure were and remain designed to manage the national debt, the foreign and domestic borrowings of the government and the exchange rate of the currency. The Commission’s report on the issue of the Reserve Bank’s status is significant for its lack of decisiveness. It recognized the ‘fact’ that ‘the Reserve Bank and the Treasury must act together as the monetary authorities’. Yet while claiming on the one hand that ‘the Reserve Bank’s policies must always be in accordance with the Government’s broad economic strategy’, it asserted on the other that its ‘independence’ must be respected. This ambiguity was strongly challenged by Professor Jan Lombard, a leading member of the Commission and subsequently the Senior Deputy Governor of the Reserve Bank, and perhaps the most influential authority in the Reserve Bank in the recent period. In a separate comment on the conclusions of the Commission he advanced a critical reservation which was to prove to be noteworthy, if not prophetic, in that it was made in 1985, a time of tumultuous

events in the body-politic of the country. He proclaimed that ‘the independence of the Reserve Bank within the political structure of South Africa will in future have to be more definitely secured than was necessary in the past’. He argued that ‘the problems of political policy, including those of determining the priorities in economic affairs, become increasingly complex in the years to come, and hence the maintenance of monetary neutrality under all circumstances becomes of paramount importance’. The trade-offs between price stability, full employment, equitable income distribution, financial stability, private financial power, economic growth, etc., which are likely to be made through the political process, according to this view, should not affect the independence of the banking system and in particular that of the Reserve Bank. The Commission took a somewhat more cautious position, holding back from fully endorsing Professor Lombard’s views. It proposed that the Reserve Bank should determine and announce target ranges for one or more newly defined monetary aggregates with the concurrence of the Minister of Finance and the Cabinet. The attainment of these targets would require close coordination between the Reserve Bank and the Treasury with respect to their policy decisions and activities. These are listed as public debt management, Reserve Bank open market operations and both exchange rate and exchange control policy.






Public debt management is an important instrument of monetary policy: it is employed in close coordination with the Reserve Bank’s open market operations and thereby ensures the effectiveness of the Bank rate.







8 oo

(9% of GDP)

Government debt


Monetary and Foreign Exchange Rate Policy












Figure | Total government debt as a percentage of GDP 1989-95

Since 1989 South Africa’s public sector’s borrowing requirement and aggregate indebtedness have soared to new heights, as is evident from Figure 1. Between 1989 and 1995 total national debt (inclusive of the debt of the so-called Bantustans) as a ratio of gross domestic product jumped from around 44 per cent to almost 56 per cent. The nominal debt of the public sector has been rising by almost 20 per cent a year; the share of interest payments (on the national debt) to total government expenditure is approaching 18 per cent. These debt servicing costs now amount to over R25 billion a year or twice the amount spent on health and about the same as that devoted to education. This suggests that South Africa is likely to find itself in a ‘debt trap’ where the primary deficit of the state becomes structural and there 1s increasing borrowing to meet the servicing costs of the national debt. This seems inevitable given the steep rise in the public debt, the sustained high level of interest rates and the fact that the present government has inherited several off-budget liabilities, such as forward exchange cover losses, the massive deficits of the state sector’s pension funds (estimated at over R75 billion), government guarantees on the debt of the now derelict Bantustans, and the Land Bank. To all intents and purposes the government is already heavily ‘over-borrowed’. As matters stand, the primary fiscal deficit (expenditure before interest costs less revenue) is already in deficit. For the 1995-96 financial year an attempt was made to avoid the interest burden on the debt reaching the ‘debt trap’ level, not by lowering interest rates — which the Reserve Bank opposes — but by the technique of creating new debt through the issue of deep-discount bonds. In the first 10 months of the 1994-95 fiscal year the total local registered government stock rose by R31.4 billion to R208.7 billion. But the interest due on this additional debt rose by only R2 billion, which at the margin produces an average rate of interest of around 6.4 per cent.

Two methods are now in operation to alleviate the problem of increasing debt servicing costs arising from budget deficit funding requirements. The first refers to reducing the coupon rate on stock issued to replace maturing stock. For example in September 1994, R1.6 billion of 15 per cent government stock was


The Political Economy of South Africas Transition

redeemed and replaced by an equivalent volume of R100 denominated stock but now Carrying a coupon rate of 9 per cent and an issue price of R66.20. The other is simply to issue zero coupon stock; about R1 billion was raised by this method in the past year, though no information is available about the size of the discount. What this means is that old stock is redeemed at its face value on expiry and simply reissued at deep discounts; this, of course, depends on the continued existence of a viable market for zero coupon government paper (Osborne, 1995).

THE OVERALL STANCE OF MONETARY POLICY SINCE [985 Perhaps as a result of the de Kock Commission report and/or the gathering political crisis South Africa’s monetary policy had by 1989 undergone two major sets of changes. The first was the shedding of direct and semi-direct forms of intervention in the system’s credit and money-creation operations and its replacement by an increasing and ultimately exclusive dependence on marketbased policy instruments. This movement was associated with the Reserve Bank governorship of G.P.C. de Kock (who retired in August 1989). The second major change is associated with Chris Stals, the present Governor. ‘Monetary stability’ became the key objective of the Reserve Bank. This meant that the conduct of monetary policy would henceforth be pursued with a view to attaining a stable general price level, namely an approximate absence of inflation or deflation. Both these changes were argued in terms of the switch in monetary policy among the leading Western economies away from a primary concern for external (balance of payments) stability with economic growth and relatively full employment and towards achieving quantitative monetary targets to reduce inflation and the rise in nominal incomes. With interest rates said to possess a clear allocative function, and with the growing complexity and other advances in the banking and financial services industry, coupled with the role of risk-taking, the role of market forces was seen to have significantly increased. Further, the emergence of globally operating capital and money markets had in these terms considerably weakened the role of governments in managing their economies other than through the control of the money supply and the pursuit of fiscal balance. In August 1990 the Reserve Bank formalized this policy switch in a ‘Mission Statement’, setting out the main aim of the Bank as the protection of the ‘internal and external value of the rand’. This aim was thereafter inscribed in the Interim Constitution though with the proviso that the protection be pursued ‘in the interest of stable and sustainable growth . . ... The mission statement called for the pursuit of monetary and financial stability as a medium-term objective apart from other standard functions concerned with sustaining a sound and wellmanaged banking and financial sector, orderly financial markets and money transmission systems and safeguards against systemic risks. The Mission Statement went on to claim that this policy would significantly contribute to

Monetary and Foreign Exchange Rate Policy


‘comparatively stable exchange rates’ for the rand currency. With inflationary pressures still present, it was anticipated that the effective exchange rate would depreciate to balance out the inflation differential between South Africa and its trading partners. Interest rates would be maintained at positive real levels for as long as inflationary pressures persisted. This shift in the Reserve Bank’s approach was largely grounded in the belief that South Africa occupied a place within the same league as the Western industrial countries — a belief which persists today despite the duality of the economy’s structure with the greater proportion of the population continuing to live out their lives not in the sphere of relatively advanced living standards and sophisticated markets but in conditions of an unrelieved cheap labour system and poverty. Nevertheless, the Reserve Bank’s practice of monetary policy has since closely followed the techniques of the ‘monetarist’ approach deployed by the central banks in Europe and North America in the 1980s. Monetary targeting, taking the form of guidelines for the growth of M3 money supply, was pursued reflecting the Reserve Bank’s assessment of the appropriate rate of expansion of money supply (in each forthcoming ‘guideline year’) required to reduce inflation, after accounting for the expected real growth of the economy (the latter based on the Bank’s econometric forecasts). As might be expected, the Bank’s performance in meeting these targets has been dismal: marked overshoots have occurred almost continuously since 1986. For example, the 1995 guideline for M3 growth was set at between 6 and 10 per cent; the outcome was a rise of 14.3 per cent. The explanation given for this overshooting was the large-scale inflows of foreign capital and the strong demand for credit. However, it would have been easy for the Bank to overcome the effect of these influences if there was indeed a serious intent to achieve the guidelines. These could have been achieved through a firm application of open market operations and other neutralizing measures such as selective credit controls (given the inadvisability of raising interest rates). The lack of success in managing an orderly growth of M3 money supply has now led to a revision of the guidelines: a new base for each year’s guidelines will be used, calculated as the average amount of M3 money supply in the fourth quarter of each year. This is now accompanied by an admission that ‘the money supply is a less useful indicator of potential underlying inflationary pressures in the economy’, and that ‘the Reserve Bank does not regard money supply guidelines as a rigid rule for monetary policy in South Africa’.’ The general level of the rate of interest nevertheless remains the key instrument of monetary control. The Bank’s discount rate plays a critical role in the management and the terms of refinancing of an ever-widening range of debt, and hence one of the factors determining the level of liquidity (or the equivalent of cash balances) 1n the banking system. From this flows the influence of the Bank’s rate of discount over the term structure of market interest rates. The other and perhaps more important factor relates to the extension of short-term credit by the Reserve Bank (at bank rate) to the banking sector (via the discounting of


The Political Economy of South Africas Transition

prime bills), and other ‘open market operations’ through the purchase or sale of Treasury bills and certain other securities of the public sector. The sharp fluctuations 1n the size of Reserve Bank claims on the private banking sector in recent years suggests the Bank’s considerable preoccupation with making its interest rate policy effective though with negative outcomes for the economy’s growth and the level of employment. The monetarist strain within this system 1s reflected in the liquidation of such quantitative controls as the ceilings on credit to the private sector, and other forms of prescriptiveness which were central to monetary policy in the period prior to the 1980s. The ‘open market operations’ instrument has become much more important than before, reflecting the shift in monetary policy towards a search for stability in the general price level and hence in the level of wage incomes largely aS a response to the growing wage pressures during the past decade. The other critical concern determining this monetarist approach was undoubtedly what was perceived as the inflationary outcome of a fiscal policy directed towards supporting an income redistributive and employmentgenerating programme such as the ANC’s 1994 Reconstruction and Development Progamme (RDP). The Reserve Bank, with its leadership and policies more or less sanctified under

the terms

of the Interim


and ensconced

within the ‘government of national unity’, began issuing dire warnings of the dangerous implications of government budgetary deficits ‘getting out of control’ — with claims that the government was likely to be confronted by a ‘debt trap’ (namely, the government’s need to borrow through the issue of fresh debt to meet the interest cost of servicing the existing debt). Moreover it was held that any further rise in the level of the government’s budgetary deficit would be a harbinger of rising inflation (or an expectation of higher inflation) and inevitably contribute to wage, cost and other price raising tendencies with severe negative consequences for ‘investor confidence’, the balance of payments and much else. The ‘debt trap’ was in these terms seen as having cumulative ‘explosive’ consequences — with a ‘snow-balling’ national debt ending in ‘financial collapse’. That would

arise, according to this scenario, when

the national authorities, in

desperation, decided to monetize parts of the national debt and thereby undermine the Reserve Bank’s ability to maintain its money supply management functions.* There do exist techniques for dealing with such a debt ‘crisis’. First, a lower interest rate regime and, secondly, direct measures such as stricter reserve asset

and prescribed asset (investment) requirements on the banking and savings institutions, deposit and lending interest controls, and import deposit schemes. These measures would not be new to South Africa — they were central to monetary policy until the late 1980s. Nor are they exceptional for a country at South Africa’s stage of development. As noted on pp. 109-110 two methods were adopted to temporarily alleviate the debt-servicing costs to the government, namely reducing the coupon rate on stock issued to replace maturing stock, and next the issue of zero-coupon stock at heavily discounted issue prices.

Monetary and Foreign Exchange Rate Policy


The Governor of the Reserve Bank has in more recent times admitted to the difficulties of achieving the desired monetary targets in support of price stability through the existing market-orientated policy instruments.’ These difficulties are certainly not new. There is ample evidence to suggest that there does not exist anything in the nature of an optimal monetary rule which 1s able to determine with any degree of certainty the relationship between monetary instruments and economic outcomes as well as the relationships between the Key economic variables. What this implies is that it may not be possible to identify monetary rules which are robust enough to exclude the need for some discretion in monetary policy.° This recognition has since promoted experiments with a variety of supplementary discretionary rules in the hope of achieving more predictable outcomes from monetary policies; (these rules have come to be known as the practice of ‘leaning against the wind’ and it was to this that the Reserve Bank Governor alluded in his 11 July 1996 address). This implies that in concert with increasingly revisionist approaches being adopted in the practice of monetary policies abroad, the Reserve Bank is also moving, albeit cautiously, towards adding an element of discretion in its monetary policies. This may signify a growing recognition that the present monetary regime may well be the cause of, rather than the remedy for, the present crisis of high unemployment, slow growth and a depreciating currency. In any case it 1s arguable that there exists plenty of room for a faster growth of output before inflation is triggered off, and hence that the Reserve Bank’s preoccupation with the central government’s fiscal deficit and its own failure to hold the money supply growth in check is dangerously misplaced under present economic conditions. The discretionary rules discussed in the literature suggest that the level of interest rates should be made to depend not only on the rate of inflation relative to its target but also on the level of output (and/or nominal incomes) relative to the latter’s required trend. Here, the policy instruments (money supply growth and the rate of interest) feed back (or ‘lean against the wind’) in response to economic conditions. There are undoubted problems with these feedback rules because they are largely based on guesses about unobservable magnitudes. However, they suggest the need for a greater element of discretion in policy, and that the old monetarism

(based, for example, on Milton Friedman’s k per cent

rule, namely, keeping the money growth to a fixed percentage each period, as well as the other variants of the simple monetarist approach) may well now be losing steam given slower economic growth and the rise in unemployment throughout the advanced industrial countries, and persistence of underdevelopment in large parts of the ‘developing world’.’ Despite these experiences big business, principally the South African Foundation, and also government, persist in holding to policies grounded on the assumption of a stable relationship between monetary growth and inflation and the belief that the government can simply choose the size of the fiscal deficit. The International Monetary Fund and World Bank have been the strongest proponents of this parable as manifest in the way the projections of the South


The Political Economy of South Africas Transition

African Foundation and the Governments’ Growth, Employment and Redistribution — A Macroeconomic Strategy statement for monetary growth and the fiscal deficit are seen as declining on a smooth curve over the years to the year 2000, and miraculously produce an overall investment growth rate of over 26 per cent a year and by the year end (of the decade) by almost 44 per cent, with exports rising by over 10 per cent annually and aggregate output increasing towards an annual rate of 6 per cent. And this despite the fact that in practice monetary targets have been consistently missed and the fiscal deficit unpredictable with interest rates having to be raised in a futile effort to achieve the prescribed targets. Even the substantial ‘unplanned’ depreciation of the rand currency has done little to alleviate the monetary situation and, if anything, has further destabilized monetary policy to a degree which makes inappropriate the lifting of exchange controls over capital transactions.®



The exchange rate defence mechanisms available to the Reserve Bank remain exceedingly fragile. The foreign exchange reserves at around $1 billion (R4.5 billion at the mid-1996 exchange rate) cover no more than one month’s cost of imports and over the year, from August 1995, the dollar value of the rand depreciated by almost one-third. The Bank’s overriding objective, as set out in its Mission Statement,’ to maintain the internal and external value of the rand has

been comprehensively shattered by the country’s vulnerability to capital outflows, and its lack of adequate defences for the currency’s value. The Reserve Bank has since replaced its commitment to maintain the external value of the rand by a new longer-term objective of maintaining a fairly stable real value of the exchange rate of the rand. This latter formulation now features in the South African constitution. However, this policy revision has done little to improve the ability of the Reserve Bank to mount meaningful defences for the currency in view of the government’s determination to further open out the economy with the promise of increasing deregulation of the financial markets and the further lifting of exchange controls on capital account. The objective of sustaining a stable real exchange rate necessarily calls for a continuing level of foreign exchange intervention (by the Bank) coordinated with monetary and fiscal policies which seek to influence the level of domestic prices. However, in a situation of rising prices (in which South Africa has found itself over the past decade), a restrictive set of monetary and fiscal policies in support of the exchange rate implies a worsening of the outlook for economic growth and employment, and in the present South African context, that constitutes the worst of outcomes, generating further social tensions and hence renewing the pressures on the exchange rate. Here, undoubtedly, lies the policy dilemma. The country is confronted by two severe weaknesses. Firstly, the inadequacy of reserves undermines any attempt to

Monetary and Foreign Exchange Rate Policy


stabilize the rand at whatever the chosen target rate of exchange, and secondly,

the severity of the problems of unemployment and poverty impose severe constraints on the use of high interest rates and other deflationary policies to support such a target exchange rate. Hence, and within the officially chosen terrain of an increasingly deregulated economy, the stabilization of the exchange rate turns only marginally on internal policy instruments and more critically on the substantial inflows of foreign direct investments on a predictable and long-term basis. The latter prospect must, for a variety of reasons, be regarded as little more than a forlorn hope at the present time. In the meantime the Reserve Bank’s management of the foreign exchange market and the exchange rate has been little short of a disaster. It failed to understand let alone learn from the collapse of the Mexican peso following the 1994-95 withdrawal of foreign funds invested in peso-denominated securities. In South Africa, in the 18 months to December 1995, net capital inflows — the bulk invested in listed securities — amounted to R30.8 billion. Of this, one-half

went into financing the current account deficit in that period. The balance was used to repay short-term credits from foreign central banks and run down other liabilities (principally, oversold forward exchange contracts). Much of the inflow came through the financial rand (finrand) market leading in time to the closing of the discount on the finrand rate in relation to the commercial rand rate of exchange. The Bank, buoyed by the capital inflow, and the rise in the nominal exchange rate by over 4 per cent in the months towards the end of 1995, abolished the finrand in March 1996 (an outcome which, it would seem, the speculators who generated the capital inflow had anticipated). Over the full 18-month period the rand appreciated by over 6 per cent, and in the light of South Africa’s higher inflation rate relative to that of its trading partners, the appreciation of the rand was even greater. These developments, instead of being assessed for what they were, namely the speculative inflow of footloose short-term capital and, as in the Mexican case, liable to be withdrawn at any time, gave rise to a euphoric feeling that the country had not only recovered from its long isolation but was destined to become a significant recipient of foreign capital flows. This perhaps explains the policy of the Bank in the months to February 1996 to encourage the appreciation of the rand rather than improve the size of the foreign exchange reserves. When that appreciation reached the point where it became eminently profitable for the speculators to reverse their open positions in rand denominated paper the rand’s collapse became inevitable. The outcome was the rand’s melt-down starting on 16 February 1996, and depreciating from R3.66 to the US dollar to R4.5 by the end of August 1996 — a decline in nominal terms of almost 25 per cent. The Bank’s efforts to shore up the rand’s value also proved to be costly, with substantial losses in the foreign exchange reserves. Moreover, the Bank’s intervention efforts in the forward market — selling foreign exchange for forward delivery to importers and commercial banks — produced substanual liabilities to be borne by the central government (the latter bears the risks and the losses of the Bank’s intervention in support of the exchange rate). According to the 1996


The Political Economy of South Africas Transition

Budget Review such losses amounted to R1.57 billion in the financial year 1994—95. These losses became part of the net government borrowing requirements and thus an addition to the national debt. Furthermore, according to a study by the Centre of Research into Economics and Finance in South Africa: For the period as a whole, frotmn the middle of February to the end of April 1996 the Bank’s intervention in the foreign exchange market exceeded US$5.3 billion, as reflected in the rise in the Bank’s total net oversold (sales less purchases of foreign currencles) position from $6.6 billion to more than $12 billion. Approximately $3.5 billion of this cumulative intervention was through the forward market. (CREFSA,


It is clear from this experience that the decision of the Bank to abolish the finrand in March 1996 was precipitous if not a grave mistake. The Governor of the Reserve Bank had previously defined three conditions for the finrand’s abolition: first, a substantial reduction in the discount of the finrand to the exchange rate of the commercial rand; second, the country’s net foreign exchange reserves must rise substantially, and finally, the stock of non-resident call deposits with South African commercial banks should be substantially reduced. Only the first condition was met and this, as subsequent developments revealed, was no more than temporary. With the abolition of the finrand the sudden liquidation of foreign-held portfolio investments played a major role in the depreciation of the commercial rand. Next, the balance of payments has been and remains in a parlous state; in 1995 the current account deficit amounted to R12.7 billion and in 1996 was running at an annual rate of R10.5 billion. There exist significant short-term liabilities in the form of drawings on foreign credit facilities by both the Reserve Bank and South African commercial banks and importers. At the end of 1995 a $855 million borrowing from the IMF was exhausted in the Bank’s failed efforts to bolster the rand during the April 1996 run on the currency. The policy options facing the authorities in managing the exchange rate system have narrowed sharply as a result of these experiences, and the rand’s almost chronic weakness. As noted above, the currency’s stability critically depends on a continuous and sizeable inward flow of long-term investment capital. That has not happened. On the other hand, the main concern of the South African business community remains the early lifang of all existing exchange controls. Their main interest, 1t would seem, is located in the early liberalizanon of capital movements. This may explain the Reserve Bank’s decision to abolish the finrand well before its own preconditions for such a step had been met. Despite the severe repercussions of that abolition, the pressure for the further dismantling of exchange controls, regulations and restrictions on both residents and non-residents persists. The Reserve Bank has already relaxed some of its regulations by allowing the savings institutions (insurance companies and building societies) to hold prescribed proportions of their assets in foreign investments. Moreover, a number of overseas investments have been made by South African companies in recent years with apparent Reserve Bank agreement

Monetary and Foreign Exchange Rate Policy


(such as the Gencor’s acquisition of Billiton, the stainless steel producing subsidiary of Shell International and the Anglo-American Corporation’s $600 million purchase of Del Monte Foods International). Nevertheless, the ending of controls on all capital account transactions movements is now being focused on the completion of what essentially is a structural adjustment programme that ensures fiscal and monetary ‘stability’, ‘flexibility’ in the domestic


for goods,

services and


and the

completion of the liberalization of all transactions on the current account of the balance of payments. This approach 1s spelled out in both the government’s Growth, Employment and Redtstribution — A Macroeconomic Strategy document of June 1996 and the Growth for All document of the South African Foundation of February 1996. Both are united in calling for tight monetary policies with positive real rates of interest, a sharp contraction in the size of the budget deficit, and labour market ‘flexibility’ (amplying multi-tier wage structures and limiting the application of uniform employment standards in the economy). This structural adjustment approach to foreign exchange policy is being strongly contested. In a country with heavy unemployment and substantial social ills, such an approach is seen as spelling further social instability and a contraction of the economy. And as matters presently stand the exchange control system over capital transactions by residents remains porous and largely ineffectual and a significant volume of ‘capital flight’ out of the country is already evident. Hence, a first and necessary measure to shore up the rand currency is not a relaxation but a sharp tightening of controls on capital outflows with strict surveillance of trade transactions to prevent transfer pricing and other indirect methods of capital exports. Finally, the inflow of foreign capital, in the form of fixed investment, will increasingly come to depend on economic policies that aim towards resolving the inherited problems of the apartheid period, improving living conditions, expanding employment and the skill-base of the working population, creating a thriving domestic market, and joining with foreign capital in undertaking joint venture investments for the enlargement and modernization of the country’s social and economic infrastructure. The materialization of such an advance in economic policy constitutes the necessary precondition for the abolition of exchange controls.



Since the early 1990s, there was mounting pressure from the banking and finance industry and the economic establishment more generally for implementation of the Jan Lombard position on Reserve Bank independence, which was first raised in the context of the de Kock Commission recommendations. Reports to the effect that the independence of the Reserve Bank was to be written into the new Constitution were based on press speculation of threats of resignation by Reserve


The Political Economy of South Africas Transition

Bank directors and the bogey of upsetting foreign investors and international monetary institutions. Let us again look briefly at this issue of central bank independence in the context of South Africa’s political transition. Paul





in a notable





technical—economic analysis which treats central bank autonomy as exogenous and reduces complex institutional structures to a single variable such as central bank independence and, at a further remove, that inflation is a purely monetary matter. Instead, they adopt a ‘political economy’ approach which ‘examines the relationship between various politico-economic forces and interests which act to constitute and maintain institutions’. This approach specifically rejects the common argument that governments are naturally irresponsible. Further, it notes that it is only in recent years, when the rate of inflation has generally fallen to modest levels, that the case for central bank autonomy has become fashionable. This is to be compared to the 1970s when inflation was running at record levels (Bowles and White, 1994). Moreover, empirical studies find little evidence of any relationship between central bank independence and the rate of inflation. Robert Barro, for example,

correlates an index of central bank independence average inflation rate from 1967 to 1990:

for 67 countries with the

A comparison between the index and the inflation rate reveals a crucial problem; the correlation between the two variables is essentially zero. This verdict is also

maintained if one looks separately over the three decades from the 1960s to the 1980s and if one holds constant other possible determinants of inflation. In this

broad sample of countries, differences in legal provision that ought to affect central bank independence have no explanatory power for inflation. (Barro, 1995a)

‘Global neoclassicism’ involves a sustained attack by mainstream economists, working within the neoclassical tradition, on the intellectual foundations of state intervention in the economy’s management and direction based on the belief that there exists a unique set of what are regarded as ‘natural’ levels of certain critical economic variables, in particular the level of unemployment. The international financial institutions have rapidly aligned themselves to this new orthodoxy, enforcing it through ‘policies of structural adjustment’ in the developing countries. In South Africa this new orthodoxy found particularly strong resonance within the political establishment and the South African mining-—financial conglomerates by virtue of what were seen as the dangers of ‘populism’ — of putting in place far-reaching redistributive mechanisms through Keynesian-type interventionary policies, to begin to implement the ANC’s Freedom Charter. That undoubtedly was at the centre of Jan Lombard’s nightmares. The Governor of the Reserve Bank has a duty, so it is generally believed and expected, to control and reduce the rate of price inflation and protect the stability of the currency, domestic and externally. But there also exist other Key considerations: a firm monetary stance taking the form of high interest rates

Monetary and Foreign Exchange Rate Policy


could generate serious negative outcomes — deflation, high unemployment and a decline in the level of private investment and output. However, there is nothing in the charter of the Reserve Bank that requires it to prevent such a deflationary outcome from the monetary stance it chooses to adopt. As Edward Osborn (1994) notes, the rise in real interest rates in the recent period worsened the recession with ‘the blood of thousands of unemployed on the Reserve Bank’s hands’. Further, the conglomerates control some 70 per cent of the economy and are endowed with substantial cash flows (apart from running their own banks) and so welcome a rise in interest rates for two reasons: first it dampens competition from small and medium-sized independent enterprises which are heavily dependent on commercial bank overdraft facilities, and secondly, it increases the yield on their substantial cash resources.




Following the unbanning of the ANC the key issue of economic debate within the existing political establishment, as indeed among the international monetary institutions, was the relationship between what was called a ‘prudent’ fiscal and monetary policy coupled with stable prices and external balance on the one hand,

and on the other, the amelioration of abysmal

living conditions for the

black population through faster growth and/or policies of income redistribution. The World Bank (1994) sought to resolve this relationship through its predominantly supply-side proposals, namely advancing labour skills, shifting the orientation of the manufacturing sector towards exports and the encouragement of small businesses. It recommended that these objectives should be supported by a fiscal and monetary stance which ensured a ‘stable’ inflation rate. It advised that ‘monetary policy should be well managed’ in two respects. First, it would be wrong to stimulate the economy through a return to the negativereal-interest regime which prevailed through much of the 1973-83 period, and which encouraged capital intensity, raised investment—output ratios, imposed heavy strains on the balance of payments, while doing nothing to encourage employment creation. The World Bank held that it would be disastrous for a future government to engage in the monetization of the fiscal deficit since this would lead to an acceleration of the inflation rate. Equally, it advised the new authorities to consider the damaging consequences for the real economy of attempting to reduce inflation too quickly (World Bank, 1994). This approach represented an advance on the previous positions of the World Bank and the IMF (as reflected in their earlier reports of 1992—93, which were largely framed within the compass of programmes of ‘structural adjustment’ and of extensive economic deregulation). Its model, based on the work of the Macroeconomic Research Group (MERG), suggested that on the best case scenario, the democratic government should be able to meet the major infra-


The Political Economy of South Africas Transition

structural goals of the ANC’s reconstruction and development programme by the year 2001 at a cost of R39-—46 billion without bankrupting the economy. This closely followed MERG’s analysis and policy recommendations. By contrast the previous government’s ‘Normative Economic Model’ (NEM) (CEAS, 1993) was hardly a ‘model’ in the correct understanding of that term. There were no clearly defined relationships between the complex of economic variables operating in the system, and hence no testing of the viability or mmpact of different projections, hypotheses or policies on the national economy. Rather, the NEM was little more than a series of assertions grounded in a largely subjective view of how the economy functions. It was drafted in the fashion of a textbook for undergraduates and this is nowhere more evident than in its discussion of monetary policy. Underlying its assertions on monetary matters 1s a broadly unchanging approach to economic policy in general and little more than a carbon copy of the policy platform of the United States and Britain. The NEM saw the key in unlocking private sector potential through rising productivity which in turn was dependent on the pursuit of competitive policies, deregulation, privatization and budgetary and other restraints on the government’s involvement in the economy. There was no recognition of the contradiction which this approach posed in terms of the cartel-like organization and ownership manifest in and over dominant sectors of the national economy, nor the constraints on the level of aggregate demand which result from the highly structured inequalities in the distribution of wealth and income and the level of unemployment (CEAS, 1993). The ANC’s formal participation in this debate has been strong at the level of generalities. As Laurence Harris notes, ‘the ANC did not give high priority to research on economic policy or its discussion within the movement. . . as a result, as the political structures maintaining apartheid began to weaken at the end of the 1980s, the ANC did not have a thoroughly worked out and agreed post-apartheid economic strategy’ (Harris, 1990). This is certainly true: in the various documents on economic policy produced at conferences -mainly held in exile — the attention given to the instruments to be deployed to achieve the ANC’s broad objectives were seldom articulated with the precision and incisiveness required. It was only after the decisive shift in power became evident during the negotiations towards creating a ‘government of national unity’ in 1993, coupled with the close attention of the Western powers and the international financial institutions to issues concerned with the management, property relations and future direction of the South African economy, that officials of the ANC began to pay attention to the institutions and instruments of economic policy. Given the circumstances this attention came to be largely influenced by the monetary policy structures in place, the overwhelming level of control over the economy by the conglomerates, the highly constraining character of the national debt and its servicing costs and the initiatives of the international financial institutions 1n policy recommendations. The MERG report (1993) sought to deal with these deficiencies in the economic approach of the democratic movement. Chapter 8 of the report was specifically concerned with finance and banking. It argued that the financial

Monetary and Foreign Exchange Rate Policy


liberalization policies of the past decade had failed to create a system providing the necessary basis for successful economic transformation. The belief that the unrestricted and competitively based financial markets could facilitate mmprove-

ments in the flow and allocation of finance and advance efficient economic growth remain unrealized. The MERG proposals, by contrast, do not depend on competition alone to promote improvements in the financial and monetary system. They involve major initiatives for the reconstruction of institutions designed to meet the requirements of the new South Africa. These proposals may be summarized as follows: V Creating a ‘People’s Bank’ with a view to drawing all South Africans into the banking nexus based on cheap and effective means of transferring and receiving payments and the holding of savings. V Putting in place measures to increase the savings ratio through savings-related institutions concerned with housing finance and earnings-related schemes for the provision of state-managed pensions. V Orienting the capital market towards the funding of productive infrastructural ventures rather than financial speculation. This calls for changes in the tax structure, especially the adoption of a capital gains tax and prescribed asset ratios for pension funds and the life assurance companies. VW Making the Reserve Bank accountable and subordinate to the Ministry of Finance and subject to parliamentary scrutiny. It was argued in the MERG report that while the Reserve Bank is expected to restrict the excessive growth of the money supply and to raise interest rates whenever it considered inflation was becoming too high, there should be no contradiction between the policies of the Reserve Bank and that of a democratically elected government, even if the latter sought to pursue a high employment strategy at the cost of a higher inflation rate. MERG rejected the view that inflation is controllable only through the application of monetary policy, or that the Reserve Bank should be obliged to protect the value of the currency through a zero inflation rate and at a fixed exchange rate.

CONCLUSION Monetary policy is as much a political as it is an economic art. Raising interest rates is not a costless affair; the economy slows down precisely because credit 1s dearer with substantial knock-on effects on the levels of investment and employment and the distribution of income and wealth. Central bankers tend to deny that the pursuit of an ant-inflationary monetary policy hurts long-run economic growth. However, this evidence is largely based on the flawed belief that low inflation alone is the cause of economic growth. There 1s no recognition that the opposite may be more true: that increasing capacity to produce may be the best long-term strategy for low inflation.


The Political Economy of South Africas Transition

In South Africa, despite the thought-system which the Reserve Bank now inhabits (in contrast to the 1970s and 1980s when it seemed to possess little compunction in allowing an inflationary growth of broad money supply to meet the government’s financial requirements) the Reserve Bank needs to be less anxious to prove its anti-inflationary credentials to the financial markets and the international financial institutions and show more sensitivity to the wider economy and its crying need for economic growth, higher employment and steady and visible improvements in standards of life for the majority of the people. This is the sense in which monetary policy must remain a servant of macroeconomic policy rather than its master.

REFERENCES ABSA Bank (1995): Economic Spotlight. February. Bank of England (1987): The instruments of monetary policy. Quarterly Bulletin, August, The Mais Lecture. Bank of England (1996): Financial change and broad money. Quarterly Bullenn, December. Barro RJ (1986): Rules vs. discretion. In CC Campbell and WR Dougan (eds.) Alternanve Monetary Regimes. The Johns Hopkins Press, Baltrmore.


RJ (1995a):

Inflation and economic


Quarterly Bulleun of the Bank


England, May.

Barro RJ (1995b): Target practice. Economist April 22. Bowles P and White G (1994): Central Bank Independence:

A Political Economy Approach.

Mimeo, January. Central Economic Advisory Services (CEAS) (1993): The Restructuring African Economy — a Normanve Model Approach. Pretoria, March.

of the South

CREFSA (1996): Managing the Rand Deprecianon: the role of Intervention. London School of Economics, April. de Kock GPC (1985): The Commisston of Inqutry into the Monetary System and Monetary Policy in South Africa. Government Printer. Pretoria, May.

Franzsen DG (1983): Monetary policy in South Africa 1932-82. South African Fournal of Economics, §1(1): 88-133. Garner J (1994): An Analysis of the Financial Rand Mechanism. Research Paper No 9. Centre of the Research into the Economics and Finance in South Africa, London.

Goodhart CAE (1989): Money, Information and Uncertainty. Macmillan, London. Goodhart CAE (1992): Objectives for and the Conduct of Monetary Pohcy for the 1990s. London School of Economics, Special Paper No 149 1992. Harris L (1990): The economic strategy and policies of the African National Congress. In A McGregor (ed.) McGregor’s Economic Alternanves. Juta & Co., Wynberg, South Africa. International Monetary Fund (IMF) (1995): The Adopnon of Indirect Instruments of Monetary Policy. Occasional Paper No

126, Washington DC, June.

Lombard JA (1994): Abolttion of Exchange Control. South African Chamber of Business, Discussion Document. Johannesburg, June. Lowitt S (1994): Repression and liberalisation: An Application of the McKinnon-Shaw Model to South Africa. Unpublished M.Com Thesis, Witwatersrand University.

Monetary and Foreign Exchange Rate Policy


Mainardi S (1994): The Gold Price and the Exchange Rate. Mimeo, University of Natal, November. McKinnon RI (1973): Money and Capital in Economic Development. Brookings, Washington DC. MERG (1993): Making Democracy Work: A Framework for Macroeconomic Policy in South Africa. Centre for Development Studies, Bellville, Cape.


J and



J (eds.)



the Global Economy.


University Press, Oxford.

Moll T (1983): Monetary Policy since 1989: Is the ‘Stalsjacket’ still working? Mimeo. November.

Nel H (1994): Monetary control and interest rates during the Post-De Kock Commission Period. South African Journal of Economics, 62(1): 16-27. OECD (1975): The Role of Monetary Policy in Demand Management. Paris. Osborne E (1994): If It Moves Kill it. Mimeo, September. Osborne E (1995): The Great Interest Bill Robbery. Mimeo, March.

Republic of South Africa (1996) Growth, Employment and Redistribution, A Macroeconomic Strategy. Pretoria. Shaw ES (1973): Financial Deepening in Economic Development. Oxford University Press, Oxford. South African Foundation (1996) Growth for All, An Economic Strategy for South Africa. South African Foundation, Johannesburg. UNCTAD (1994): Internanonal Monetary and Financial Issues for the 1990s. Geneva. World Bank (1994): South Africa: Economic Performance and Policies. Discussion Paper No 7, Washington DC.

ENDNOTES 1. Comments on an earlier draft of this chapter by Edward Osborne, Harry Zarenda and the editors are gratefully acknowledged. I am also obliged to Edward Osborne for access to his economic papers. 2. For a more

detailed account

of this Western


see, for example,



Grieve Smith (1995), especially Chapter 8. 3. C.L. Stals, ‘Money Supply Guidelines for 1996’, Quarterly Bulletin, South African Reserve Bank, June 1996.

4. J.H. Meijer (Deputy Governor of the Reserve Bank), South Africa and the Debt Trap, address at a function in Cape Town, 25 October 1994; and ‘Monetary policy’ in H.B. Falkena et al. (eds.), The South African Financial System, Southern Books, Johannesburg, 1995. 5. See his address to the South African Institute of International Affairs, Johannesburg,

11 July 1996. 6. P. Levine and D. Currie, Optimal feed-back rules in an open economy macromodel with rational expectations’, European Economic Review, 27, 1985.

7. See Allison Stuart, ‘Simple Monetary Policy Rules’, The Bank of England Quarterly Bulletin, August 1996, and The Economist of 10 August 1996. 8. See the South African Foundation, Growth for All, February 1996, and the government’s

Growth, Employment and Redistribution — A Macroeconomic Strategy, June 1996. 9. See the Reserve Bank Quarterly Bulletin of September 1990.

industrial and Energy Policy Ben Fine



Debating industrial policy


Towards an alternative 130 The institutional context 132

Concluding remarks


INTRODUCTION It is extremely difficult to provide a review of industrial and energy policy under the Reconstruction and Development Programme (RDP) because the new government has been in office little more than two years, it has needed to take stock, and what it has achieved may not be open to the public gaze or have come under my private scrutiny. To guard against premature obsolescence, I begin in the first section with a review of three firmly established approaches to industrial policy that have been highly influential in South Africa, those from the World Bank, the Industrial Strategy Project and the Monitor Group. Paradoxically, although the first of these is probably the least respected, it is almost certainly the most important. For it is like an alter ego, informing even those alternatives that fundamentally break with it. The market is presumed to work unless you can show otherwise; it is more a matter of addressing the balance between the state and the market, and less one of unravelling the formation and representation of economic and political interests through both of these institutions.’ In practice, if not of necessity, it is suggested that each of these approaches has misjudged the structure and dynamic of the South African economy and each places undue optimism in policies that are liable to have limited impact in generating employment and meeting basic needs. An alternative assessment of the South African economy as a minerals—energy complex is very briefly outlined in the second section. This is used in the third section to place emphasis on the continuity in industrial policy that has marked the first years of the RDP, a result of the continuity in institutional structure and functioning. Such a focus also allows some insight into the potential that has existed and, in certain instances, has been taken in making breaks with past policy. In the concluding remarks, some strategic alternatives are offered for industrial policy.



The Political Economy of South Africas Transition



Broadly, three different approaches have been most prominent in setting recent debate about South African industrial policy. They emanate from the World Bank, from the Industrial Strategy Project (ISP) and, most recently, the Monitor Group. Whilst they differ considerably, they do have one common characteristic — each 1s informed by an analytical framework that has previously been developed without reference to South Africa itself. This might be considered a strength, given the elaboration of general principles without their being unduly prejudiced by their specific application to South Africa. In part, this depends, first, upon the validity and usefulness of the principles themselves as well as, second, the extent to which they are, indeed, appropriate in practice to South Africa. Neither of these conditions is met by these approaches. As a consequence, because the fit between the theory and the facts of South African industrialization has often proved uncomfortable within these approaches, one or the other has often been sacrificed in the examination and formulation of industrial policy. This has implied the necessity for considerable flexibility and ingenuity in the application of the various approaches, giving rise to nuances that the brief overview offered here is incapable of elaborating. In short, we hope to provide a fair if rough review. The World Bank (1993) approach focuses on two related issues — the need to eliminate distortions in prices whether as inputs (capital costs and labour, for example) or as outputs (protection) and the need to reduce state intervention more generally. It argues that the high level of capital intensity in some sectors of South African industry, such as heavy chemicals, 1s due to artificially depressed costs of capital and that manufacturing weakness more generally is due to protection from international competition. In addition, it otherwise takes the high levels of unemployment as indicative of real wages that are already high enough. But there is an acceptance that inequality in infrastructural provision, including education and skills, has reinforced other aspects of apartheid and inhibited the emergence of small- and medium-sized enterprises (SMEs). Interestingly, the World Bank has not adopted a strong stance on privatization, especially in the form of denationalization, and has even accepted that public sector might crowd in rather than crowd out private sector investment. Its emphasis has been upon getting the prices of capital and labour ‘right’ and eroding protection. The weaknesses of this approach arise out of its central commitment to the notion that the market works and, where it does not, policy should be aimed at conforming with the market. As an explanation for successful industrialization, as in the East Asian newly industralized countries (NICs), this has been shown to be woefully inadequate.” In the case of South Africa, it is particularly inappropriate since much of the economy’s success has been built upon state intervention on behalf of, and in coordination with, large-scale corporate capital, as in Eskom, Iscor, Sasol, Transnet, Armscor, etc. It is not necessary to argue that these corporations represent an optimal mobilization and use of resources. But

Industrial and Energy Policy


nor can there be a presumption that in their absence, and with appropriate undistorted prices, these huge capital investments would have been replaced by a more labour-intensive and internationally competitive manufacturing sector. The evidence for such a counterfactual is simply non-existent even if sense could be made of it. In addition, there is a serious neglect in the World Bank approach of the political economy of industrial policy. The growth of capital-intensive industry within South Africa has reflected the formation of large-scale private corporate capital and the representation of its interests through the state. These interests and their corresponding economic power cannot simply be wished away by virtue of the election of a democratic government whether it be committed to undistorted prices or not.° The ISP (1995) approach has drawn its inspiration from the idea that we now inhabit a new post-Fordist world of flexible specialization (flec-spec). Whilst concerned with economy-wide factors such as industrial relations, technology, and corporate monopolizaton, its focus has primarily been directed around the restructuring of individual sectors towards best practice in the new forms of flexible production.* Rogerson (1994) has provided a thorough review of the applicability of flec-spec to South Africa. I have given a critical response elsewhere (Fine, 1996) emphasizing how little of the South African economy can be understood in these terms; how limited will be the benefits of a flec-spec strategy in terms of employment creation where it is applicable; and how the analysis has deep roots in a reversed dualism between the large-scale and the small-scale













modernization, requiring a compromise in principle between capital and labour which in practice is liable to lead to an erosion of wages and working conditions as flexible enterprises struggle to survive. Here, I want to focus more explicitly upon how the ISP approach has unfolded in addressing South African industrialization. One of its strengths is to have highlighted the need to examine vertical integration in formulating industrial policy. This has, however, been married to the flec-spec approach of seeking market niches and a corresponding search for international competitiveness through high product quality and variety. It necessarily leads to a pessimistic view of the potential for employment creation through manufacturing — output will come from higher productivity and serve fragmented and competitive markets. The logic of this approach is questionable. For there is undoubtedly within South Africa an enormous domestic market for standardized products to serve the basic needs of the majority of the population - in housing, clothing, food, energy, infrastructure, etc. Many of these can be based on labour-intensive methods using standardized production and drawing upon the existing strengths of the economy. Moreover, in so far as a flec-spec approach 1s adopted to serve international




a domestic


it can





crowding out the provision of cheaper, standardized products with the potental to support basic needs including employment.’ In other words, it is not simply


The Political Economy of South Africas Transition

that the flec-spec approach 1s liable to be of limited scope even where it is worth pursuing to meet market niches and international competitiveness, but it can have the effect of crowding out the potential for more labour-intensive, cheaper, standardized production. Paradoxically, this is precisely what used to be argued about the apartheid economy with its division between white elite consumerism and black impoverishment! These negative aspects of its policies were they to succeed have been recognized by the ISP. Since only an elite of workers can benefit, there is a danger of their being unduly rewarded by virtue of their trade union organization and attachment to profitable firms and sectors. Consequently, a national accord and multi-tier bargaining is necessary to control their wages and conditions and to prevent them from setting standards that would render other employment uncompetitive where levels of quality and productivity are not matched. More positively, the needs of those excluded from the flec-spec strategy are incorporated through a mixture of training and education, promotion of SMEs, and the unbundling of conglomerates which are perceived to have excluded SMEs from access to markets. These initiatives also have the rhetorical advantage of being designed to advance the interests of the black population in both employment and opportunities for entrepreneurship. However, and this is not unique to the ISP approach, the deserved attention to training, SMEs and competition policy cannot serve as a substitute for mainstream employment creation in the economy more generally. Indeed, providing training without employment, SMEs without commercial viability, and substituting competition for more broadly based industrial policy can, at best, be tokenism and, at worst, counterproductive.

The Monitor Group’s analyucal framework was previously developed in Porter’s (1989) The Competitive Advantage of Natons. It has prompted a worldwide business consultancy. It too emphasizes vertical integration in terms of the focus on industrial ‘clusters’ of related industries and activities. In addition, it

rejects the World Bank’s exclusive emphasis upon relative prices and stresses the importance of creating comparative advantage rather than relying upon it. As an approach, it 1s stronger on terminological innovation than analytical content. It is organized around the notion of a Diamond (i.e. four factors) — inputs, demand, firm strategy, structure and rivalry, and relations to related and supporting industries (clusters). Consequently, the approach has been recognized to be little more than an extremely flexible descriptive framework.° Not surprisingly, academic response to the Monitor approach has combined a mixture of contempt and envy, with admiration reserved for the wealthy compilation of descriptive material. For Muller (1990: 103-6), there 1s ‘codifying the obvious’, ‘cutesy mnemonics’, ‘a book devoid of original insights’, ‘mumbojumbo’ and by way of the study’s conclusion, ‘a taxi driver made pretty much the same point to me as I was coming back from the airport the other day’. For Thurow (1990: 95), ‘Porter preaches the economic equivalence of the survival of the fittest’. For Jones (1991: 352-4), “there is oversimplification or even banality’ and we are liable to ‘shudder at some aspects’. For Arndt (1991: 335), ‘Unlike an abstract model, limited by its nature to a few causal factors, Porter’s explanation

Industrial and Energy Policy


of industrial success seems to encompass virtually everything .. . It would be easy to criticise .. . for describing everything and explaining nothing. This 1s correct but not surprising given that Porter has chosen an inductive approach’. Also particularly notable is the facile periodization of industrial development, with its plagiarized overtones of the modernization teleology adopted from the long since discredited stages of economic growth associated with W.W. Rostow: There are four stages of national competitive development: factor-driven, investment-driven, innovation-driven, and wealth-driven. All nations begin at the

factor-driven stage. Here, virtually all the nation’s internationally successful industries draw their advantage almost solely from basic factors such as natural resources or low cost labour. In the investment-driven stage, a nation and its firm actively invest in factor upgrading and in modern, efficient plants and methods, normally based on foreign technology . . . In the innovation-driven stage, all four determinants are in place and work together to foster continuous innovation and upgrading in a wide range of industries in the economy. . . The fourth, or wealthdriven stage, is a stage of decline. In this stage, vitality ebbs and redistribution of wealth, rather than its creation, becomes the focus (Monitor, 1995, Appendix:


We might hesitate before letting Monitor loose in a history lesson but possibly industrial policy-making is less important. Despite these apparent analytical deficiencies, the specific application of the approach to South Africa has had some merit. It has exposed the lack of vertical integration and coordination, for example, in a variety of industries and product fragmentation within the car industry. But very rarely have novel insights emerged, with limited original research and ample support to that fastest growing of South African industries, the employment of domestic and foreign consultants. What Monitor does provide is some ballast against the market-led view, with a designated role for the state to intervene in order to enhance the

Diamond:’ Government’s role is inherently partial, and it succeeds only when working in tandem with favourable underlying conditions in the Diamond. Government policies that succeed are those that create an environment in which companies can gain competitive advantage rather than those that involve government directly in the process. Government’s role is strongest as a catalyst and challenger. It is to encourage, or even push, companies to raise their aspirations and move to higher levels of competitive performance, even though this process may be unpleasant and difficult. Government’s job is to make firms feel wanted but in need of improvement, not to forge cozy business-government ‘partnerships’, relax pressures on industry, or seek to eliminate risks (Monitor,

1995: 8).

This, however, despite the evidence to the contrary from the NICs, places the state in a secondary position to private enterprise. What 1s more important than state or private ownership is ‘rivalry’:®


The Political Economy of South Africas Transition Rivalry triggers product rationalisation, greater manufacturing efficiency, and price competition (Roberts and Green, 1995: 38).

Almost inevitably, despite a healthy stance against gung-ho privatization, the Monitor position is one of reliance upon market forces and private profitability and against the state’s strategic planning and development of industry.” What this fails to recognize is the extent to which the state has been instrumental in creating many of the strengths of the South African economy, even if on the basis of the inequalities and iniquities attached to the apartheid system. On these latter issues, and those of politics and power more generally, the Monitor approach has been remarkably silent. Although the Diamond is intended to construe the economic performance in terms of a system, it embodies an extremely limited understanding of the socio-economic system that has been inherited from apartheid. Apart from the deeply embedded and systemic features of racist oppression and inequality — which go far beyond the boundaries even of an unpolished Diamond -— the system of corporate power, its global operations, and its interaction with an overbloated financial system are scarcely recognized.'° In short, the Monitor approach provides more or less good business advice for enhancing the economic performance of particular sectors. As Thurow comments upon Porter’s 1989 work: We all know we should consume less and invest more in education, research and

development, plants and equipment, and infrastructure. But we don’t. We all know that the US financial system places a dangerous emphasis on short-term profits. But we don’t change the system (1990: 96).

The same must be said of the Monitor studies of South Africa. Whatever the merits of their proposals, the political economy of implementation is notable for its absence.



In the MERG report (1993), the policy stances adopted represented a compromise between inputs from two essentially incompatible positions. The first derived from the previously discussed work of the ISP. The second position arose out of the research of Fine and Rustomjee.'' It argued against many of the conventional wisdoms that informed both the ISP project as well as the vast majority of the literature on South Africa’s industrialization.'? The latter has almost universally been seen as arising over the past seventy years out of import-substituting industrialization (ISI) as a consequence of freely given protection for consumer goods industries. These have primarily served white consumers and promoted profitable, but internationally uncompetitive, indigenous capitalists, generally presumed to include politically favoured Afrikaners.”

Industrial and Energy Policy


In contrast, Fine and Rustomjee emphasize the presence of what they term a minerals—energy complex (MEC), at the heart of the South African economy. Quite apart from its own core sectors in mining and energy, the MEC has been primarily responsible for the extent and form taken by South Africa’s industrialization. For it is the immediate, downstream activities from mining and energy — in iron and steel, metal processing and heavy chemicals, for example — which have been most prominent. To a large extent, this has been disguised by the traditional way of constructing national statistics in which manufacturing has been separated out from primary production even though the two have been intimately connected with one another. This has then led to aggregate figures for primary, non-agricultural production and for manufacturing which give the impression that the latter, easily and erroneously identified with consumer goods, has become relatively more important. Exactly the opposite is the case. Fine and Rustomjee also tie their different view of the form taken by South Africa’s industrialization with a broader political economy. They argue that the MEC has been built around the small number of large-scale, corporate capitals that have always dominated the economy over the past century. They have been integrally coordinated through state policy and with the large-scale state corporations

such as Eskom,

Iscor, Sats

(now Transnet),

Sasol and Armscor.

Further, the post-war period has witnessed both the incorporation of Afrikanerbased ownership into the MEC and the extensive conglomeration of corporate capital over the entire economy, with a particularly prominent role played by mergers, acquisitions, interlocking and pyramid forms of ownership, and parallel developments and control in the financial sector. These differences of interpretation might now only seem to be of academic or historical interest. But this is wrong for three reasons. First, even where there 1s common agreement about many negative features of the economy -— the lack of development of small-scale business, monopolization, low levels of investment,

relative lack of capacity in intermediate and capital goods, poor export performance in manufacturing, the negative impact of sanctions and social instability, the low levels of skills of the workforce, and the inappropriately high levels of capital intensity in many sectors for a labour surplus economy — these will be interpreted differently in terms of their causes, significance and solutions. Second, the government is faced with an industrial sector with a particular dynamic and a particular set of economic and political interests with which It is forced to compromise. Third, the government has inherited a set of private and public institutions which, in view of the economy’s history, are inappropriate for the formulation and implementation of alternative policies. Against this background, the specific proposals for industrial policy in the RDP itself are extremely weak. Apart from acknowledging the apparent necessity to adjust to a more liberal trade regime without undue disruption, it recognizes the excessive concentration of economic power in the hands of a few whites. The main goal 1s to increase investment and employment. But concrete proposals are few and far between: small, micro and medium enterprises (SMMEs) will be promoted; monopoly pricing in vertically integrated production linkages will be


The Political Economy of South Africas Transition

investigated along with anti-trust actions; parastatal mandates will be reviewed together with the lines of accountability to their responsible ministries; and privatization proposals will be reviewed and reversed where against the public interest.

THE INSTITUTIONAL CONTEXT Over the life of the democratic government, these limited policy perspectives within the RDP have, if anything, been even further weakened. It is not simply that the commitment to public ownership, for example, has been further eroded and even reversed, with privatization erroneously seen as a potential means by

which to fund the RDP.”* Rather, the RDP has been divorced from industrial and other areas of economic policy and increasingly reduced to measures traditionally associated with the welfare state.'° This raises the issue of who is deciding and making industrial policy if it is not being driven by the RDP. It 1s here that the institutional structures carried over from the apartheid regime have continued to be important. But, first, it is mecessary to consider what constitutes industrial policy before its practitioners can be identified.’° At one extreme, industrial policy tends to be reduced to a single issue. This figures prominently in the conventional wisdom concerning South Affica’s ISI. According to the Industrial Development Corporation (IDC) the problems of poor industrial performance have been due to tariff policies: For almost 70 years, the industrial development policy of successive governments

was based on import replacement (1990: 1).

Accordingly, almost as if as a matter of terminological convenience: In this report the terms ‘trade policy’ and ‘industrial policy’ are used synonymously and interchangeably (1990:


A different example is provided by the laissez-faire stance, in which the issue of industrial policy is simply a matter of greater or lesser reliance upon the market or the state, especially in terms of private versus public ownership, although many other issues around getting the prices right can also be incorporated. At other times, competition policy, and its counterpart in regulation, have been more prominent in industrial policy debates. At the other extreme, it is apparent that, as industrial performance is potentially influenced by any number of economic policies, the potential scope of industrial policy is more or less unlimited. This is true of specific interventions for particular sectors, particular types of business (SMMEs for example), and for economy-wide factors whether these concern traditional macroeconomic policies (the level of aggregate demand, interest rates, the exchange rate, etc., all

Industrial and Energy Policy


affect industrial performance) or infrastructural provisions (as in technology policy or education and training). In this light, two important conclusions emerge. First, industrial policy and debate 1s liable to be profoundly ideological with its particular definition shifting to accommodate particular policy stances. Thus, at the time that the IDC was defining industrial as trade policy, it had itself been responsible, possibly more than any other agency, for industrial policy through the extent of its own industrial investments in heavy industry.'’ Currently, the preoccupation with industrial policy as the promotion of SMMEs has the dual advantages of being associated with affirmative action and of displacing attention from its effective absence in the ownership and control of big business.'® In short, industrial policy does not simply shift in response to changing circumstances and interests, its very definition is subject to change. Second, this implies, from an analytical point of view, that the attempt should not be made to provide a general definition of industrial policy. Depending upon the particular issue concerned, there will be differences in the underlying factors determining industrial performance and the scope of specific policies to influence outcomes. In the case of telecommunications, for example, it is more liable to be

an issue of dealing with multinationals, joint ventures and technology transfer than for the clothing industry where the problems concern wages, tariffs, appropriate choice of available technology, product mix and marketing, etc. It follows that industrial policy will both be heterogeneous and, consequently, draw upon a shifting range of policies that affect industrial performance but which do not necessarily fall directly or primarily under its rubric. In some respects, this strengthens the laissez-faire case against industrial intervention. This is that government 1s no better at picking industrial ‘winners’ than the private sector. Against this, it has effectively been argued that government must not only pick winners, it must also coordinate highly variable conditions for their success. Indeed, the creation both of winners from which to pick (not just separating out the losers) and of the conditions for them to succeed is a precondition for successful industrial performance. Both theoretical and empirical evidence suggest this is precisely where state intervention has proved

essential. '? Industrial policy requires, then, both coherent objectives and the coordinated

means by which to achieve them on a case-by-case basis. In some respects, postwar industrial development of South Africa can be considered a success in these terms. It was designed to strengthen large-scale Afrikaner capital and, after gold and energy price increases in the 1970s, to take advantage of these through the state-led expansion of economic activity around the MEC. The downside to this has been the continuing absence of long-term, coherent industrial policy in terms of a concerted promotion of a broader industrial base. Consequently, especially with the fall and stagnation of gold prices in the 1980s and the exhaustion of the most productive gold reserves,”° industrial investment has subsequently stagnated alongside the sharp fall in public sector investment in the MEC parastatals.


The Political Economy of South Africas Transition

Apart from these inherited contours in the industrial structure, the government has been faced with a corresponding institutional structure and mode of operation appropriate to past policy goals. This is characterized by a number of features. First, there are a number of different ministries whose policies have significant potential impact upon industrial policy which 1s not, thereby, the sole preserve of the Department of Trade and Industry. This is so for the policies adopted by the Ministries of Employment, Transport, Public Enterprises, Communications,


and Energy Affairs, and


In addition,


bodies such as the IDC, the Competition Board and the Board on Trade and Tariffs are of considerable importance. Not surprisingly, given the view adopted here of the complexity and heterogeneity of industrial policy, responsibility for it is widely spread. One index of this 1s the division of public corporations between the various ministries, with Trade and Industry having no direct power over telecommunications (subject to Department of Post and Telecommunications) or electricity (Department of Public Enterprises).7' Second, each of these ministries is itself organized on a hierarchical basis with limited scope for rapid reform given the security of employment effectively granted in the constitutional settlement to the existing civil service, the limited openings available for new posts, and the lack of black employees with the necessary skills to fill them at the highest as well as at intermediate levels. This involves a considerable degree of policy inertia even within those departments in which there are ANC appointments in ministerial and/or director-general posts. Within ministries and departments, there is limited initiative from below, limited potential for it to pass upward and, similarly, limited innovation in the opposite direction in response to more progressively-minded and reforming chains of command. Third, this implies that policy preoccupation 1s primarily focused on intradepartmental matters and, even where it is not or cannot be, the potential for inter-departmental coordination and coherence is limited by the heterogeneity of intra-ministerial organization, capacity and goals. It is worth dwelling on how this differs from the situation that prevailed previously, where the promotion of the MEC was unambiguously hegemonic in policy-making. This was institutionally formalized explicitly with the formation of the Department of Mineral and Energy Affairs (DMEA). It was initially created in 1980 by bringing together the previously separated departments covering energy and minerals: For the first time in the history of the public administrative system in South Africa all energy related functions are not only housed in one and the same department, but are housed in a department which 1s responsible for both the energy and the mineral policy of the country (DMEA,

1980: 71).

The concerted exercise of power is explicitly detailed — noting that the Energy Policy Committee (EPC) formed in 1974, had long been responsible for making policy recommendations to Cabinet:

Industrial and Energy Policy


The energy function of the former Department of Environmental Planning and Energy was incorporated into the newly formed Department of Mineral and Energy Affairs on Ist March 1980. This transfer of function included the transfer of the Energy Policy Committee. The Electricity Control Board, Eskom (Electricity Supply Commission) and Sasol (S.A. Coal, Oil and Gas Corporation Ltd) were transferred from the former Department of Industries to the Department of Mineral and Energy Affairs on 1 June 1980 as were several other institutions and functions concerned with liquid fuels. Energy functions of the former Department of Commerce and Consumer Affairs relating to coal and liquid fuels were taken over on 7 October 1980 so that all energy functions in the Public Service, with the exception, at present, of the energy-related aspects of coal research, are now vested in the Department of Mineral and Energy Affairs (OMEA, 1980: 71).

The membership of the EPC had itself been made up from the leading public sector figures in energy (including transport, finance, commerce and industry) joined, in 1981 for example, by two private sector representatives (from Gypsum Industries Limited and Sentrachem Limited, both heavy energy users within the MEC and subject to major private corporate affiliate control) (DMEA, 1981: 60). Although there are new institutional developments in the government, none of these has the coordinating and executive powers so clearly exercised previously.7” Fourth, in addition, governance under the apartheid system was heavily based upon patronage and the capacity of the Cabinet to define and coordinate common goals, even if these were to swing with the regime’s crisis in the 1980s. This has been lost in the formation, in this context, of the inaptly named, Government of National Unity. There is no unity of vision of what constitutes industrial policy and no unity of purpose in formulating and implementing such policy. Certainly, this role has not and cannot be taken by the RDP. In short, there is an important institutional background against which progress in industrial policy under the RDP is to be assessed. It does include some dismantling of the previous institutional structures, goals and modes of operation which exhibited some degree of coherence and coordination. But this has not been replaced by a well-developed alternative. Not surprisingly, then, there is evidence of substantial policy continuities with the past. This can be highlighted with a number of illustrations. First, for industry lying outside the MEC, industrial policy had been highly dependent upon seeking discretionary support in case of difficulties, usually in the form of added protection. As the newly-appointed Director-General for Trade and

Industry was to observe in his first Annual Report:?° My experience thus far as Director-General suggests that, if firms spent only half the resources and time that they are at present giving to lobbying for protective tariffs and the retention of GEIS benefits, and channelled the balance into a critical

examination and international benchmarking of their productive processes, a growth rate of 5 per cent could be reached before 1999! (DTI, 1994: 9).


The Political Economy of South Africas Transition

More recently, import protection has been supplemented by export incentives under the General Export Incentive Scheme (GEIS) but has also been subject to the squeezes imposed by commitment to conform to the newly negotiated GATT agreement.”* The increasing abandonment, whether appropriate or not, of protected consumer goods industries to the vagaries of the world market, even if cushioned by adjustment programmes in the short-run, is evidence of continuity with the past. For it highlights both the lack of broader industrial policy and the relative unimportance of these sectors to the economy and as economic interests. The policies being made may have changed, reflecting the general weakening of the economy and its capacity to offer support, but the way in which the policies are made and their focus have remained substantially unaltered. Indeed, such policy reforms were initiated prior to the election of the democratic government. A continuity in policy, then, is to be found in the focus upon tariffs and protection, even if these are themselves being eroded. Many of the reports, deliberating on what levels of support should continue, note the importance and/ or lack of coordination in vertical integration — albeit recognizing how pricing along the chain of activities is important to their considerations, as in textiles and clothing (PTG, 1994) where the protection of the one constitutes a cost for the other, and in synfuels (Arthur Andersen, 1995). Similarly, the fragmentation of the car industry into a large number of producers and models is treated as a constraint in setting tariffs rather than as a target of policy itself (BTT, 1995). A second continuity with the past is the sustained momentum of economic activity organized around the MEC. This is highlighted in the approval, and continuing ANC support, of mega-projects, especially Alusaf and Columbus. Together these two investments, for aluminium smelting and stainless steel manufacture, respectively, were projected to absorb almost half of all manufacturing investment between 1993 and 1995 (32 per cent and 15 per cent, respectively) (Moritz, 1994: 36). Both have in common IDC support, dependence on cheap sources of electricity which is in considerable excess supply, high capital intensity and the promise of foreign exchange through exports and downstream, more labour-intensive industrial activity. To accrue in practice, the latter benefits have to be targeted, in case foreign exchange is transferred abroad and vertically integrated activity does not materialize. Current prospects for Columbus look bright because of the high price of stainless


(Financial Mail,






Its R3.5

billion investment is projected to make it the largest single-site stainless steel plant in the world with an output of 600 000 tonnes at full production by the end of the century, 85 per cent of it to be exported, adding R2.5 billion to GDP per annum and R18 billion in foreign exchange over the next 25 years. Six thousand four hundred temporary jobs have been created during construction and 8 00010000 in engineering and maintenance. However, at the same time, for a fraction of the cost at R100 million investment, Iscor is also expanding its stainless steel capacity by 480 000 tonnes. It has to be doubted whether this dual addition to capacity is justified, has been examined and coordinated, in the light

Industrial and Energy Policy


of uncertainty around export markets and the limited job creation involved for the huge investments in Columbus. Both investments have been supported by the IDC, the latter stepping in to fill the gap left by Taiwanese withdrawal from participation in the joint venture. This also had the added advantage of tax advantages in early depreciation write-offs. Alusaf is a R6 billion investment at Richards Bay with the prices paid for electricity and alumina, the main inputs, subject to a sliding scale with the price of aluminium so that profits are guaranteed.”° It is estimated that R1.5 billion foreign exchange will be earned out of total sales revenue of between R2.6 and R3 billion. Eleven hundred jobs will be created on site, with the potential for a further 30 000 downstream. The point emphasized here is not so much whether these projects are worthwhile or not by whatever criteria, although this is extremely important and could warrant much closer public scrutiny and availability of information. Rather, the capacity to deliver these projects, and the economic and political momentum and public and private institutions pushing to deliver them, are all the product of the past. They are liable to pre-empt the development of other initiatives,

let alone



to deliver




their very

rationale depends upon them - as in the retention of foreign exchange and employment generation, whether through downstream processing or public or

other works based on the financial surplus generated.”° Third, the IDC

remains a key institution in industrial policy-making, with

total capital assets of over R7 billion.*’ This last figure, large though it is, considerably understates the IDC’s importance since much of its investment ts 1n joint ventures with the private or public sector and it can dispose of its shareholdings to finance other projects. Thus, its total funding of industry has reached almost R12 billion between 1992 and 1994. Much of this has been financed by the sale of shareholdings 1n Sasol and Sapp), realizing over R4 billion over the same three-year period.”®° Although slackening off in 1994 with the near-completion of the Alusaf and Columbus Steel projects, Table 1 indicates how mega-projects have continued to dominate IDC investment. It is claimed that, whilst 112 000 or 7 per cent of industrial jobs have been lost in the economy as a whole, 26 803 jobs have been created by IDC finance over the past three

years (15147 in SMEs), with 12545 in 1994 (8034 in SMEs).”” Although some concessions have been made to RDP objectives, with support for SMEs,°° tourism and black empowerment, the financial weight of these activities 1s limited. In short, again in conformity with the past, the IDC has always participated marginally in politically and ideologically motivated activities in response to government imperatives. Previously, it has, for example, been charged with small business development and decentralization of industry, that is token support for black business as part of a totally failed apartheid strategy for separate industrial development. Conveniently narrowing the scope of the meaning of politics, the IDC claims:


The Political Economy of South Africas Transition

Table | IDC new investments (R million) Investment type


Past Three Years

Small and medium



Large beneficiation®



Other industrial Total industrial Tourism Export finance Black empowerment

778 | 973 [5 164 185

1953 10823 57 446 345


2 337


* Beneficiation refers to the downstream processing of minerals and metals. Source: IDC (1994b).

We always have been and hopefully will continue to be politically neutral. We have never made a contribution to any form of political fund-raising and our staff members are not allowed to take an active part in politics, on a national or local basis. No politicians are allowed to sit on our Board, which consists entrely of

experienced private sector businessman . . . We have a proven record of objectivity and neutrality and we are trusted to act accordingly by both the private and public sectors (1994b: 3).

This is an extraordinarily complacent rewriting of the historical record. Note that the opening pages of the Annual Report for 1994 follow a familiar pattern of displaying photos of the nine board members (all white males) and the ten senior managers (ditto).*’ Significantly, the IDC’s current activities are apparently in line with the RDP despite having been formulated long before it had itself ever been aired: The IDC’s latest long range strategic plan covering the period 1991 to 1996 is in harmony with the industrial policy initiatives of the RDP (IDC, 1994a: 6).

A more accurate characterization of the IDC is of an institution heavily embroiled in the core activities of the MEC but with a reluctant capacity to turn its capabilities to other policy areas if required to do so by government. In the latter respect, it 1s, at most, reactive. It would prefer now to be free as possible from government interference and to present itself as such to potential private investors and partners.°” Yet, it does continue to have an important influence on policy-making, participating with the DTI and BTT in the formation of South Affrica’s offer to the Uruguay Round of GATT and preparation of the tariff schedule for 1995-— 99, in revision of GEIS, and in policy research more generally (IDC, 1994a: 17). It also has the capacity to undermine DTI policy, choosing to acquire and

Industrial and Energy Policy


finance the South African Foreign Trade Organisation (SAFTO) after the DTI had decided not to continue to fund it (for what were reported to be budgetary reasons, Financial Mail, 30 June

1995: 68).

Fourth, the scope for industrial policy-making is considerably circumscribed by the globalization of the operation of South African corporations. SAPPI, for example,

in which





a substantial





world’s largest producer of woodfree coated paper through the acquisition of a US company, and generates over 85 per cent of its income (60 per cent of turnover which totals nearly R8 billion) outside South Africa. Clearly, domestic industrial strategy is liable to be subordinate to its international interests (Financial Mail, 14 July 1995: 85). Similarly, Minorco which was set up by Anglo-American to hold many of its overseas assets outside South Africa, boasts a turnover of almost $5 billion. The issue of how such overseas holdings have an impact on the functioning and efficacy of domestic policy remains unaddressed. Fifth, where limited change has been made in the hierarchy within a department, there is a paralysis of initiative and understanding. Consider, for example, the Draft Policy Principles emerging from the Department of Mineral and Energy Affairs (DMEA), in November, 1994. The capacity to rewrite history and to draw upon the crudest ideology in order to preserve discretion is

astonishing:*” South Africa’s mineral industry has become a world leader in respect of mineral supply, management and technology. This position was largely achieved under conditions of free enterprise and subject to the disciplines of the market mechanism, which has provided the stmulus towards increased effort and efficiency. Faced with the rigours of the marketplace, the industry will remain competitive only if it is allowed to operate with minimum intervention from Government. State intervention should be limited to ensuring that the national interest is protected as far as possible (DMEA,



Of course, this does not and cannot represent policy as such. It 1s, however, indicative of the paralysis not only in thinking but even in self-presentation. How many could have imagined that an ANC-dominated government department could have moved so far from the aims of the Freedom Charter in the following proposed principles for ownership of mineral rights: The existing mineral laws of South Africa, which make provision for private and State ownership of mineral rights, have stood the country in good stead and were instrumental in making the country a leading mineral producer. Drastic changes in the system, which has evolved over a period of more than a hundred years, cannot be made overnight and would involve substantial practical problems and perceived inequities. Where such changes are indicated, due to the requirements of increased access and optimum utilisation of resources in the national interest, these should be approached with circumspection and taking cognisance of economic conditions and viability COMEA, 1994: 4).


The Political Economy of South Africas Transition

Apart from continuities in the making of industrial policy, there are breaks with the past but only in the limited sense of the policies themselves in the light of changed circumstances rather than in the way that policy is formulated and implemented. Often, these developments reflect initiatives that predate the present government. Thus, a first example is provided by the restructuring of the armaments industry. The armaments industry was built up through the state-owned industry, Armscor, in order to evade the impact of sanctions whilst pursuing policies for internal and external ‘security’. The industry met with some success, achieving international competitiveness in some products and accounting for a major part of manufacturing exports. Armscor previously incorporated a large number of subsidiaries.** These were hived off into a separate company, Denel, in 1992, with Armscor primarily concerned with defence procurement. Subsequently, its net income has dropped from R40 to R5 million; Denel’s has risen from R157 to R310 million, although employment in its first two years fell from 25000 to 13000. Conversion to civil production, then, is the major issue facing the South African armaments industry at a time when domestic demand and subsidies are liable to be cut. There is little evidence that the necessary state support to bring about successful conversion is in place; for it requires considerable coordinated and detailed support across a wide range of factors, such as science and technology policy, public procurement and sectoral intervention. The difficulties faced by the industry in continuing primarily within armaments 1s illustrated by the failure to win the contract from the UK for 91 Rooivalk (Red Hawk) helicopters. The specifications required US gunsight technology which was not licensed to South Africa; the US effectively disbarred its winning the contract in order to promote its own short-run commercial interests in the offer of Apache helicopters through McDonnell-Douglas and to undermine South Africa’s longrun armaments capability. Sanctions against South Africa may have been abolished in principle, and it may more readily be able to bid for export orders, but the long-run viability of the sector depends upon diversification through conversion. Market solutions to this problem tend to lead to conversion to unemployment, closure of production facilities and loss of high and collective

skills in research, design and technology.~” Further, consider the procurement of four corvettes which the Ministry of Defence was seeking to order in a R1.6 billion deal with the Spanish Bazan shipyard. In the past, this would have been approved by Cabinet command; now, it has been overturned, at least temporarily, with questions over need given changing defence priorities and levels, and a recognition that such orders should be more broadly incorporated into economic policy, engaging with issues of counter-trade and impacts on the balance of payments. Thus, the episode is indicative that defence priorities have changed and weakened but the capacity to coordinate defence procurement with economic policy remains weak. It is at least as likely that the Defence Department will seek to lobby support for procurement by individual negotiation with other departments than that more permanent mechanisms for coherent policy-making will be put in place.

Industrial and Energy Policy


A second example of change with continuity is provided by Sasol. In response to oil sanctions, it has long been manufacturing oil by coal conversion at costs which exceed international prices, with a subsidy to cover the difference. Necessarily, this would be reconsidered in the light of freely available oil imports, with the added complication that the international oil companies operating refining capacity in South Africa have an interest in seeing the subsidy removed as far and as quickly as possible. The issue, then, has been treated very much as one in these terms. A report has been produced by consultants Arthur Andersen (1995), recommending withdrawal of the subsidy by the turn of the century with support of R780, R730, R520 and R320 million in the intervening four years (Financial Mat, 14 July 1995). It reckons that this will lead to savings of R5 billion in foreign exchange. The oil majors have complained that this represents an unfair subsidy to Sasol which it will use to fund competing investment.”° Significantly, account is being taken of broader economic implications, as in the balance of payments effects. But, as the Financial Mail puts tt: We’re not sure that government knows which of its Ministers should intervene. Sasol

falls under the energy portfolio but the money is the Treasury’s (14 July 1995: 24).

But these are not in principle the only ministries involved. Sasol has spawned a huge petrochemical complex which will survive irrespective of the fate of coalto-oil conversion. Industrial, and employment, policy in these activities will be profoundly affected by the way in which Sasol 1s subsidized, and is also a matter of competition with other domestic and international producers. Further, energy and employment policies more generally are involved because of the weight of Sasol’s energy use. Apart from its own coal mines which provide more than 30 million tonnes each year for conversion, it is the country’s fourth largest corporate purchaser of electricity, accounting for 4.7 per cent of Eskom’s output and 3.0 per cent of its revenue at over R400 million (Eskom, 1994: 21).?’ In short, the Sasol subsidy, reconsidered though it must be, should not necessarily be the central focus of policy-making which needs to be more broadly cast and coordinated.*® This is so in view of the importance of the forward and backward linkages involved, particularly for the Eastern Transvaal economy. Arthur Andersen (1995: 45) estimates that 12.1 per cent of the region’s GDP and 5.1 per cent of its employment depend upon Sasol’s synthetic fuel business. Third, the Competition Board, which came under the jurisdiction of the DTI

in 1994, has been more effectively used in some instances 1n order to control monopoly pricing. The most important case has been in the supply of cement”” which is crucial to the RDP’s housing programme, although its impact has yet to be thoroughly tested in this respect given the negligible progress made as yet.*° On the other hand, the R3.4 billion bread baking industry, despite deregulation in 1991 and the existence of approximately 3 000 in-store bakeries with about 15 per cent of the market and 174 large plant bakeries, continues to exhibit the behaviour of a well-organized cartel (Financial Maul, 14 July 1995). In July 1995,


The Political Economy of South Africas Transition

there was a simultaneous increase by seven cents in the standard 800 gram loaf. This is despite a 1994 Competition Board investigation to the effect of finding no evidence of collusion, ‘especially as there is competition from the new inhouse bakeries’.*! Competition policy, even if it were actively pursued, cannot suffice since lowering price at one point along the chain of bread provision opens up the possibility of the benefits being appropriated elsewhere along the chain (and of eliminating smaller distributors or retailers as large retailers and wholesalers can use bread as a loss-leader). This is particularly so given the diverse holdings of the major South African corporations across the various components of the bread chain, from flour milling to retailing.** The recent Background (to the White) Paper on Competition Policy (Fourie et al., 1995) correctly points to the power of the conglomerate structure to abuse market power and it seeks to strengthen the capacity to deal with this. Its stance has, however, in part been wedded to an unjustified ideology that it is such market power that has been the major factor impeding the desirable growth of SMEs and of corresponding black advancement. In other words, competition policy, which is never going to have more than a limited impact — because economies of scale and scope are important and market power is difficult to identify and rectify — is liable to be used more as a populist symbol of confrontation with big business and its apartheid origins than as one element in coherent and effective industrial strategy in which the strengths of big business are deployed rather than irritated. After all, the prospects for black advancement and inclusion, including the fortunes of SMEs, rest more upon the prosperity and scale and direction of investment of the conglomerate economy, public and private, than they do upon its market structure. Significantly, the Background Paper does recognize the need for competition policy to be integrated with other components of industrial policy. But, except when dealing with restrictive practices, it tends to see competition policy in terms of horizontal market competition. And, as such, it 1s much stronger on the way in which policy should be implemented than in defining its content. This 1s hardly surprising. For unless you believe in the law of large numbers — that competition is more fierce and beneficial the more firms that there are, a proposition for which there is neither sound theoretical nor empirical evidence — policy stance towards market competition can only be adequately determined on the basis of industrial policy and strategy more generally. This follows, for example, since a little extra mark-up on lower costs might well be preferable to normal profit on higher costs, irrespective of whether these be achieved through private market forces or state intervention. There are two areas where industrial/energy policy has made significant breaks with the past. One of these, electrification, represents the potential to draw upon existing institutional capacity, namely the electricity utility Eskom, although it has been pushed by developments arising out of the pre-election National Electrification Forum which focused popular pressure for electricity connection as one element of meeting basic needs. Yet it has to be understood why this element could so readily be met whilst the others such as housing could not.

Industrial and Energy Policy


The answer rests in part on the capacity to deliver that has developed in Eskom, especially as connection to the grid is not expensive and the fixed costs can and have been wrapped up in the charges for electricity use which can be guaranteed by pre-payment meters.*” Particularly important, however, is the heavy excess capacity that exists within Eskom. It is estimated that no new power stations will be needed until towards the end of the next decade even with current expanding demand, and power stations previously under construction have been temporarily mothballed. Eskom has the institutional capacity to deliver electrification, and there are no major obstacles to it doing so. The programme began in late 1990 and had already realized over 600000 connections by 1994. But it has accelerated in recent years and is peaking at 300 000 connections per annum 1n 1995, a level to be maintained until the end of the century. It 1s esumated that electrification brings around one new business for every ten households connected, with tens of thousands of jobs created each year through knock-on effects; twelve million tons of firewood will be saved, 1.2 million hours of travel time, mainly by women,

to collect it; and R8 billion will

be spent on appliances over the next decade (Financial Maul, 28 April 1995). The electrification programme has also readily made use of foreign assistance with, for example, a R1 billion loan from the Export Import Bank of Japan. How great will be the spillover gains from electrification depends on support given to the associated economic activity. Here, institutional capacity has not benefited from a running start equivalent to that provided by Eskom itself in the electrification programme.** Yet, even 1f indirectly, this is where the other break with the past has been most prominent — in the promotion of small business. Here progress has been most impressive in a number of ways, not least because of the lack of significant entrenched institutions and interests and opposition to new ones. First, the weak and ineffective existing framework for support has been essentially sidelined with the marginalization of the Small Business Development Corporation (SBDC), and the focus of new initiatives being centred within a newly created unit around the DTI.*° A new agency, the Small Business Development Agency (SBDA), is to be formed in 1995/96. Second, impressively, a White Paper on small business has already been tabled in Parliament. Third, drawing upon past experience throughout the world of bribery, corruption, clientelism and failure to achieve

commercial viability, policy 1s heavily committed to avoiding simply handing out financial support to individual businesses. Rather, the focus is upon providing an institutional framework of national and decentralized support in which services will be paid for. Attempts will be made to ensure that minimum labour standards are met. The programme is detailed, modest in scope, and with provision for monitoring progress to replicate successful ventures and to avoid failed initiatives. Overall funding is also modest at R180 million through the DTI, and a further R140 million for agencies such as the SBDA. This is, however, liable to be swamped by other sources of government assistance, whether central, local or parastatal,*° and foreign donor funds on which small business development will inevitably depend heavily.


The Political Economy of South Africa's Transition

In short, the progress in breaking with the past in small business development is explained by the weakness of existing institutions, the energy and vision of those promoting the programme, and the political acceptability of the programme across a wide spectrum of opinion, not least because it leaves unchallenged existing power relations embedded in the conglomerates. Whilst there can be little doubt that the South African SME sector has been underdeveloped because of the restrictions of apartheid and the particular path followed by the economy, the impact of these measures on employment and growth remains unquantified and, almost certainly, unquantifiable. What has also remained primarily unexamined is the dependence of the fortunes of the SME sector on the structure and dynamic of big business.*’ Essentially, the SME strategy is one of providing infrastructure in support of occupying what has previously been underdeveloped territory and, otherwise, to follow the fortunes of the non-SME economy as it permits.



The substance of this chapter has been to emphasize how the existing wide and varied institutional structures involved in the formulation and implementation of industrial policy exhibit considerable continuities with the past. Not surprisingly, this has had its counterpart in considerable continuity of industrial policy itself, and has been a powerful influence on the alternatives that can and have been adopted where a break has been made with the past. The argument is not, however, one of

institutional determinism, calling forth the inertia and resistance of a hierarchical and entrenched white civil service bureaucracy, important though this is. Rather, of more importance are the underlying characteristics of the economy itself which I have characterized as a muinerals—energy complex, based in and around the corresponding core sectors and under the control of highly monopolized, globally organized private corporate capital,*® with powerful links to state and parastatal corporations and influence over policy and policy-makers themselves. One of the conclusions of this study, then, is that institutional reform 1s desperately needed in order that coherent and effective industrial policy can be made, irrespective of the form and direction that it takes. But the nature of the institutional reforms suggested will depend upon how the South African economy is understood and what direction it is to take. I would emphasize the following factors: 1. The South African economy has developed considerable strength and capacity around its minerals—energy complex but, in part reflecting a wider weakness of past industrial development and policy, vertical integration between sectors remains undeveloped. The economies of scale and scope in diversifying forward into capital and intermediate goods from the MEC core must be vigorously pursued on a selective basis, as well as the backward integration from the weaker consumer goods industries.

Industrial and Energy Policy


2. South Africa has considerable infrastructural capacity which must be extended not only as a means of meeting basic needs in public utilities but also as part of a broader strategy to generate industrial employment. In particular, this should be married to the creation of mass consumption industries meeting basic needs and employment creation in housing, energy, transport, clothing, schooling, health, etc. In many ways, whatever its history, the unique success of Eskom in meeting RDP targets is a testimony to the potential for such a strategy on a much broader front. By accident rather than design, it has had the institutional and productive capacity to deliver. It can be matched in other areas. 3. The South African financial system is often compared with that of Britain, with a highly developed range of financial services and a corresponding set of financial institutions and regulations. There is some truth to this claim, although the international competitiveness of South Africa in financial services has yet to be tested. Whatever the extent of the parallels, the British financial system is not one to emulate, not least in the context of reconstruction. It has long been recognized that the British financial system has the following weaknesses as far as domestic industry, as opposed to the fortunes of the City, are concerned. These are: (a) an emphasis on international mobility of financial assets at the expense of domestic investment, particularly that in industry; (b) reliance upon short-run speculation and borrowing and lending, leading the economy to be particularly vulnerable to economic downturns and short of long-term investment in domestic industry; (c) priority in policy-making to the objectives set by international finance, particularly at the expense of government expenditure and policies more favourable to industrial reorganization; (d) limited coordination between the provision of industrial finance and the implementation of long-run policies for industrial development. Not surprisingly, exactly the same characteristics are to be found 1n the South African financial system. They are all the more inappropriate given that the financial system is attached to a developing rather than a developed economy. There

is an urgent



to reform

the South



system with three particular goals at the forefront: to finance expanded government expenditure at the lowest possible cost; to provide for industrial investment, possibly through the state, and to forge a closer relationship between industry and finance; to subordinate financial policy to the goals of economic and industrial policy rather than to those dictated by an elusive

business confidence.*” 4. The political and economic power of large-scale corporate capital has to be confronted directly so that it can be drawn into industrial policy-making and the issues both of control and of distributive outcomes are negotiated. Whilst apparently an aggressive step, it is one more likely to lead to crowding-in of private through public investment, and one more conducive to long-term business confidence than rhetorical assaults on big business in the name of black advancement.”°


The Political Economy of South Africas Transition

5. South African industry has inherited a range of mega-projects. Some of these were more prompted by political than by economic motives, as in the case of Sasol, Koeberg and what was previously Armscor. Others were developed in response to an economic rationale, although their growth and character were and continue to be heavily influenced by their apartheid origins, as for Eskom and Iscor. Moreover, large-scale private capital has persisted in pressing for state subsidies for further mega-projects, such as Alusaf, and these have been granted. This is despite their huge capital requirements, the limited employment that they generate, and the failure of their output to meet basic needs directly. Such projects have considerable advantages for capital. They tend to guarantee markets or inputs for existing capacity which, however, does not necessarily correspond to the direction that should be taken by industrial development. Apart from limiting employment generation, they tend to minimize the extent to which the labour force can actively participate in and influence policy formation. And the huge capital costs involved tend to pre-empt changes in industrial policy in the immediate future. On the other hand, mega-projects can contribute directly to industrial development through the provision of basic inputs to manufacturing and even in the provision of basic needs through electrification. An indirect contribution can be made through export earnings, as is intended with Alusaf, for example, thereby potentially funding more imports to support more labour-intensive production of basic needs. There is, however, no guarantee that the calculation of the costs and benefits of

continuing or new mega-projects conform to intended goals in principle nor that they actually accrue in the way which was intended. If, for example, a megaproject is undertaken primarily to generate exports, then the exercise is futile if the foreign exchange is retained abroad by a participating private corporation and used to expand investments overseas. Existing and proposed mega-projects need to be assessed in terms of their ultimate contribution to basic needs and employment generation, and the mechanisms need to be put in place to ensure that anticipated benefits materialize in the way that was intended. Notably absent from this list are the four issues that have more commonly dominated discussion of South African industrial policy — competition policy, SMEs, trade stance and training. Each of these is important but none of them can be effectively dealt with, nor make an effective contribution, unless the more

fundamental issues are first confronted.

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Arthur Andersen (1995): Sasol Synfuel Protection Study, A Report to the Liquid Fuels Industry Taskforce. Mimeo.

Industrial and Energy Policy


Atkinson A (1995): Capabilities, exclusion and the supply of goods. In Basu K, Suzurama K and Pattanaik P (eds.) Choice, Welfare, and Development: A Festschrift in Honour of Amartya K. Sen. Clarendon Press, Oxford. Basu K, Suzurama K and Pattanaik P (eds.) (1995): Choice, Welfare, and Development: A Festschrift in Honour of Amartya K. Sen. Clarendon Press, Oxford. Branscomb L (1994): An analysis of South African policy. Science and technology policy. Science and Technology Policy Sertes, No 1, FRD, Pretoria. BTT (1995): Proposal for a Revised Phase VI Motor Industry Development Programme, Board of ‘Trade and Tariffs. Mimeo. Chang H (1994): The Poltncal Economy of Industral Policy. MacMillan, London. Cook P and Kirkpatrick C (eds.) (1995): Privatsanon Policy and Performance: Internanonal

Perspectives. Prentice Hall, New York. Davis G (1994): South African Managed Trade Policy: The Wasung of a Mineral Endowment. Praeger, London.

DMEA: Annual Reports, various years, Braamfontein: Department of Mineral and Energy Affairs. DMEA (1994): Draft Principles on Which a Mineral and Mining Policy for South Africa Should Be Based: November, mimeo.

DTI: Annual Reports of the Director-General of Trade and Industry, various years, Pretoria: Government Printer. Eskom (1994a): Strategic View of the Energy Market. Eskom Marketing Intelligence. Eskom (1994b): Annual Report, Sandton. Eskom: Newsbrief, various issues. Fine B (1992): Total factor productivity versus realism: the South African coal mining industry. South African Journal of Economics, 60(3): 277-92. Fine B (1995a): ‘Politics and economics in ANC economic policy’: an alternative assessment. 7ransformanon, No 25, pp. 19-33. Fine B (1995b): Privatisation and the RDP: a critical assessment. Zransformanon, 26:1-—23.


B (1996): Flexible production and flexible theory: the case of South Africa. Geoforum, 26(2): 107-19. Fine B and Leopold E (1993): The World of Consumpnon. Routledge, London. Fine B and Rustomjee Z (1997): South Africa’s Political Economy: From Minerals-Energy Complex to Industrialsanon? Hurst, London. Fine B and Stoneman C (1996): The state and development: an introduction. Fournal of Southern African Studies, 22(1): 5-26. Fontaine,










in Sub-

Saharan Africa. In P’ Cook and C Kirkpatrick (eds.) Privansanon Policy and Performance: International Perspectives. Prentice Hall, New York. Fourie F, Lewis D and Pretorius W (1995): Towards Competition Policy Reform in South Africa. Backgound Working Paper, February. Gelb S (ed.) (1991): South Africa’s Economic Crists. Zed Press, London.

Gleason D (1995): The Commissioning of Columbus Stainless. Oprma, 41(2): 2-7. IDC (1994a): Presentation on IDC’s Activities before the Standing Committee on Trade

and Industry. 7 September, mimeo. IDC (1994b): Annual Report. Industrial Development Corporation, Sandton. IDC (1990): Modification of the Applicanon of Protection Policy: Policy Document. Industrial Development Corporation, Sandton. ISP (1995): Improving Manufacturing Performance: Report of the Industrial Strategy Project. UCT

Press, Cape Town.


The Political Economy of South Africas Transition

Jones G (1991): Review of Porter (1989). Business History, 33(2): 352-4.

Kaplinsky R (1995): Capital-intensity in South African manufacturing and unemployment 1972-90. World Development, 23(2): 179-92. McKendrick N (1982): Commercialization and the economy. In N McKendrick, J Brewer and J Plumb (eds.) Birth of a Consumer Soctety: The Commerciahzanon of Eighteenth Century England. Europa Publications, London. McKendrick N, Brewer J and Plumb J (eds.) (1982): The Birth of a Consumer Soctety: The Commerciahzanon of Eighteenth Century England. Europa Publications, London. MERG (1993): Making Democracy Work: A Framework for Macroeconomic Policy in South Africa. Centre for Development Studies, Bellville, Cape.

Miller M (1990): Of pushcart vendors and management consultants. Public No 101: 103-6. Monitor (1995): Global Advantage of South Africa Project. Presentation Parliamentary Standing Committe on Trade and Industry; and the Media, Moritz L (1994): Trade and Industrial Policies in the New South Africa. Research

Interest, to the 5 April. Report

No 97, Nordiska Afrikainstitutet, Uppsala.

Nattrass N (1995): The crisis in South African gold mining. World Development, 23(5): 857-68. Pinheiro A and Schneider B (1995): The fiscal impact of privatisation in Latin America. Fournal of Development Studies, 31(5): 751-76. Porter, M. (1989): The Compettive Advantage of Nations. Macmillan, New York. Porter, M. (1992): Capital disadvantage — America failing capital-investment system. Harvard Business Review, 70(5): 65-82.

Porter, M. (1995): The competitive advantage of the inner-city. Harvard Business Review, 73(3): 55-71. Porter M and Vanderlinde C (1995): Green and competitive — ending the stalemate. Harvard Business Review, 73(5):


PTG (1994): Long-Term Strategic Plan for the Textile and Clothing Industries in South Africa, Panel and Task Group for the Textile and Clothing Industries. Mimeo. RDP (1994): The Reconstruction and Development Programme. Umanyano Publications, Johannesburg. Roberts R and Green D (1995): Privatising the private sector. Financial Maul, 7 July.

Rogerson C (1994): Flexible production in the developing world: the case of South Africa. Geoforum, 25(1):

Teisberg E, Porter


M and Brown G (1994): Making competition in health-care work.

Harvard Business Review, 72(4):


Thurow L (1990): Review of Porter (1989). Sloan Management Review, 32(1) 95-7. White Paper (1995): National Strategy for the Development and Promotion of Small Business in South Africa. Government Gazette, 387(16317): 20 March.

World Bank (1993): An Economic Perspective on South Africa, World Bank, Washington.

ENDNOTES 1. For a discussion of the way in which the World Bank and IMF have set the analytical agenda in development policy, even if not always having their own way, see Fine and Stoneman (1996). 2. See, for example, the contributions edited by Amsden


Industrial and Energy Policy


3. Paradoxically, Kaplinsky (1995), a leading figure in the ISP approach, rejects distorted factor prices as the explanation for the capital-intensity of South African industry, but sees it as due to polttical factors rather than the direct economic interests of large-scale corporate capital. . It is important

to recognize,


that not all sector reports



concur with the overall ISP framework. See the various published sector reports — and the limited reference to them in the overview document! One of the weaknesses of these reports for the purposes of this paper is that, though published in 1995, they rarely extend commentary beyond 1993. . For a formal model of how commitment to higher quality products can crowd out those of lower quality serving the needs of the poor, see Atkinson (1995). Fine and Leopold (1993) have made the same argument in the context of the eighteenth century in criticizing the notion, due to McKendrick (1982), that Wedgwood’s continuous innovations in pottery stimulated the industrial revolution through a consumer











continuous change in products had the effect of impeding the emergence of standardized products for mass consumption. . Hence the capacity to become immediate worldwide consultants. Apart from fluidity across countries, the bland analytical content is also reflected in the belief that the

approach is readily applicable to the environment, the inner city, the financial system, and











Teisberg, Porter and Brown (1994), respectively. For the latter, for example, p. 131: In industry after industry, the underlying dynamic 1s the same. . . competition compels companies to deliver increasing value to customers. The fundamental driver of this continuous quality improvement and cost reduction is innovation.

Of course, this is not the central issue in health delivery in the United States, let alone South Africa, where it is delivery at all that is at stake for many. . There is a semiotic reading to be had of the texts emanating from Monitor, with their fairy tale language and motifs. It 1s, of course, a neat irony for South Africa that the

Diamond should occupy the focus of mystical power. . One author, David Green, is reported as having written the Monitor report on South Africa’s worldwide competitiveness. . See Porter (1995: p. 55), emphasis added: A sustainable economic base can be created in the inner city, but only as it has

been created elsewhere: through private, for-profit initiatives and investment based on economic self-interest and genuine competitive advantage. 10. Porter and Vanderlinde (1995) on the environment and Porter (1995) on the inner city both reflect a failure to confront systemic power and how it functions, the former remarkable for seeking solutions in which profit can be made out of environmental improvement, the latter most remarkable for failing to mention race! Nor does Porter’s (1992) commissioned report on the US financial system hold out great hopes for radical improvements in South Africa’s capacity to provide finance for industrial investment. Noting the US financial system’s short-termism, he reckons that it can be reformed to provide a system superior to that of Japan and Germany but without recommending the creation of financial institutions dedicated to the provision of industrial investment.


The Political Economy of South Africas Transition

11. Now fully reported in Fine and Rustomjee (1997). 12. For a recent contribution along these lines, see Moritz (1994).

13. Note that literature concerned with the crisis of the apartheid economy has now fallen out of favour in the rush to provide constructive advice. This reflects a change in direction and content since it has also meant a substantial decline in consideration of political and economic interests, previously understood around the class—race debate. The literature closed with Gelb’s (ed.) (1991) notion of racist-Fordism, a

peculiar imposition of regulation theory in the South African context — the latter is to be understood as a form of Fordist mass production distorted by racism to limit mass consumption to the whites. Unfortunately, this implies incorrectly that South Africa’s industrialization has been based on the limited growth of consumer goods industries, whereas it is the growth of heavy industry that has been most important. A further irony is that the ISP itself grew out of the COSATU-linked Economic Trends Group, ET, and essentially sees South Africa as racist post-Fordism! 14. See Fine (1995b). It is also particularly disturbing that Minister of Public Enterprises, Stella Sigcau, as reported in the Financial Mail, should believe that privatization has

stimulated growth internationally, when there is absolutely no evidence for this. Significantly, the World Bank has become disillusioned with the impact of privatisation in Africa; see Fontaine and Geronimi (1995: 147). The experience of Latin America suggests that the use of privatization to improve fiscal stance is a shortrun political expedient with long-run costs; see Pinheiro and Schneidel (1995). 15. This 1s not entirely accurate in ideological terms since, as the RDP has been marginalized in scope and content, so paradoxically any economic policy or outcome — particularly if perceived as a success — is captured and presented as part of the RDP. 16. For a comprehensive discussion of this issue, although leading to a different position than the one adopted here, see Chang

17. 18.

19. 20. 21.



(1994). Davis (1994), in the South African

context, also adopts a wider definition of industrial policy than as trade policy but protection and export subsidies remain his preoccupation. As previously observed, other ‘industrial’ policies that have been crucial include the role of state corporations, especially that of Eskom. Because of its heterogeneity, its potential as a source of populism, and its limited challenge to large-scale capital, the small business sector (itself an ideological construct) 1s extremely flexible in terms of the range of policies that it can incorporate. Thus, it can be seen as a source of innovation (technology policy), selfemployment (employment policy), competition (anti-trust policy), etc. For a recent discussion of this in the context of South Korea — World Bank versus the rest — see the special issue of World Development, edited by Amsden (1994). See Nattrass (1995) for a recent account of the gold industry. Whilst the Department of Transport has charge of airports, it does not have charge of Transnet which falls under the Department of Public Enterprises — which is weak and primarily concerned with privatization. And it is worth recalling that Pik Botha was appointed as the Minister for Mineral and Energy Affairs, thereby undermining any potential use of the existing institutional structure for coordinating alternative policies. There are remarkable differences between this report and its predecessors, not least in the stance adopted by the Director General’s contribution, the omission of a parallel Afrikaans text, and detailed tables on the racial, gender and disabled composition of,

and targets for, the workforce (revealing dramatic inequalities). Equally, the bulk of the remainder of the text retains considerable continuity with the past.

Industrial and Energy Policy


24. According to the Fimancial Mail, 1 September 1995, R1.7 billion had been extended in various subsidies to industry over the past three years, with a continuing commitment of R839 million. R500 million alone had been granted to Iscor under GEIS. For a detailed discussion of recent trade policy, see Bell (Chapter 4, this volume). 25. Details from Financial Mail, 23 June 1995. The guaranteed profits are reminiscent of those accruing to the private coal mines that were dedicated to specific state-owned power stations. See Fine (1992). 26. Account must also be taken of the import bill of such investments. In 1994, imports rose by R16 billion, a 28.1% increase over 1993, with almost half of this accounted for by machinery (which usually accounts for about one-third of imports). The main part of this increase was accounted for by computing equipment, the mega-projects, the

electrification programme, and the cellular telephone network — with implications for the corresponding programmes’ impact upon balance of payments. An interesting feature of the (corrected) official figures is an import bill from the US of R3.9 billion for brake linings. I estimate this would have sufficed to provide every member of the population with a full set — providing a warning over the accuracy of official data. See Financial Maul, 14 July 1995. 27. The following account is drawn from IDC (1994a) unless otherwise stated. 28. IDC proudly presents itself as not having drawn on government funds since 1954. This sets aside the way in which state support and pricing 1n parastatals have more or less guaranteed its capacity to generate a financial surplus and access to finance. 29. All job creation claims have to be treated with considerable caution for two different reasons. First, other agencies may be involved in which case the same jobs can be claimed to have been created many times over. Second,

gross job creation can be

accompanied by job displacement, especially where subsidy is concerned. Thus, support for a highly capital-intensive project may create some jobs at the expense, through productivity increase, of the loss of even more jobs in competing enterprises. Only a full and proper economic analysis, including these considerations and counterfactual assumptions, can ascertain the extent of net job creation. Not surprisingly, IDC (1994b: 2) claims to have created 301 000 of 1 125 000 jobs, 26 per cent, in industry since 1940.

30. It is appropriate that the M(icro) should be dropped from SMMEs. For the IDC, SMEs are defined as manufacturing enterprises with total assets not exceeding R100 million! Half of the enterprises supported by the IDC over the past three years (32 per cent in 1994) had assets exceeding R10 million, and one suspects that most of its finance has been absorbed by these. The IDC also reports that over the past three

years, 505 enterprises have been supported with an average approval of R1.5 million assistance, the creation of 15147 jobs at an average cost of R141000 per job, and increased exports of R1.2 billion or 3.2 per cent of manufactured exports. 31. The Board is open to change by the new Minister for Trade and Industry. 32. This view follows from the perusal of a number of documents about the IDC and a number of informal interviews with those who have had dealings with it. It is a moot point whether the IDC is changing in its orientation or is becoming more sophisticated in presenting a more acceptable image of itself. 33. This text is ripe for semiotic analysis in terms of its real meanings and messages. 34. See Financial Mail, 9 June 1995, and also Branscomb (1994). 35. It has long been recognized that the problems of conversion are not of the tanks to kidney machines type but of the economic and social policies to provide alternative markets and employment.


The Political Economy of South Africas Transition

36. Controversy also surrounds major differences between the draft and final reports, and undue Sasol influence and lack of broader consultation. Between the two reports, Sasol has been favoured by approximately an extra two-thirds. There is also debate over whether the support is a subsidy or a tariff. 37. This is total Sasol electricity use, including activities other than coal-to-oil conversion. But the latter 1s very heavily dependent upon electricity as well as coal. 38. This is recognized by the DTI



Chemical and fuel production are integrated and, consequently, the fuel price and the price of other intermediate inputs to downstream (relatively labour intensive) manufacturing, becomes an issue of industrial policy. There is close cooperation and coordination between the DTI and the Department of Mineral and Energy Affairs in moving towards a resolution of this volatile matter. 39. DTI (1994: 12) also refers to the cinema industry where apartheid has left whitedominated control over much film distribution. 40. Financial Maul, 7 April 1995, in its first year review of the RDP, reports provision of

878 low income houses by the end of February! 41. The situation particularly disturbs the major retailers such

as Pic’n

Pay. Their

oligopoly is another story.

42. The Chair and Chief Executive of Premier Foods, leading flour miller, reveals honesty and knowledge of the laws of competition in equal measure in responding to the charge of a cartel. Admitting that regular cost meetings take place (Financial Mail, 14 July 1995: 66), he argues that:

Due to the tight level of competition, when one group increases its price, the news travels fast and all the major groups tend to move in sync. 43. The


to the electrification

discussed in MERG



its potential




44. In this context, the DTI (1994) Annual Report admits, p. 11: Due to the weight of activities in other areas, the DTI did not do much work in linking industrial expansion with RDP infrastructure projects in 1994, but expects to develop clearer policy options in this regard in 1995. 45. Other institutions with interests in SMEs

include the IDC, which will be more than

happy to be relieved of responsibility, and the Development Bank of Southern Africa, DBSA,

whose future and role remains uncertain. Is it an accident that SBDA

is an

anagram of DBSA? Whilst proud of its ‘commitment to enterprise’ through buying policies, management advice and technical support, Eskom only reckons to create 2400 jobs (only 435 realized by the year ending in May) in 800 small black businesses in 1995, Eskom Newsbrief, no 14, July 1995. 46.

Currently estimated at R700 million.

47. The main exceptions are in stressing the oligopolistic exclusion of SMEs from market access and the unsuitable character of financial institutions in providing loans for investment. 48. It is arguable that the most pressing issue in industrial policy is direct foreign investment (DFI) — not, however, that of attracting inward flows. These are liable to

Industrial and Energy Policy


be futile when set against the outward DFI of South Africa’s own private corporations. The ending of apartheid has unleashed a flood of international acquisitions, mergers and overseas investments, complementing an earlier illegal flow of as much as 7 per cent per annum. This, of course, raises the issue of how effective industrial policy can be made in these circumstances when the most important decisions about the levels and locations of investment are not known let alone under any control. 49. See Fine (1995a). 50. In this instance, I am September 1995, in its disassociated from that however, to back off on

in serious danger of agreeing with the Financial Mail, 22 insistence that the issue of anti-trust/competition policy be of black exclusion/advancement. The logic of its position is, both issues rather than to pursue each vigorously.

Developing the Institutional Framework:

Employment and Labour Market Policies Jonathan Michie’ Introduction 155 The needs andthe constraints

Alternative policy responses



Wage bargaining and ‘social corporatism State—market relations Conclusion 168



INTRODUCTION To tackle South Africa’s large-scale unemployment problem and overcome the legacy of apartheid requires a major programme of house building, electrification and other public works and a diversification of the economy from its existing strengths in the minerals and energy sectors into other closely related sectors. It is from this starting point that we need to consider how the institutional framework for a developmental state can be developed to manage the reconstruction and development of the South African economy and society.” To start with the state of the South African economy, prior to the first democratic election in 1994 the previous government’s own ‘Normative Economic Model’ had in 1993 identified several structural defects in the political, economic and social system which would clearly require far more than just economic growth to overcome. These problems were listed as including: inappropriate education and training; costly functional and physical separation of people; inadequate access to economic opportunities; unsettled community life; inadequate entrepreneurship; and ineffective financial intermediation between savings and development investment. On the neglect of training, the


The Political Economy of South Africas Transition

share of gross domestic product (GDP) devoted to this was reported at only 2 per cent, as against typically around 5 per cent in other countries. As detailed in MERG (1993) and Fine and Rustomjee (1997), the South African economy also suffers from weaknesses in the capital-goods and intermediate-goods manufacturing sectors. Some sectors have of course been successful, such as mining and energy. But overall these weaknesses mean that growth tends to lead to imports and hence to balance of payments deficits, and this inevitably leads to a brake on growth itself. The starting point for a consideration of what role a developmental state might play in the reconstruction and development of the South African economy should, then, be to recognize that South Africa does have a minerals—energy complex which is strong in its own areas which include transportation, engineering and construction, and that this could lay the basis for developing other closely related parts of the economy (on which see Fine and Rustomjee, 1997). This therefore gives South Africa a head start in terms of experience for the sort of construction and development projects which are needed in other economic areas, such as housing and electrification (and throughout the whole of the Southern African region). But there is no inevitability about these prospects being actually realized. The purpose of the present chapter is to consider what sort of institutional framework is being — or might be — developed to see through the reconstruction and development of the economy. In particular the need to create employment is discussed in relation to the development of ‘tripartite’ or corporatist institutional arrangements. The following section considers South Africa’s economic and developmental needs and the constraints it faces. This is followed by a discussion of the policy responses of the South African government prior to the 1994 election through to the 1996 policy documents from both business and government. The argument in the first two of these three documents that wage bargaining should be either decentralized or restricted is then considered in the context of the ‘corporatism’ literature. Different state—market arrangements are then discussed.






South Africa’s social and economic structure compels an examination of issues of ownership and control: five corporations control more than 80 per cent of the shares on the Johannesburg Stock Exchange, and South Africa has the world’s most unequal distribution of income (with a Gini coefficient of 0.6). To address such disparities requires bold policies for economic renewal as well as a heavy legislative programme, aimed not least at making the market function in line with principles of social and economic justice. State intervention has of course been used in the past to see through structural change, and in particular to effect a change in the distribution of income towards the Afrikaners, and to alleviate the balance of payments constraints

Employment and Labour Market Policies


arising from the isolation of South Africa. It is unlikely that either of these objectives could have been realized without this degree of state involvement. The size of the structural changes required if the new South Africa is to overcome the legacy of apartheid is no less. It will therefore be vital that the public sector is used actively to promote, facilitate and deliver such changes to achieve the goals of gender and racial equality, to overcome the dual threats of capital flight on the one hand and social unrest on the other, and to satisfy the very different constituencies that now make up the new South African polity, while sull ensuring growth and a redistribution of wealth. However, the idea of pursuing the sort of industrial strategy which would be required to achieve these aims has been criticized on a number of grounds. First, because of the inefficiency and corruption associated with what was seen as an industrial policy under apartheid. And secondly, because the term has been used in the past to describe little more than just trade policy plus ‘decentralization’, with the latter referring to the homelands policy. The starting point should be to look at what needs to be done, and then to consider whether or not private capital is likely to do it. Where this appears unlikely, there is a case — indeed a need — for the public sector to intervene to ensure that the job 1s done. The key reason for greater government intervention is that the private sector appears incapable or unwilling to undertake the huge reconstruction and development tasks facing the country, for example in terms of house-building and the balanced development of the housing supply and other associated industries, along with the upgrading of other aspects of the social and productive infrastructure. Even the most orthodox of free market economics recognizes the need for state intervention in cases of ‘market failure’. The classic cases given are goods such as lighthouses which may otherwise not be provided, since a private owner might not be able to ensure that people pay for the use of it. The transition to a new South Africa 1s likely to suffer from all sorts of such market failure. In addition, there are many areas of potential economic strengths such as tourism, which to flourish will require a reduction in the level of general criminal violence.” The question is, how can such a reduction be brought about? Certainly not by monetary and fiscal prudence alone. Rather, it requires public action to bring hope and a sense of purpose to the townships and communities most affected by the present levels of unemployment, illiteracy and economic hardship. Thus the real ‘constraints’ should not be seen in terms of the factors usually associated with that phrase — such as the foreign exchange constraint or the inflation constraint.* Such factors are of course important, but equally it needs to be appreciated that the government is also constrained to pursue the reconstruction and development of the country, or else court political and economic disaster. Such policies would in this sense be in the long-term interests of private sector business itself, regardless of the negative attitude they inevitably display to the idea of policies seen as too interventionist (although of course lip-service to the Reconstruction and Development Programme (RDP) 1s paid by all).


The Political Economy of South Africas Transition




This section considers three policy responses: from the South African government prior to the 1994 election; from the business sector in 1996 (Growth For All — An Economic Strategy for South Africa, Prepared by the South Africa Foundation); and from the government in 1996 (Growth, Employment and

Redistribution — A Macroeconomic Strategy, prepared by the Ministry of Finance).° The Pre-April 1994 South African Government’s Economic Model The pre-election government’s ‘Normative Economic Model’ correctly identified a number of defects in the country’s political, economic and social system, as mentioned above. However, the model, along with its accompanying published commentary, also included a number of naive assumptions and assertions, and some of these appear to have been carried over into the approach and policies of the present government. First, central to the pre-election government’s strategy was ‘the need for the government sector to free national resources for more investment, mainly by the private sector’. But there is no automatic mechanism whereby resources ‘freed’ by government will reappear as private investment; those resources risk instead lying idle, thereby reducing national income. The approach of the government’s published model was static, implying a given national cake, so that if the public sector takes a smaller slice, a larger piece will be left for the private sector. Instead, the size of the national cake is itself a product of public as well as of private spending and investment. Reducing the size of the public sector’s ‘slice’ may simply result in a smaller cake being generated. And since much private sector activity is linked to public sector spending, such cuts may hit private sector production, leading to the cake shrinking yet further. The private sector’s increased share of the cake may turn out to be smaller in absolute terms than its previous share. Secondly, rising unit labour costs were identified as harming competitiveness, with wages seen as the culprit (a theme repeated in Growth For All). But the rising costs identfied were due not to wage increases — real wages fell between 1985 and 1991 — but to falling productivity. Hence the real need is to upgrade and modernize. Thirdly, the pre-April 1994 government correctly identified increased investment as playing a key role. However, in listing five determinants of investment it ignored the crucial role of demand (and expected demand). It also ignored the vitally important role played by having access to an efficient productive infrastructure. Investment is unlikely to be forthcoming unless there is a demand for the resulting output. And even then, investment may fail to deliver without the necessary productive infrastructure being 1n place, in terms of transport




between the private and public sectors.






Employment and Labour Market Policies


Fourthly, the criticism of centralized collective bargaining ignored international experience, where decentralized bargaining loses the pressure on inefficient firms which a centralized system can deliver (see Section on wage bargaining and ‘social corporatism’, below). Fifthly, the prescription of financial deregulation as a mechanism for creating new institutional arrangements to provide increased investment in domestic capital formation flies in the face of international experience throughout the 1980s and 1990s. Increased property prices would be a more likely outcome, with any real investment being diverted to yet more shopping malls, or whatever else promised short-term returns. And finally, globalization was interpreted in a one-sided way, in terms only of weakening the efficacy of national economic policy levers (and this again is carried over in Growth For All and to some extent also by the 1996 government policy document, Growth, Employment and Redistribution). The other side of the globalization coin is that gains in national competitive advantage are magnified in international markets. Economic policy may be more difficult, but it also becomes more important.


For All

The employers’ 1996 economic strategy document (South Africa Foundation, 1996) was an explicitly ‘market-friendly reform programme’. While written to fit with the post-apartheid agenda, paying lip-service to the need for reconstruction and development, its policy prescriptions were old-style orthodoxy. The poor were to be helped by having wages forced down; employment was to be created by cutting public sector employment and by making it easier for workers to be sacked; and the legacy of apartheid was to be overcome by instituting a two-tier labour market, where those who currently have employment rights and reasonable levels of pay would by and large keep them, while new employees would do without such things. Such marketoriented reform programmes were claimed to work by pointing to the examples of Chile since the military coup in 1973 and Britain since the election of Thatcher in 1979. This 1s not the place to debate these points 1n detail — they have been countered comprehensively elsewhere® — but what is of concern to the present discussion is that some of this orthodox policy agenda appears to have been accepted by the present government.

Growth, Employment and Redistribution The Ministry of Finance’s Growth, Employment and Redtstribution document is thin on what the proposed policies — on trade, industry, small enterprise, and so on — are actually to be. On trade the proposals appeared to be to do away with any policies, as fast as possible. Some small enterprise policies were listed but


The Political Economy of South Africas Transition

with little new proposed. And there was a complete absence of any proposals for an industrial policy or strategy. Issues of trade policy appear to be high on the South African policy agenda. This is not surprising, given the emergence of the economy from the era of sanctions, with the need to build and develop new trading relations. However, this is not the spirit in which the issue 1s approached in Growth, Employment and Redistribution. The objective should be how to use trade to assist in the reconstruction and development of the economy. Instead the ‘free trade’ line 1s accepted wholesale by the Ministry of Finance paper. Of course there are many potential benefits from free trade, and in many times and places it is undoubtedly the best policy. And conversely, tariffs and other forms of protection carry all sorts of dangers and can certainly lead to a range of negative effects. But to leap from this recognition to the assumption that free trade will always and everywhere be the best policy — and that interventionist trade policy can never improve matters — is quite wrong. The free trade consensus is based on simplistic theory,’ and in policy terms it can encourage a dangerous complacency as is certainly displayed in the government document. There is a good case for protecting or supporting sectors that, for example, generate positive externalities such as technological spillovers. Tariffs may also have beneficial effects through increasing domestic demand, thus stumulating the introduction of new products. By encouraging import-substitutes, protection can expand the domestic traded goods sector. The means of expansion operates through reducing the propensity to import and thus reducing the leakages from the domestic economy. The objective of protection in an underemployed economy is to reduce the propensity to import competitive goods, not to reduce the actual volume of imports. If the policy is successful, the rise in domestic incomes should encourage more imports of complementary and subsequently competitive goods. The 1996 government document presented the proposed acceleration in tariff reductions as being to compensate for the depreciation of the currency. Instead, an active industrial policy should be used to expand domestic production of those goods on which tariffs apply. This is the opportunity which a currency depreciation allows — an opportunity which the government would squander by accelerated tariff reductions to benefit imports. The Ministry of Finance document suggests that allowing in cheap imports will reduce prices for domestic consumers. But the aim should be to expand domestic production, allowing the spreading of overheads and investment in new technologies to lower unit costs and hence reduce prices. This is the sustainable way to lower prices. Furthermore, the government revenues from maintained tariffs could be used in a range of ways to lower domestic prices, including subsidies or tax cuts.® On small and medium-sized enterprises the 1996 government document referred to the policies outlined in the previous White Paper on small business promotion but added nothing new. The emphasis on cutting the fiscal deficit, maintaining interest rates above the rate of inflation and so on all suggested an orthodox economic approach which would continue to squeeze small and

Employment and Labour Market Policies


medium-sized enterprise. The prospects for their development will remain poor in the absence of an industrial policy committed to the creation and support of such enterprises, if necessary through the creation of new public sector enterprises. Yet there was no mention of any such industrial policy.” It is perhaps symptomatic that while the reference in the Table of Contents of the government’s 1996 policy document was to “Trade, Industrial and Small Enterprise Policies’, the corresponding subheading within the body of the paper is not to industrial policy but to ‘industrial support measures’. And the section did little more than list existing policies. It was said that the review of competition policy would ‘open up new opportunities for investment’. But there was no indication of what would be done to ensure that the new opportunities would be met by investment rather than by imports. High real interest rates do not help. ‘There was no commitment to public enterprise in any form — whether the creation of new public-private ventures, the sponsoring of new co-ops, encouraging local enterprise initiatives, or whatever. The only reference in the document to public-private ventures was to make existing public ventures into public-private ones; yet there are many areas of the economy where private enterprise is failing to establish new ventures and where a partnership with the public sector could facilitate this. The government’s 1996 Macroeconomic Strategy document argued that industrial innovation support programmes would be enhanced but again with little detail. This is an area where public sector involvement is vital — without it the private sector is extremely likely to under-invest, or miss out completely. Government policy can promote innovation by enhancing industry’s awareness and by improving the vision of firms of the opportunities of new technology. This has happened successfully with Japan’s collaborative research programme in which government (especially MITT) officials and researchers have been able to enhance long-term economic performance as a result of their ability to compensate for the shortsightedness and blind spots of companies. The role of MITT 1s thus, in part, to help firms to improve their economic competence and expand their perceived opportunity set, particularly in periods of rapidly increasing technological opportunities. Public procurement could be used more actively and in close coordination with other instruments, such as educational policy. A technologically competent buyer can not only specify the price and performance of a new product but can also contribute to the design of it. Moreover, paying for the seller’s research and development (R&D) reduces the risks of venturing into new technologies, and buying the product to be developed, may give the seller a first-mover advantage. Thus technical change depends on more than just the behaviour of individual firms; institutions matter, too. One of the most important institutions is the educational system. Universities have a critical role to play in identifying new emerging technologies, creating awareness of their potential, and rapidly increasing society’s absorptive capacity by accelerating research and education in new technologies when they are judged to be on the verge of becoming economically interesting.


The Political Economy of South Africas Transition

A proactive educational policy is therefore central to any technology policy. But this 1s not to be construed as an argument for developing new competence to always replace part of the existing skills. Technical change is, of course, to a degree a process whereby new knowledge replaces old. But the dominant feature of technical change is probably one where new knowledge complements existing knowledge. This implies that as new technological areas are born (for example electronic circuit design), they will have to be included in the curriculum of the universities not initially at the expense of the existing technological areas (such as solid mechanics), but in addition to them. This necessarily means that the educational establishments need to expand, to a degree, just as firms’ R&D expenditures need to expand to incorporate a growing number of technologies in their technology base. An additional role for the public sector is the establishment of ‘bridging’ institutions which act as information exchanges within the technological system, thereby improving the absorptive capacity of the system. While bridging institutions may need public support to get started, once they function they can be financed by those who discover the usefulness of their ‘bridging’ work. There are thus a range of initiatives and activities which can be usefully pursued by government or government-sponsored institutions in the area of innovation and many of these could usefully be linked to a negotiated programme between government, business and labour, connected as many of these innovation activities are to issues of training and company activity more generally. Given the importance for innovation policy of the link between national institutions and individual firms, the benefit which could be got from being connected to a national negotiated programme would depend crucially on the degree to which a future such programme could itself become relevant at the individual firm level. The lack of any serious trade, industrial or small enterprise policies in the government’s 1996 policy document is made more worrying by the general backdrop of the document, committed as it is to a rather orthodox economic agenda. Thus, for example, ‘greater flexibility in the labour market’ may actually undermine the incentive for firms to train their workforce if it increases labour turnover and makes it more likely that the benefits from such training will be enjoyed by rival firms poaching the skilled workers.





Should wage bargaining be centralized or decentralized? And should other issues — such as investment and pricing policies — be included in the bargaining process? Should government be involved? These questions have been disputed in policy debates throughout the world, including in South Africa where what might be interpreted as an attempt at corporatism is being pursued through the

National Economic, Development and Labour Council (NEDLAC).’° Various





in the economics,




Employment and Labour Market Policies


politics literatures regarding the effects of ‘corporatism’ or ‘social corporatism’ on economic performance. Many contributions have focused on the case of Sweden and that country’s relative success in preventing mass unemployment in the 1970s and 1980s."" In the neoclassical economics literature Calmfors and Driffill (1988) make generalized claims about the comparative performance of weakly, strongly and mediumly corporatist economies, finding a U-shaped relationship between employment and centralization of wage bargaining.'* The more centralized the bargaining structure, the lower tends to be the country’s wage dispersion; Rowthorn (1992), for example, reports a significant coefficient on the Calmfors—Driffill ranking when countries’ degree of wage dispersion was the dependent variable. Nevertheless, such attempts at ranking countries are complex and may be misleading; for example the British labour market might appear corporatist because of having a single trade union centre (the TTUC) but in reality that body has only weak links with the individual trade unions; Japan has a high degree of participation and integration of interests between government and business, but labour interests are fragmented; and so

on. Indeed, it is hard to pin down the definitions of the terms ‘corporatism’ and ‘social corporatism’. The New Palgrave Dictionary of Economics, for example, has no entry under ‘social corporatism’ and the entry under ‘corporatism’ does not get much beyond Mussolini’s fascism (see Eatwell et al., 1987). The expression ‘social corporatism’ has emerged in the literature, then, as stressing the social democratic and trade union component of the Scandinavian version of corporatism as a more or less coherent system.’? The key to the theory of how social corporatist institutions might deliver improved economic performance lies in the idea, first, of their being able to produce different outcomes in the wage bargaining process than would otherwise occur,









economic consequences. The argument can be made with nominal or real wages, and each is dealt with in turn below.




to either

Wage Bargaining and Inflation Wage agreements are made in money terms. But the aim for the workers is to improve living standards, taking account of inflation. Success in reducing the rate of money wage increases need not reduce the rate of real wage increases provided inflation — the rate of output price increases — falls fully in line. The difficulty comes in ensuring that a reduction in the rate of money wage rises does indeed result in inflation falling to the same degree. If it does not then real wages will fall and firms may take advantage by continuing to use outdated equipment which would otherwise have had to be replaced, resulting in lower productivity. In such a case the lower real wages may result in unit labour costs not actually falling (since productivity growth also falls), and likewise profits may not even benefit. An alternative danger if firms do not reduce prices in line with the nominal wage reductions is that this feeds through into higher profits with


The Political Economy of South Africas Transition

productivity growth being taken out in increased dividend payments and/or increased share price values rather than in reduced output prices. It is only if such issues are faced up to, and realistic solutions to them implemented, that wage bargaining reforms could be expected to deliver what is often promised, namely maintained growth of real wages despite a slower growth of money wages. Fundamentally it would require a bargaining strategy capable of delivering increased real wages across the economy, forcing inefficient firms to upgrade through investment.

Wage Bargaining and Employment However, a separate argument is sometimes made that the growth of real wages should indeed be reduced — that this should actually be an aim of restraining money wage growth. This argument is usually made with regard to unemployment, to the effect that workers price themselves out of jobs and that restraining real wage growth would improve competitiveness, allowing increased production and hence increased employment. The corollary of this is the idea that if business is given extra profits they will independently take care of the problem of competitiveness. The idea that real wages and employment are negatively correlated in the cyclical upturn, with workers being priced back into work, has a long history in economic theory and a negative wage—employment correlation can certainly be found from statistical tests which are carried out on the assumption of ‘other things being equal’. But of course, cutting wages would itself prevent other things being equal: consumer demand would also be cut and lower wages might induce firms to postpone productivity-raising investment. Empirical research reveals that there is no consistent correlation between wages and employment over the business cycle: wages are just as likely to be positively correlated with employment as negatively. '* Thus, reducing the rate of growth of real wages has a two-way relationship with employment. In the short-term it might encourage individual firms to take on more workers because their wage costs are lower. But low wage dependency has two long-term costs to the national economy. In the first place, it redistributes income towards the relatively better off who consume a higher proportion of imported goods, reducing demand and causing unemployment. In the second place, it eases pressure on firms to replace their outdated equipment and managerial methods, with the result that innovation slows and international competitiveness 1s lost.

Centralized Bargaining ‘Centralized’ bargaining exists in countries where the national federations of trade unions and employers, while not necessarily able to impose a uniform

Employment and Labour Market Policies


settlement upon their members by force of law, nevertheless exert a predominant influence over the bargaining process and its outcome. Countries which have used centralized wage bargaining to bring about a high level of wage equalization have had a comparatively successful record on employment growth since the early 1970s. The Nordic countries come into this category, in contrast to most other European countries which rely on a combination of national-level and local-level bargaining and which are generally characterized by a reasonably high level of wage equality for those in work but by a poor employment record, resulting in greater inequality between employed and unemployed. Countries with, by contrast, highly decentralized systems of wage bargaining and higher levels of inequality in earnings levels, such as the US and Japan, have also enjoyed better than average employment growth over this period. However, much of the growth of jobs in the US (and to a lesser extent in Japan) has taken the form of poorly paid and low-productivity employment. It is only in the north European countries, and in particular Sweden, that a high level of employment growth has been combined with comparative wage equality between occupational groups. In the Calmfors and Driffill model, the best outcomes are achieved therefore

either by what might be termed a ‘free market’ approach or else by what might be termed the ‘social corporatist’ approach. The worst of all worlds 1s to fall between the two stools. The non-corporatst end of their U-shaped finding might be thought to deliver high employment either because workers then identify with their own firm and hence will take wage cuts 1n the belief that they will gain from their firm’s competitive advantage, or else because the lack of corporatist institutions leaves workers powerless to prevent wages being driven down to their ‘market-clearing’ levels (which according to this argument would deliver full employment). The corporatist approach its said to allow high employment by overcoming the prisoner’s dilemma whereby no group of workers will agree to the necessary degree of wage restraint for fear that others might not; hence they fail to achieve the optimal outcome (which would result from all cooperating), albeit they avoid an even worse fate which befalls those who follow a cooperative strategy which is not reciprocated. This is as far as the story goes in much of the literature, stopping at the level of wage bargaining. However, this does not answer either of the objections made above, against attempting to pursue a strategy of employment creation through wage restraint. These objections can be countered, but only by expanding the nature of the bargaining system, to allow commitments to be made by employers and government. This allows the employers to make commitments on investment levels, and more generally on the use of profits. It also allows the government to make commitments about future levels of aggregate demand in the economy. NEDLAC and other institutional developments could be seen as providing a potential mechanism for organized labour to advance policy demands which could force through the reconstruction and development of the South African economy. But so far any such potential has remained untapped. Business


The Political Economy of South Africas Transition

interests have by and large continued to pursue their own agenda unconstrained. On the other hand, it could be objected that in a country like South Africa with a relatively small percentage of the population organized in trade unions, the mass of unemployed and poorly organized workers would lose out if organized labour

was guiding policy.'? The opposite is more likely to be the case: with organized labour limited to negotiating wage levels, there is little scope for the interests of the unorganized to be encompassed; it is only if labour 1s able to secure action on a broader policy front that the interests of the unemployed — and the poorly organized — can meaningfully be represented. Thus in his analysis of manufacturing wages, Falkov (1994) finds powerful worker organization to have succeeded in placing upward pressure on real wages in the ‘upper’ segment of that labour market, with falling living standards and growing job insecurity found amongst unskilled manufacturing workers, leading him to conclude that ‘Policies that focus on accelerating the rate of output growth in the manufacturing sector, the establishment of appropriate collective bargaining institutions, and increasing coverage for unskilled workers, are the only basis for securing both rising employment levels and standards of living in the future’ (Falkov,

1994: 26).



Reading off lessons for South Africa from international experience would not be straightforward. Britain, for example, has experimented with a number of labour market policies over the past few decades, but has never succeeded in using centralized bargaining to force through modernization as happened in Sweden. Other countries have varied their institutional arrangements in face of global changes, including now Sweden. Australia’s ‘Accord’ was launched as one component of an ambitious programme of economic and social reform, but when the other elements in the reform programme faltered, the wages policy alone was left to bear the brunt, and suffered accordingly. The key to achieving full employment combined with low inflation requires improved productivity and competitiveness. The focus of any labour market policy should therefore be on how to force firms and industries to match best practice through investment, and to ensure that the resulting productivity gains are passed on in reduced output prices. The ability of governments to manage this will depend in part on the country’s insttutional structures. National economic management is only an anachronism if it is seen as operating 1n an international vacuum); instead it should be recognized as the single most powerful mechanism of legal and organizational power for economic intervention. The argument that independent national governments either have had or should have their powers to act limited, has crystallized recently in South Africa as elsewhere around the issues firstly, of whether the responsibilities of the state need to be rolled back, in favour of private enterprise, and secondly and more specifically, over whether the Reserve Bank should be independent. The above

Employment and Labour Market Policies


general considerations of the state—market relation are now focused on these specific points.

The State and its Public Administration The development of public administration has in South Africa, as elsewhere, reflected economic developments; and again as elsewhere, the public administration has itself shaped these economic developments themselves. The case of South Africa is interesting, of course, because of the peculiar nature of the economic, political and administrative developments under the policy of apartheid. Thus the term ‘decentralization’ when applied to economic policy meant in the South African context the peculiar construction of the ‘homelands’ — notionally independent nation states. Political decentralization remains, though, a live political issue both because of the Afrikaner Weerstandbeweging (AWB) demands for an independent homeland and because of the demands for independence for the Zulu Natal region. In South Africa both the state and the market came therefore to have rather peculiar constructions. Huge commuting distances to work, for example, were one consequence of the settlement arrangements. And the political response of the international community in imposing economic sanctions led to stl further public interventions in the economy to encourage import substitution, for example. The pre-election government spent the last couple of years leading up to the first democratic election trying to dismantle as many of these powers as possible. This has left democratic South Africa struggling under a double legacy: firstly, the peculiar construction of an apartheid economy and society, and secondly, an enfeebled public administration no longer capable of wielding the influence required to force through a change of direction on the economy and society. Left to itself, the free market is likely to develop the economy along its existing lines to a great extent. To overcome the economic legacy of apartheid will require an interventionist state to diversify the economy and build up a capital goods sector; to provide public services to the mass of the population; and to monitor public purchasing, contract compliance and other such mechanisms. Equally, public administration itself will need to be rejuvenated, breaking out of its own apartheid straitjacket, developing affirmative action programmes for its own development, and so on. It is generally recognized that South Africa has a bloated bureaucracy, in part a legacy of the apartheid structures. The problem of this unproductive public service has to be tackled, but in doing this it is important that the role of the civil service is linked conceptually to the country’s economic,

social and






but renewing itself in the process. It needs to play an active development role rather than a merely regulatory one.


The Political Economy of South Africa’ Transition

Independence of the Reserve Bank There is strong pressure internationally to make central banks independent of elected governments. The German Bundesbank and the US Federal Reserve are both independent. The proposals in the Maastricht Treaty are for the European Union’s new central bank to be independent. In South Africa, the Reserve Bank is supposedly independent, and there is pressure for this to continue. The economic and political logic of this is questionable to say the least; the Reserve Bank

should rather be accountable

to a democratic




may well prove to be a necessary condition for the South African Government to pursue a balanced programme. Being ‘independent’ means in effect being unaccountable to any elected authority. The electorate therefore have no mechanism for influencing the policies of the Reserve Bank. The direct policies are monetary and interest rate, but the Reserve Bank also has influence over exchange rate policies, and interest rate policy has repercussions for fiscal and industrial policies, as well as for the state of the economy and popular well-being more generally. This lack of democratic accountability therefore has widespread implications for the whole of economic policy. It would be possible for an incoming government to attempt to implement the programme on which it was elected, using the remaining economic instruments at its disposal, as for example in America in the 1980s when a fiscal expansion led to rapid economic growth and employment, with a dramatic fall in unemployment. But since monetary policy was independent from this, the conflicting monetary and fiscal policies led to increased interest rates, an overvaluation of the currency,

a loss of competitiveness 1n international markets as well as in the home market, and a huge balance of payments deficit and a growing international debt. An independent Reserve Bank in South Africa represents a danger politically as well as economically. If the sort of reconstruction and development programmes which are vital to the economy -— and vital for defusing the level of violence, introducing some degree of hope and sense of purpose and progress into Communities — are made impossible by the actions of an unaccountable Reserve Bank, then the democratic political process will lose legitimacy. South Africa needs a coherent economic programme with all its elements — fiscal, monetary, industrial, regional, international — kept in balance. That requires an

accountable Reserve Bank.

CONCLUSION The success with which the government can break with the deeply ingrained structures of apartheid within the economy and society will depend to a large extent on the type of state which is developed: whether it can become an active developmental state or else becomes limited to playing a passive regulatory role. One test will be when the inevitable pressure comes for government to intervene in labour markets; will it respond by limiting itself to incomes policy type

Employment and Labour Market Policies


reactions, in effect leaving the free market to decide the inflation, investment and

employment response, or will it intervene more proactively to expand investment, productivity and output? The development of NEDLAC shows a desire to develop structures — which might be characterized as social corporatist — to pursue the more developmental approach. One particular problem will be how corporatism can be developed in South Africa with its high rates of unemployment. Corporatist structures may be good at preventing unemployment rather than solving it, and have not before been developed in a country already characterized by high unemployment. What still needs to be worked out in practice is how the interests of some of the largest constituencies in South Africa (such as the unemployed and those in the informal economy) can best be represented in the system which is developing. In the Government’s 1996 economic strategy document there was a lack of imagination regarding public sector initiatives. Where private enterprise is failing to invest, and the ‘free market’ is failing to respond to new opportunities by launching new enterprises, the public sector should show the way. This could be done by government investing in the productive infrastructure; by supporting start-ups by co-ops; by establishing new joint ventures with the private sector; and where necessary by establishing new public sector firms. Free enterprise is all too often neither free nor enterprising. It is the government which has a duty and a mandate to reconstruct and develop the economy. Perhaps by economic orthodoxy where possible; but certainly by public intervention where necessary.

REFERENCES Calmfors L and Driffill J (1988): Bargaining structure, corporatism and macro-economic performance. Economic Policy, no. 6 (April): 13-61. COSATU (1996): Social Equity and fob Creation: The Key to a Stable Future. COSATU, Johannesburg. Commission to Investigate the Development of a Comprehensive Labour Market Policy (1996): Restructuring the South African Labour Market. Directorate of Communication, Department of Labour, and Government Printer, Pretoria.

Deakin S, Michie J and Wilkinson F (1992): Inflanon, Employment, Wage-bargaining and the Law. Institute of Employment Rights, London. Eatwell J, Milgate M and Newman P (eds.) (1987): The New Palgrave Dicnonary of Economics. Macmillan, London.

Falkov L (1994): African Wages in the Manufacturing Sector — 1975 to 1990: Alternative Perspective. Masters Dissertation: University of the Witwatersrand.


Fine B and Rustomyjee Z (1997): South Africa’s Political Economy: From Minerals—Energy

Complex to Industriahsaton? Hurst, London. Glyn A and Rowthorn B (1988): West European unemployment: corporatism and structural change. American Economic Review Papers and Proceedings, 78: 194-9. Harris L and

Michie J (1997)

The Effects of Globahzation

on Policy-formanon

in South

Africa. Paper for the EPI conference on Globalization and Progressive Economic Policy, Washington DC.


The Political Economy of South Africas Transition

Henley A and Tsakalotos E (1992): Corporatism and the European Labour Market After 1992. Brittsh Fournal of Industrial Relations, December. ILO (1996): Restructuring the labour market: The South African challenge. International Labour Organisation (ILO), Geneva.

Kitson M and Michie J (1995): Conflict, cooperation and change: the political economy of trade and trade policy. Review of Internanional Politcal Economy, 2(4): 632-57. Macroeconomic

Research Group


(1993): Making Democracy

Work: A Frame-

work for Macroeconomic Policy in South Africa. Oxford University Press, Cape Town. Michie J (1987): Wages in the Business Cycle. An Empirical and Methodological Analysts. Frances Pinter Publishers, London. MichieJ (ed.) (1992): The Economic Legacy — 1979-1992. Academic Press, London.

Michie J and Grieve Smith J (eds.) (1994):

Unemployment in Europe. Academic Press,


Michie J and Grieve Smith J (eds.) University Press, Oxford. Michie J and Grieve Smith J (eds.)




the Global Economy.


Creanng Industrial Capacity — Towards Full

Employment. Oxford University Press, Oxford. Michie J and Grieve Smith J (eds.) (1997): Employment and Economic Performance. Oxford University Press, Oxford.

Ministry of Finance (1996): Growth, Employment and Redistribunon — A Macroeconomic Strategy. Ministry of Finance, Pretoria. Nattrass N and Seekings J (1995): And the jobless? Mad & Guardian, 8 to 14 September. Pekkarinen J, Pohjola M and Rowthorn R (eds.) (1992): Soctal Corporansm: A Superior Economic System?. Oxford University Press, Oxford. Pohjola M (1992): Corporatism and wage bargaining. In J Pekkarinen, M Pohjola and R

Rowthorn (eds.) Social Corporansm: A Superior Economic System? Oxford University Press, Oxford.

Rowthorn R (1992): Centralisation, employment and wage dispersion. Economic Fournal, 102(412): 506-23. Rowthorn B and Glyn A (1990): The diversity of unemployment experience since 1973. In S Marghn and J Schor (eds.) The Golden Age of Capitalism. Oxford University Press, Oxford. South Africa Foundation (1996): Growth For All — An Economic Strategy for South Africa. South Africa Foundation, Johannesburg.

ENDNOTES 1. This chapter was written while Department of the University of both for their comments and their 2. These general propositions have Research Group

(see MERG,

I was a Visiting Professor in the Economics the Witwatersrand and I am grateful to the staff hospitality. been detailed by South Africa’s Macroeconomic

1993) and by Fine and Rustomjee


3. South Affrica’s tourism industry contributes around 4 per cent of GDP, as against an international average figure of 7 per cent. 4. The degree to which the South African Government’s economic policy is constrained by global economic forces and developments is discussed in Harris and Michie


Employment and Labour Market Policies


5. The Growth, Employment and Redistribution publication is referred to in the text both as a Ministry of Finance and Government document; it appears in the bibliography as Ministry of Finance (1996). Growth For All appears in the bibliography as South




Africa Foundation (1996). See also COSATU (1996), Commission to Investigate the Development of a Comprehensive Labour Market Policy (1996) and ILO (1996).

See, regarding the UK, European and global contexts, Michie (1992) and Michie and Grieve Smith (1994, 1995, 1996 and 1997). This is argued in detail by Kitson and Michie (1995).

For further discussion of trade policy see Bell (Chapter 4, this volume). On which, see Fine (Chapter 7, this volume).

See, for example, the Report of the Presidential Commission which argued for an Accord which would bring ‘the social partners together to try to agree on a means to increase employment, raise real wage growth by reducing inflation, and increase investment in human and physical capital’ (Commission to Investigate the Development of a Comprehensive Labour Market Policy, 1996: 209). 11. See, for example, Glyn and Rowthorn (1988), Rowthorn and Glyn (1990), Henley and Tsakalotos (1992), Deakin, Pohjola and Rowthorn (1992).

12. For a development Rowthorn







of Calmfors and Driffill’s work along more realistic lines see

(1992), and for a critical survey of the literature see Pohjola (1992).

13. Pekkarinen et al. define social corporatism as an economic system whose labour market is characterized by two basic features: first, centralized bargaining — primarily wage bargaining but also possibly bargaining over government economic and social policies, in which case the state is either formally or informally involved in the process; and secondly, a non-exclusive and egalitarian approach to such bargaining. 14. For the theoretical and empirical evidence, see Michie (1987). 15. This is argued, for example, by Nattrass and Seekings (1995).

Policy Formulation and Implementation

Growth, Demand and Redistribution: Economic Debate, Rhetoric and Some

Food for Thought Martin Wittenberg Introduction


Some snapshots from the great economic debate


Visions, fantasies and nightmares: rhetoric in the economic debate 1|//7

Some ‘stylized facts about output growth in manufacturing




Appendix: The Granger causality tests


INTRODUCTION In the wake of South Affrica’s political transition the question of its economic future has shifted centre stage. South African business, labour and government have all outlined their vision of South Africa’s growth path (see South Africa Foundation,

1996; Republic of South Africa, 1996). These policy interventions

take place against a backdrop of academic debate and it is therefore of some interest to scrutinize the terms of this debate. The chapter 1s divided into three parts. In the first, a crude thumbnail sketch of some of the staging posts in the debate is provided. In the second, some of the terms of the debate are examined. It is suggested that besides the content, the rhetorical devices used are illuminating. We argue that often the form of the debate has been such as to overly polarize the options available. In the third we provide some ‘stylized facts’ about South African manufacturing which we argue need to be taken into consideration if the debate is to progress further.


The Political Economy of South Africas Transition

SOME SNAPSHOTS FROM THE GREAT ECONOMIC DEBATE The departure point for the macroeconomic debate has been first the imminent prospect of political transformation and subsequently its realization. In this process the ANC and ANC-aligned economists have been as much initiators and participants in the debate as the target of 1t — with various contributions intended to sway the process of policy formation. The initial position of the ANC in this debate (as reflected in the 1990 discussion document on economic policy) was that apartheid had left a legacy of such distortions in the operation of the South African economy that extensive state intervention was required for ‘reconstruction’. Furthermore, restructuring of the South African economy was not inimical to economic growth, instead growth would occur through redistribution. ! Moll (1991a) suggested that the ANC vision was akin to the ‘macroeconomic populism’ of various Latin American governments and that it would have similar effects — it would show some initial successes but would lead to economic collapse in the medium term. Moll (1991a,b,c) also cautioned about some of the

mechanisms of redistribution that had been or might be put forward. He suggested that many of them would lead to unintended consequences which would have the effect of undermining the operation of the South African economy. The Macroeconomic Research Group report (MERG, 1993) developed the ‘interventionist’ position further. It suggested that state investment was required to ‘crowd in’ private investment and put forward a set of simulations as to how such a programme might be managed without leading to the kind of collapse that Moll had warned about. The MERG report also presented a set of policy interventions in areas ranging from the operation of the financial markets to agriculture. The MERG proposals were attacked by Nattrass (1994a,b) on at least two counts. She argued that the importance of business confidence was not taken into consideration. The proposals contained in the MERG report might trigger capital flight and certainly would not promote the investment South Africa required to deal effectively with the unemployment crisis. Secondly, she expressed grave doubts as to whether the South African state had the necessary characteristics (the ‘embedded autonomy’) to intervene successfully. She thought it more likely that the state would become the site of rent-seeking than an impetus for development (1994b: 528). Nattrass in turn was attacked by Fine (1994), Kaplinsky (1994) and Sender (1994). Inter alia they argued that Nattrass’s position was quasi-laissez-faire — the state should or could not do much to promote economic development other than through education and providing an investor-friendly climate. They suggested that this position ignored the historical context — it was impossible to ignore the fact of the transition from apartheid. It would be politically and socially impossible to leave the economy where it was.

Growth, Demand and Redistribution






In the polemics between Nattrass and her critics rhetorical devices of a very obvious kind have been deployed: Nattrass being wont to contrast ‘moderates’ with ‘militant populists’ (1994c: 350-1) and her critics accusing her of ‘apologetics for business’ (Fine, 1994) and ‘reactionary rhetoric’ (Sender, 1994). Similarly Moll (1991a) suggests that redistribution through growth may be a ‘dangerous fantasy’ while the ANC (1994) puts forward its Reconstruction and Development Programme (RDP) proposals as a ‘vision’ for the future. Nevertheless as Hirschman (1991) has pointed out, the form of the argument may contain rhetorical devices as much as the language in which it is couched.” Indeed, Hirschman suggests that in highly polarized debates about a reform process, certain typical rhetorical manoeuvres are likely to be deployed. Opponents of the reform will tend to make use of three types of arguments: they will contend that the reform will jeopardize some other hard-won gains, e.g. liberty or democracy; it will have perverse effects, i.e. it will actually harm its intended


or it will be futile, i.e. there are underlying


‘laws’ which nullify the operation of the intended reforms. Hirschman dubs these the jeopardy, perversity and futility theses. Proponents of reform use their own characteristic forms of argumentation which are, to some extent, the mirror images of the three ‘reactionary’ forms. The counterparts of the jeopardy thesis are the ‘mutual synergy’ and ‘imminent danger’ theses: instead of endangering hard-won achievements, the reform will actually support and extend liberty/ democracy etc.; instead of the reform posing the danger it is maction which will imperil society. The counterpart to the belief in perversity is the progressive’s belief in the plasncity of society — that social relations can be moulded and remoulded at will. The futility thesis is. opposed by the ‘march of history’ argument: instead of the ‘laws’ of society ordaining that change is impossible, they actually make the change inevitable, human action can only serve to accelerate or delay the inevitable, with delays imposing greater hardships on society. Various exemplars of these arguments can be seen in the South African economic debate. It might therefore be of interest to point out how specific arguments raised in the South African context can be read as belonging to the broader category of ‘reactionary’ or ‘progressive’ rhetoric. It should be noted that classifying an argument as one or the other is not meant as a negative or positive judgement — ‘reactionary’ forms of arguments can be used by left-wing opponents of right-wing (or, for that matter, social democratic) reforms. At this stage the form of the argument 1s at issue more than its content. Before considering some of the arguments raised in the economic debate, it is perhaps useful to list some of the ways in which redistribution can be conceived of. Moll (1991b) suggests that redistribution can be thought of in at least three ways:

178 V a

The Political Economy of South Africas Transition redistribution

of assets:


of this

nationalization or privatization of firms; ¥V interventions in the market resulting in held by poor people: examples would helping micro-enterprises gain access to WV changes in state spending and revenue heavier taxes on the rich and increased





changes 1n the returns to the assets include minimum wage legislation, credits; collection: examples would include welfare spending on the poor.

Moll also argues that such redistributive packages need to be analysed within an overall macroeconomic context (199lc). Indeed, most of his sharpest criticisms seem to be directed at what he considers to be the latent ‘macroeconomic populism’ in ANC thinking at the time. Because Moll’s critique centres mainly on the last type of redistribution, this 1s the one on which we will concentrate.

The Futility Argument The futility argument and its counterpart, the ‘march of history’, have not been extensively raised in the current South African debates. This is not all that surprising since Hirschman suggests that the futility argument tends to be deployed mainly in retrospect, where a sufficiently ‘detached’ academic can claim that what at the time seemed a life-and-death issue was really a non-issue after all, that the ‘laws’ of history were such that the reform was actually irrelevant to the outcomes that were achieved. The ‘march of history’ as an argument for redistributive (socialist) measures seems to have gone out of favour with the demise of actually existing socialism as a model. Paradoxically the best exemplar of this mode of argumentation 1s to be found in John Kane-Berman’s writings about the ‘silent revolution’ (1991). Deployed in this way it suggests that the political and economic liberalization of South Africa is the inevitable outcome of the operation of individual optimization and market forces. The political and economic campaigns and visions of the ANC have the capacity of making the transition more or less traumatic — but the inevitability of the outcome is fundamentally not in doubt. While few commentators view the economic policy options available to South Africa in such fatalistic terms, many of the economic theories which serve as backdrop to these debates can be cast in this way. Neoclassical approaches, particularly in the monetarist and new classical variants, suggest that the ‘supply side’ of the economy is insulated from the demand side. Because markets always clear, the economy is inevitably operating at full capacity. This means that any fiscal stimulation of the economy will immediately run up against the supply constraints. This will have two effects: imports will tend to increase, leading to a deterioration of the balance of payments; and prices will tend to increase. Equilibrium will be re-established with higher prices and lower foreign reserves. The ‘real’ variables will not have been affected at all. In its new classical variant, the futility argument is posed in an even more

Growth, Demand and Redistribution


extreme form: all market actors will anticipate the government interventions in such a way that the policy is nullified before it has even been properly implemented! Again the ‘real’ variables (e.g. the marginal product of labour compared to its marginal cost) will determine who receives what in the economy. The neoclassical general equilibrium framework which underlies this kind of perspective is criticized by various new Keynesian and post-Keynesian approaches. To take just one example, Sawyer (1991) presents a ‘postKaleckian’ perspective which differs in a number of crucial respects from the neoclassical picture: 1. The economy is not perfectly competitive. Instead there is 1mperfect competition. Concretely this means that prices are seen as a mark-up on costs (i.e. firms are price-setters, not price-takers). The extent of the mark-up depends on the relative market power of the firm and on strategic considerations. 2. Prices do not only serve to allocate resources; rather they serve a number of functions: (a) they can be used to pass on price increases to consumers; (b) they are ‘positional’, 1.e. they serve to position the supplier in relation to all other potential suppliers (e.g. at the high-end or low-end of the market, as high-status or low-status product or worker); (c) they also serve a financial role — firms will try to finance their investment plans at least partially from internally generated resources and hence the extent of the mark-up (and thus prices) 1s related to the investment plans of the firm;

(d) prices are also allocative, in the prices and so demand will depend been set. 3. Firms are conceptualized as having demand, they will tend to respond increasing price.

sense that consumers will respond to to some extent on how the prices have excess capacity. If there is increased by increasing output rather than by

4. Investment decisions by firms are endogenous to the model, 1.e. growth is not

exogenous (as it is in the neoclassical view). The key variable that determines investment is the anticipation of future demand. In Sawyer’s model several features are noteworthy. Firstly, firms are prepared to accept excess capacity, in the sense that investment might accompany the existence of excess capacity (if strong future demand is expected). Furthermore, firms may even actively welcome excess capacity since it may protect them against new entrants or enable them to capitalize on upsurges in demand. Secondly, excess capacity does not arise due to price inflexibility. Prices are, in fact, flexible both in the sense that they are determined within the model (i.e. they are endogenous) and that they may vary with the level of demand. Thirdly, the level of capacity utilization depends on the pricing decisions of firms and the resultant aggregate demand. Within this model ‘growth through redistribution’ becomes a distinct possibility.


The Political Economy of South Africas Transition

If pricing decisions of firms in the past have led to an income distribution which generates insufficient aggregate demand to lead to full capacity utilization, then the country will be on a growth path characterized with endemic excess capacity. In this situation redistribution would have two potential benefits. Firstly, it may lead to higher utilization ratios and secondly, it may boost demand so as to increase the growth rate as well.

The Perversity Argument Moll (1991a) concedes that the idea of a ‘virtuous cycle’, in which redistribution leads to higher demand which leads to higher output (due to the existence of spare capacity) which in turn leads to more resources being available for redistribution



1s an attractive one.


he cautions


there is little empirical evidence to support the idea that there 1s excess capacity in the economy. Furthermore he suggests that even 1f there was extensive spare capacity, bottlenecks in key industries (such as cement) would mean that demand stimulation of the economy would soon run up against supply constraints. According to Moll where such ‘growth through redistribution’ strategies have been tried, the results have been simular: In the first stage of the programmes, many macro-economic variables looked highly

satisfactory. Inflation sometimes fell, real wages rose sharply, the welfare of poor people improved and exports sometimes rose too. The disconcerting features were falling investment levels, a running down of foreign exchange reserves due to escalating imports, and a real exchange rate appreciation (the nominal exchange rate usually being kept high to reduce inflation). These difficulties tended to be overlooked or ignored by exultant policymakers. Sooner or later, these economies drifted out of control as government deficits soared, inflation accelerated and growth slowed. Usually governments resorted to direct controls (e.g. over imports and prices) for a while, which could keep economies in check until imbalances were simply too large to handle. The expansionary phases were usually terminated by countries running out of foreign exchange reserves, leading to balance of payments crises and abrupt stabilisation phases involving falls in government spending and budget deficits, large currency devaluations and drastic cuts in real wages; subsequently, welfare indicators usually deteriorated sharply. (Moll 1991la: 316)

This is the ‘perversity’ thesis with a vengeance: not only will the fiscal samulus be nullified by the operation of ‘market forces’ — the poor will actually be worse off than before. Of course the question can be asked what is it in the process outlined above that produced the perverse effect. The first ‘culprit’ is, of course, the government’s mistaken view about the existence of substantial spare capacity. Nevertheless, the fact that real income rose in the beginning of these ‘populist’ experiments suggests that there must have been at least some spare capacity to start with. The second ‘culprit’ might therefore be an over-ambitious stimulation

Growth, Demand and Redistribution


on the part of the governments concerned. Indeed, Moll prefaces the section quoted above by saying that these circumstances obtained in ‘extreme circumstances’. This at least raises the prospect that a more cautious stimulation would have been more sustainable in the long run. The biggest ‘culprit’, however, 1s the falling of investment levels. In Sawyer’s (1991) model referred to above, it is assumed that capitalists will respond to the growth in aggregate demand by investing to meet that demand. In Moll’s account of redistributive experiments they did not. There could be at least two reasons for this failure. In the first place the neoclassical ‘crowding out’ effect might be at work, where government expenditure is itself the mechanism which prevents the needed investment from occurring. If this was, indeed, the reason,

then the perversity thesis would hold with full effect — attempts to redistribute now would undercut the investment needed to generate wealth in the future. A temporary alleviation of poverty would have been bought at the cost of longerterm penury. Empirically this does not seem an accurate description of South Africa: World Bank research suggests that the private sector responds positively to changes in public-sector-generated demand. (Fallon and Pereira de Silva, 1994: 11)

If there is any crowding out, it does not seem to be complete and, if anything, there seems to be some evidence for a mild ‘crowding in’ effect. It is conceivable that the lack of investment was due to an ‘investment strike’ by local and foreign capitalists worried about the ideological stance of the government pursuing the redistributive policies. Indeed Nattrass has consistently argued that ‘business confidence’ is a key variable and that ‘radical’ policies would have the effect of scaring away both domestic and foreign investors (1994a, b). Her key contentions can be summarized as follows: The world economy in the 1990s is a very different place to that in the heyday of developmental-state intervention. Capital is substantially more mobile, and 1s faced

with a much wider range of investment opportunities across the planet. This inevitably reduces the scope of government policy at the national level. Disciplining and coercing capital is a great deal more difficult. Capital simply leaves (or does not

enter) if the policy environment is perceived as unfriendly. (1994: 530)

The perversity thesis could therefore be stated in the following terms:° redistributive experiments lead to a loss of investor confidence. This in turn leads to an economic downturn which negates the effects of the fiscal stimulation. Furthermore the loss of confidence lingers even after the experiment has run out of steam — resumption of investment will occur only at penalty rates or as a result of structural adjustment programmes supervised by the IMF. While the intention of the experiment had been to aid the poor the resulting economic collapse actually makes the poor worse off. While this sketch account might reflect some of the mechanisms at play in


The Political Economy of South Africas Transition

certain episodes

in Latin America,

the question

is whether

the processes


God-ordained: is it inevitable that every attempt at redistribution will lead to investor flight? Several mechanisms might lead from fiscal stimulation to investment flight: V Objective factors in the economy might bring the consequence about, e.g. bottlenecks in the economy might lead to inflation which in turn prompts investors to move their capital off-shore. V The result might be due to a self-fulfilling prophecy: if every investor believes that fiscal stimulation will lead to economic collapse, then no one will invest and many will disinvest and consequently the necessary expansion in output to match the expansion in demand will not materialize and the economy will head for a recession. VW The result might be due to political factors: if the redistributive experiment is seen as a sign of an anti-capitalist orientation on the part of the government, investors may not trust the long-term intentions of the government and hence refrain from investing. If it is the first mechanism that is at play, then it might be appropriate for the government to ensure that parallel with the fiscal stimulation, measures are taken to enhance the supply side in those sectors where bottlenecks are most likely. The perverse effect would not be a God-ordained punishment for the hubris of wanting to redistribute, it would be the result of insufficiently careful implementation of the redistributive programmes. The second mechanism does not seem to be universally at work: the ‘military Keynesianism”™ of the Reagan era did not lead to large-scale capital flight. This mechanism, if it operates at all, will probably operate mainly in tandem with the third one: a strong belief that the government is out to ‘wreck’ the economy will of course lead to disinvestment and the wrecking of the economy. As Jeffrey Sachs has argued: the basic fiscal problem is often as much one of public confidence in future policies as it is the size of the budget deficit per se. (Economist, 1 October 1994: 28; cited in Adelzadeh and Padayachee 1994: 6) .

Implicit in Nattrass’s arguments, therefore, there seems to be the warning that certain economic policies will send the ‘wrong’ signals to the private sector and the way in which investors respond to these signals will in turn lead to economic collapse. The question, of course, is why redistributive measures should inevitably be

interpreted as being anti-capitalist. Indeed, Harris’s left-wing critique of the ‘growth through redistribution’ philosophy sees the agenda being pursued by the ANC and COSATU as ‘no different from a rational capitalist agenda’ (1993: 96). Stimulation of the economy and the promotion of competitiveness would certainly bring benefits to sections of the local economy. The fact, of course, is

Growth, Demand and Redistribution


that in a world in which economic policy matters (i.e. one different from the new classical











therefore is to what extent the biggest losers are also the ones with the biggest investment funds at their disposal. Again it does not seem inevitable that the biggest investors should also be the biggest losers. Domestic oligopolies might have the most to fear from the promotion of competition and the tax increases which might follow fiscal stimulation. On the other hand, they also stand to gain from the increased domestic demand, as well as from the increased stability that would result from redistribution. Of course the fact that a measure might 1 fact be in the interest of certain sections of capital might still not be percetved as such. The fundamental issue seems to be that of trust — right-wing regimes, such as Ronald Reagan’s, can get away with large budget deficits more than left-wing ones can, because investors trust their intentions more. Partially the issues are also about information and control — because the investors have fewer channels of communication and influence to left-wing governments they are less certain about what kind of policies might be pursued in future. If the issue is one of trust, however, then the question arises as to what a ‘leftleaning’ government like the ANC can do to assuage investor fears. Would the kind of conservative rhetoric emanating from the Department of Trade and Industry assuage all fears? Or would such talk be interpreted as empty? Surely as important would be ‘objective’ factors in the economy — an immaculately conservative government facing instability in the face of worsening material conditions would be as unlikely to persuade investors to part with their money as an interventionist ‘populist’ one. Furthermore will every attempt at redistribution, however cautiously introduced, be perceived as anti-capitalist? This seems to be stretching the point somewhat. The South African investor community seems to perceive the need for the ANC to ‘deliver’ to its constituency — otherwise the concern expressed 1n the establishment print media about the ‘failure’ of the RDP to deliver would not make



If there is this understanding,


then the idea that

redistribution will of necessity lead to capital flight does not hold. The problem with the perversity thesis is that it paints the picture too starkly — it suggests that there are built-in mechanisms which will ensure that redistribution has to fail. An analysis of the linkages suggests, however, that these mechanisms are not automatic at all; they depend on how the state implements its programmes and how private investors respond. As Hirschman notes, the perversity thesis presumes that it is impossible to learn from past mistakes, that it is only the gifted analyst who discerns the mechanisms that lead to the perverse outcomes and that policy-makers cannot adapt their programmes to take these mechanisms into account. Rather than abdicate all thought of being able to change current relationships, the lesson is to be more creative in the way that one implements policies.” The danger, however, with overplaying the perversity argument is that it suggests that incremental reforms are always doomed to fail. The conclusion which might


The Political Economy of South Africas Transition

easily be drawn is that change from the root up is the only alternative. This is the spirit of ‘no middle road’ (Harris, 1993). It is the ‘progressive’ counterpart of the perversity thesis. In Harris’s view ‘growth through redistribution’ frequently degenerates into a mechanism for protecting sections of domestic capital while delivering few working class gains; in South Africa large sections of business

advocated such a policy (calling it ‘inward industrialisation’) for a long time before democracy came onto the horizon. We also know that even from the point of view of capital it has a poor record for it has frequently protected stagnation and managerial backwardness.

(Harris, 1993: 95-6)

Because compromise solutions do not work, the message seems to be that more thorough going transformation is called for. Implicit in the argument seems to be the suggestion that ¥ the situation of the majority of South Africans is highly desperate; ¥V ‘structural reform’ cannot work and so;

V socialist transformation is the only option.°® The possibility of failure is down-played because the current situation is so desperate that nothing short of a radical experiment will do. Hirschman comments on the rhetorical device employed here as follows: by invoking the desperate predicament in which a people is caught, as well as the failure of prior attempts at reform, it is implicitly or explicitly argued that the old order must be smashed and a new one rebuilt from scratch regardless of any counterproductive consequences that might ensue. The invocation of the desperate predicament can therefore be seen as a rhetorical manoeuvre of escalation meant to neutralize and override the argument of the perverse effect. (Hirschman,



The perversity and ‘no compromise’ positions agree that there are mechanisms at play which will not only nullify reforms but positively subvert them. They, however, draw fundamentally different conclusions. The perversity thesis implies that social engineering 1s to be distrusted — that the organic development of society is to be preferred to consciously designed reforms. The spirit of ‘no compromise’, by contrast, suggests that society 1s pliable — that a sufficiently bold initiative can break through the strangleholds of past traditions, power relations and social practices. Put in this way it 1s clear that the perversity thesis and the spirit of ‘no middle road’ represent polar positions in a spectrum in which intermediate positions will be occupied by various brands of reformism — with some more sceptical of the possibility of changing social relations and others more sanguine.

Growth, Demand and Redistribution


The Jeopardy Thesis Indeed, it is clear that Moll and Nattrass do not wish to argue for the impossibility of redistribution, but rather that it should be handled very, very carefully because ‘radical’ measures would imperil the health of the economy. In this reading, the argument has affinity with the jeopardy thesis — the idea that reform would undermine an existing achievement (in this case a reasonably well developed economic infrastructure). Another incarnation of the jeopardy thesis can be seen in the Moll article (199la). He notes that a key question in redistribution 1s: How 1s income to be taken from rich people? He argues: It 1s not realistic to suppose that the rich would passively sit by and let the state reduce their incomes (by asset expropriation, taxation or whatever) for allocation elsewhere. If they resist — via right-wing political activities, investing even less than at present, capital flight or skilled people leaving the country — then shifts in the demand structure may well be accompanied by economic instability and contraction. (199la: 324).

Political conflict and right-wing resistance obviously raise the spectre of states of emergencies, suspension of civil liberties and so on. The suggestion seems to be that redistribution might imperil the gains which have recently been made — democracy, political stability and civil liberties. Critics of these kinds of arguments (e.g. Fine, 1994; Sender, 1994; Kaplinsky, 1994) contend that the key question is what would happen to stability if redistribution does not occur. As Fine puts it: Let the matter be put crudely (and, analytically, incorrectly). It can be argued that business holds economic power due to its power to withhold domestic investment — hence the imperative for business confidence. But, by the same token, (ANC) government holds the key to political and/or social power (the latter subject to

COSATU). Hence, the requirement for business is to ensure adequate wages and social provision, or endure the disastrous consequences of social and political instability — the counterpart, by symmetry, of business confidence. (Fine, 1994: 20)



of course,

1s a version

of the ‘imminent




discussed by Hirschman. Where the jeopardy thesis focuses on the dangers of action, the imminent danger argument highlights the problems with inaction. Similarly, where the jeopardy thesis points to ways in which redistribution might undercut existing achievements, the ‘mutual synergy’ position argues that redistribution may actually reinforce and build on existing accomplishments. The RDP Document, for example, suggests that redistribution would strengthen democracy: No political democracy can survive and flourish if the mass of our people remain in poverty, without land, without tangible prospects for a better life. (ANC, 1994: 4, point 1.2.9)


The Political Economy of South Africas Transition Similarly redistribution is seen as strengthening the economy: The RDP integrates growth, development, reconstruction and redistribution into a unified programme. The keyto this link is an infrastructural programme that will provide access to modern and effective services like electricity, water, telecommunications, transport, health, education and training for all our people. This programme will both meet basic needs and open up previously suppressed economic and human potential in urban and rural areas. In turn this will lead to an increased output in all sectors of the economy, and by modernising our infrastructure and human resource development, we will also enhance export capacity. (ANC, 1994 point 1.3.6)

It is obvious that the jeopardy thesis and its progressive counterparts again occupy polar positions in a continuum. Neither is particularly persuasive when seen in this light. As Moll notes (1991a), the problem with the mutual synergy thesis is that it denies the existence of trade-offs. Harris, in a similar vein, argues that: the idea that the whole country will gain from the construction of a new South Africa is a serious weakness in the politics of the ANC and the left. If coalitions are built on that Panglossian assumption they will fall to pieces in the face of the reality that reconstruction involves severe social dislocation, producing losers as well as winners (1993: 96-7).

The optimism that ‘all good things go together’ may be fundamentally misplaced. The jeopardy thesis, on the other hand, tends to ignore the fact that social interaction is not inevitably a zero-sum game. Synergies and win-win situations (although equally lose—lose situations) are possible.

The Rhetorics of Redistribution The conclusion that more nuanced positions are possible 1s, of course, the main lesson that Hirschman draws from his reading of the rhetoric surrounding major reforms: By demonstrating that each of the reactionary arguments has one or more progressive counterparts, I generated contrasting pairs of reactionary and progressive statements about social action. To recall some of them:

Reactionary: Progressive: Reactionary: Progressive: Reactionary:

The contemplated action will bring disastrous consequences. Not to take the contemplated action will bring disastrous consequences. The new reform will jeopardize the older one. The new and older reforms will mutually reinforce each other. ‘The contemplated action attempts to change permanent structural characteristics (‘laws’) of the social order; it is therefore bound to be

wholly ineffective, futile.

Growth, Demand and Redistribution



|The contemplated action 1s backed up by powerful historical forces that are already ‘on the march’; opposing them would be utterly futile. Once the existence of these pairs of arguments is demonstrated, the reactionary theses are downgraded, as it were: they, along with their progressive counterparts, become simply extreme statements in a series of imaginary, highly polarized debates. In this manner they stand effectively exposed as muting cases, badly in

need, under most circumstances, of being qualified, mitigated, or otherwise amended.




Given that the debate has been highly charged, drawing attention to the polarizing nature of the rhetorics deployed might be of some use. To achieve a more measured discussion it would be necessary to use less extreme forms of argumentation. As Hirschman argues, there are dangers and risks 1n both action and inaction. Furthermore the negative effects of action or inaction can never be known with the certainty assumed by the proponents or opponents of reform: When it comes to forecasts of impending mishaps or disasters, it is well to remember the saying Le pire n’est pas toujours sur — the worst is not always sure (to happen). (Hirschman, 1991: 154)

In other words, the nightmares imagined in the minds of some economists may in reality not turn out to be such absolute disasters. Conversely, of course, the fantasies of other economists may not turn out to be all that brilliant when actualized. If it is conceded that it is neither inevitable that redistribution should fail, nor that it should succeed; that both redistribution and failure to redistribute carry dangers with them and that we cannot be absolutely certain what the outcomes of our policies will be; then it might be possible to explore the ground between the excessive caution of Nattrass and the perhaps overoptimistic assessment of the RDP document.’ Of course such a debate needs to be premised on an agreement about the fundamental desirability of redistribution and restructuring. If the futility, perversity and jeopardy theses are being deployed to obscure a fundamental disagreement about these values then of course a more nuanced debate is not possible.



‘The conclusion reached above 1s, of course, unsatisfactory 1n itself, since 1t does

not present any points of departure on which a more measured discourse could be constructed. We would suggest that the possibilities of achieving both growth and redistribution need to be based on an appreciation of some ‘stylized facts’ about


of Nattrass’s




to the




is that










The Political Economy of South Africas Transition

international evidence, without addressing some of the peculiarities of the South African situation. There are two such ‘facts’ which in our opinion deserve to be more widely considered. The first 1s that the ‘Verdoorn effect’ seems to be widespread in South African manufacturing. The second is that output growth seems to cause employment growth rather than vice versa. We will discuss the second point first.

What Comes First: Output Growth or Input Growth? The neoclassical position (which serves as the backdrop of both Moll’s and Nattrass’s arguments) suggests that growth occurs through the process of augmenting the inputs into production. As more capital, human capital and labour are deployed, so more output can be generated. If one wants to stimulate output, the logical procedure is therefore to increase the utilization of inputs. If the inputs are available (as certainly is the case for labour in the South African economy) but are not being utilized, then it is clear that they are priced incorrectly. The way to address the unemployment problem is therefore to cut the wage rate. The Keynesian and post-Keynesian position is, of course, quite different, suggesting that it is the level of effective demand which determines the utilization of inputs. One would therefore expect that unemployment can be eradicated only through increased demand. The question of the priority of input growth and output growth is an issue that can be investigated econometrically. Using data on South African manufacturing from the IDC, Granger causality tests were conducted to determine which comes first: output growth or employment growth. Fuller details are given in the Appendix to this chapter. The key finding is that output growth precedes employment growth but not vice versa. The conclusion seems clear — the ‘demand-led’ account seems to be supported by the evidence much more than the supply-side one.

The Verdoorn


A further piece of evidence in favour of a heterodox position is the fact that the ‘Verdoorn effect’ can be detected in South African manufacturing. The Verdoorn ‘law’ (as it is sometimes known) 1s the generalization that fast growing countries, regions or industries also exhibit fast growth in labour productivity (output per capita). The existence of such a relationship was first noted by a Dutch economist (Verdoorn) and subsequently introduced to the English literature by Kaldor (for a review of the Verdoorn literature see McCombie and Thirlwall 1994). In the case of South Africa, Verdoorn effects can be detected at the level of different metropolitan areas, different industrial sectors, and even within industrial sectors over time (see Wittenberg, 1996). A useful graphical illustration

Growth, Demand and Redistribution


of the relationship is provided by Figure 1 which shows the relationship between per capita output growth and output growth in South African manufacturing. The scatter diagram plots data obtained from the Industrial Development Corporation for 26 ‘major groups’ for the period 1972 to 1990. The positive relationship is very clearly evident. It is interesting to contrast this diagram with another figure which plots the growth in labour productivity against changes in the capital—labour ratio. Conventional neoclassical/supply-side economics would suggest that increases in the capital—labour ratio should lead to increases in per capita output. As Figure 2 suggests, however, there 1s little evidence in the South African manufacturing data for such a relationship. At the least this suggests that the neoclassical ‘supply-side’ explanations of output growth are in serious need of supplementation. If one is willing to accept the reality of the Verdoorn effect, however, then the message seems clear — stimulating the economy can have all the effects of the ‘virtuous cycle’ that the heterodox literature suggests. With increased output one is likely to make the kinds of productivity gains which in turn would make production more profitable thus fuelling more growth. Of course another implication of the Verdoorn approach is that growth is a cumulative phenomenon -— countries and regions that perform strongly are likely

0.311517— O




2 5


8 5 8



ton Oo




p 0










Growth of value added

Figure | Output growth and labour productivity growth.


Growth, Demand and Redistribution


thrust of the redistributive/post-Keynesian position seems to have more support from South African manufacturing data than does the orthodox account. The lesson is that demand growth can induce growth in employment. Furthermore, there are important dynamic gains from this process. The long-term costs of ignoring these lessons may be unbearably high.

REFERENCES Adelzadeh A and Padayachee V (1994): The RDP White Paper: Reconstruction of a Development Vision? Transformation, 25: 1-18. African National Congress (ANC) (1994): The Reconstruction and Development Programme.

Umanyano Publications, Johannesburg. Deakin S, Michie J and Wilkinson F (1992): Inflanon, Employment, Wage-bargaining and the Law. The Institute of Employment Rights, London. Fallon P and Pereira de Silva LA (1994): South Africa: Economic Performance and Polictes, Discussion Paper 7, Informal discussion papers on aspects of the economy of South Africa. World Bank, Washington. Fine B (1994): Politics and economics in ANC economic policy: an alternative assessment. 7ransformanon, 25: 19-33. Harris, L (1993): South Africa’s economic and social transformation: from ‘No Middle

Road’ to ‘No Alternative’. Review of African Political Economy, §7: 91-103. Hirschman A (1991): The Rhetoric of Reaction: Perversity, Futility, Jeopardy. Belknap Press of Harvard University Press, Cambridge, Mass. Kane-Berman J (1991): South Africa’s Silent Revolution, 2nd edition. South African

Insutute of Race Relations, Johannesburg. Kaplinsky R (1994): Economic restructuring in South Africa: the debate continues: a response. Journal of Southern African Studies, 20(4): 533-7. McCombie JSL and Thirlwall AP (1994): Economic Growth and the Balance-of-Payments Constraint. St Martin’s Press, New York. Macroeconomic Research Group (MERG) (1993): Making Democracy Work: A Framework

for Macroeconomic Policy in South Africa. Centre for Development Studies, Cape Town. Moll T (1991la): Growth through redistribution: A dangerous fantasy? South African Fournal of Economics, 59(3): 313-30. Moll T (1991b): Microeconomic redistributive strategies in developing countries. In P Moll, N Nattrass

and L Loots

(eds.) Redtstributnion: How

Africa? David Philip, Cape Town, 1-24. Moll T (1991c): Macroeconomic redistributive packages P Moll, N


and L Loots


1t Work

in developing

(eds.) Redistribution: How


in South


it Work


in South

Africa? David Philip, Cape Town, 25-38. Nattrass N (1994a): South Africa: the economic restructuring agenda, a critique of the MERG report. Third World Quarterly, 1§(2): 219-25. Nattrass





in South





Journal of Southern African Studies, 20(4): 517-31. Nattrass N (1994c): Politics and economics in ANC economic policy. African Affairs, 93: 343-59. Republic of South Africa (1996): Growth, Employment and Redistribution: A Macroeconomic Strategy. Government Printer, Johannesburg.


The Political Economy of South Africas Transition

Sawyer M (1991): The economics of shortage: a post-Kaleckian approach. In J Michie (ed.) The Economics of Restructuring and Intervennon, Chapter 9. Edward Elgar, Aldershot. Sender J (1994): Economic

restructuring in South Africa: reactionary rhetoric prevails.

Journal of Southern African Studies, 20(4): 539-43. Sengenberger W and Wilkinson F (1995), Globalization and labour standards. In J Michie and J Grieve Smith (eds.) Managing the Global Economy. Oxford University Press, Oxford. South Africa Foundation (1996): Growth for All: An Economic Strategy for South Africa. South Africa Foundation, Johannesburg. Wittenberg M (1996): Regional Development and the Verdoorn Relationship: Some analytical and empirical considerations, M. Com dissertation, Economics Department, University of the Witwatersrand.

ENDNOTES 1. Nicoli Nattrass (1994c) provides an overview of the evolution of ANC thinking as portrayed in its policy documents. Fine (1994) does not dispute some of Nattrass’s main contentions, viz. that there has been a shift from a quite interventionist position to

a much


conservative one, but disputes the idea that the analysis of policy

documents in itself is the most appropriate method of getting a handle on the process of policy formation. He also objects to the way in which different positions are characterized by Nattrass.

2. I am indebted to John Sender for referring me to this book. He himself, used it in his attack on Nattrass (Sender,


3. I am not suggesting that either Nattrass or Moll would advance the argument in this way. 4. A phrase which is borrowed from journalist Alexander Cockburn. 5. This may be Moll’s intention in raising problems with past redistributive experiments. 6. Of course the problem of Harris’s argument is that it does not indicate what the socialist alternative might be and how one might achieve it, given the very real failures notched up by ‘socialist’ societies. 7. The RDP document is, of course, not an academic analysis but a political statement of intent. As such it serves a different purpose — inter alia that of constructing an alliance between different class and interest groups. Its upbeat tone about the possibility of win-win solutions ts therefore as much a function of this alliance-building project as a reflection of the underlying economic philosophy. 8. The following section draws heavily on my M.Com dissertation (Wittenberg, 1996).

Growth, Demand and Redistribution







The specifications that were adopted were the following (1)

Gig = Oy + LjHQDj + O3qirr + Lig Didier. +

AsQir-2 + LiW6Didir-2 + ot7l;, t-1


2jX%g;D; Li. t-1


Otol, yt-2


Ljo10D)l 1 t-2


11k; t-1


24%12;D Ki,e-1


di3kie2 + i013D3Ki 1-2 + Ui;


lie = Bi + DiBaiDj + Baier + LPs DiGi. + Bsqit-2




Bali + LiPsiDilia +

Bolir-2 + UiBroDilir-2 + Birkyer + 2BiaDike1 + Biskir-2 + 2iBisDiKir-2 + Uar (3)







¥3i, t-1




¥5Gi-2 + ViYeDidir2 + Y7i, t-1 + Li¥siD; lie-t + Yoli., 2 + Li10D;j li t-2 Yuki, t-1


2i¥12iD iki, t-1


¥13Kie-2 + Li¥i3DikKir-2 + Use where q, | and k refer to proportional rates of change, the D; are industry dummies, and the subscripts 1 and t refer to the industry and year respectively. As is evident from the specification, industries were allowed to have their own intercept and slope coefficients. The only restriction was that the error process had to be common across industries. The causality test was done using two lagged terms. The test of the hypothesis that employment growth causes output growth was the test of the hypothesis: Ho:

a7 = Ago

= Ags =...

= Ag26 = UW = Ao2

and similarly for all the other hypotheses. tested: (4a) (4b) (4c) (4d) (4e) (4f)

= 10,3 =...


Employment growth causes output growth Capital growth causes output growth Output growth causes employment growth Capital growth causes employment growth Output growth causes capital growth Employment growth causes capital growth

= A0,26

six hypotheses

= 0

can be


The Political Economy of South Africa’ Transition

The results are as follows:

(4a) (4b) (4c) (4d) (4e) (4f)

F(52,234) = 1.22 F(52,234) = 1.24 F(52,234) = 1.49 F(52,234) = 1.25 F(52,234) = 0.78 F(52,234) =1.00

P=0.1648 P=0.1461 P=0.0259 P=0.1371 P=0.8619 P= 0.4889

Modelling the South African Economy Asghar Adelzadeh Introduction 195 Introduction to the four models


Comparison of the models analytical foundations Policy analysis and policy recommendations Some general observations and conclusions


215 218

INTRODUCTION Macroeconomic models are increasingly being integrated into forecasting and policy analyses in South Africa. However, little attempt has been made to raise public Knowledge regarding the characteristics of these models, their structural properties and their forecasting accuracy. The purpose of this chapter is to review recent developments in the construction of macroeconomic models and the use of these models for policy analysis and forecasting in South Africa. The chapter will limit itself to a comparison of the analytical foundations and behavioural function structure of four large macroeconomic models of South Africa. The chapter will also review the use of the four models for policy analyses. In general, the task of comparing the specification and performance of large macroeconomic models is difficult due to the fact that: (a) there are a number of areas where there is no consensus on the best-practised theoretical framework, appropriate level of aggregation, and estimation procedure;' and (b) the application of formal statistical tests of model validity rest on assumptions that do not permit statistical comparisons across models.” In addition, in the case of South Africa, the models under study are relatively new and not all of them are fully documented. Despite these difficulties, especially in terms of cross comparisons of models simulations, it is, however, possible to compare models in terms of their analytical foundations. Given the challenges facing the economy, a good understanding of the underlying behavioural function structure of each model is specially needed if we are to make an assessment of how well a specific model captures the underlying structure of the economy, and the degree of accuracy of its simulation results. Therefore, the main aim of this chapter is to provide a systematic comparison of four macroeconomic models of South Africa by focusing on each model’s underlying behavioural function structure as it relates


The Political Economy of South Africas Transition

to the real side of the economy, the financial side, and the government’s participation in economic activity. There are a number of large macroeconomic models that have been built for South Africa. The four models chosen for this study represent a spectrum of theoretical and methodological approaches to model building that encompass the analytical and simulation frameworks of the other models. Two of the four models are macroeconometric models (World Bank, WB, and National Institute

for Economic Policy, NIEP), while the other two are computable general equilibrium models (Industrial Development Corporation, IDC, and Development Bank of Southern Africa, DBSA).° The chapter 1s divided as follows. The following section briefly introduces the four models. This is followed by a comparison of the models in terms of their analytical function structures. The discussion in this part covers production, prices, households’ income, consumption and saving, treatment of financial sector, government’s role in the economy, the labour market, and the specification of the external sector. The following section is devoted to the use of the four models for policy analysis in South Africa and a summary of their policy recommendations. This is followed by some general observations and conclusions.




Before engaging in a comparison of the models in terms of their analytical foundations and specifications, it is important for the reader to be introduced to the history of each model and their stated objectives. All four models reviewed in this chapter were constructed in the 1990s with the aim of exploring the new government’s macroeconomic policy options and their implications. The work on the NIEP model began with the establishment of the Macroeconomic Research Group (MERG) in the early 1990s. The modelling exercise was intended to be used for quantifying a new economic framework for the upcoming ANC-led government. The original architects of the MERG model, S. Gelb, B. Gibson and L. Taylor, developed a structuralist-Computable General Equilibrium model.* However, the model was subsequently transformed by Peter Brain of the National Institute of Economic and Industry Research in Australia from a structuralist--CGE model to a structuralisteconometric model. The later model was used extensively to formulate MERG’s quantitative policy recommendations in Making Democracy Work (MERG, 1993). In the second quarter of 1996, I began to revise the NIEP model with the aim of (a) strengthening the theoretical underpinning of the model, (b) extending the model from a two income group model to a five income group model, and (c) updating the model database. However, the stated objectives of the NIEP model have stayed the same, which are to ensure that the model captures the special underlying features of the economy; secondly, to be a multpurpose model used for forecasting, long run resource allocation strategies, and

Modelling the South African Economy


sensitivity analyses; and thirdly, to highlight structural changes that are necessary to accommodate Reconstruction and Development Programme (RDP) expenditures and their long-term effects.” The World Bank’s macroeconometric model evolved from the Bank’s 1991 study programme on the post-apartheid economic issues. By focusing on macroeconomic policy, industrial policy and public expenditure alternatives, the programme strived to provide some answers to the questions of sources of growth in post apartheid South Africa and mechanisms to reduce unemployment and income inequalities. The model was constructed to help analyse possible answers to these questions. The stated objectives of the World Bank model are: (a) to capture the economy’s underlying quantitative relationships, (b) to use a quantified and consistent macroeconomic framework to simulate economic scenarios for the new South Africa, and (c) to explore the macroeconomic consequences of increased public expenditure. The Industrial Development Corporation’s CGE model was built in 1993 with the help of the Impact Research Group of the Monash University in Australia and is

closely based on the Australian ORANI-F model.° The stated objective of the model is to assist policy-makers by quantfying the impacts of proposed economic policy measures. The model of the Development Bank of Southern Africa is the most recent large macro model built in South Africa. It is a structuralist--CGE model built by B. Gibson and D. van Seventer in the first half of 1995. Its origin goes back to Gelb, Gibson and Taylor’s work on the MERG model. Its stated objectives are to examine the consistency and impact of the new government’s policies and to explain the effects of exogenous shocks on the economy.’ Table 1 summarizes each model’s degree of disaggregation. The table shows that the four models differ significantly in size, and specifically in terms of the number of endogenous variables, the degree of industrial disaggregation and the number of income groups used.


from both macro-

and microeconomics,

constitute the

underlying structure of a model. A complex large multisectoral macroeconomic model utilizes a number of theories for the specification of its different components,










financial market and other sectors. Since in this short chapter it is not possible to review all the theories employed in the four models, special attention 1s given to both the theoretical underpinning and specification methodology used in designing the major sectors of the South African economy in each model.


The Political Economy of South Africa's Transition

Table | Models scale


Model's scale

World Bank

300 endogenous variables 60 exogenous variables 2 income classes 2 classes of labour


| 534 endogenous variables 256 exogenous variables 37 industries 2| categories of consumption goods 5 income classes 50 categories of labour (10 occupations by 5 income classes)


103 single-product industries 2 classes of commodities 65 categories of labour (13 occupations by 5 races) 24 households (4 race groups by 6 income levels)


48 endogenous variables 34 exogenous variables lO goods 2 income classes 2 classes of labour


The IDC model The neoclassical Walrasian general equilibrium theory provides the analytical underpinnings of the IDC model with optimizing behaviour for individual actors in the economy. The agents are price takers, producers operate in competitive markets, and changes in relative prices of primary factors induce substitution in favour of relatively cheaper factors. All industries share a common constant elasticity of substitution (CES) production structure, although input proportions and behavioural parameters may vary between industries. To determine the commodity composition of industry output, the total revenue from all outputs is maximized subject to the production function. By setting output prices equal to average costs, the model imposes the perfect competition zero pure profits condition. Demand for each factor is proportional to overall factor demand and to a price term. Additionally an increase in a commodity price, relative to the average, induces transformation in favour of that output. In the IDC model, aggregate private investment Is given exogenously; thus it is not crowded out by government spending. Distribution of aggregate investment between industries depends on relative rates of return. The investment demand equations are derived from the solution to the investor’s two-part cost

Modelling the South African Economy


minimization problem. The price of new units of capital is determined as the average cost of producing the unit — a zero profits condition, and no equation for inventory investment is specified. The model 1s calibrated to a real Social Accounting Matrix (SAM).

The World Bank model! The main theoretical foundation of the World Bank econometric model is the mainstream IS-LM model, where under excess capacity the dynamic of short run economic activity is determined using the Keynesian aggregate demand model, while the long term economic activity is determined by the neoclassical equilibrium forces. Therefore, in the World Bank model the treatment of output and employment differ, depending on whether the economy is demandconstrained or supply-constrained. In each period, the model calculates the GDP from the national account identity and a neoclassical production function and then takes whichever value is lower. The switching feature of the model allows for a demand-constrained model during demand-constrained years and a supply-constrained model during supply-constrained years. Spare capacity allows a quick supply response when aggregate demand is stimulated. The neoclassical production function used 1s based on a CES formulation with three factors (Fallon and da Silva, 1994). All factor demand equations are determined by the relative prices and the relative factor cost. In the World Bank model, investment and capital stocks are disaggregated by four economic agents: the private firms, the households, the parastatals and the

government. Private (non-residential) investment expenditure is a function of the GDP growth rate, the real interest rate, the aggregate ratio of corporate savings over income and a lagged dependent variable. Private investment in residential building depends on real disposable income, relative price of investment and the consumer price index, the real interest rate (as proxy for the expected maintenance cost) and the ratio of inflation rates between South Africa and the OECD (as indicator of portfolio optimization behaviour of the households). Investment by parastatals 1s a function of GDP as an expected demand accelerator, non-gold terms of trade as a proxy for the structural shifts in the economy, and the ratio of inflation rates between South Africa and the OECD countries as a proxy for a measure of portfolio risk. General government investment is taken as exogenous or driven by purely political considerations.

The NIEP model The underlying theoretical framework of the NIEP econometric model is neoKeynesian structuralist. The model focuses on the interaction between aggregate demand and economic capacity in determining economic outcomes, with an institutionally determined distribution of income. Unemployment is a normal feature of the economy. Industrial activity is central to income and final demand formation which in turn determines industry demand output via an input— output procedure. The model allows structural and technological changes to adjust input-output generated potential outputs of industries. Investment in


The Political Economy of South Africas Transition

human and physical capacity is regarded as a necessary factor to expand the economy’s total potential output and to achieve long-run sustainable growth. A major difference between the four models is in terms of their specification and the scale of the industrial sector in the models. In the NIEP model the industry block is composed of an integrated industry component of the input-— output table with 37 industries. Each of the 37 industries in the model: capital stock, employment, output, investment, profits, capacity, imports and exports are calculated. Final demand formation 1s central to industrial activity because this, through the conventional input-output procedure, determines the total and industry specific demand outputs. Final demands by industry are constructed from relevant consumption, investment, government expenditure and trade variables in each period. If the difference between an industry’s demand output and potential output is equal to zero, the industry’s actual gross output is equal to the industry’s demand output. However, in the case of a positive or a negative potential excess demand in an industry, the industry’s actual gross output adjusts slowly to the industry’s demand output. A vector of production adjustment coefficients incorporates into the model the differences among industries in their speeds of adjustment that the potential excess demand or supply are eliminated. Each industry’s inventory change 1s equal to the difference between the industry’s actual gross output and the industry’s demand output. In terms of investment expenditure, total investment is disaggregated by two economic agents: the private sector and the government. The equations for the private sector investment expenditures are estimated for residential investment, non-residential building investment, construction work investment, transport equipment investment, and non-transport equipment investment. The interest rate, lagged dependent variables, and lagged GDP were found to be the main explanatory variables of the private sector investment behaviour. Government investment expenditure directly relates to changes in total government capital expenditures.

The DBSA model This 1s a structuralist--CGE model in that (a) real world departures from the Walrasian competitive markets are allowed and integrated into the model formulation using a neo-Keynesian theoretical framework, and (b) in the absence of exogenous shocks, the static version of the model does not deviate from its benchmark base simulation, 1.e. it remains in equilibrium. Given its theoretical foundation, the economy’s structural rigidities imply that the economy is less responsive to changes in relative prices, at least in the short run (Gibson and van Seventer, 1995a). The model 1s calibrated to a real and a financial Social Accounting Matrix (SAM). As a result parameters are either based on fixed coefficients of the underlying SAMs, or are determined by assumption. In the DBSA model, economic activity is broken down into nine sectors: one service sector and eight goods-producing sectors. These sectors are divided between price adjusting sectors (i.e., agriculture and mining), which are assumed to be operating at full capacity, and quantity clearing sectors. One

Modelling the South African Economy


set of uncalibrated coefficients are used in the investment functions of all of the sectors. These are coefficients defined to capture the effects on specific sector’s investment of changes in the real interest rate, inflation, capacity utilization, profit rate and government investment. Given the sizes of these coefficients, the main positive forces behind a sector’s investment and output are its capacity utilization, last period’s profits and government expenditure on its output. The investment and output of a sector is negatively affected by the cost of capital captured by the level of real interest rate, the inflation rate which ts included as a ‘crowding out’ factor and the expansion of investment in the housing sector. Firms’ investment in the DBSA model is assumed to depend negatively on the cost of capital measured by the real rate of interest and the inflation rate. It increases with sector capacity and the after tax profit rate but it diminishes as the construction sector approaches full capacity utilization. It also increases with the ‘crowding in’ term which is measured by government investment normalized by lagged capacity output. Investment by firms, households and government is determined as a scalar and then multplied by a fixed vector to convert investment demand into a good specific investment vector. The strongest effects on firm investment are from crowding in effects of inflation, profits and the accelerator. The cost of capital has a relatively weak effect: most crowding out takes place through the inflation term, rather then the interest rate. Household

investment is negatively related to the interest rate and increases with real household income. Government investment expenditure is assumed to adjust in order to maintain an exogenously given ratio of public sector borrowing requirement (PSBR) to GDP.

On Prices The specifications of price equations differ across the four models. In the DBSA model, the price of domestically produced goods is determined by a mark-up on costs, raised by the indirect tax rate. Costs are made up of intermediates including imports and wages for both skilled and unskilled labour as captured by the wage rate and the direct labour coefficient.® In this model, material input prices for each industry are computed using price indices of total supplies to each industry weighted by the input-output coefficients. Output prices are determined by material input prices (domestic and imports), wage costs and gross operating surplus by industry. Consumer prices are derived from weighted production costs, transport costs, retail margins and sales tax rates. Retail margins are a function of profitability in the commercial sector. Other specific prices and deflators are calculated by weighing the relevant industry prices. For the tradeable goods industries the supply price (or the weighted average of domestic and import prices) was used. For the tertiary sector output prices were either built up from the value added prices using special purpose constructed material price indexes or derived by the combining of available (e.g. consumer) price indices (Gibson and van Seventer, 1995a).


The Political Economy of South Africas Transition

In the IDC model, purchasers’ prices (defined for producers, investors, exports and government) are the sum of basic values, sales taxes and margins. In the World Bank model, price changes depend positively on both unit labour cost and changes in the exchange rate, and negatively on changes in existing spare capacity in the economy. In the NIEP model, a distinction is made between the supply price and the actual or market price for each industry. Each industry’s supply price adjusts (a) to the gap between the growth rate of the general price index and the growth rate of the industry’s market price during the last period, (b) to changes in the industry’s total factor productivity, and (c) to the rate of change of a composite variable that measures the impact of changes in the exchange rate, foreign prices, the industry’s import penetration ratio, and a change in the industry specific tariff rate. The model uses the Flaschel and Semmler (1989) method of Keynesian dual and classical cross-dual micro dynamic adjustment processes where prices and quantities adjust on the bases of supply-demand and price— cost discrepancies.” In the previous section, an industry quantity response to excess demand or supply was discussed. Given an industry’s supply price, the actual or market price for each industry 1s determined based on the industry’s supply price and industry’s response to the potential excess supply or excess demand in the industry. Therefore, a positive or negative excess demand in an industry leads to both quantity and price adjustments in that industry. In terms of industries’ price adjustments to excess demands, the model assumes that (a) industries’ price responses to excess demand or supply differ, and (b) an industry’s upward price adjustment due to an excess demand is faster than the same industry’s downward price adjustment due to an equivalent excess supply. Therefore, the model uses two vectors of price adjustment coefficients. The general price indices


price index,




price index,

PPI) are calculated based on the weighted average of sectoral price indices.

On Each

Households’ Income, Consumption and Saving ’° of the four models


with both

split income,

similarities and

consumption differences

and saving into various


the four models


terms of their specifications of households’ income, consumption and saving. In the NIEP model, there are separate income and consumption estimates for

each of the five income groups. Income formation occurs at the industry level with each quintile’s income depending on employment growth, wage growth and fiscal policy settings. Wage income constitutes the major component of each quintile’s income. Other sources of income are dividend, government transfers,

interest income and transfer payments from the rest of the world.'’ Three factors have gone into specifying consumption expenditure in the NIEP model. Firstly, using the Reserve Bank’s disaggregated data on consumption, private consumption expenditure has been broken down into 21 consumption categories; each category is linked to a corresponding vector of the final demand

Modelling the South African Economy


which links each consumption category to the 43 sectors of the input—output matrix. Secondly, each period’s consumption expenditure 1s aggregated and distributed among the five income groups using the SALDRU household survey. Thirdly, in order to allow for a rich interaction between the real and financial sides of the economy, the financial asset position of households is tested as one possible explanatory variable that can have direct influence on consumption expenditures. The significance of this relationship on each consumption category is tested in addition to the traditional indirect link between consumption expenditure and households’ financial position via the interest rates. In order to specify an explicit equation for the determination of expenditure in each of the 21 categories of goods and services, time series estuumations of the level of significance of the effects of the following variables on each consumption category were conducted: a consumption-good-specific demand indicator variable, lagged dependent variable, change in relative prices, change in net financial assets to income ratio, change in total consumption to income ratio, change in income distribution indicator, change in employment to population ratio, change in percentage of population in urban areas, change in real interest rates and change in the rate of growth of real disposable income. The savings of each household group is determined as a residual, equal to the group’s after-tax income minus group’s consumption. The World Bank model breaks down the overall private income into two classes composed of the top 20 per cent of income earners in the economy and the rest. Income of each class is the sum of wage income, property income and government transfers. The one consumption function used 1n the model has the property that private consumption is more significantly affected by movements in the wage bill than by changes in total profits with the low income class having a higher marginal propensity to consume. The estimated private consumption equation is a function of real private disposable income, political uncertainty, percentage changes in the unemployment rate of unskilled labour and the real interest rate. Given households’ income and consumption, the model takes savings as the difference between the two. In the DBSA model, social classes are also divided according to the size of income between the bottom 80 per cent of income-earning households and the top 20 per cent income group. The low income group derives about two thirds of its earned income from the unskilled labour category while the high income group gets about four fifths of its earned income from the skilled labour category. In this model, the correspondence between households and labour categories is not one to one; therefore, share parameters have been used for the distribution of

labour, government and firm income to households.'* The households’ consumption expenditures by goods and social classes are determined using linear expenditure system, which consists of two components: a fixed subsistence level of consumption for each good, and a second component which 1s determined by applying marginal propensity to consume (specified by good and class) to the after-tax, after-saving income. Households’ saving 1s determined as a residual, equivalent to income less expenditure on consumption and taxes.


The Political Economy of South Africas Transition

However, there is an ambiguity regarding whether households’ saving is determined residually, based on a fixed marginal propensity to save, or is determined based on a changing saving rate. In one of the tables of the Base Document (Gibson and van Seventer, 1995a), the savings rate is determined endogenously, influenced by the rate of interest, inflation and capacity utilization, with consumption proportional to the after-saving disposable

income.’* In another place, households’ savings are determined residually based on a fixed marginal propensity to save.'* In the IDC model the household sector is disaggregated by four race groups and within each race group there are six recognized income levels. The source of households’ income is wages paid to different types of labour whose wage rate 1s determined based on the underlying assumptions regarding the production process in the model (i.e. constant return to scale, constant elasticity of transformation) and a constant elasucity of substitution assumption in the factor markets. The model therefore assumes flexible wages with the wage rate determined by marginal productivity based on the private sector’s cost minimization behaviour. Household consumption 1s determined using the linear expenditure system based on the Stone—Geary utility function. In this formulation total consumption of each commodity composite is divided into two components, a luxury part and a subsistence part. The subsistence component is proportional to the number of households and to a taste change variable. The luxury component has Cobb-

Douglas form and enters each household’s utility function.'° Treatment of Financial Sector There are important differences between the four models in terms of their treatment of the financial sector and its interaction with the real side of the economy. The NIEP model and the DBSA model both use flow of funds to capture, on the one hand, the behaviour of the firms, households and government in the financial market, and on the other, to establish links between

the financial sector of the economy and the real side. The World Bank model adopts a much simpler approach while the IDC model has no explicit financial sector. The financial sector of the World Bank model is designed to capture the crowding out of the private sector by excessive government borrowing through its effect on interest rates. This sector is composed of equations for credit demand, money supply, interest rates, the exchange rate and reserves (capital flows). Household demand for credit is equal to the difference between household investment expenditure on housing and its savings. Households are not allowed to finance part of their demand for credit by borrowing from abroad. Government’s demand for credit from the domestic banking system is equivalent to the portion of the fiscal deficit that is not financed by an increase in domestic debt.'° Although the model allows the government to borrow from abroad, foreign debt is limited to 10 per cent of the government’s borrowing requirements

Modelling the South African Economy


in any year. Using the relevant national accounts identity where total national saving is equal to the current account, the corporate sector demand for credit is determined as a residual once households’ and government’s net saving/demand for credit are computed. The composition of its borrowing, i.e. the proportion borrowed from the domestic banking system or from abroad, depends on the money supply and the cost differential between borrowing abroad and borrowing domestically. The total demand for credit in the economy is the sum of

households, government and corporate sector demands.?’ On the supply side, the money supply is assumed to follow an accommodative rule, following the growth path of GDP and inflation with a one period lag. Two interest rate equations have been estimated for the model, a nominal money market rate and a T-bill rate. The money market rate is positively affected by the exogenously given Reserve Bank’s discount rate and the total demand for credit relative to the current value of the GDP, as an indicator of disequilibrium in the money












government borrowing will cause the interest rate to rise. Since private investment reacts negatively to the rise in the interest rate, to the extent that government borrowing from the domestic banking sector increases, it drives up the interest rate, thus crowding out private sector investment expenditure. The second estimated equation for the interest rate is the equation for the T-bill rate, which depends on the money market interest rate, the discount rate and the country’s risk factor which is captured by the inflation differential between South Africa and the industrialized countries. For the exchange rate, the model assumes a constant real exchange rate where the nominal exchange rate adjusts to the inflation differential between South Africa and the major industrialized countries. The World Bank model captures the financial interrelationship between South Africa and the rest of the world through its specifications of the exchange rate determination, the evolution of the country’s foreign reserves and the evolution of a country’s foreign indebtedness. The exchange rate is assumed to keep a constant real value by adjusting to the difference between South Africa’s inflation and the inflation in the industrialized countries. In order to explain the evolution of foreign reserves, the World Bank model assumes that the monetary authorities try to build up at least enough reserves to cover a targeted number of months’ imports. Using balance of payments identity, the net inflow of capital is equivalent to the sum of the current account and changes in reserves. The capital flows are then broken down into its long-term and short-term components, where the long-term flows are a function of the trade account and the interest rate. The short-term capital flow is calculated as a residual. The financial sectors of the NIEP model and the DBSA model have a common theoretical underpinning. However, there are specification differences among them. In both models financial wealth is distributed among the corporate sector, households and the government using portfolio allocation theory. In the DBSA model, the financial wealth 1s composed of government bonds, firms’ equity, money and foreign assets with separate specifications for agents’ demand


The Political Economy of South Africas Transition

for loans. Financial wealth in the NIEP model is composed of all the above elements with a similar specification for the banking sector’s loans to the three agents. In the DBSA model, demand for a given asset depends on its rate of return relative to the rate of return on the other assets, its riskiness, and its current rate of return relative to its rate of return for a given base year. In the NIEP model, on the other hand, demand for a given asset depends on the current real interest rate relative to the last period’s real interest rate, the growth in firms’ nominal income, and the rate of depreciation/appreciation of the rand. Both models take into consideration the agent’s wealth effect on its demands for financial assets. In both models, the demand for money generated by firms, households and government depends on the rate of economic activity and the rate of return on other assets. For example, in the NIEP model, firms’ demand for money 1s a positive function of their transactions demand for money, captured by the change in the firms’ income, and a negative function of the domestic currency depreciation, which reflects firms’ speculative demand for money. Households’ demand for money depends positively on the increase in income, and negatively on changes in the real rate of interest and the rate of depreciation of the rand. Government’s demand for money rises proportionally to changes in its transaction demand for money, reflected in the change in its income. Both models treat money supply as endogenously determined, passively responding to the total money demand in the economy. The models, therefore, provide no explicit equation for the evolution of the money supply. However, in these models the Reserve Bank’s broad discretionary power to affect the interest rate allows the government to influence the supply of money. In the DBSA model, the interest rate is specified as a positive function of inflation and capacity utilization. The interest rate’s response to inflation is one to one, while it adjusts to the difference between current capacity utilization and an exogenously given cross-sectoral average capacity of 0.87, by a factor of 0.3. In the DBSA model, the bond interest rate is defined as a linear function of the market rate. In the NIEP

model, a distinction is made between the determination of the

prime overdraft rate and two long-term interest rates, the bond rate and the mortgage rate. The prime overdraft rate is determined by augmenting the type of reaction function that Taylor (1993) used to characterize the behaviour of the US




In this formulation,

the Reserve


raises the

short-term real interest rate when there is a gap between the actual inflation rate and the inflation rate that the Reserve Bank is willing to accept, and when there is a gap between output and target output. Added to this formulation 1s an asymmetric policy rule along the lines suggested by Clarida and Gertler (1996) where the coefficient used to reflect the response of the Reserve Bank to the inflation gap is set to be larger when the inflation gap is positive compared to when the inflation gap is negative, allowing for an asymmetric policy response. The above formulation of the determination of the prime rate is further augmented by an additional variable representing the sensitivity of the Reserve Bank to the evolution of the balance of payments. When the country experiences

Modelling the South African Economy


negative balance of payments, the Reserve Bank is allowed to have the option of rising the prime rate, or to use a form of parity condition to affect the determination of the prime rate. Long-term interest rates are estimated as a function of the current and expected future prime rates, where current and past values of the prime rate are used as proxies for expected future values along the lines proposed by Fair (1984). The NIEP and DBSA models differ in their specifications of loans from the banking sector to firms and households. In the DBSA model banks’ loans to firms and households depend on aggregate capacity utilization, agents’ financial surpluses (i.e. the difference between savings and investment) and a speculative motive composite variable.'® In the NIEP model, the demand for loans from the corporate sector and from households are formulated similarly to their demand functions for other financial assets. The formulation of exchange rate determination also differs in the two models. The DBSA model has a similar exchange rate determination to the World Bank model, 1.e. the nominal exchange rate follows changes in the domestic price level such that the real exchange rate remains constant. In the NIEP model, exchange rate responses to the balance of payments condition (i.e. the current account plus the net capital inflow) and depends on the extent that the Reserve Bank 1s willing to participate in the foreign exchange market to preserve a given value for the country’s currency. To the extent that the Reserve Bank does not intervene in the foreign exchange market, the exchange rate depreciates or appreciates when the balance of payments is negative or positive, respectively. In the NIEP model, in each period the country’s total foreign debt is equivalent to the sum of its current account deficit and the revaluation of its last period’s foreign debt using the change in the exchange rate. The main direct links between the financial sector of the three models and the real side of the economy is through the interest rate. In the three models, changes in the interest rate have implications for economic growth through its impact on the components of aggregate demand. In the DBSA and NIEP models, changes in the interest rate, by affecting the cost of investment, have a negative impact on the investment level. On the other hand, an increase in the interest rate has a

positive impact on the rate of return on firms’ and households’ holdings of domestic bonds. Changes in the interest rate also have a direct impact on the government’s interest payments on its debt and on the saving ratios of the lower and upper income households. In the World Bank model, domestic investment is affected directly by a two-period lagged real interest rate and, indirectly by the negative impact of changes in the interest rate on firms’ net profits. Moreover, private consumption 1s negatively affected by interest rate rises due to increased savings. Apart from the interest rate, none of the other financial variables feed into the current period determination of the real side variables. There are some differences between the NIEP and DBSA models in terms of impacts of financial side variables on real side variables. For example, in the NIEP model four of the equations estimated for the specification of the consumption equations are significantly affected by changes in the net household stock of financial assets.


The Political Economy of South Africas Transition

The DBSA model uses a common linear expenditure system for the determination of all consumption goods in the model with no provision for the influences of financial wealth accumulation on current consumption. In the DBSA model, a fall in foreign reserves has no effect on the interest rate. Another feature of the DBSA model is that government debt is financed by the private sector who hold government bonds in their portfolios, the central bank and the international market. In this model, the government does not have control over how much of the change in its debt should be financed by the private sector. Government’s main decision is how much to borrow from the Reserve Bank and how much from the international market. Additionally in the DBSA model, the banking sector’s loans to firms and households depend on aggregate capacity utilization, the financial surplus of each (i.e. difference between saving and investment) and the attractiveness of the asset for which the loan 1s taken out. The IDC model follows the neoclassical tradition of focusing on the real side of the economy and not explicitly formulating monetary variables in the model. Instead it makes the assumption that there is no constraint on foreign borrowing,’? with domestic interest rates changing as a result of changes in government domestic borrowing.

On the Government’s Role in the Economy Historically, the development of economic models has been used to estimate the likely impact of government interventions in the economy; if the future performance of the economy can be estimated with some degree of accuracy, it may be feasible to use policy tools to achieve certain defined goals. Among the different models, while the ones with an underlying neoclassical general equilibrium theory have served to provide a rationale for government inaction, the macroeconomic models based on Keynesian theory have provided a basis for government intervention in the economy. This section deals with the specification of the government sector within the four models. Despite differences in the level of disaggregation all four models break down government income and expenditure to their relevant components. Generally, sources of government income are direct and indirect taxes and a set of non-tax revenue; components of government expenditures are expenditures on goods and services, government’s wage bill, interest payments on its debt, its capital expenditures, transfers to households and subsidies to firms. The World Bank model defines government economic objectives as being to help re-establish growth, reduce unemployment and the unequal distribution of income and wealth, and to widen public access to government services. As was discussed in the previous section, this model 1s designed to produce the crowding out of the private sector by excessive government borrowing through its effect on interest rates. However, it is argued that the higher the government’s expenditure on market oriented activities, the faster will be GDP growth and the more

Modelling the South African Economy


sustainable the growth path will be. The multiplier effects of overall government expenditure, it is argued, are too smail and thus insufficient for the country’s growth needs. Thus private sector growth and policies to enhance private sector growth are essential for the attainment of a sustainable growth path.7° The elasticities of households’ direct income taxes and firms’ direct taxes are estimated in the World Bank model. The model also assumes that government’s expenditures on goods and services are a function of the number of government employees and the costs of maintenance of its capital stock. Based on these assumptions, a government cost function is estimated where government current expenditures on goods and services is regressed on government’s demand for labour (skilled and unskilled) and government’s capital stock. The equation also accommodates two types of exogenous expenditure shocks, a government investment shock and a consumption shock. The model also includes a number of other policy instruments on both the revenue and expenditure sides of government accounts. On the income side, the indirect tax rates are exogenously given. On the expenditure side, four policy variables are included: transfers to households, transfers to the rest of the world,

subsidies to firms, and grants from abroad (Fallon and da Silva, 1994: 212). Fiscal deficit can be financed either through the extension of domestic bank credit or through foreign borrowing, with limitations imposed in each case (Fallon and da Silva, 1994: 214). Political considerations determine government investment expenditures which is, therefore, exogenously given. For forecasting, government investment expenditure 1s allowed to grow at the rate of population growth, of 2.5 per cent per annum (Fallon and da Silva, 1994: 190). There are two major differences between the World Bank model and both the NIEP and DBSA models. The first 1s with respect to whether government expenditures have the potential to enhance economic growth. Contrary to the World Bank model, both the NIEP and DBSA models provide more economic space for the government’s participation in the economy to be growth enhancing without crowding out the private sector activities. In both models, in fact, certain government expenditures are formulated as growth enhancing through their positive effects on the economy’s capacity output; these are mostly expenditures on social services, human resource development and infrastructural development. Moreover, differences in the specification of the interest rate determination between the World Bank model and the DBSA and NIEP models explain how the latter two models do not follow the mainstream channel of crowding out effects through interest rate responses to credit squeeze originating from the increase in government borrowing. In the NIEP and DBSA models, since the dynamic of the interest rate 1s not directly affected by government borrowing or the credit market, the mainstream channel of crowding out is not present. Moreover, since the interest rate is not determined in the asset market, changes in the government’s demand for money or credit do not have direct interest rate repercussion either. However, to the extent that government expenditures affect inflation or increase output, and with it capacity utilization, interest rates will respond positively and thus lead to a crowding out effect in the two models.”!


The Political Economy of South Africas Transition

The other difference between the World Bank model and the NIEP and DBSA models 1s that the latter two models’ formulation of the financial market along the lines of portfolio allocation allow the government to hold financial assets and issue bonds. Government’s participation in the asset market adds new components to the government’s income and expenditure.** This also means that government’s overall wealth is affected by its participation in the financial market. In the DBSA model, government’s current expenditure on goods and services is linked positively to aggregate capacity utilization. An increase in government intervention in the economy 1s modelled by raising the PSBR/GDP ratio. Both current expenditure and government investment would then have to adjust in order to maintain the fixed ratio of the PSBR to GDP. In terms of the financing of the debt, it is the domestic private sector that determines how much of the government’s debt to hold in its portfolio. The government’s decision is with respect to the proportion of its borrowing that should come from international markets. In this model, government employment is a function of capacity utilization. As a fraction of nominal capacity output, government transfers to different income groups fall with the economy’s capacity utilization and thus stabilize fluctuations in the GDP to some extent. The government sector of the NIEP model is much more disaggregated than the other models, especially on the expenditure side. Government expenditure is broken down between ten economic functions with each function’s expenditure divided into current and capital expenditures. The current expenditure of each of the government’s economic functions 1s then linked to a corresponding vector of final demand which translates a given level of current expenditure in a given function into demands for outputs of the different sectors of the input-output table. The capital expenditures of the government is also linked to the input— output table in a similar fashion with government’s total investment being proportional to the government’s total capital expenditures. Inspired by the recent advances in the theory of endogenous growth and cross country empirical studies on the role of government expenditures in promoting long-term growth, government’s capital expenditure and a portion of its current expenditure (e.g. part of expenditure on education) are linked to the expansion of the country’s economic capacity for growth, measured in each period by the industries’ potential outputs. The model is developed such that the macroeconomic implications of different expenditure scenarios can be quanttatively assessed. In the IDC

model, since no explicit financial sector is specified, the issue of

crowding in or out 1s tackled differently. The model sets the aggregate private sector investment exogenously in order to abstract away from either one of the above theoretically induced mechanisms of the crowding ouv/in effect. Therefore, the IDC model constructs its government sector so that by assumption there will be no crowding out of the private sector investment activities due to the increase in government expenditures. Moreover, in order to safeguard the economy from other implications of an increase in government spending, such as its implications for the trade balance due to the increase in domestic absorption,

Modelling the South African Economy the model




2 namely,

that there is no constraint on

foreign borrowing. This means that the net capital inflow adjusts to the size of the trade balance without changes in the interest rate or the exchange rate (Cameron et al., 1994: 3).?°

On the Specification of the Labour Market With respect to the specification of the labour market, especially in terms of the determination of the demand for labour, there are sharp differences between the IDC and World Bank models, on the one hand, and the NIEP and DBSA

models on the other. The first two models follow the neoclassical formulation of the demand for labour based on a production function, cost minimizing firms and a CES assumption in the factor markets. The second set of models share a Keynesian framework where output and employment are mainly determined by the overall aggregate demand in the economy and demand for labour is mainly determined by the amount of labour needed to satisfy a given level of aggregate demand. In the IDC model, the occupational composition of labour demand in each industry 1s derived from an optimization problem where firms minimize their labour cost subject to a CES production function that allows substitution between skill categories. The solution to this optimization, presented in percentage form, is that demand for a given type of labour is proportional to the overall labour demand and to a price term.”* Changes in the relative prices of the occupations induce substitution in favour of relatively cheaper occupations. The percentage change in the average wage is determined by the value share of a given occupation type in the total wage bill of a given industry.*”? Nominal wage rates are indexed to the consumer price index with allowance for deviations 1n

the growth of wages relative to the growth of the CPI.”° To solve the model, one needs to set either the aggregate employment exogenously and allow for the market clearing wage rates to be determined endogenously, or to set wage rates exogenously and allow for employment to be demand determined.”’ The model does not provide an equation for the supply of labour. In the World Bank model, the racial employment categories have been used as a proxy for the general skill categories. This means white employees are categorized as skilled labour and all the other employees, black, coloured and indian,

are categorized as unskilled labour. In this model, in order to specify the factor demand side of the economy, a two-level CES production function is designed where two of the factors are contained in a single CES aggregate which, 1n turn, is nested within the second CES production function. The relative demands for factors of production, namely skilled and unskilled labour and capital, are esti-

mated in two stages. In the first stage, the relative demand for the capital stock and unskilled labour is regressed on the relative factor cost (the real user cost of capital over the real product wage of unskilled labour), and the relative prices of non-gold exports and imports. The result is used to construct a CES aggregate


The Political Economy of South Africas Transition

of the two factors. For the second stage, the relative demand for the CES combination of the first two factors and skilled labour 1s regressed on the relative factor cost and relative prices of exports and imports. The World Bank model estimates the real wage equations for skilled and unskilled workers using Phillips curve formulations. The real wage of unskilled labour is estimated as a function of the level of unemployment in this category, trade union activity, the real wage of white workers, and a proxy for the effect of apartheid influx control policy on wages of unskilled labour. The real wage of skilled labour 1s affected by a demand side variable (the ratio of non-government GDP and the labour demand for skilled labour), the unemployment of skilled labour and the lagged dependent variable. The government wage rates follow those in the rest of the economy. It is worth noting that, in the estimated price equation of the World Bank model, more than half of the changes in unit labour costs are immediately transferred to prices (Fallon and da Silva, 1994: 123). The base document of the DBSA (Gibson and van Seventer, 1995a) does not provide an explicit employment equation for the private sector, although it provides an equation for government employment which 1s a function of overall capacity utilization. Sectoral employment is derived from the dynamic of each sector’s productivity determined as a positive function of that sector’s capacity utilization, i.e. productivity grows with an increase in the level of economic activity. In each period, given a sector’s output and productivity, that sector’s employment level can be derived by multiplying the sector’s productivity and output. In terms of wage rate determination in the DBSA model, growth of nominal wages is written as a function of lagged inflation and aggregate and sectoral capacity utilizations (Gibson and van Seventer, 1995a: 23). It 1s assumed that skilled labour has a ‘target’ real wage that is used in its wage negotiation. The nominal government wage rate is the weighted average of the nominal private sector wage rate where the weights are shares in output (Gibson and van Seventer, 1995a: 24). In the NIEP model, Lichtenberg’s 1992 method of estimating the effect of investment on labour productivity at the country level 1s extended to take account of the effects of investment in research and development (R&D), as well as investment in fixed and human capital on labour productivity at the industry level. This is combined with an input-output procedure to calculate the labour input for industries. Total employment is obtained by aggregating industries’ labour inputs. SALDRU survey ts used to develop an occupational matrix which is based on the distribution of ten categories of work among the five income groups. Using the occupational matrix and a vector of industries’ growth rates, an index of concentration of employment in growing industries 1s constructed for each income group. In each period, the total employment ts distributed among the five income groups. Each quintile’s employment is affected by changes in the quintile’s index of employment concentration in growing industries, changes in the quintile’s specific wage index relative to the total wage index, and changes in the skill index relative to the total skill index. Public sector employment is formulated as a positive function of government current expenditure.

Modelling the South African Economy


In terms of wage rates, each income group’s wage rate is determined by expected price changes, the quintile’s unemployment rate, the overall unemployment rate, and the change in the productivity participation index for the income group. The model calculates three productivity rates, two for labour and one for capital. The two labour productivity rates differ in terms of one being based on the number of employed in the economy and the other being based on total skillbased labour input.

On the Specification of the External Sector Each of the four models has separate equations for exports and imports where exports are generally a positive function of a measure of foreign demand for domestic goods and the terms of trade. Import equations are written as a negative function of changes in domestic demand for imports and a positive function of changes in the terms of trade. In this regard, the main differences between the four models are in terms of the magnitude of the elasticities used and the proxy used to measure foreign demand for domestic goods. In all four models gold exports are considered to be exogenous. The specification of the capital account is elementary in the DBSA, IDC and World Bank models. These models do not specify behavioural equations determining capital inflow; the economy does not experience a foreign exchange constraint under the DBSA, IDC or World Bank model. These models in essence allow the capital account always to accommodate the foreign exchange needs of the country arising from trade and other sources. In the NIEP model, on the other hand, the capital inflow is determined by changes in the domestic and foreign interest rates and the expected exchange rate depreciation. In all four models, the evolution of foreign prices is given exogenously. In the DBSA model, exports of the quantity adjusting sectors are determined according to the above formulation, while exports of the mining and agricultural sectors, for which capacity utilization is set at unity, adjust to domestic demands for the outputs of these sectors, i.e. for a given level of output, a rise in domestic demand leads to declines in these sectors’ exports. The two elasticities used in the DBSA model for the export sector are 0.8 and 0.9 for the export elasticity of income and the export elasticity of the real exchange rate, respectively. Both values are uncalibrated. In this model, the real exchange rate does not affect imports. Imports are a function of demand from different sectors of the economy and from consumption. Therefore, the model assumes zero substitutability between


and domestic



the model


that the

state of the country’s foreign exchange reserves, i.e. the dynamic of the balance of payments, does not restrict or enhance economic activity, which is determined by the overall level of effective demand in the economy. Therefore, the net capital flows always accommodate the country’s foreign exchange needs. In the World Bank model, the estimated equation for non-gold exports follows the above general line with export elasticity to foreign demand equal to


The Political Economy of South Africas Transition

1.732 and export elasticity of the real exchange rate equal to 0.333.7° For the estimation of the non-oil import equation, the World Bank includes a trend to ‘isolate the pure short term demand effects from the structural long term

changes in the import composition of the economy.” The result is that the estimated import elasticity to GDP is 0.708 and the relevant elasticity for terms of trade is —1.078.°° The equation for the current account takes account of the factor services payments, which includes payments on foreign debt. Current account deficits are assumed to be financeable through foreign investment or borrowing, and foreign grants are limited to the 1992/1993 level. Capital flows are functions of the balance in the trade account and the interest rate. In order to maintain a constant real exchange rate, nominal exchange rates change with the inflation differential between South Africa and the industrialized countries. In order to specify the export demand, the IDC model divides commodities into the traditional exports, mostly primary products, and the remaining nontraditional exports. The model specifies downward sloping foreign demand schedules for each traditional export, 1.e. export volumes of each commodity are declining functions of their prices in foreign currency. For the non-traditional exports, their downward sloping demand curves are supplemented by a transformation function for export production. Therefore, for the latter case, commodities exported differ from those sold on the domestic market and producers switch between domestic production and export production based on the relative price of producing for each market (Horridge, Parmenter and Pearson, 1993: 104). For imports, the model assumes an infinite elasticity of the supply of imports (Horridge, Parmenter and Pearson, 1993: 107). Foreign debt accumulation relates to the accumulated balance of trade deficits. Capital inflows are assumed to offset changes in the trade balance without variations in the domestic interest rate or exchange rate. Therefore, there is no constraint on foreign borrowing and foreign trade can freely move to deficit in response to the rise in domestic absorption (with no macroeconomic implications). In the NIEP model, exports of each of the manufactured goods 1s a function of firstly, the ratio of the domestic industry price to world prices, and secondly, world demand. Export prices are determined by world prices, exchange rates and domestic costs. Imports of manufactured goods are determined as functions of the ratio of industry import prices and domestic prices, industry demands and industry capacity. Import prices by industry are functions of exchange rates, world manufacturing prices, the respective industry output prices and the tariff rates. Trade in non-manufacturing goods 1s largely determined by functions that include prices, domestic production and consumption, and exogenous factors. Trade in services is related to domestic prices, world prices and demands.



In this section we will present a summary of policy issues that each of the above models has been employed for and recommendations that have been provided.

Modelling the South African Economy


To conduct policy analysis using models, comparisons are usually made between baseline projections and policy-induced projections. It is important to bear in mind that although some comments will be made about simulation results, no systematic evaluation of the results is undertaken. This 1s due to the differences that exist between the four models with respect to the structural specification and the examined policy scenarios, which together make a cross modelling comparison of their results methodologically problematic. The World Bank model has been used for the analysis of: (a) the economic effects of different public investment programmes of varying sizes; (b) the implications of a shift towards more labour intensive investment, and of a possible improvement in the external international environment for South Africa goods; and (c) the impact of excessive wage increases. These scenarios were to provide answers to four questions: what are the economic consequences following a substantial increase in public investment? How large should a viable programme be? What share of the backlog in social expenditures could be eliminated? How much external finance will South Africa need? The simulation results were evaluated based on the characteristics of the growth path and three sustainability




state external




state non-interest fiscal deficit-GDP ratio and moderate (10 to 20 per cent) inflation. All the policy scenarios examined assumed simular exchange rate and interest rate policies. This means monetary policy remains indifferent to the variation in the policy scenarios. Given our space limitation, the following 1s a summary of some of the policy recommendations that follow the comparisons between baseline projections and policy-induced projections in the World Bank model: VW Increased















an increase in the fiscal deficit, a deterioration of the current

account, an increase in wages and possibly a higher inflation rate. Without supply-enhancing policies, the sustainability of economic growth will be threatened by rapidly rising foreign debt arising from high current account deficits. Without a healthy climate for private investment, sustainable growth will not take place. A sustainable high growth path revolves around a targeted real growth rate of 5 per cent per year, with a maximum current account deficit of about 1 per cent of GDP and a maximum fiscal deficit of about 5-6 per cent of GDP in the medium to long term. These figures would be consistent with a foreign debt-to-GDP ratio of between 25 per cent and 50 per cent and a government debt-to-GDP ratio of between 40 per cent and 60 per cent. The government should adopt measures to encourage small and mediumsized enterprises (SMEs) 1n order to raise the level of labour intensity, and employment. The economy needs to be re-oriented towards exports.


The Political Economy of South Africas Transition

The NIEP model has been mainly used to look at requirements that would make the RDP succeed in terms of employment creation, changing patterns of income distribution, sustainable imbalances in the balance of payments and the government deficit, and developing the country’s infrastructure. It was used for the quantfication of the RDP and for the assessment of the impacts of implementing the tariff reduction schedule under the GATT. Currently, the NIEP model is being extended for the assessment of the macroeconomic impacts of government expenditures during the next five years. Also, as part of the current debate on the suitable macroeconomic framework and policy proposals for the country’s economic growth and development, the Institute is also involved in developing and simulating its policy scenarios. The book published by the Macroeconomic








summarizes some of the major policy recommendations that stem from running extensive simulations using the NIEP model. A few of these recommendations are: V Given the rate of population growth, for the RDP to succeed, living standards of the top 20 per cent of households need to remain constant or increase only a small amount over the next four to five years, losing the gain they would have enjoyed under a non-RDP growth regime. But once the RDP expenditures reach the target level around the year 2000, the living standards of the top 20 per cent of households can improve in line with the economic growth rate. V The priority must be to ensure that demand expansion is focused on those categories of expenditure which increase the stock of physical infrastructure, skill formation and physical capital formation. VW The reform of the tariff system must be gradual enough to encourage enterprises to adjust to international competition and enhance their export capabilities. Over the medium term it will be necessary to adopt exportoriented incentives for strategic industries in order to partly offset the impact of tariff reduction on these industries and rising imports. VW Over the next five years the model results indicate a 7 to 9 per cent growth in machinery and transport equipment investment. Its impact on import requirements will be an additional R14 billion annually in imports by the year 2000. The less the degree of income distribution and the greater the degree of rationalization in the manufacturing sector, the greater will be the leakages of expenditures into imports. To conduct policy analysis with the [DC CGE model, a ‘base run’ is performed for five years without altering the parameter settings, the results of which are used as a benchmark against which different sensitivity tests are compared. From the papers we have received, the model has been used for the following sensitivity analysis: (a) to evaluate the effects of an increase in government spending under different financing methods; (b) to evaluate the implications of capital flows and trade policy on the industrial sector of the economy; (c) to analyse the effects of an increase in government spending on the geographic

Modelling the South African Economy


gross products of the nine provinces; and (d) to predict the short run, comparative static effects of trade liberalization measures following the Uruguay

Round.” Some of the policy recommendations of the IDC model are: WV The income distribution effects of an increase in government spending financed by domestic borrowing and foreign capital inflows are relatively small. IDC suggests that counter measures should be adopted to offset the real exchange rate appreciation which constrains exports. V The implementation of the GATT will stimulate both final and intermediate goods, and by reducing domestic costs relative to international price levels, stimulate exports. In their Base Document, the DBSA modellers present the results of several comparative static experiments to demonstrate how the DBSA model behaves in the very short run.*” In addition to these experiments, the model has been used to evaluate the following policy issues: (a) to examine the impact of changes in the volume and structure of trade on macroeconomic variables; (b) to examine the effect of contractionary fiscal policy on the economy; (c) to outline the elements of a growth strategy for the medium term; (d) to examine the implications of adopting fiscal policy based on a constant PSBR-GDP rato (at 6 per cent); (e) to analyse a proposal to fund low-income housing expenditure by reducing the level of government employment; (f) to analyse the effects of a policy that emphasizes export growth; (g) to examine the impact of a possible devaluation on income distribution, inflation, growth and employment; and (h) to survey the macroeconomic consequences of different government expenditure scenarios.°” Recommendations include: VW The effects of export growth on macroeconomic variables depends on the way in which it is brought about. A 1 per cent autonomous growth in mining generates more economy wide growth, less inflation, more employment and provides a more equal distribution of the gains. The main effect of a devaluation of the exchange rate is to ease the balance of payments constraint through growth in non-traditional exports. V Elements of a growth strategy should be the lowering of the marginal capital— output ratio in various sectors through increased public sector spending and encouraging small and medium-sized enterprises. V Implications of adopting a contractionary fiscal policy are examined under the assumption that the ratio of PSBR to GDP will decline. Policy implications are that an increase in private sector investment will not be sufficient to offset the PSBR decline completely. There will be moderate growth but with increasing unemployment and a decline in public investment. A switch in public expenditure from the current to the capital account (reducing public sector employment to finance an RDP housing programme) will lead to a similar growth path, but there will be more inflation.


The Political Economy of South Africas Transition






Our comparison of the structure of four large macro models built for South Africa highlights both similarities and differences between the models in terms of their overall theoretical foundations, the behavioral specifications of each sector of the economy, and their use for policy analyses. It reveals each model’s strengths and weaknesses, and the challenges ahead for enhancing model building and model-based policy analyses in South Africa. As the 1996 government document on Growth, Employment and Redistribution indicated, government officials in charge of macreconomic policy are increasingly utilizing models to formulate and quantitively assess their policy proposals. The problems with the way models have been used in such documents highlights the amount of work that still needs to be done before models can be properly used to provide relatively reliable answers and projections for the economic issues they are utilized for.°* For example, VW The majority of South African models are not well documented in terms of their specifications and little is known about the measurement error distribution of Key variables. This shortcoming needs serious attention, particularly because the intermodel differences in outcomes can stem from (a) simple differences in their single-equation specifications for the same endogenous variable, (b) differences in exogenous versus endogenous treatment of certain variables, and (c) differences in the size of critical parameter estimates. V Given that poor data can lead to biased, inconsistent and inefficient coefficients and solutions,

South Africa’s modellers

also need to document

clearly the background information and sources regarding the data used in their models. V The forecasting accuracy of the models can significantly improve, if modellers undertake a number of testing exercises to validate their models. None of the South African models have gone through systematic validation examination.” V None of the South African models systematically treat expectations. This means that in these models, current decisions are not affected by expectations about future prices or volumes. The incorporation of expectations about future prices into a macroeconometric model speeds up the process of price adjustment and therefore typically moves the system much faster towards equilibrium. Markets clear much more quickly and much more effectively. On the other hand, in a more Keynesian framework, ‘incorporation of expectations about future volumes speeds up quantity adjustments and thereby accentuates the business cycle: the fluctuations in volumes may well be faster and more rapid.’*° V Finally, all of the South Africa models can benefit from establishing more elaborate links between the financial and real side of the models. Moreover,

given the increasing importance the government Is giving to the role of foreign direct investment, the models can benefit from a more adequate treatment of the capital account.

Modelling the South African Economy


REFERENCES Adams FG and Klein LR (1991): Performance of quarterly econometric models of the United States: a new round of model comparisons. In L R Klein (ed.) Comparanve

Performance of US Econometric Models. Oxford University Press, New York. Adelzadeh A and Semmler W (1993): Open Economy Macro Dynamics with Least Square Learning of the Exchange Rate. Working Paper, Department of Economics, New School for Social Research. Cameron

M, de Jongh D, Joubert R, Suleman A, Horridge J and Parmenter B (1994):

IDC-GEM Simulanons for the Workshop on Economy-Wide Models of the South African Economy. Industrial Development Corporation of South Africa, second draft, July. Clarida R and Gertler M (1996): How the Bundesbank Conducts Monetary Policy. C.V. Starr Center for Applied Economics, New York University, Research Report # 96— 14, April. Fair RC (1984): Specificanon, Estumanon, and Analysts of Macroeconometric Models. Harvard University Press, Cambridge. Fair RC


Zesung Macroeconometric Models. Harvard University Press, Cambridge.

Fallon P and da Silva LP (1994): South Africa, Economic Performance and Policies. The World Bank Southern Africa Department, Discussion Paper 7, April. Flaschel












dynamical processes. IFAC Dynamic Modelling and Control of National Economies. Edinburgh, UK.

Fromm G and Schink G (1973): Aggregation and econometric models. International Economic Review, 14, 1-32. Gelb S, Gibson B, Taylor L and van Seventer DE (1993): Modelling the South African Economy — Real—Financtal Interactions, unpublished. Gibson



Southern Gibson B and Economy. Gibson B and










Africa, February. van Seventer D (1995b): Towards a Growth Strategy for the South African DBSA, May. van Seventer D (1995c): The Impact of Foreign Trade on Growth and

Distribution in the South African Economy. DBSA, July. Gibson B and van Seventer D (1995d): The Macroeconomic

Effects of Restructuring

Public Expenditure by Function in South Africa. DBSA, November. Gibson

B and van Seventer D






in the South

African Economy. DBSA, April. Horridge JM, Parmenter BR and Pearson KR (1993): ORANI-F: A General Equilibrium

Model of the Australian economy. Economic and Financial Computing, 3(2): 71-140. Laffer AB and Ranson RD (1971): A Formal Model of the Economy for the Office of Management and Budget, unpublished. Lichtenberg RR (1992): R&D investment and international productivity differences. NBER Working Papers Series, no. 4161, September. McNees SK (1981): The methodology of macroeconometric model comparisons. In J Kmental and JB Ramsey (eds.) Large-Scale Macro-Econometric Models. North Holland Publishing Company, Amsterdam. MERG (1993): Making Democracy Work, a Framework for Macroeconomic Policy in South Africa. Centre for Development Studies, University of Western Cape.


The Political Economy of South Africa's Transition


Institute for Economic

Policy (NIEP)

(1995): A Non-Technical Outline of the

NIEP Annual Mult Sector Model of the South African Economy. Occasional Papers. Orcutt GH, Greenberger M and Rivlin A (1961): Micro Analysis of Soctoeconomic System: A Stmulanon Study. Harper and Row, New York. Republic of South Africa (1996) Growth, Employment and Redistribution, A Macroeconomic Strategy. Pretoria. Taylor J (1993): Discretion



Conference on Public Policy. December,









1. The debates surrounding some of these issues go back to Orcut et al. (1961), Laffer and Ranson (1971) and Fromm and Schink (1973). . cf. McNees (1981) and Adams and Klein (1991).



3. Four other large models of the South African economy are: the Bureau of Economic Research quarterly econometric model of the University of Stellenbosch, the World Bank computable general equilibrium model, the Econometrix quarterly macroeconomic model, and the Reserve Bank model of the South African economy. Gelb, Gibson, Taylor and van Seventer (1993).

NIEP (1995), p. 2. For details on the ORANI-F model see Horridge, Paramenter and Pearson (1993). Gibson and van Seventer (1995a).

Mark up is considered a variable for the financial services sector. Flaschel and Semmler (1989).

For issues related to households’ income and expenditure in the financial market see the next section, on the financial sector.

11. See the section on the labour market below for more details on employment and wage determination. 12. The share of earned income going to each income class is taken as a constant, but the

share of firm income is modelled explicitly. This share depends on the interest rate, inflation, and capacity utilization. See Gibson and van Seventer (1995a). 13. Gibson and van Seventer (1995a), Table 2, equations 2 and 3, p. 18. 14. Gibson and van Seventer (1995a), Table 5, equation 8, p. 26. 15. Horridge, Paramenter and Pearson (1993), pp. 13-14.

16. ‘The government sector’s demand for credit is assumed to be limited and only occurs once the fiscal deficit rises beyond a certain percentage of GDP, which is set to 5 per cent in the model. 17. As we will see later on, this formulation of the composition of the demand for credit using national accounts identities differs from which use portfolio allocation theory.

the NIEP

and DBSA


18. Firms’ speculative demand for loans depends on their financial surplus. The upper income


are allowed

to engage

in speculative

activity when


is a

positive difference between the rate of return on equities and the cost of borrowing (Gibson and van Seventer,

1995a: 27).

19. Cameron et al., (1994: 3). 20. In all of the proposed scenarios, government recurrent expenditure growth is assumed to be lower than it was in the early 1990s (see Fallon and Da Silva, 1994: 123).

Modelling the South African Economy


21. It is in this context that the investment functions in both the NIEP and DBSA model include the growth rate of prices with a negative coefficient. 22. Government receives dividend income from its investment in the equity market. Its expenditures, on the other hand, include investment in financial assets and interest

payments to households and firms for holding government bonds. 23. Therefore, the interest rate is isolated from government expenditure by assumption. Since aggregate private investment is given exogenously, increases in government spending do not crowd out the increase in private spending. 24. In change form, the price term is composed of an elasticity of substitution multiplied by the percentage change in a price ratio representing the wage of the given type of labour relative to the average wage for labour in a given industry.

25. 26. 27. 28. 29.

Horridge, Parmenter, and Pearson (1993: 96-97). Horridge, Parmenter, and Pearson (1993: Horridge, Parmenter, and Pearson (1993: Fallon and da Silva (1994: 202).

113). 108).

The real terms of trade used for the estimation of the import equation is the ratio of price of non-gold imports to the CPI. 30. Adams FG and Klein LR (1991): Performance of Quarterly Econometric Models of the



A New


of Model






Comparanve Performance of US Econometric Models. Oxford University Press, New York. 31. Cameron et al. (1994). 32. Gibson and van Seventer (1995a). 33. Gibson and van Seventer (1995b, c, d, 1996).

34. Underlying the results presented in the 1996 government document is a modelling exercise which is fundamentally problematic because (a) the main model used, i.e.

the Reserve Bank model, has never been made public and thus has never been the subject

of independent





to the




cannot provide information on the income distribution effects of policies, is unable to furnish sectoral employment effects, and is unable to incorporate the effects of restructuring government expenditures on growth, employment and income distribution. 35. For an excellent review of some validation procedures see Fair (1994). 36. For more details see Adelzadeh and Semmler (1993).

The South African Policy Debate Resumes Jonathan Michie and Vishnu Padayachee Introduction


The governments macroeconomic strategy


Explaining the economic policy shift 227 Strategies, alliances and accords inthe late l990s


INTRODUCTION For two years or so after April 1994, South Africans, together with millions around the world celebrated the ‘South African miracle’. The transfer of political power to the black majority government ‘was unexpectedly smooth’, and it has been argued that ‘the use of this power since has been eminently responsible’ (SAF, 1996: 1). A broad consensus also appeared to take shape around the government’s Reconstruction and Development Programme (RDP). It was virtually impossible to find anyone, from businesspeople, trade unionists, community leaders, even foreign governments and international financial agencies, who were not in support of the broad principles and objectives of the RDP. Those few academics and others who raised concerns about discernible policy shifts to the right (which were already beginning to occur, for example in the RDP White Paper published in November 1994) were accused by some within the movement as undermining the RDP office, and dismissed by others outside for being facile. Of course the RDP was no more than a broad statement and vision of the economic manifesto of the ANC, as was the RDP White Paper in relation to the government. Much work needed to be done in putting in the required detail, in ensuring macroeconomic consistency and feasibility. The building of consensus, even over details in the macroeconomic framework of the democratic government, was regarded in many quarters as being at least as important as that developed on the political front between 1990 and 1994. Of course, as happened in the political negotiations, parties and constituencies were unlikely to get exactly what they wanted, but a high degree of consensus, extending beyond the broad vision statement of the RDP, was widely expected. However, little progress along these lines occurred for over a year after the publication of the RDP White Paper. In the meantime the economy itself was


The Political Economy of South Africas Transition

not performing strongly enough to deflect attention away from the voices of frustration and discontent which gradually began to be raised from various fronts. Grassroots communities, in both urban and rural areas, began to complain about the lack of delivery, especially of physical and social infrastructure. Business complained about the absence of a clear macroeconomic framework from government. Trade unions became increasingly concerned about the continuation of racist practices on the factory floor, about the effects of the government’s trade liberalization policies on employment in certain industries, and about the state’s privatization moves. Strikes and protests became the order of the day, especially during 1995. Alarmingly, for all sections of South African society, the levels of criminality and criminal violence began to reach nearanarchic proportions, further threatening investment and development. In response to this, the government went on the attack itself, accusing South African business of delaying critical investments, and for not facilitating black economic empowerment; foreign investors and governments for not investing more vigorously in support of the new democracy; and trade unions for taking their protests to the streets, for not moderating their wage demands, and for failing to shift from a politics of resistance to one of nation building. By early 1996 much of the goodwill and common purpose engendered both nationally and globally by the miracle of the political transition was fraying at the edges. This was brought out most openly when in December 1995 the government unilaterally announced its commitment to the privatization of state assets, sparking a massive showdown between it and its trade union allies, COSATYU, and other unions. In the first half of 1996 the South African rand came under intense pressure, losing some 25 per cent of its value between February and July, and the trade account of the balance of payments became highly erratic, changing from monthly surplus to deficit and back in unpredictable fashion. By mid-1996 foreign exchange reserves were equal to just five weeks’ import cover, one of the lowest in the world. Real interest rates remained high. These factors and pressures all served to focus attention on the appropriateness or otherwise of the government’s macroeconomic policy. So it was not surprising that in February 1996 the South African Foundation, a consortium of South Africa’s 50 most powerful companies, published its own macroeconomic blueprint, Growth for All (SAF, 1996). Acclaimed in some quarters, damned in others (including by ANC ministers) for its vulgar freemarket


(see, for example,



and Pillay,

1996), the

document appears to have stirred other constituencies to quicken the pace of production of their own economic blueprints. Within a few months the South African labour movement (including COSATV) produced its document entitled Social Equity and Fob Creation (SALM, 1996). The government itself, arguably 1n response to the currency crisis published its own strategy document, Growth, Employment and Redtstribution: A Macroeconomic Strategy (Republic of South Africa, 1996), with the announcement that it was ‘non-negotiable’. Other official policy documents followed, including that of the government-appointed Labour Market

The South African Policy Debate Resumes


Commission, and the ILO’s (1996) report on the South These documents and reports were widely debated constituency circles (and increasingly within the alliance to some extent, been discussed in the preceding chapters

African labour market. in the media and in itself), and they have, (see also Adelzadeh et

al., 1996; Rix, 1996). Therefore, this debate will not be covered here in detail.

However, and for obvious reasons, some macroeconomic strategy will be necessary.








The underlying (unstated) premise of the government’s macroeconomic strategy (for example as published in June 1996) appears to be that growth would best be promoted by freeing the private sector from the fetters of the distorted, racist logic and constraints of the country’s apartheid past. In this respect the government’s philosophy of development approximates that which free-market liberals advocated in the 1970s and 1980s when confronted by the neo-Marxist critique of the relationship between apartheid and capitalist accumulation in South Africa. The government’s position, however, appears to extend beyond the removal of all vestiges of racially based economic policy interventions (which all progressives would, of course, support) to all other state interventionist measures such as tariff protection, financial regulation, state ownership and the like. These latter kinds of interventions, are rejected, it would appear, on one or

both of two grounds: either by virtue of the fact that they were employed by the apartheid state (and hence must be opposed for that reason), or because they were perceived incompatible with the liberalized, deregulated, free-market logic of the new global economy. It is only in this sense that one can begin to understand the government’s obsession — apparent in its June 1996 macroeconomic strategy document — with reducing the size and scope of public sector activity and with cutting the budget deficit to GDP ratio to 3 per cent by 1999. The growth outcome in the government’s June 1996 document depends entirely upon the existence in South Africa of the phenomenon of ‘crowding out’. This is in line with the orthodox, neo-liberal argument that government borrowing/spending crowds out the private sector from financial markets through the mechanism of pushing up interest rates. This in turn it is argued discourages private investment. However, as Weeks points out (1996: 1): No rigorous empirical work exists for South Africa to indicate the interest elasticity of money demand [monetary adjustment] and investment outlays [real adjustment] to interest rates. In the absence of [such] evidence ‘crowding out’ is an issue of political rather than economic debate.

Both international experience and South Africa’s post-war economic record demonstrate that public sector investments (both infrastructure and basic


The Political Economy of South Africas Transition

services) can both crowd in and reduce the costs of private sector investment, a possibility even admitted to by the World Bank in an earlier Report on South Africa (Fallon and da Silva, 1994: 94). It is not at all apparent why in the macroeconomic strategy document and elsewhere this kind of approach is rejected a priori by the government. Apart from the hopes pinned on a ‘brisk expansion in private sector capital formation’ (both local and foreign) following on reduced state expenditure and wage restraint imposed through the mechanism of a national social agreement, there is little or no clear explanation in the strategy as to the sources from which its forecast of a 6 per cent per annum output growth and employment growth of 400000 per annum by the year 2000, derive. No argument is advanced, for example, as to why the accelerated growth in non-gold exports which the strategy punts can be reasonably expected, in current global conditions. Neither is there any clarity about the nature and extent of the public sector investment which is nominally proposed as one element of the overall growth strategy. Should growth from these or other sources not materialize, and the preoccupation with fiscal deficits continues, then the implications for job creation, reconstruction and development will indeed be serious. The strategy document is at pains to stress the compatubility between it and the RDP.’ In the second paragraph we are assured that the whole purpose of rebuilding and restructuring the economy in terms of an integrated strategy is in keeping with the goals set out in the RDP, and that this macroeconomic framework would enable government to ‘successfully confront the related challenges of meeting basic needs, developing human resources ... and implementing the RDP in all its facets’. However, in contrast to the substantive discussion of and motivation for these goals and related policy options in the RDP and in the MERG report (1993), the macroeconomic strategy document pays scant attention to these issues. The government’s June 1996 policy document advanced no strategy in respect of the most disadvantaged sections of South African society, especially women in rural areas. Under the heading of social and sectoral policies, education, health and welfare policies and programmes are discussed (and dismissed) in a few paragraphs. Apart from the lack of detail, there are several aspects of the strategy that could impact negatively on the provision of basic services. The most obvious of these is the fixation on the targeted deficit. Another is the automatic association of state expenditure as a ‘public bad’. No recognition is made of the potental productivity and efficiency gains from, for example, a better fed, healthier, more educated, literate and skilled labour force.

In contrast to the rather gloomy predictions in the document regarding the incompatibility of fiscal expansion with future growth in South Africa, it may well be argued (as the MERG report did) that the only way to ensure that foreign investment and export expansion rise to the desired level in the medium to long term is through enhanced state expenditure on the provision of basic services, infrastructure, housing, education, roads etc. Certainly inefficient and wasteful

government consumption expenditure should be curbed (and there is a lot that

The South African Policy Debate Resumes


can and should be done here, including in the former homelands and selfgoverning territories), but care must be exercised to ensure that productive elements of government expenditure, essential to the realization of the broader goals of reconstruction and development, are not dragged down in the singleminded pursuit of an orthodox fiscal policy. Regrettably, it would seem that it may take many years and hard experience before the bad name which the apartheid state gave to state intervention in general will be erased from the memory banks of South African economic policymakers — especially so in a context when they are constantly bombarded by the anti-state neo-liberal prescriptions of the Washington institutions as well as by capital (foreign, local white and increasingly also local black too). Notwithstanding a degree of state intervention in support of black economic empowerment and the existence of corporatist structures and legislation which some see as a Challenge to neo-liberal orthodoxy,” it is our argument that the government’s macroeconomic strategy by 1996 could only be characterized as a neo-liberal one, a far cry from the developmental philosophy which underpinned the MERG report and the RDP.





Christopher Hood (1994) has attempted to explain the policy shift in the OECD countries over the 1980s, which saw, in the area of macroeconomic policy, a shift from broadly Keynesian concerns with the maintenance of full employment to a monetarist obsession with low inflation. Hood explores how far such changes can be explained in terms of the following: firstly, the power of new or revived ideas; secondly, the power of new interest groups and classes; thirdly, the effect of changing social contexts (habitats); and fourthly, the ‘self-destructive’ dynamics operating within institutions. None of these forces, according to Hood, are alone likely to account for such policy shifts; most often two, three or all four may need to be invoked to account for a particular change. Regarding the macroeconomic shifts which occurred in Europe firstly, ideas which purported, at least, to be new

and elsewhere, there were, (monetarist, new classical);

secondly, there was a shift in the balance of power towards certain interest groups (the growing middle-strata voters, for example, less concerned with issues of full employment); thirdly, there were habitat changes such as the fragmentation of production which undermined the social basis of consensus politics, and the globalization of finance and production which undermined the power of national actors (including national governments, trade unions, and even business); and fourthly, it could be argued that previous institutions, structures and mechanisms of policy formulation and implementation began to unwind. As for South Africa, Trade and Industry Minister Alec Erwin observed that the union movement:


The Political Economy of South Africas Transition simply underestimated the pressures on an economy like South Africa, and the difficulties in bringing about economic change and growth. Those pressures are very, very, powerful (1996:


What were these pressures? And can the policy shifts which occurred in ANC economic thinking between 1990 and 1995 (which Erwin implies resulted from these unnamed pressures) be understood in terms of Hood’s thesis, despite the obvious differences in place, time and context? The first three factors, at least, may have had some currency in the South African situation, as do a few more specific to the South African situation. Firstly, after 1990 the leading political figures in the ANC had to confront neo-liberal ideas which were vigorously and enthusiastically fed to them by powerful agents including the international financial institutions and Western governments. For most of its history the ANC had placed little emphasis on economic issues, so much so that when it was unbanned in 1990 and began the process of negotiations and discussions with domestic and foreign constituencies and institutions, some (understandably) vaguely defined clauses of the 1955 Freedom Charter — ideas formulated in a very different historical context — constituted the essence of its economic policy. In terms of the economic debate, the ANC was therefore clearly on the defensive at the beginning of the negotiations process in 1990. It simply did not have a set of new progressive ideas and strategies to counter those neo-liberal ideas so powerfully proposed by the Washington institutions, Western governments, local business interests, and

the de Klerk regime. The hope (it would appear) was that foreign funders and investors, impressed by the new government’s recognition of the ‘realities of the new world order’, would invest massively in the economy. The more interventionist, Keynesian ideas and policy recommendations of MERG (December 1993) and the RDP (February 1994) came too late in the transition process to stop the ANC’s steady slide into neo-liberalism. Secondly, while the ANC at the time of negotiations claimed to represent the (mainly black) working class and the poor and marginalized, it was also the representative of a wider section of black society, including a growing black middle class of professionals and businesspeople. Furthermore, as an avowed champion of non-racial politics since at least the 1950s it also — of necessity — had to appeal to whites, Indians and coloureds, and among these groups, there were to be found by 1990 many wealthy or at least middle-class people, whose concerns were not those of the black working class. In fact Tom Lodge has argued that the ANC’s concerns with interests other than those of workers and the oppressed goes back to the 1950s. In 1955, despite its increasing sensitivity to the preoccupations of the least privileged, and despite the increasing strength of its links with worker organisations, the ANC

was not a movement strongly oriented towards the working class...

despite a more radical leadership the ANC was often slow and ineffective to resist fresh infringements on existing freedoms and rights (1983: 174).

The South African Policy Debate Resumes


The need to accommodate and be attractive to wider social and economic interests intensified as democratic elections approached in April 1994, forcing the ANC further right in its economic policy stances. Thirdly, the habitat of the 1990s was very different to that of the 1950s. Part of this relates to the collapse of the ANC’s principal political and military supporter for decades, the former Soviet Union. As Ginsburg has observed: Indeed, we should not underestimate the extent to which the South African

transition was shaped precisely by the fact that it gathered momentum just when alternative visions of democracy [and economic transformation] were becoming utterly tarnished by experiences in the Eastern bloc, or by the growing perception that Western European social democracy was bankrupt (1996: 96)

On the economic front, globalization was interpreted as having reduced the power of nation states in respect of their leverage and control over economic policy (although in our view this death of the nation state has been greatly exaggerated).” It was not unusual in the early 1990s to hear senior ANC spokespersons arguing that the world had totally changed, and that those arguing for more radical or alternative economic solutions in this new globalized context were simply living in a bygone age. In this context, globalization has become a synonym for inaction, even paralysis, in domestic economic policy formulation and implementation. The recognition (now apparent even to such pillars of the US establishment as the Council on Foreign Relations) that globalization has also brought growing income inequality, job insecurity and unemployment, in both industrialized and developing countries, has not yet struck South African economic policy makers (see Kapstein, 1996). Neither does it seem that they, like their counterparts in much of the West, have recognized that ‘after all the fate of the global economy ultimately rests on domestic politics in its constituent states’ (Kapstein, 1996: 17). It is not clear whether and how the fourth factor referred to by Hood to explain policy reversals in the OECD countries, 1.e. the self-destructive dynamics of institutions, may apply in the ANC’s case. What 1s clear is that the ANC did not at the beginning of negotiations in 1990 possess a ready institutional capacity on the economic policy front to counter the power and resources available to its main opponents, and other institutions. The economic expertise it had (both within and outside South Africa) may have been better than that available to other comparable developing countries at the time of their transitions, but it took a great deal of time, energy, resources and coordination to

set up, orient and direct such policy thinktanks as MERG to the new task of formulating policy options, and all this under enormous political pressure. Finally, and moving beyond Hood’s framework, the kind of economic policy programme that could be put in place was to some extent conditioned by the nature of the political settlement and by constitutional constraints. Some of this has been dealt with in Chapter 1. Habib (1996) has expressed this general problem as follows:


The Political Economy of South Africas Transition One of the implicit assumptions of the negotiated political settlement was the ANC’s commitment to manage, and to locate its programme of economic reconstruction within the framework of, a market economy. This commitment was captured in a range of clauses in the Bill of Rights which recognised the rights of individuals to own property and accumulate capital, and to dispense with these as they please. The settlement thus established the parameters of the GNU’s [Government of National Unity] economic programme and conditioned its evolution in a neo-liberal direction (1996: 101).

There was in April 1994 a profound sense of pride in the world-historic victory by South African democrats over the forces of racial and gender oppression. For many progressives the programme to transform this political victory into one of economic liberation was the ANC’s Reconstruction and Development Programme. As progressive academics, our central concern in this book has been to capture something of the nature and character of macroeconomic policy developments in the transforming of South Africa of the mid-to-late 1990s, and to assess these in the light of the various economic ideas and policy proposals which were advanced by the democratic movement in the 1990s, including those proposed in the MERG report and the RDP (Base Document). It might be argued that it is too early to undertake such a task: that to see through the institutional and administrative changes and restructuring needed to give effect to the RDP will inevitably take a great deal more time than has yet elapsed. According to some in government these kinds of factors render premature any critical assessment of policy developments and policy shifts. Others have tended to take a more defensive position, arguing that there have not been any deviations (even in the macroeconomic strategy document) from the RDP which had to be explained. Yet others in government urge us all to be more patient, promising that the government ‘will come up with a much more elaborated statement’ of economic policy, following the macroeconomic strategy (Erwin, 1996: 24). Clearly, as the economic policy debate within and outside the alliance intensified during the course of 1996, not everyone agrees or is content to be patient. In contrast to the macroeconomic foundations, policies and strategies of the government (as evident, for example, in the macroeconomic strategy document) the contributors to this volume have either explicitly or mmplicity advanced some core ideas and principles of an alternative strategy for South Africa’s economic reconstruction and development. In summary form these ideas and proposals may be captured in the following way: V regulated, state-led growth and development ts the only strategy which offers the possibility for economic change sufficiently deep and sustainable to address the problems of poverty and inequality which was the legacy of the apartheid regime. V attention must be paid, and resources directed, to ensure that the capacity, efficacy and efficiency of the state is improved in order to meet the challenges of development which it undertakes, leads or coordinates.

The South African Policy Debate Resumes


V one critical element of an alternative strategy is an active industrial policy, located in the context of existing capacities, while seeking out new opportunities in the restructured global economy.




The tensions and conflicts among different constituencies and interest groups in South Africa over the direction of economic policy, especially since early 1996, has spawned a new popular and academic literature which has focused on three essential organizational and political issues: first, the future of the ANC-SACP-— COSATU








of national


contract arrangements such as the National Economic, Development and Labour Council (NEDLAC); and third, the prospects for the consolidation of democracy in South Africa, as the country approaches its first ‘normal’ elections in 1999. That election will bring the years of ‘Mandela magic’ to a close, and may well usher in a whole new struggle over South Africa’s economic and political landscape as we enter the new millennium. COSATU as the strongest component in the South African labour movement made its entry into the Tripartite Alliance ‘contingent upon the ANC and SACP adopting [the RDP] as the basis of all subsequent development policy’ (Ginsburg, 1996). By the first half of 1996 the labour movement, including COSATU, had openly and repeatedly attacked the government’s macroeconomic strategy for abandoning the vision of the RDP. John Roemer has recently argued that: the transformation of society, by the implementation of [alternative economic blueprints], and their subsequent modification and improvement through practice, requires a politically organised, progressive and aggressive labor movement

(1996: 60-1).

Applying that argument to South Africa suggests that the labour movement offers the only vehicle for pushing an alternative, progressive economic policy agenda onto the table. Whether this can occur, while its strongest component, COSATU, remains allied in its current form to the dominant political party, the ANC,

remains unclear.

Despite murmurings from within the ANC itself and the SACP about the macroeconomic strategy, there appears to be little prospect of any remaining progressive voices within the movement asserting themselves in a way which would alter the present trajectory of macroeconomic policy. Neither, given the high degree of interlinking and dependency between the ANC and the SACP, and the latter’s inability or unwillingness in the contemporary period to chart and clarify an independent and sustainable economic and political vision, 1s there much likelihood of the Party breaking with the ANC, or even significantly reshaping the nature and form of its alliance. In short, we would suggest that


The Political Economy of South Africas Transition

while tensions within the alliance may well continue to manifest themselves, and may even become more intense over economic policy differences, the alliance is likely to hold, at least until the 1999 elections. While a high degree of commitment still exists in post-apartheid South Africa about the need for a broad national social agreement and for cross- or multi-class constituencies such as NEDLAC and workplace forums at which critical economic policy issues can be debated, there has been confusion about their powers and precise roles in South Africa’s transitory and uncertain context. NEDLAC in particular appears to be burdened with responsibility for bringing its constituencies to consensus (or sufficient consensus) over a very broad set of policy issues, and it is not at all clear three years into the transition that it 1s doing this very successfully. Its greatest success has been the consensus it delivered on the Labour Relations Bull. But important issues such as privatization are no longer being debated within its forums, as a bilateral arrangement was reached between the government and the labour unions over a range of issues and processes linked to the ‘restructuring of state assets’. The divisions within the very different elements of South African business (especially between big ‘white’ business and emergent black business) also appears to have made some of them wary about the usefulness of NEDLAC, although at times it would seem that business recognizes NEDLAC as a useful forum to lobby government. The non-governmental and community organizations have been marginalized in the Development Chamber of NEDLAC, somewhat isolated from the relatively more powerful Monetary Chamber. In contrast to the preelection period when Regional Economic Forums complemented the work of the National Economic Forum (a forerunner to NEDLAC), little effective organization of this sort exists in the regions since 1994. All in all, the future role, importance, strength and sustainability of social accords or agreements and forums in post-apartheid South Africa appears unclear. Assessing the prospects for the consolidation of democracy in South Africa is too complex an issue for us to address here (see, for example, Habib,

1995 and

Ginsburg, 1996 for a fuller discussion). But one point relating the character and performance of the South African economy to democratic prospects in this country needs to be made. Habib puts it thus: In a country of heightened racial awareness amongst the populace, the transformation of the racial nature of ownership . . . must be conceived as one of the significant goals of the democratic experiment. The failure of the newlyestablished democratic regime to address this problem, then, could make it the

rallying cry of the many disaffected elements within the country. The long-term consolidation of democracy in South Africa is thus dependent, in part, on the deracialisation of the economic system (1995: 68).

But that transformation will need to be a genuine one if it 1s to gain widespread support, quell dissident voices and anarchic forces, and consolidate democratic prospects in post-apartheid South Africa; in other words it needs to

The South African Policy Debate Resumes


avoid the dangers of empowering only a small black economic elite in the name of deracialization. That is the real challenge which the fledgling democracy faces in the last years of the twentieth century.

REFERENCES Adelzadeh A, Moolla J and Pillay V (1996): The South African Foundatnon Report: Growth for Some, Poverty for the Rest. National Institute for Economic Policy, Johannesburg. Bond P (1996): GEARing up or Down? South African Labour Bulletin, 20(4): August. Erwin A (1996): Engaging with the global economy (interview). South African Labour Bulletun, 20(3): June. Fallon P and de Silva P (1994): South Africa: Economic Performance and Policies. World Bank Informal Discussion Paper on South Africa, No 3, Washington DC.

Ginsburg D (1996): Transition theory and the labour movement. 7ransformanon, 30. Habib A (1995): The transition to democracy in South Africa: developing a dynamic model. 7ransformation, 27. Habib A (1996): Defeat in Victory:

A Macro-study of the Transition to Democracy


South Africa. PhD dissertation in progress, City University of New York. Harris, L (1995): International financial markets and national transmission mechanisms.

In J Michie and J Grieve Smith (eds.) Managing the Global Economy. Oxford University Press, Oxford. Hood C (1994): Explaining Economic Policy Reversals. Buckingham, Open University Publications. International Labour



(1996): Restructuring the Labour Market:


South African Challenge. ILO Country Review, Geneva. Kapstein E (1996): Workers and the world economy. Foreign Affairs, 75(3): May/June. Lodge T (1983): Black Politics 1n South Africa since 1945. Ravan Press, Johannesburg. MERG (1993): Making Democracy Work, A Framework for Macroeconomic Policy in South

Africa. Centre for Development Studies, Bellville, Cape. Michie J and Grieve Smith J (eds.) (1995): Managing the Global Economy.


University Press, Oxford.

Republic of South Africa (1994): RDP White Paper: Discussion Document. CTP Book Printers, Cape Town. Republic of South Africa (1996): Growth, Employment and Redistribution, A Macroeconomic Strategy. Pretoria. Rix S (1996): A nightmare and a near miss. South African Labour Bullenn, 20(3): June. Roemer J (1996): An alternative to capitalism. South African Labour Bullen 20(5): 60-68. South African Foundation (SAF) (1996): Growth for All, An Economic Strategy for South

Africa. South African Foundation, Johannesburg. South African Labour Movement (SALM) (1996) Soctal Equity and fob Creation, The Key to a Stable Future. Proposals by the South African Labour Movement, Johannesburg. Webster E (1996): Speak out, social democrats! Weekly Maid and Guardian, 18 August. Weeks J (1996): Crowding Out, Notes for a meeting of the Tripartite Alliance and the Gauteng Legislature, Johannesburg, July. Zarenda H (1996): Macroeconomic

Strategy and the Provision of Basic Services. Notes

for a meeting of the Tripartite Alliance and the Gauteng Legislature, Johannesburg,



The Political Economy of South Africas Transition




1. The next few paragraphs on the links between the strategy and the RDP draw heavily from Harry Zarenda’s talk to the Tripartite Alliance in August 1996. . See, for example, Webster (1996). . See, for example, the various contributors to Michie and Grieve Smith (1995), and in

particular Harris who challenges the idea eliminated any room for manoeuvre.

that globalized





Act of Union (1910)


see also Anglo-American Industrial Corporation; Del Monte; Minorco

Adelzadeh, A 5, 45, 182, 195-221, 224-225 Affirmative action 21 Africa Development Bank

Anglo-American Industrial Corporation (AMIC) 24 see also Anglo-American Corporation Anglo-—Boer War 56

57, 60

African Communist 23 African Economic Community



African National Congress (ANC)

2, 11-12,

Apartheid x, 6, 16, 28, 32, 41, 82, 98, 105, 130, 137, 142-144, 155, 157, 167-168, 176, 225, 227 see also Racist practices Armaments Corporation (ARMSCOR) 126, 131, 146

15, 30, 36—37, 41, 44, 46, 48—49, 60, 61, 62, 71, 78—80, 82, 119-120, 134, 136, 139, 176-178, 182-183, 185, 223-224, 228, 230-231 see also Government of National Unity (GNU),

liberation struggle

alliance 23, 24, 44 Department of Economic Planning Department of International Affairs economic policy

78 61

19-20, 41, 43, 46, 79,

229 see also RDP, Macro Economic

Research Group (MERG) financial policy, international 45 macroeconomic strategy

225, 230-231

see also Manufacturing, armaments; Denel; Parastatals Arndt, D. 128 Arthur Andersen 136, 141 Asian countries 16, 41, 93 see also East Asian Countries; FDI, Asia Askoy, A. 33 Australia 166, 196

see also National Institute of Economic and Industry Research; Impact

see also Macro Economic Research Group


National Executive Committee (NEC) 22 parliamentary caucus 24 ready to govern document 41 Aggregate demand 180-181 see also Effective demand; Keynesian ageregate demand Agriculture 13, 103 see also Imports, agriculture commodities exports 64



Research Group; Monash University (Afrikaaner Weerstandbeweging) 167

Balance of payments

27, 32, 39, 85,

91-93, 105, 110, 116-117, 119, 105, 110, 140, 178, 180, 206, 216, 224 see also Current account; Capital account; Exports; Imports; External

account; Capital flows

2, 74, 77

constraint 40, 156 deficit 30, 156, 168


Alusaf 136-137, 146 America, see United States of America

(US) Anglo-American Corporation


Ballivan, A. 33, 75 Bank Act (1965) 103 Bank loans, private, international

37, 117, 139

Banking sector





Bantustans 109 see also Homelands Barlow Rand 35 Barro, R. 118 Basic needs 15, 44, 125, 127, 145, 186, 226 see also Healthcare; Education; Electrification; Water, provision;

Business cycle


Bhagwat, J. 64 Bilateral trade agreements



163, 165

Capital account

Black economic empowerment

21, 224

Board on Trade and Tariffs (BTT) 138 Bond market 10, 34, 38 Bond, P. 11, 41



Borrowing, domestic

18, 27, 38, 85

see also Balance of payments; Capital flows; External account controls 117

see also Exchange controls liberalization 116 corporate

see also Homelands



expenditure 210 flight 30, 40, 103, 117, 157, 176 see also Investor confidence; Investor

Botswana 57, 59 Bottlenecks 182 Bourgeoisie 24 Bowles, P. 118 Brain, P. 196 Brazil 73

flight flows 10, 13-14, 16, 27, 29, 36, 38, 40, 85, 115, 101, 217 see also Balance of payments; Capital account

Bread baking industry Bretton Woods _

11, 21, 48, 108, 134-135, 140

Calmfors, L.

Bill of Rights 230 Billiton 117 see also Gencor



Business Day 24, 29, 40 Business press 31 see also Media Business Report 35 Buthelezi, M.G. 21

Basutoland 56 see also Lesotho Becker, C.M. 82 Bell, T. 2, 71-88 Belli, P. 33, 75 Bercuson, K. 30



Bridging institutions Bruwer, A.J.

see also South African business medium sized 21 see also SMEs small 21 see also SMEs confidence 145, 176 see also Confidence; Investor confidence; Market confidence



Budget 16, 24 see also fiscal policy deficit 14, 32, 50, 91-92, 117, 182-183 see also Fiscal Deficit; Public sector deficit Bundesbank 168 Bureaucracy 18, 167 see also Civil servants bureaucratic inertia 37 Business 2, 5, 157

formation, domestic 159 goods 3-4, 75, 131 local, private 41 markets 27, 29, 34—35, 37, 38, 83,

98-99, 110, 120 portfolio 34 private 157 shortage 16 stocks




Cattaneo, N. 81 Cement industry 180 Central bank, independence

3, 11, 19,

23, 46, 108-110, 118, 168 see also South African Reserve Bank


Index Central Economic Advisory Service


12, 41, 120

Central Statistical Services (CSS)

Chang, H-J.


Consumer goods industries 17

Control, private 156 Corporate capital 126, 145

Chemicals 10 Chile 159 China 36 Choksi, A.M. 78 Ciskei 57 see also Homelands Civics 24 see also South African National Civic

power 130 taxes 36 Corporatism 4, 49, 96, 156, 162-163,

165, 169 see also Incomes policies social 159 Corruption 19, 157 COSATU (Congress of South African

Organisation Civil servants 11 see also Bureaucracy Civil society 47, 49, 50 Clarida, R. 206 Cobb-Douglas production function Cold war 41 Cole, T. 29 Collective bargaining 166 centralized 159, 164-165


Consumer interests 80-82 Consumption 196, 208


Trade Unions) 204

Columbus 136-137 Common Market for Eastern and Southern Africa (COMESA) | 55, 58, 60-62, 65-66 Commercial rand 36 Commodity markets 83 Communications 158 Communications sector 14

Communism see South African Communist


Party (SACP)

Community-building organizations (CBOs) 18-19 Comparative advantage 128 Competition Board 134, 141-142 Competition policy 21, 37, 142, 146, 161 background to White Paper 142

Competitiveness 164, 166 Compromise politics 11 Confidence x see also Business confidence Conglomerates 37, 82, 96, 101, 120, 128,

2, 23, 24, 41, 44,

47, 48, 71, 78-80, 82-83, 182, 185, 224, 231 see also Trade unions; Organized labour

Cost of capital


Credit rating 36 Credits, short term


CREFSA (Centre for Research into Economics and Finance in South Africa) 35, 40, 116 Criminal activity 6, 36, 175, 224 Cross-border Initiative Plan 62 Crowding in

13, 33, 98, 145, 176, 181,

210, 226 Crowding out

98, 128, 201, 204,

208-210, 225 Centre for the Study of the South African Economy and International Finance

(CSSAEIF) Current account

34 18, 38, 91-92, 97, 215

see also Balance of payments; Exports; External account; Imports;

Manufacturing, exports deficit 18, 40, 116, 214 liberalization surplus 14


Customs Union Treaty Cyclical factors 14

56-57, 59

142, 144 Consolidated Revenue Fund of South Africa 57

see also South African Development Community (SADC) Constitution see Democracy

Dagus, M. 1x—xl, xii da Silva, L.P. 33, 199, 209, 212, 226 Davies, R. 36, 59, 64 de Klerk, F.W. 21), 41



de Klerk regime


de Kock Commission De Melo, J. 64, 65

Debt crisis, global Debt

3, 103—106, 110, 117


Developmental state

levels 16 standstill 29, 30 crisis (1985)

109, 112


157, 167

Defence spending 24 Del Monte _ 117 see also Anglo-American Corporation Democracy

17, 224, 229, 231-233


Growth, state led Dexter, P. 12, 23, 48

Direct controls 180 Director General for Trade and Industry 135 see also Department of Trade and Industry Disinvestment

29, 34

Distnbution activity Domestic

Democratic alliance 19

banking sector

elections 35, 40, 92 government x, 1, 16, 127 movement 49 society 1x

transformation, economy Denel

96, 155-156,

see also Public sector, development role;

see also National debt; Foreign debt trap

Development Bank of South Africa (DBSA) 5, 196 structuralist computable general equilibrium model 197, 200-201, 203-208, 209-213, 217



see also armaments Corporation (ARMSCOR); Manufacturing,



borrowing 217 financial surpluses savings 16, 38, 43 Driffill, J. 163, 165 Dual economy Dutch disease


111 72, 102

armaments; Parastatals

Department of Commerce and Consumer Affairs 135 Department of Environmental Planning and Energy


Department of Finance 62 Department of Industries 135 Department of Mineral and Energy Affairs 135, 139 Department of Post and Telecommunications 134 134 Department of Public Enterprises Department of Trade and Industry (DTI) 59, 62, 80, 82, 134, 138-139, 141, 183 see also Director General for Trade and Industry Deregulation 36, 107, 120, 225

see also Liberalization Desai, A. 45 Devaluation 30, 71, 217

see also Exchange rate Development

2, 6, 15, 37, 43, 224, 230

Developing countries


East Asian countries 41, 48, 95—96, see also Asian countries; FDI, Asia

Eastern Europe


45, 48

Eatwell, J. 163 Economic development 36 growth x, 3, 5, 12, 15, 16, 20, 22, 31, 36, 38, 41, 93-95, 110, 121, 144, 176, 186, 207, 209, 217, 226, 228 distribution of 5 policies 30 programmes 98 theory 93-94 liberalization 178 performance 17 policy x-—x1, 2, 4, 12, 15, 16, 19, 21, 23, 30-31, 132, 140, 229, 231-232 systems xi transition 11, 12, 6 uncertainty 35 variables, real 24 Economic Research on South Africa (EROSA) 41


Index Economic Trends

real appreciation

30, 46

Economic Trends/Industrial Strategy Product 44 Economies of scale



Economist 182 Intelligence Unit (EIU)


policy 11, 36, 117, 132 see also Foreign exchange policy Expectations 218 Exports 18, 30, 131, 180, 213, 216


Economies of scope


18, 20-22, 45

see also Balance of payments; Current

Education x, 3, 15, 91-95, 133, 155, 158, 162, 226 see also Basic needs

account; Manufacturing, exports

Effective demand

5, 97

see also Aggregate demand; Keynesian aggregate demand Electricity Control Board 135 Electricity Supply Commission (ESCOM) | 18, 96, 126, 131, 135, 141, 143, 145-146

capabilities 216 capacity 186 expansion 226


mcentives promotion


Emerging markets


account; Current account

34, 35 125,

127, 144, 164, 169, 212, 215, 217 creation

127, 146, 216


Endogenous growth theory Energy 131 policy


3, 125, 142

Energy Policy Committee England see United Kingdom Environmental balances 43

134-135 (UK)

Export Processing Zones (EPZ) see also Trade policy Equity capital 34 Erwin, A. 23, 227, 230


European Union (EV) 62, 63, 67 Eurobond issue 35 Excess capacity 16 Exchange controls 30, 32, 36, 105, 114 see also Capital account, controls Exchange rates 101, 103-105, 108, 116,

120, 205, 207, 214 forward market



32, 72, 98, 111, 114

see also Devaluation

98 14

habilities 97 relations, liberalizing


see also GATT sector 196-197

distribution 5 growth 5, 191, 226 opportunities 3 policies 4, 141 record


see also Balance of Payments; Capital deficit

x, 3, 17, 24, 120-121,

72-73 71

32, 71, 212, 214, 226

External account

see also Parastatals Electrification 13, 15, 18, 142, 155 see also Basic needs Employment


Fair, R.C. 207 Falkov, L. 166 Fallon, P. 33, 181, 199, 209, 212, 226 Finance 13 Finance, minister, see Minister of Finance Financial indicators 16 policy 4

see also Monetary policy regulation 225 relations, liberalized 30 sector 1, 21, 46, 131, 196-197 system 4, 145 variables 24 Financial Mail 41, 136, 139, 141, 143 Financial Times 18, 22 Fine, B. 3-4, 12-13, 18, 21, 24, 33, 125-153, 156, 176-177, 185 Fine, J. 65, 67 Finger, M. 33, 75 Finrand (financial rand) 23, 32, 36, 38, 40, 72, 115-116



Fiscal conservatism 20 deficit 37, 59, 160, 209, 215, 226

see also Budget deficit; Public sector deficit discipline 37, 44 instruments 32 policy xi, 22, 114, 119, 168, 217

see also Budget; Taxation policy Flaschel, P.


Flexible specialization (flec-spec) 127-128 Food security issues_ 1, 2] Foreign, ownership, strategic areas 43 Foreign borrowing 211, 214 Foreign capital 1, 16, 18, 29-31, 34—35, 38, 41, 43-44, 47-48, 99, 217 Foreign debt 16, 91, 168, 204 see also National debt crisis (1985) 14, 38 see also Debt standstill level 16 maturity structure 40 repayments 16 to GDP ratio 15 total 14-15 Foreign Direct Investment (FDI) 10, 27, 29, 30, 34, 36, 38, 49, 115, 117, 219 Asia 10 see also Asian countries; East Asian countries

developing countries Latin America



Foreign exchange constraint 157 policy 3, 103

see also Exchange rate policy reserves 40, 102, 114-115 Foreign investment 214 Foreign investors 36, 44, 224

Foreign policy


Foreign reserves 205, 208, 178 Formal economy 13 employment 31 Fourie, F. 142 France 102 Franzsen, D.G. 102 Free market 3, 165, 169, 225 Free trade 160

41, 118, 139,

Freedom Charter (1955)

228 Friedman, M.

104, 113

Full capacity


Full employment

Fuulity thesis

166, 227


Garner, J. 30, 34, 35 GDP (Gross Domestic Product)

budget deficit ratio to composition x growth rate



17, 199, 215

ratio of foreign debt to 38 real, per capita 17 Gelb, S. 41, 196-197 GENCOR (General Corporation)


see also Billiton

General Agreement on Trade and Tariffs (GATT) 9, 20, 24, 62, 63, 72-74, 76-79, 83, 136, 138, 216-217 see also External relations, liberalizing; Tariffs, liberalization; Trade policy reform General Export Incentive Scheme (GEIS) 33, 73, 77, 135-136, 138 Geo-political interests 28 Gertler, M.


Gibson, B. 14, 196-197, 200-201, 204, 212 Ginsburg, D. 231-232, 229 Gisselquist, D. 28 Gleason, D. 136 Global economy 9

Global financial insttutions 28 Globalization 229 Gold 103 and foreign exchange reserves pool



28, 72, 102-103

Goldin, I. 77 Government xi, 5

debt, interest yields debt 91, 111, 208 to GDP ratio 14 deficit 216 pension fund 109 revenues







Index Government expenditure



158, 208-209 see also State spending


33, 200

current 33 recurrent 33

composition consumption

30 226

defence 49 Government of National Unity (GNU) 1x, 12, 48, 49, 64, 66, 120, 135, 230 see also African National Congress (ANC); National Party (NP);

High Commission Territories

56, 57

Hirschman, A. 177-178, 183—184, 186—187 Homelands (formerly independent) 12, 81, 157, 167, 227 see also Bantustans; Bophutatswana; Ciskei; Transkei; Venda Hood, C. 227, 229 Horridge, J.M. 214 Horwood, O. 41 see also Minister of Finance Households’ income 196

Housing, minister


Liberation struggle; Multi-party

Housing 3, 15, 91-94, 155, 157 see also Basic needs Human capital 94-95, 188, 200



White Paper

44, 45

Government paper 102-103 coupon rates 109-110, 112-113 Granger causality tests 188, 193-194 Grassroots communities 6, 224 Green, D. 130

Griffin, K.


Gross domestic expenditure (GDE) 13 Gross domestic fixed investment (GDFI)

13 Grossman, H.



Growth, Employment and Redistribution policy framework (GEAR) _ 5, 99, 117, 158-161, 175, 218, 224 Growth rate xX state led 230 see also Developmental state

Gypsum Industries Limited


Impact Research Group


see also Monash University; Australia

Imperfect competition 179 Imports 18, 38, 178, 180, 211, 213 see also Balance of payments; Current account agricultural 18 see also Agriculture liberalization propensity to


2, 33, 71-82, 84 160


quantitative restrictions substitution 71, 82 surcharges 73


Import substituting industrialization (SD 130, 132 Income distribution

5, 14, 120, 156, 180,

216-217 Habib, A. 45, 229, 232 Haggard, S. 16 Harare conference 41 Harris, L. 3, 11, 12, 91-100, 184, 186 Health 226 Health services x, x! Healthcare 3, 15, 91-95 see also Basic needs Helleiner, G.K. 73 Helpman, A. 94 Heterodox literature 5, 189

Income inequality Incomes, real 24

120, 182,

15, 16, 229

Incomes policies 169 see also Corporatism Indian Ocean Rim 62 Industrial development 59, 78 Industrial Development Corporation (IDC) 5, 73, 75-76, 78, 80, 85, 132, 134, 136-139, 188-189, 196, 211 see also Mega projects IDC computable general equilibrium model (CGE) 197-198, 202, 204, 211, 213-214, 216




Industrial employment finance 145 liberalization policy


financial institutions


x, 1, 3-4, 32, 79, 83, 125,

127-128, 132-133, 136-137, 139-142, 144, 146, 160-162, 168, 231 see also Regional industrial strategy sector 200, 217 Strategy 157 unrest 13, 14



Industrialized countries 23 Inflation 14, 16, 18, 20, 22—23, 30, 32, 84, 105-106, 110, 112-113, 115, 118, 120, 157, 160, 163, 166, 169, 180, 201, 205-206, 217-218, 227 Infrastructural development 33 Infrastructural programme 15, 186 Infrastructure 4, 145 investment 65, 93-94, 97, 120, 133 physical 1, 6, 15—16, 18, 49, 93, 96,

117, 157-158, 224 see also Physical capital social 1, 6, 15, 16, 18, 93, 96, 117, 157, 224 Innovation, industrial support programmes

Input prices

49, 50, 223, 228 regulation 45 financial policy 1, 2 trade relations 17 International Development Agency (IDA) 29 International Labour Organisation (ILO) 224-225






US executive director US support 49

Investment 6, 15-16, 32, 107, 114, 120, 131, 137-138, 141, 161, 164, 169, 180-181, 199-200, 216, 224-225 portfolio


29, 30, 34, 36

29, 127






13, 145, 207

firms 179, 201 fixed, growth of 17 foreign, legislation 44, 45 21, 23, 37, 43, 44, 226


Interest rates 14, 22, 24, 101-102, 105, 109, 111, 114-115, 119, 160-161, 202, 204-205, 207-209, 224-225 bonds 206 policy 11, 112, 117, 132, 168 see also Monetary policy

gross domestic



Interim constitution

11, 12

Intermediate goods capacity 131

4, 75


Intervention, spot, forward exchange rate markets 106




2, 20, 27-28, 30-31, 37, 40-41, 43-44, 47, 49, 72, 99, 102, 114, 116, 119, 181 SA — special relationship 28

Institutional structure 12, 125, 144, 155 Interest groups 1x, 227, 231


41, 43, 45, 47, 48,

International Monetary Fund

Industrial Strategy Project (ISP) 3, 46, 77, 79, 81-83, 85, 125-128, 130 Industrialization



government incentives

199, 201


19, 22, 45

indirect 27 industrial 4, 133, 145 local 226 long term 116, 145 parastatals 199 private 32-34, 66, 98-99,

158, 176,

198-199, 210, 215, 226 public sector

33, 38, 133, 158, 215,

217, 225-226

International capital markets

6, 35


9, 126-128

economic relations

1, 27-29

Investor confidence 181 see also Business confidence; Investor

flight; Market confidence; Capital flight



Investor flight 182 see also Investor confidence; Capital flight Inward industrialization 184 Iron and Steel Corporation (SCOR) 126, 131, 136, 146 see also Parastatals IS-LM model 199

Japan 37, 95-96, 163 Export Import Bank of MITI 161 Job creation


policies 4, 21 militancy 36 organizations 30


see also Trade unions



Johannesburg Stock Exchange (JSE) 36, 156 see also Stock market


128 23

Kahn, B.

34, 35

Kaldor, N. 188 Kane-Berman, J.

relations 78 see also Labour Relations Bill standards 43, 65, 128 unrest 18 see also Strikes


Labour Relations Bill 20, 232 see also Labour relations; NEDLAC Lachmann, D. 30 Lall, S. 10

Land and Agricultural Policy Centre 178

(LAPC) Study 81 Land Bank 109 Land reform 33 Latin American countries Lawrence, R. 10 Leape, J. 30, 34, 35

Kaplan, D. 77-78, 81-82 Kaplinsky, R. 77-78, 80-83, 176 Kapstein, E. 229 Kaufman, R.R. 16 Keet, D. 59, 64 Kentridge, M. 42

Learning by doing


Keynesian aggregate demand


see also Aggregate demand; Effective demand concerns 227

dynamic adjustment processes framework 218, 228 intervention 33


theory 182, 188, 208, 211 Keys, Derek 41

see also Minister of Finance Knowledge transfer 44 Koeberg 146 Kornai, J. xi Krugman, P.


Labour Market Commission

Jones, G. Jordan, P.



costs 126, 158 market 17, 169, 196, 197 flexibility 117

77-78, 81-82

Keynes, J.M.




20, 22, 226

Job insecurity Joffe, A.

Kumar, U. 59 Kwa-Zulu Natal


16, 22, 28, 176


Leistner, E. 57, 58, 60, 64, 65 Leith, J.C. 59 Lesotho 57, 59 see also Basutoland Levy, B. 78 Lewis, D. 142 Lewis, R. 77-78, 81-82 Liberalization 225

see also Deregulation Liberation struggle 56 see also African National Congress

(ANC) Liberty Life 35 Lichtenberg, R.R. 212 Leibenberg, C. 22 see also Minister of Finance

10, 84-85

Local government structures




Lodge, T. 228 Lombard, J. 3, 108, 117-118 Lome Convention 62, 63, 67 Lundahl, M. 57, 59

employment growth exports

28, 64, 71

see also Current account; Exports intermediary goods 156 motor industry 20, 73 output

Maasdorp, G.

Maastricht Treaty Macroeconomic constraints



3, 6, 12, 19, 91, 93

debate 176 forecasting 195-196 Macroeconomic models 195 see also Modelling exercises behavioural functions 195 forecasting accuracy 195, 218 statistical testing 195 structural properties 195 Macroeconomic policy

5, 23-24, 28, 32,

36, 37, 195, 224—225, 230 analysis 195-196 Macroeconomic populism 176, 178 Macroeconomic Research Group (MERG) x, 4, 13-16, 21, 31, 38, 41, 44, 46, 48, 50, 61-62, 83, 119-121, 130, 156, 176, 196, 226-230 see also African National Congress (ANC), economic policy; African National Congress (ANC), macroeconomic strategy; National

Institute For Economic Policy

(NIEP) 103 Mainard, S. Malawi 57 Malaysia 48, 98 Mandela, N. 41-42, 231 Manuel, T.


see also Minister of Finance Manufacturing 10, 13, 74, 82, 93, 119, 127, 131, 166, 175, 188, 216 armaments

17, 81

output growth



see also Armaments Corporation (ARMSCOR); Denel; Parastatals capacity 105 capital goods 156 clothing 133 see also Textile industry; Manufactures, textiles




production 44 subsidies 140 textiles 62 see also Manufacturing, clothing Margo Commission (1987) 59 Market confidence 97-99 see also Investor confidence; Business

confidence Market failure 157 Marketing activity 34 Matona, T.




Mayer, M. 56, 57, 58, 59 Mbowen1, T. 20

McCarthy, C.L.


McComblie, J.S.L.


McDonnell Douglas 140 McGrath, M. 14 106-107 McKinnon, R.I. Media

2, 48

see also Business press Mega projects 136, 146 see also Industrial Development Corporation (IDC) Metallurgy 10 Metropolitan structures Mexican crisis 36, 115


Michaely, M. 78 Michie, J. 1, 4, 9-26, 155-171, 223-234 Microeconomic constraints 93 Middle income countries 15 Milgate, M. 163 Miller, M. 128 Mills, G. 60, 61 Minerals-Energy-Complex (MEC)

3, 125,

131, 133-134, 138, 144, 155-156 Mining 10, 13, 49, 131 Minister of Finance

11, 108

Minister of Trade and Industry 227 Ministry of Communications 134 Ministry of Defence 140



Ministry of Employment


Ministry of Finance 48, 107, 120, 160 see also Horwood, O.; Keys, D.; Liebenberg, C.; Manuel, T.

Ministry of Mineral and Energy Affairs 11, 48, 134 Ministry of Public Enterprises 134 Ministry of Transport 134 Minorco 139 see also Anglo-American Corporation Modelling exercises 5 see also Macroeconomic models Moll, T. 176-178, 180—181, 185—186, 190 Molla, J.


Monash University 197 see also Impact Research Group; Australia Monetarist concerns theory



178, 227


Monetary adjustment


Monetary conservatism Monetary policy


x1, 3, 11, 14, 16, 22, 32,

37, 44, 101-104, 106, 108, 110, 111, 113-114, 117-120, 168 see also Interest rate policy; Financial

policy Anglo-American model German model 106 Japanese model Monetary targeting



32, 104, 106, 111,

114 Money aggregates Money

104—105, 111

demand 206 interest elasticity 225 supply 104, 121, 206 velocity of circulation 105 Money markets 98-99, 110 Monitor Group 3, 125-126, 129-130 see also Porter, M. Monopolies 22

Monopoly power 82 Monopoly pricing 141 Moral suasion 101 136




Multi-party powersharing 11 see also Government of National Unity

(GNU) Multiplier effects


Namibia 57, 59 Natal Mercury 23, 34 National debt 16, 109, 116, 120 see also Debt standstll; Foreign debt

National Economic Development and Labour Council (NEDLAC) 4, 47, 79, 83—84, 162, 165, 169, 231-232 see also Labour Relations Bill Development Chamber 232 Monetary Chamber 232 (NEF)


71, 83, 142, 232 National Institute for Economic Policy (NIEP) x, 5, 196 see also Macroeconomic Research Group (MERG) structuralist computable general equilibrium (CGE) model 196, 199-200, 202, 204—207, 209-214, 216 National Institute of Economic and Industry Research (NIER) 196 see also Australia National Party (NP)


quantitative controls

Moritz, L.


National Economic Forum





see also Government of National Unity (GNU); Political organizations, opposition Nationalization

42, 178

Nattrass, N. 38, 82-83, 176-177, 181-182, 185, 187, 190 Negotiations

Neo-classical supply side theory

1x, 9, 11, 30, 223


178, 188

Walrasian general equilibrium theory


Neo-classicism, global 118 Neo-Keynesian structuralist theory Neo-liberal economic philosophy

225, 227-228


2, 33, 36, 47-48,



Panel and Task Group for the Textile and Clothing Industry 136 Papageorgiou, D. 78 Parastatal 132-133

Neo-liberal (continued)

orthodoxy policy

49-50, 227

2, 16, 23, 45, 82

Neo-Marxist critique Net job creation


see also Denel; ESKOM; Manufacturing, armaments; ISCOR; TRANSNET Parmenter, B.R. 214 Pearson, K.R. 214


New classical theory 178, 227 New-Keynesian theory 179 Newly industrialized countries (NICs) 126, 129 see also East Asian countries Newman,


Petersson, L.

Osborne, E.


Pillay, D.

Ovenden, K.

57, 59



Pillay, V. 11, 23, 101-123, 224—225 Policy analysis 5 Political economy instability

1x, xl, 1, 118 24, 28, 29

liberalization 178 negotiations 11, 16, 34 organizations, opposition 30 see also Nationalist Party (NP) parties see African National Congress (ANC); National Party (NP); Pan

African Congress (PAC) uncertainty

34, 35

violence 36 Pollard, PM. 82 Population growth rates

x 110, 119



Ownership distribution 107 private 156 pyramid forms 131

1, 9-26, 27-53, 182, Padayachee, V. 223-234 Pan African Congress 48 Panagariya, A. 64, 65


Porter, M. 128 see also Monitor Group

Post-Fordism 127 Post-Keynesian theory



Physical capital 200, 216 see also Infrastructure, physical

Options 34 Organisation for Economic Co-operation and Development (OECD) 93, 103, 199, 229 Organized labour 4 see also COSATU Orthodox policy prescriptions 9, 16, 20, 159, 227 Orthodox theory 191



Perfect competition 198 Performance requirements


growth model 21 Orthodoxy economic 1, 6, 162


Pereira de Silva, L.A.


Nkhulu, M. 69, 64 Nominal variables 24 Non-governmental organizations (NGOs) 18 Nordic countries 165 see also Sweden Normative Economic Model (NEM) 120, 155, 158 Norton, T.

Peoples’ bank

1x, 15—16,

179, 188, 191

106, 181

alleviation 34 distribution 31 profile 30 Preferential Trade Agreement for Eastern and Southern Africa (PTA)

58, 60, 61, 62, 66 President’s feeding schemes


Pretorius, W. 142 Prices, distortion 126 Prices, flexible 31, 179 Primary sector 13

non agricultural production





Private corporate capital

127, 144

Private financial sector




Private international banks Private investment 31 Private savings 31, 92, 97


141, 157, 185-187, 190, 197, 216, 218, 223, 226—228, 230-231 see also African National Congress (ANC), economic policies base document

Private sector — employment


Privatization x, l, 6, 19, 21, 22, 46, 120, 126, 130, 178, 224, 232 Production sector 197 Productivity 166, 169 growth 5, 18, 164

44, 47, 48, 50, 230

Kaleckian features 46 Keynesian features 46 liaison mechanism 19 objectives


office 19 White Paper 5, 6, 43, 223 Reactionary rhetoric 177, 186-187

Progressive rhetoric 177, 186—187 Property market 10 Property rights x


Protectionist measures Public administration

119, 177-178, 180, 182-183, 186 Regional Economic Forums 232 Regional industrial strategy 62 see also Industrial policy Regional integration 1-2, 21, 63

Public debt

9 167



106, 108

Public policy x, x debate ix Public procurement 161 Public sector 17 106, borrowing requirement (PSBR) 201, 217 budget 92 deficit 98 see also Budget deficit; Fiscal deficit developmental role 12 see also Developmental state employment 213 initiatives 169 regulatory role 12 saving 92 transformation 11 Public utilities 4 Public—private ventures 161

Quantitative restrictions Quotas



Racist practices 6 see also Apartheid RDP (Reconstruction and Development Programme)

3, 5, 16, 21-24, 33,

37, 43-44, 50, 56, 61-62, 64, 94, 112, 125, 131-132, 135, 137-138,

2, 11-12

Reddaway, W.B.




5, 14, 31, 37, 93, 95, 98,

55, 56, 67

Southern African Parliament/ Secretariat 67 55, 56 Regional trade policies Remuneration, real 17 see also Wages, real

Rentier interests Reparation x


Research and development

95, 161, 162,

212 Restrictions legal


political 35 Reynders Commission Rhetorical devices Rice, P. 91-92


175, 177, 187

Richards Bay 137 Risk premia 98 Rix, S. 225 Road building programme Roberts, R. Robson, P.

130 65

Rodrik, D.


Roemer, J.


Rogerson, C.


Romer, P. 94 Rostow, W.W. Rowthorn, R.

129 163

Rural development

1, 21




Rustomjee, Z. 4, 13, 130-131, Russia see Soviet Union

Sachs, J.



SALDRU 202, 212 Samancor 35 Sanctions 38, 41, 49, 58, 82, 105, 131, 140-141 Sappi 137, 139 SASOL 126, 131, 135, 137, 141, 146 Savings 107, 196 gross domestic 17 rate




Sawyer, M.

179, 181

School of Oriental and African Studies (SOAS), University of London 41 Schools

93, 96

SDR, special drawing rights 28 Secondary sector 13, 17 Sectoral distribution 5 Self-fulfilling properties 182 Semmler W. 202 Sender, J. 176-177, Sentrachem Limited Seventer, D. 14



Shaw, E.S.


Short term credits Sigcau, S. 23 Singh, A. 10 Slovo, J.

185 135

South African Communist Party (SACP) 23, 47, 48, 231 South African Customs Union (SACU) 55-63, 66-77 see also Consolidated Revenue Fund of South Africa secret memorandum 58

South African Development Co-ordination Conference (SADCC) 57 South African Development Community (SADC) 55, 57, 60-61, 64, 66-68 central secretariat 58 South African Foundation (SAF) 4, 113, 158-159, 175, 223-244 South African Labour Movement (SALM) 224 South African National Civics Organisation (SANCO) 47 see also Civics

South African Reserve Bank (SARB)


5, 11, 13, 14, 17, 18, 22, 23, 31, 40, 46, 59, 101-103, 106—112, 114-117, 120-121, 166, 168, 202, 206—208

see also Central bank, independence



Small and medium sized enterprises (SMEs) 126, 128, 137, 144, 146, 160, 215-216 see also Business, medium sized; Business, small

policies 162 Small Business Development Agency (SBDA) 143 Small Business Development Corporation (SBDC) 143 Small, micro and medium enterprises (SMMEs)_ 131 Smithin, J. 23, 24 Social Accounting Matnx

199-200 Social instability

Social spending x, 31, 33 Socialism xi, 178, 184 Solow, R. 94 South African business 224, 232 see also Business



discount rate 205 Governor 48, 107, 113, 118 open market operations 101, 106, 111-112

South African Trade Organisation (SAFTO) 139 South Korea _ 10, 48, 95, 98 Southern African Social Charter Southscan 18, 19 Soviet Union 45, 48, 83, 229

Speculative bubble


Srinivasan, T.N. 65 Stabilization 1 Stals, C. 110 Standard of living 3 State institutions 12 State ownership 225 State revenues 66, 178

see also Taxation policy




State spending 178 see also Government expenditure

see also Manufacturing, clothing The Star 23

Stock market see also JSE

Thirlwall, A.P.


Thompson, C.

30 128, 130

10, 31

Stone—Geary utility function Stoneman, C.


18, 24, 30, 33

Strategic interests Strategic planning



bilateral agreements free





1, 2, 6, 20, 32, 46, 56,

65, 71-74, 77, 224

82-83, 93, 119


2, 20, 22, 23, 32, 59, 63, 71, 74, 77, 79, 135, 160, 216

common, external 58 liberalization 62-63, 66

see also Trade policy; GATT protection 225



non price factors 9 policy 2, 79-80, 82-84, 133, 157, 160, 162, 217 see also Tariffs; Liberalization; Export Processing Zones (EPZ) reform 23, 71, 74 see also GATT primary goods 9 regional, free, protocol Trade Monitor 63


Trade unions xi, 4, 6, 21, 24, 37, 50, 78, 84, 104, 128, 166, 223-224 see also COSATU;


organizations; Trade Union Centre

(TUC); Wage bargaining Trade Union Centre (TUC)


reductions 63, 78, 80 Tarp, F. 31 Taxation policy 24, 178, 208-209 see also State revenues; Fiscal policy Taylor, J.



Taiwan 10, 137 Tanzania 57



liberal system of

Swaziland 57, 59 Sweden 163, 166 see also Nordic countries Swiss banks 34 Syndicated bank loans 29, 30, 34



Latin America

Sunday Times 21, 41 Supply side 178 Supranational structures



integration 57 intra-country 60 intra-industry 9


Subasat, T. 65, 66 Subsidies 208 Sunday Independent 36



Total factor productivity Trade 13

28 130

Strikes 224 see also Labour unrest Structural adjustment 23 programme 63, 73, 117, 119, 181 Structuralist—-econometric model 196

Student protests

Thurow, L. Tjonneland, E.


Taylor, L. 196-197 Technology 10 policy 162 spillovers 160 Telecommunication 133 Tertiary sector 13, 17 Textile industry 20, 73


see also Trade unions



Transition to democracy 9 Transitional Executive Council


32, 35

sub council, Finance 35 Transkei 57 see also Homelands TRANSNET (formerly SATS) see also Parastatals

Transport Treasury

14, 29, 158 108, 141

126, 131



Trickle down effect Tsikata, Y. 33



minimum, legislation 178 real 15, 32, 80 see also Remuneration, real

agricultural sector 14 average rate of growth (African

21, 128

Uncertainty, electoral 13 UNCTAD 107 Unemployment x, 15, 17, 21, 66, 106, 115, 119, 155, 164, 169, 188, 199, 217, 229 United Kingdom (UK) 102, 140, 145, 159, 165-166 United States of America (US) 102-103,

140, 165 Council on Foreign Relations Treasury 102 Federal Reserve Bank 168 Federal Reserve Board 206


Secretary of the Treasury 28 Senate and House Banking Committees 28 Universities 161 Urquhart, R. 33-34, 45-46 Uruguay Round 74-76, 138, 217 Utzon, J. 92

workers) 13 Washington consensus

Water, provision

15, 18

see also Basic needs Wealth distribution 107, 120 Weeks, J. 65, 66, 225 Welfare 226 state 132 Western diplomatic representatives

Whally, J.

White, G. 118 Whiteford, A. 14 Whiteside, A. 59 Wits Economics Initiative Conference x Wittenberg, M. 4, 5, 175-194 Wooton, I. 65 Worker protests 49 World Bank 2-3, 5, 13, 22—23, 27, 29-30, 32-33, 37, 43-47, 49, 50, 59, 63-64, 78, 95-96, 114, 119, 125-128, 181, 196, 226

van der Mensbrugghe


Van Nieuwkerk, A. 64 van Seventer, D. 197, 200-201, 204, 212 Venda 57 see also Homelands Verdoorn effect 5, 188-189

Vertical integration Virtuous cycle


macroeconometric model 202-205, 207-215

65, 66

project loans



sectoral studies


World Development Report 22 World Trade Organisation (WTO) 62, 64

127-129, 144

5, 180, 189 Yanagihara, T. 95 Yeo, S. 65, 67


4, 128, 180

employment correlation agreements


bargaining 159, 162 see also Trade unions decentralized 4

2, 48


financing protocol Vaitsos, C.V.

2, 84—85, 92

164 Zambia 57 Zarenda, H. 2, 13-14, 55-69 Zimbabwe 57, 62