Economics: South Africa's game of patience

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The Independent Online
THE success and durability of South Africa's embrace of multi-racial democracy this week depends on the patience with which the country's black majority is still prepared to wait for the prosperity denied it by 340 years of white rule.

Racial divisions in health, transport, education, employment and land ownership have opened a huge gulf between the wealth of the black and white communities, while economic mismanagement and international isolation have left everyone worse off than they were 20 years ago. Around 8 per cent of South Africans own about 90 per cent of the country's wealth, while the Development Bank of Southern Africa says 9 million people are 'completely destitute'.

The incoming coalition government - almost certainly dominated by the African National Congress, but also likely to include F W de Klerk's ruling National Party as a junior partner - will have to tackle these inequalities quickly if black South Africans are not to lose faith in their 'managed revolution'.

Nelson Mandela, the president-in-waiting, knows that this cannot be achieved overnight. Social reform can only be paid for if the economy performs better, and a better economic performance cannot be sustained without social reform. Mr Mandela will not have much time to square this circle and has warned his supporters not to expect too much too soon.

But expectations are still running high. Smartly dressed conmen across the country have made a fortune selling black families fake title deeds to houses in the white suburbs, saying that they will be handed over after the election. One white home-owner in Pietermaritzburg returned home recently to discover a black family working in her garden so that it would be tidy when they took possession on 28 April.

Free houses are not in the manifesto, but the ANC has campaigned on an ambitious programme to raise living standards. It plans to create 2.5 million jobs in the next decade through public works programmes, to build a million new homes, to provide electricity for 2.5 million families and to boost education, health and training services.

Land reform will also be high on the ANC's agenda, including plans to redistribute agricultural and residential land from whites to blacks. This is not simply an act of political revenge, but promises important economic benefits.

More than 85 per cent of South Africa's land had been set aside for white settlement by the early 1900s. White farmers have dominated commercial agricultural production ever since, but the World Bank argues that many of them are inefficient and make inadequate use of their land. Spreading land ownership more evenly could help.

But the ruling National Party last week dismissed the ANC's plans as 'Mickey Mouse economics'. It claimed the programme would cost around pounds 120bn, 15 times more than the ANC had estimated and nearly twice South Africa's annual output of goods and services. With government borrowing already running at about 6 per cent of national income, there is little scope for to run a more expansionary budget.

The NP argues that the transition to democracy will be better served by safeguarding the economy's emergence from recession, boosting investment, lowering inflation from its current 7 to 8 per cent and cutting government borrowing and tax rates.

The NP no doubt realises that this would not satisfy the black majority quickly enough, but its stance may nonetheless be politically canny. The NP is on a hiding to nothing in this election, but could regain credibility if a combination of political instability, external economic events and the difficulty of cranking up the country's capacity to supply goods and services blows the ANC off course.

Leaving aside the long-term problems of industrial and agricultural inefficiency and under-utilised human resources, the South African economy's short-term prospects are relatively favourable.

Last year South Africa emerged hesitantly from an unprecedented three-year recession, sustained and deepened by the country's worst drought since the 1800s, the uncertainties of the transition to majority rule and recession in its main export markets.

But Derek Keys, the finance minister, expects the economy to grow by 3 per cent or more this year. Independent economists regard this as a realistic prediction now that the Inkatha Freedom Party's decision to participate in the elections has made serious political unrest less likely.

The recovery is being driven by a bumper harvest and higher exports, with a rise in commodity prices as the world recovery takes hold, promising to reinforce the upturn. The lifting of sanctions will provide a short-lived boost by easing trade. If the ANC carries through its plans for capital investment and house-building then investment spending should also become an engine for growth. By 1992 South Africa was investing only 16 per cent of its national income, the lowest share since 1946.

But the rate of growth forecast by Mr Keys will not be enough to make much impact on the country's unemployment problem: barely half the labour force has a formal job and two-thirds of the black population are without work. Getting unemployment down will be an important pre-condition for safeguarding political stability.

For most of the century the South African economy has grown at an average of around 5 per cent a year, earning a reputation in the 1920s and 1930s much like that the Asian tigers enjoy today. But the Soweto riots of 1976 and a falling gold price saw foreign investment funds withdrawn. After a brief respite, courtesy of a rising gold price in 1979, political unrest erupted during the mid-1980s.

Capital flight struck again as the government announced that it would freeze repayments on much of its outstanding debt in 1985. Capital outflows forced the country to run a balance-of-payments surplus, achieved by keeping domestic spending subdued. This constrained the economy to grow by less than 1.5 per cent a year during the 1980s, half the rate at which the population was expanding.

Capital continued to flow out of the country in the late 1980s as the graphic shows, but at a less dramatic rate. The unbanning of the ANC in 1990 further reduced capital flight, only for it to accelerate again as the negotations over reform suffered setbacks in 1992. Capital outflows quadrupled between 1992 and 1993, exceeding 4 per cent of national income.

South Africa's long-term growth prospects depend on capital flight being reversed to finance investment and to pay for imports of plant, machinery and technology. The economy is prone to suck in imports of investment goods even when demand is subdued.

But, political stability permitting, the Johannesburg stock exchange should see perhaps pounds 5bn of the pounds 65bn invested around the world in specialised emerging market funds. Political stability is also vital to attract direct investment by foreign companies.

The Overseas Development Institute argues that South Africa is already being seen as a more attractive low-cost base for investment than the former republics of the Soviet Union, not least because some foreign investment has already taken place. Potential investors are also reassured by established legal and accounting frameworks, good financial services and relatively impressive infrastructure. There is a domestic market of 34 million people to service, and the country is set to extend its economic dominance of the rest of the continent.

The fate of political and economic reform in eastern Europe and the former Soviet Union may well remain unclear for decades, but in South Africa the verdict will probably be delivered more quickly. At worst, economic growth will fail to meet the material expectations of the newly enfranchised majority, derailing democracy, frightening foreign investors away again and irreparably worsening its economic plight.

But if the black population is patient - which the whites who have oppressed them for so long have no right to expect - then there is a fleeting chance that a virtuous circle of economic growth and political stability will be given time to develop.

(Graphs omitted)