South Africa’s Potential

June 6, 2004 • Commentary
This article was published in the Washington Times, June 6, 2004.

South Africa today is economically freer than it was under apartheid, but its economic growth continues to be slow. To generate faster growth, the African National Congress must overcome its resentment of the free market. The ANC government must also get serious about protecting the life and property of South Africa’s citizens.

The Economic Freedom of the World Report, published by the Fraser Institute in Canada, saw South Africa move from 67th place in 1990 to 44th place in 2003. The fact members of different races now are allowed to interact and trade has substantially helped increase South Africa’s economic freedom. More South Africans today have access to clean water, electricity, housing, land and education. The budget deficit fell from 9.5 percent in 1993 to 3 percent in 2003 and public debt fell from 60 percent to 50 percent.

But rapid economic growth has, so far, proved elusive. In 1994, the government announced plans to generate an annual gross domestic product growth of 6 percent to lower existing unemployment and provide jobs for an expanding population. However, over the last 10 years, the country has averaged only 2.8 percent GDP growth yearly.

Average growth of 2.8 percent annually is an improvement on two decades before the ANC took over, when the economy was stagnating. But what does it mean in practice? According to the World Bank, the South African population grows by an annual 2.1 percent, which means South African income growth per capita is less than 1 percent per annum.

Unfortunately, such income growth is not enough to tackle South African poverty. That ought to concern all those who care not only for the plight of South Africa’s poor but also about future political stability in the country.

It is important to know rapid economic growth is possible. South Africa has the best infrastructure and banking system in Africa. It also has a stable and democratic government.

Moreover, history demonstrates poor countries can generate fast growth. For example, Botswana has averaged 7 percent GDP growth over the last 20 years. China’s growth of 8.2 percent doubles real incomes every nine years.

What, then, needs to be done to improve South African economic performance? At present, the ANC clearly is attracted to the West European social welfare system. Heavy regulation of the labor market, minimum wages and increasing welfare entitlements are characteristic of wealthy countries, but inappropriate for South Africa at this stage of economic development. As for the free market alternative, the ANC is yet to overcome its historical fears and reservations.

Many ANC members continue to associate the free market with the apartheid era. That is the result of skillful propaganda by the previous government, which tried to enhance its standing in the West by claiming it stood for capitalism and in opposition to communism.

Alas, the truth was different. South Africa’s economy under apartheid was heavily regulated. Moreover, the origins of apartheid are firmly rooted in socialist agitation.

In 1922, under a banner reading, “Workers of the World Unite For a White South Africa,” white miners took to the streets of Johannesburg to protest the increasing competition from black miners. White miners demanded job protectionism, or the color bar. The government of Gen. Jan Smuts used the army, artillery and even aerial bombardment to put down what came to be known as the Rand Rebellion. But, to prevent future white worker protests, the government instituted the color bar.

Now that black South Africans can compete in the market, the ANC government should recognize a vibrant and expanding private sector, far from being an enemy, provides poor people with the best and fastest way to increase their wealth.

Second, South Africa must address security for people and their property. The ANC must bring down the appallingly high crime rates. Greater investment in policing, however, is unlikely to bear fruit so long as police salaries are not performance‐​driven. The government should also begin to utilize the burgeoning private‐​security sector and encourage its growth. Using private security firms will introduce greater competition that may improve the performance of the state police. Outsourcing some activities to the private sector also is needed to fix South Africa’s creaking legal system.

Private sector arbitration, for example, could free resources needed to improve South Africa’s pitifully low prosecution and conviction rates for violent crimes.

The ANC also must ensure private property is secure and that South Africa is a safe place to invest. These are crucial in view of the onslaught on private property in Zimbabwe and Namibia.

Discussion of private property in South Africa is, of course, tied to the question of compensation of the population’s majority for the years of apartheid. Nobody really doubts black South Africans would have been wealthier and better educated were they not prohibited from becoming so by apartheid. The nature of the compensation, however, is a different question.

It is not clear, for example, how the expropriation and redistribution of resources by the state today corrects the expropriation and redistribution of resources by the state yesterday. As did the past losers in the redistributive process, the future losers are likely to become embittered and resentful.

From an economic point of view, nationalization of mineral and water rights, and the recent changes in the system of agricultural expropriations, may prove worrisome for the investment community. The interest of investors, domestic and international, resides, primarily, in securing their investments.

The injustices of history are not high on their agenda. And so we come to a conflict between the moral question of compensation for past wrongs and the practical question of improving the South African economy.

The efforts of the government so far have focused on redistributing the existing economic pie. For example, the government has adopted a charter to alter the mining industry’s ownership structure.

The measure’s stated goal is to “empower the previously disadvantaged groups” through hiring and ownership of mining companies’ stock.

Instead of the workers’ ability to do the required job, government quotas in hiring place the racial classification of each applicant at the center of the selection process. In other words, one of the mining companies’ most important business decisions — the hiring of workers — will depend upon non‐​business‐​related criteria.

The mining companies have also agreed to pay $10 billion over the next five years to buy and transfer mining shares to previously disadvantaged groups. That will drive down the profit margins in the industry, and the mining companies will be forced to cut their costs by hiring fewer employees than they normally would or by letting some of their employees go. As a result, unemployment may grow. The same applies to charters already in the making for other sectors of the economy.

In the future, the ANC should avoid uncertainties and tensions, inherent in redistribution. Instead of trying to redistribute the current economic pie by decree, the government should put forward policies that enable the economy to grow. If that happens, South Africa’s next decade will be even better than the last one.

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