Over the weekend, I read Jacques Pauw’s “The President’s Keepers“. I’m sure that many of my readers have received free pdf versions on Whatsapp. Fortunately, I’ve been able to ignore all the accusatory tweets about the wickedness of reading the free version*. I have now paid for the book twice: I bought the ebook after Exclusive Books went dry on me; but while I was negotiating my way through the Adobe DRM app, my sister managed to find me a physical copy on her way through an airport. That aside, reading the book, you may be left with the impression that the root of all our economic evils is the Zuma presidency. And even if there is truth to that, South Africa’s economy and its problems require more context.
*I’m not sure that it makes you “as bad” as the people in the book. But many seem to think so.

In particular, we need to acknowledge South Africa’s history of unemployment, and what that has meant.

South Africa’s Economy: A Crisis of Unemployment

Here is an extract from a 2006 paper by Harvard economist Dani Rodrick, titled “Understanding South Africa’s Economic Puzzles“:

The transformation that South Africa has undergone since its democratic transition in 1994 is nothing short of remarkable. Prior to 1994, the South African economy and polity were dominated by the white minority, and even though the Apartheid regime had begun to unravel in the 1980s, the majority blacks remained deprived of basic political and economic freedoms. Given the depth of the racial and income divides that prevailed, it would not have been unreasonable to predict a cycle of redistribution and macroeconomic populism following democratization that would wreak havoc with the economy and turn the country into a sham democracy.

Instead, the democratically elected governments led by the African National Congress (ANC) have managed to create a stable, peaceful, and racially balanced political regime with an exemplary record of civil liberties and political freedoms. Economic policy has been conducted in an equally exemplary manner, with South Africa turning itself into one of the emerging markets with the lowest risk spreads. While South Africa has instituted some innovative (and expensive) social transfer programs to address long-standing disparities, it has done so in the context of cautious fiscal and monetary policies which have kept inflation and public debt at low levels. There were no nationalizations or large-scale asset redistributions. Moreover, the economy was opened to international trade and capital flows.

If the world were fair, political restraint and economic rectitude of this magnitude would have produced a booming South African economy operating at or near full employment. Unfortunately, it has not turned out that way.

To reiterate: that was written in 2006, long before President Zuma came into power. And even then, despite all the supposedly ‘good’ economic policies that South Africa had implemented, there was no “booming South African economy”. Instead, there was low growth and rising unemployment:

The most worrying aspect of this disappointing economic performance is unemployment. South Africa’s unemployment rate today stands at 26 percent according to the narrower definition of who is unemployed, and at 40 percent if one includes discouraged workers (Banerjee et al., 2006). This is one of the highest rates of unemployment anywhere in the world. Furthermore, unemployment appears to have increased particularly rapidly since the democratic transition (from a “low” of 13 percent in 1993). (The lack of labor force surveys makes it difficult to know what the comparable unemployment rates were in the 1980s.) As would be expected, unemployment is heavily concentrated among the young, unskilled, and the black population. This poor record on employment represents not only an economic tragedy, it poses a significant threat to the stability and eventual health of the South African democracy.

Now you might think that this is a story of trade unionism and high wages. And it is true that South Africa’s wages are high relative to the rest of the world – although the ‘real’ value of those wages did not change significantly between 1994 and 2006 (instead, they were ‘preserved’ by the trade unions at those previously high levels). But Rodrick concluded that the problem was more structural than that:

The deeper cause of South African unemployment lies elsewhere, and it is intimately connected to the inability of the South African to generate much growth momentum in the past decade. High unemployment and low growth are both ultimately the result of the shrinkage of the non-mineral tradable sector since the early 1990s. The weakness in particular of export-oriented manufacturing has deprived South Africa from growth opportunities that other countries have been able to avail themselves of. The point is perhaps best made by comparing South Africa to a high-growth economy such as Malaysia, a country with which South Africa shared many common features in the 1980s. […] the main difference between these two countries is that Malaysia was able to pull an increasing share of its workforce into manufacturing—the sector with the highest labor productivity in the economy—while in South Africa manufacturing lost ground to the tertiary sector.

That is: the South African economy did not move toward expanding the manufacturing industries that would have absorbed the labour force. Rather, South Africa became more service-oriented.

Or to put it differently: South Africa was in the process of de-industrialisation, right at the time when it should have been doing the opposite.

The key points

Here is the short version of the narrative:

  1. During Apartheid-era sanctions, local manufacturing increased.
  2. When sanctions ended, those manufacturing industries went into decline.
  3. As a result, South Africa became increasingly dependent on its mining industries, as well as the service-based economy that has developed since 1994.
  4. This has, in turn, made for high unemployment.
  5. And any downward adjustment in real wages, which might have alleviated the unemployment problem, has been fiercely resisted.

Also, even if you don’t accept the argument, here is a mathematical fact: high unemployment cannot lead to greater income equality. It can only make it worse. And to address that, South Africa introduced social welfare programs to transfer income from the employed to the unemployed.

So here are the base economic realities:

  1. High unemployment amongst the already-disadvantaged;
  2. Low growth;
  3. Increasing inequality; and
  4. Welfare programs to address the social outcomes of points 1 through 3.

And there are two government imperatives that flow from that:

  1. For the long term, the SA government needed to promote the kind of growth that could alleviate unemployment and reduce income inequality; and
  2. In the short term, tax collection needed to be incredibly efficient at collecting revenues and passing them along through the social welfare grant system.

In short, the Revenue Authority is the key vulnerability in maintaining the short-term status quo for long enough to allow the long-term status quo to change (or be encouraged to change).

So how did we get to this point?

Well, speaking almost a decade after that paper was written:

  1. There has been no growth;
  2. The once-jewel-of-the-civil-service SARS has been gutted by a series of scandals; and
  3. According to Jacques Pauw, that second part was deliberate.

So that opening line in Rodrick’s paper – it might well turn out to be prophetic:

Given the depth of the racial and income divides that prevailed, it would not have been unreasonable to predict a cycle of redistribution and macroeconomic populism following democratization that would wreak havoc with the economy and turn the country into a sham democracy.

Rolling Alpha posts opinions on finance, economics, and sometimes things that are only loosely related. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha. Also, check out the RA podcast on iTunes: The Story of Money.