Question 1

The history of the ANCs economic policy after 1994 is divisible into two distinct periods: the Reconstruction and Development Program (RDP) from 1994 to 1996; and the Growth, Employment and Redistribution program thereafter (GEAR). Macroeconomic policy through the period was characterized by prudent public financial policies emphasizing tax reforms and debt containment, though with different spending priorities between RDP and GEAR. The RDP defined five policies with the dual goals of: promoting growth of aggregate demand by reducing income and wealth inequities through redistributive schemes; and restructuring the supply side of the economy to expand productive capacity. Policies to encourage urban and rural development and land reform were demand focused, while RDPs industrial strategy and support for small enterprises fixed supply side weaknesses and were to boost job creation, the fifth priority. These policy priorities were made concrete with goals such as the promise to build one million low cost homes; redistribute 30% of agricultural land; provide portable water, adequate sanitation and health care to every person by 2000; and job creation through public works. The RDPs supply side goals were left on the wayside. The policy shift from RDP to GEAR was one of emphasis away from development of domestic demand, towards stimulation of industrial output through exports. Tight monetary policy was combined with a targeted approach to government deficit reduction. The goals were to attain 6% growth in 2000, stabilize inflation below 10%, reduce the fiscal deficit to 4% of GDP, boost domestic savings up to 21.5% of GDP and cut the balance of payments deficit to 2%. Whereas lip service continued to be paid to redistribution, the real thrust of policy was to liberalize trade and restructure public sector spending and wage restraints to contain inflation. Although exports were prioritized, import tariffs were also lowered to ease the pain caused by the Rands 20% devaluation in 1996. GEAR included ingredients borrowed from the East Asian economic model: tax incentives to stimulate investment, funds to boost small and medium enterprises in vital industrial clusters and a strengthening of competition policy. Pre-1994, the ANC was opposed to the concentration of economic power in the hands of the elite few whether white or black. Yet, the actual policies of the ANC government post-1994 departed greatly from the partys previous socialist orthodoxy. Calls for a redistribution of wealth to the non-whites and nationalization were muted in practice. This was a pragmatic choice since the ANCs European models of socialism in France, Greece and Sweden had fared poorly, and neo-liberalist economic policies were ascendant. One may criticize the ANCs economic policy for not meeting fundamental goals such as reducing unemployment (which rose from 20% in October 1994 to 25.8% in September 2000), reducing inequality (the Gini coefficient rose from 0.596 in 1995 to 0.635 in 2002), and restructuring of the economy away from capital intensive industries (instead, labor intensive industries like textiles are in decline). Worst of all, South Africas national debt was not contained, but expanded from 190bn Rand in 1994 to 376bn Rand in 1999. Nonetheless progress had been made: the rise of growth rates to 3% per annum between 1994 and 2003 (according to the UNDP). Inflation fell from the 14% average from 1980 to 1994 to 5% by 2000. Fiscal discipline did little to help with employment and development priorities but the budget deficits did shrink. In the context of South Africas vulnerabilities in the global financial markets, the ANCs focus on maintaining credibility and market access by hewing close to the IMFs recommendations was probably inevitable. However, the emergence of a black elite while the working class descended deeper into poverty (400.000 formal sector jobs lost) reflects a profound failure - GEAR has despite its name, failed in terms of economic growth, creation of quality jobs, and redistribution. (Exhibit 11c shows the emergence of the black elite by 1996.)

Question 2
South Africas unemployment problem may be traced to the structural legacies of Apartheid affecting the educational attainments of population and other indicators of human capital, labor force rigidities due to unionization and labor laws that favored insiders who were predominantly white, dependence on mainly extractive industries and slow economic growth. Structurally, labor force growth due to population increase of over 2% per annum up to 2000 and higher labor force participation (from 56.4% in 1995 to 61.8% in 1999 according to the October Household Surveys from StatsSA) implied by the newly empowered, newly equal work force ran up against low economic growth of 2.44% per annum on average between 1996 and 2000 (Exhibit 5). Economic growth was simply too anemic to absorb the expanded labor force (Figure 2) and we see the effects as a ballooning unemployment rate and a fall in the median household income for both Africans and Whites (Exhibit 7). Government spending on education was around 22% (Exhibit 10a) of GDP between 1997 and 2001, but the legacy of Apartheid compounded the difficulties of the economic restructuring conducted under GEAR to liberalize trade, deregulate and privatize state owned companies. Generations of black Africans educated for their opportunities in life cannot quickly adapt to the demands of a less regimented, service economy dependent on skilled labor. The lack of labor mobility was heightened by the geographical segregation of the country under the Population Registration Act, even after it was repealed; the fact was that laborers from poorer areas could not afford housing in areas with job opportunities. The ANCs economic restructuring was held back by Union activity and rigid labor laws again adding to labor force inflexibility and contributing to unemployment. The ANCs leadership was beholden to the Unions for political support and could not easily reduce wage levels in unionized industries. The governments attempt to create new jobs with lower wages, and more austere benefits only increased the divide between the insiders and outsiders in the new South Africa. As shown in Figure 1, labor productivity growth in the private sector lagged wage growth in 1998 despite the fact that Real GDP growth was only 0.7% (Exhibit 12). Thus South Africa had a surplus arguably of relatively unskilled workers and a deficit of skilled workers reflected in the higher household st th incomes of the 81 to 100 percentile of households in 1996 even as other household incomes fell. (Exhibit 7) Social decay endemic in highly unequal societies such as South Africa explains some of the unemployment. Crime rates were high in South Africa relative to peers such as Zimbabwe and the Russian Federation that had undergone similarly wrenching economic transformations (Exhibit 17). As the search for legitimate jobs and crime rate are 1 inversely related , formal employment rates in South Africa were possibly further depressed. The HIV epidemic that overtook the economy was concentrated in the working age population and affected the ability of many to work as well (Exhibit 18). The relatively high price of hiring in the formal sector within South Africa has placed the burden of unemployment disproportionally amongst the informal sector especially since the insider-outsider segmentation is so stark due to Apartheid. The government has to tackle labor market regulations to cut the burden of labor costs for small and medium enterprises and encourage formal employment growth, perhaps by working with Chinese advisors on tactical measures to suppress militant unions. Second, the crime rate and HIV epidemic should be tackled by empowering the citizens to form local policing communes in partnership with the police and through working with international aid agencies on public health reforms. Finally, but most importantly, economic growth has to rise but the drivers of growth have to be diversified away from the mining and manufacturing sectors. Public works programs that are focused on developing renewable power infrastructure that will enhance productivity and reducing the economys dependence on oil and coal would be supported by the World Bank financially and absorb part of the unemployment whilst increasing the narrow skill base.
1

http://research3.bus.wisc.edu/file.php/228/AER2003.pdf

Question 3
3. Is inequality holding back the economic development of South Africa? If that is the case, how could it be solved? If not, why? It is true that inequality has an impact on the economic development of a country (GDP). However, in most of the cases the behaviour of the economic development lead the inequality either positively or negatively. If we look into the economies of the BRIC countries, we will find that in China for example the inequality increased slightly with the growth of the economy. In Brazil the situation is different. Between 1992 and 1997, the real GDP was growing year after year, but the the GINI index was increasing one year and decreasing the next year. If we take spain as another example, we will find the the GINI index, 34, is at an acceptable level for a developed country. In addition, it has a high level of education. However, it is experiencing a high unemployment rate and very slow economic growth. Therefore, we can conclude that the inequality alone will not hold back the economic development of any country. In fact, the the high growth a county has, a high potential that the inequality will increase and the reason for that is the rich people or the government leaders will keep the money to themselves and the poor people will become more poorer. India and China are good examples. So what caused the inequality to increase or decrease?. Some are arguing that education level is one of causes. The more educated people you have, the lower inequality you will get. This could be true, but not all the time (Examples). The two main causes of the inequality are the history of the society. [Need more elaboration] The question now is inequality holding the economic development of South Africa? and the answer is No. Observing the relation between South Africa and the SA GINI index, we will find that there is no correlation between the two. Between 1990 and 2000, SA GDP was growing in the first half and declining in the second half. However, the GINI Coefficient was increasing from 1990 till 2000.

Inequality beside the high unemployment are the main reasons for the economy slowdown. Brazil and South Africa: United in inequality http://dailymaverick.co.za/article/2012-08-15-brazil-and-south-africa-united-in-inequality World Bank: Education the only way to reverse inequality in SA http://www.google.com/hostednews/afp/article/ALeqM5iC5fdW4GhNZC7Y43lGr44WGm 2CiA?docId=CNG.6cff7c791d94053d6a8e23ca3f513f07.531

counter examples:

Question 3
1. Spain: Low inequality, some how, high education level. inflexible labour laws, result to low growth and high unemployment 2. Pressure on the reform,

Supporting Appendices
Figure 1. Based on Exhibit 19. Private sector wages shot past productivity gains in 1998.
Percentage change (1995 Base) 12 10 8 6 4 2 0 -2 1995 1996 1997 Year Productivity changes Public sector wage changes Private sector wage changes 1998 1999 2000

Figure 2. Employment cannot keep pace with population growth. Population size deduced from Real GDP/Real GDP per capita in Exhibit 12. Employment statistics reproduced from Exhibit 5. 0.00% -0.50% -1.00% -1.50% -2.00% -2.50% -3.00% -3.50% -4.00%
Employment (non agricultural, primary axis) Population growth (secondary axis) 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 -0.70% -1.70% -3.70% -3.20% -2.90% 2.11% 2.11% 2.12% 2.12% 2.12% 2.12% 2.13% 2.13% 2.00%

2.15% 2.13% 2.11% 2.09% 2.07% 2.05% 2.03% 2.01% 1.99%

Employment (non agricultural, primary axis) Population growth (secondary axis)