Overview of the South African Economy Mohr and Fourie, chapter 5 (In ECO1011S Reader)

1. Overview of the South African EconomyMohr and Fourie, chapter 5(In ECO1011S Reader) Aim of this section: To provide an overview of the South African economy, focusing on historical trends and placing South Africa in continental and global context. Please note that a number of slides cover work that is not covered in the text. All slides in this presentation are examinable.

2. The South African Economy Structure of the lectures • History of South Africa’s economic development • Structure of the economy, economic growth, unemployment, and inflation • Social indicators • International economic relations

3. MF 84-85 Development of the South African economy • Important dates • 1652: European settlement • 1867: diamonds discovered • 1886: gold discovered on Witwatersrand • 1910: Union of South Africa created • 1913: Land Act passed • 1920s and 1930s: Industrialisation • 1948: National Party to power; apartheid entrenched

4. MF 84-85 Development of the South African economy (continued) • 1960s • Very rapid economic growth, fuelled by strong world economy • Rapid increase in living standards of whites; not so for other population groups Background for cartoon: Some people argued recently that many whites did not benefit from apartheid.

5. MF 84-85 Development of the South African Economy • 1970s • Oil shocks in 1973/4 and 1979 • Bretton Woods system of stable exchange rates falls apart • Surge in inflation • Soweto uprising in 1976 • International attention on SA’s racial policies • Decrease in confidence • Struggle for freedom increases in intensity • Gold price increases from $35 level

6. Development of the South African Economy • 1980s: South Africa’s “lost decade” • Massive gold boom in 1980-81 • Housing boom in 1981-82 • 1983: Tricameral Parliament introduced • 1985: PW Botha’s Rubicon Speech • Result: SA’s international debt not “rolled over” • Leads to SA’s debt crisis • Economic performance very weak and highly erratic • High inflation (10-20 per cent) • Repayment of foreign debt places SA in economic straightjacket

7. Development of the South African Economy • 1990s • February 1990: ANC unbanned and Nelson Mandela released • Negotiations about a New Democratic South Africa • Major uncertainty and political turmoil in early 1990s • Negative economic growth • Permanent decrease in inflation rate • 1994: ANC comes to power • Strong social focus (RDP) • 1996: GEAR (Growth, Employment and Redistribution)

8. Huge pressure on the government and economy to redress past inequalities

9. Development of the South African Economy • 2000s • Stable but unspectacular economic growth • Globalisation and trade reform • Reduced import tariffs reduces price of imports • Increased productivity, but at cost of greater unemployment in primary and secondary industries • Strong focus on BEE • Inflation targeting framework adopted • Modest inflation • Exchange rate volatility • Currency meltdown in Dec. 2001 • Strengthening currency since 2002 • ASGISA (2006)

10. South Africa through the eyes of Zapiro

11. Huge backlogs and inequalitiesTime is against us…

12. Huge disparities and historical inequalities make the challenges even bigger…

13. Structure of the South African economy Economic growth Unemployment Inflation

14. South Africa: a giant amongst our neighbours USD millions

15. South Africa: A midget amongst giants USD million

16. Some multinationals’ turnover are even larger than SA’s GDP Turnover: million USD Source: Fortune 500

17. MF 86 MF 86 South Africa’s economic growth performance is improving and becoming less volatile

18. The pie gets eaten by an increasing number of people Even though the economy was hobbling along, the increase in the population outstripped the increase in the GDP. As a result per capita income decreased

19. Sectoral contributions to the GDP • In which sectors of the economy are the goods and services produced? • Distinguish between • Primary sector • Mainly Agriculture and mining • Secondary sector • Mainly manufacturing • Tertiary sector • Services, e.g. financial, wholesale and retail, logistics, social and personal services • See Table 5-1 in Mohr and Fourie

20. Primary and secondary sectors are becoming less important; the tertiary sector is becoming increasingly important

21. Substantial changes in the contributions by individual sectors

22. Production structure of the South African economy • Moving towards a service-based economy • Stronger focus in skills and technology • SA is in phase of de-industrialisation • Employment requirements • This is typical of the development process in many countries • But do our people have the education levels to meet the requirements of a service economy?

23. South Africa’s factor endowments • Factors of production: • Natural resources • Labour • Capital • Entrepreneurship • Natural resources • Poor natural resources for agriculture • Very rich mineral resources • BUT mineral resources are non-replaceable • South Africa’s three most important mineral exports (in decreasing order of importance, 2005): • Coal • Platinum • Gold

24. Gold: losing its shine

25. South Africa’s factor endowments (continued) • Labour • Labour is SA’s relatively abundant resource • Quality of labour is constrained by lack of education and skill • Poor education = legacy of apartheid • Returns on education take many years to realise • Crisis in SA’s education is more institutional than financial

26. As a percentage of GDP, SA’s expenditure is in line with many developing and developed countries Source: UNDP Human Development Report, 2004

27. South Africa’s factor endowments (continued) • Capital • All man-made assets that are used in the production process • Factories, machinery, equipment, etc • Physical and financial infrastructure • Capital is SA’s relatively scarce resource • Implication: use labour- rather than capital-intensive production techniques: has this happened?

28. Capital intensity of the SA economy Rapid increase in the capital-output ratio Decrease in the capital-output ratio

29. Some explanations for SA’s increased capital intensity during the 1970s to 1990s • Non-wage cost of labour is high • Political instability spills over to labour market • Onerous labour legislation • Relative price of labour to capital • Tax incentives on capital expenditure • Relative low productivity of labour • International competition • Protection of SA industries in the past • Overvalued currency encourages capital intensive production

30. Employment and unemployment

31. What is unemployment? • Strict definition of unemployment • Persons aged between 15 and 64 • Not in paid employment or self-employment • Is available for paid employment or self-employment • Took specific steps in the four weeks preceding the interview to find paid employment or self employment • Discouraged workers: • Have given up searching for work • Included under the heading of “expanded definition of unemployment”

32. How the numbers fit together Source: Labour Force Survey 2005

33. The magnitude of unemployment in SA

34. Source: Labour Force Survey, 2005

35. Source: Labour Force Survey, 2005

36. Between 1990 and 2002 more than a million jobs in the formal sector were lost, while the population grew by about 7 million

37. The wage gap between management and workers is large and growing

38. More comment by Zapiro

39. Educational attainment by population group: again a very unequal distribution

40. Globalisation has generally been good for SA consumers but comes at significant cost to some industries and their workers

41. Inflation

42. No crisis yet, but alarm bells are ringing High inflation period Disinflation

43. Inflation Targeting • South African Reserve Bank (SARB) views inflation as detrimental to growth • Government instructed SARB to target inflation • Overarching goal of monetary policy • Range: 3-6% • Problem of lags • Problem of uncertainty • Focus: Week 9

44. Social indicators

45. Demographics Source: AMPS

46. Measuring the distribution of income • Gini coefficient: Measure of Inequality • Two extremes • If 0: Perfectly equal income • If 1 (or 100): One person has all the income, the rest none

47. Inequality in South Africa is very severe compared to other countries Source: Human Development Report, 2004

48. Inequality (measured by LSM) has a very strong racial bias

49. The rich are getting richer and the poor are getting poorer? Source: Terreblanche

50. Income inequality is reflected in large differences in life expectancy Source: CARE