Development Dilemmas in Post-Apartheid South Africa

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Map of post-apartheid South Africa.

Development Dilemmas in Post-Apartheid South Africa

Edited by Bill Freund and Harald Witt

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Published in 2010 by University of KwaZulu-Natal Press Private Bag X01 Scottsville 3209 South Africa E-mail: books@ukzn.ac.za Website: www.ukznpress.co.za © 2010 University of KwaZulu-Natal All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any information storage and retrieval system, without prior permission in writing from the publishers.

ISBN: 978-1-86914-189-9

Managing editor: Sally Hines Editor: Alison Lockhart Typesetter: Patricia Comrie Proofreader: Lisa Compton Cover designer: luckyfish Cover photographs: Armand Hough (top); Christine Nesbitt / Africa Media Online (bottom)

Printed and bound by Interpak Books, Pietermaritzburg

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Contents

Abbreviations Acknowledgements 1 Development Dilemmas in Post-Apartheid South Africa: An Introduction Bill Freund Macroeconomic Policy and Development: From Crisis to Crisis Stephen Gelb The Minerals-Energy Complex and its Woes: A Problematic Growth Path

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Part 1 3

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Environmental Injustice through the Lens of the Vaal Triangle: Whose Dilemma? David Hallowes Development Dilemmas of Mega-Project Electricity and Water Consumption Patrick Bond and Molefi Mafereka ka Ndlovu Darkness and Light: Assessing the South African Energy Crisis David Fig

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Part 2 The State as the Agent of Change: Conflicts over Implementation
6 Planning and Land-Use Conflicts amidst the Search for Urban Integration: The Case of Wingfield Edgar Pieterse

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Unintended Consequences: Development Interventions and Socio-Political Change in Rural South Africa Mary Galvin Social Citizenship and the Emergence of the New Social Movements in Post-Apartheid South Africa Buntu Siwisa

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Part 3 Struggles over Resources and the Land
9 ‘Doing Business with a Development Ethic’: ‘New Look’ Land Redistribution in South Africa Deborah James Development by Decree: The Impact of Minimum Wage Legislation on a Farming Area in North West Province Astrid Boehm and Stefan Schirmer Land Claims, Land Conservation and the Public Interest in Protected Areas Cherryl Walker Agrarian Interventions: Corporate Biogenetics on the Makhathini Flats Harald Witt

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Part 4 Household Interventions: Gender Issues
13 Social Justice, Care and Developmental Welfare in South Africa: A Capabilities Perspective Shireen Hassim Decentralising Gender Rights and Entitlements through Integrated Development Planning? Alison Todes, Amanda Williamson and Pearl Sithole Rights and Redistribution: Thinking about the State, Gender and Class in South Africa after the 2006 Zuma Rape Trial Mark Hunter

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Notes on Contributors Index

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Abbreviations

AFRA ANC APF ASGISA BEE BIG CBD CBO CCT CDC CDM CEPPWAWU CMC COSATU CPA DEAT DEPP DLA DME DPW DRDLR DST DWAF EIA EMT EPWP ESTA

Association for Rural Advancement African National Congress Anti-Privatisation Forum Accelerated and Shared Growth Initiative for South Africa black economic empowerment basic income grant central business district community-based organisation City of Cape Town Coega Development Corporation clean development mechanism Chemical, Energy, Paper, Printing, Wood and Allied Workers’ Union Cape Metropolitan Council Congress of South African Trade Unions Communal Property Association Department of Environmental Affairs and Tourism Developmental Electricity Pricing Programme Department of Land Affairs Department of Minerals and Energy Department of Public Works Department of Rural Development and Land Reform Department of Science and Technology Department of Water Affairs and Forestry environmental impact assessment executive management team Expanded Public Works Programme Extension of Security of Tenure Act
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GATS GATT GCIS GDP GEAR GMO GNUC ICGEB IDP IDZ IEC IFP IMF INR ISAAA JDA JPC JPTC JW KCDF KLA KW KZN LCC LGNF LHDA LHWP LPM LRAD MNF MOU MRF MSDF Muni-SDF MW
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General Agreement on Trade in Services General Agreement on Tariffs and Trade Government Communication and Information Services gross domestic product Growth, Employment and Redistribution genetically modified organism Greater Nelspruit Utility Company International Centre for Genetic Engineering and Biotechnology integrated development plan Industrial Development Zone Independent Electoral Commission Inkatha Freedom Party International Monetary Fund Institute of Natural Resources International Service for the Acquisition of Agri-Biotech Applications Johannesburg Development Agency Johannesburg Property Company Joint Permanent Technical Commission Johannesburg Water Kanana Community Development Forum KwaZulu Legislative Assembly kilowatt KwaZulu-Natal land claims commissioner Local Government Negotiating Forum Lesotho Highlands Development Authority Lesotho Highlands Water Project Landless People’s Movement Land Reform for Agricultural Development Metropolitan Negotiations Forum memorandum of understanding Metropolitan Restructuring Forum Metropolitan Spatial Development Framework Municipal Spatial Development Framework megawatt

MWP NCPT NEDLAC NEPAD NERSA NGO NHF NLC NMBM NWM OBE OECD OFWCC PAETA PBMR PJ PM PMG POPCRU PWR RBM RDP SAAPAWU SACP SAGENE SANCO SANDF SAPA SAPPI SDCEA SETA SLAG TRIM TRIPS TRS

mass workers’ party Ndabeni Communal Property Trust National Economic Development and Labour Council New Partnership for Africa’s Development National Energy Regulator of South Africa non-governmental organisation National Housing Forum National Land Committee Nelson Mandela Bay Municipality New Women’s Movement outcomes based education Organization for Economic Cooperation and Development Orange Farm Water Crisis Committee Primary Agriculture Education and Training Authority pebble bed modular reactor petajoule particulate matter Parliamentary Monitoring Group Police and Prisons Civil Rights Union pressurised water reactor Richards Bay Minerals Reconstruction and Development Programme South African Agricultural Plantation and Allied Workers Union South African Communist Party South African Genetic Experimentation Committee South African National Civic Organisation South African National Defence Force South African Press Association South African Pulp and Paper Industries South Durban Community Environmental Alliance Sector Education and Training Authority settlement land acquisition grant Trade-Related Investment Measures Trade-Related Aspects of Intellectual Property Rights total reduced sulphur
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UDF UIF UPRU VEJA VOC WTO

United Democratic Front Unemployment Insurance Fund Urban Problems Research Unit Vaal Environmental Justice Alliance volatile organic compound World Trade Organization

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Acknowledgements

This book is intended to showcase the thinking that has gone on during recent years in what was once the Department of Economic History, University of Natal, Durban, and is now the Economic History and Development Studies Programme, School of Politics, University of KwaZuluNatal. We would like to thank all who have contributed to making the institution’s activities worthwhile, including two members of staff who did not write anything for this volume but attended our workshop, John Blessing Karumbidza and David Moore. Our workshop and publications costs have been generously borne by the Johannesburg office of the Ford Foundation. This has enabled us to bring to Durban the authors of papers included here, as well as two remarkable writers on development issues in Africa: Henry Bernstein of the School of Oriental and African Studies, University of London, and Bob Shenton of the Department of History, Queens University, Canada, and we thank them for making that event so successful. For his part, Bill Freund would also like to thank Neil Coleman for making COSATU documents available to him and Frank Sokolic for the frontispiece map.

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1 Development Dilemmas in Post-Apartheid South Africa
An Introduction
BILL FREUND

WHILE DEVELOPMENT STUDIES have proliferated as a subject for study,

the nature of what development is, or might be, has faded into the background. It has become easier to provide a sunny and essentially moral definition of development that links up to psychological notions of wellbeing and health, as well as to idealised participatory formulations of democracy. Development in these terms must involve everyone, including the most disadvantaged, and it must take everyone forwards in a self-conscious win-win process. Amartya Sen has seduced us into seeing development, real development of course, as a process which will overcome the ‘unfreedom’ from which humankind (the same humankind that Rousseau discovered in the eighteenth century lay everywhere in chains although born free) so generally suffers – a ‘momentous engagement with freedom’s possibilities’, as he concludes his widely applauded Development as Freedom (Sen 1999). This is the attractive side of so-called neo-liberalism, its emphasis on human rights. However, as soon as we ask why and how questions about development, we are very quickly led back to the real history of capitalism together with its antecedents and its broader context. Any serious economic historian cannot but also consider the dark side of capitalism’s rise. Karl Marx remains the master proponent of the classical view arguing that this emergence was signalled in blood and tears and mastered by individuals bent on overcoming mores – age-old moral principles embedded in social belief. At home there was the immensely destructive process involved in separating cultivators from
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the land, proletarianisation, by which means a working class was formed. Overseas commerce involved exploitative exchanges and, at their worst, the slave trade and the revival of slavery under commercial auspices. If immensely dynamic and capable of fuelling previously unthinkably rapid economic growth, capitalism was also marked by intensified new class antagonisms and a system of market-led exploitation. Marx was not especially sentimental about what had preceded capitalism, but he was certainly aware that there was enormous loss and hardship in its ruin. Historians such as E.P. Thompson, writing for England (and, of course, his innumerable acolytes and followers), have powerfully captured ‘the world we have lost’ in deepening our grasp of the economic macro-processes (Thompson 1963). Why should these losses be consigned to a half-forgotten past? Does not capitalism need to recreate itself over and over in ways that often mimic its beginnings once profits falter? Simultaneously, however, almost any writer on development is at least dimly aware that economic development itself is hardly just a simulacrum for economic growth as measured in raw statistics.1 Those statistics may be in fact flagging investment within a limited enclave of marketised activity, the successful mining enterprise or cultivation of a particular cash crop in some colony, which emerges in a wider context that is superficially traditional or unchanging. While obviously allowing some to prosper or create wealth, such enclaves are too isolated or too focused on some foreign-generated activity to have large-scale social and economic effects on a territorial or national economy. Many writers have pointed to the contrast between Ghana at the time of its independence in 1957 and, on the other side of the world, South Korea, recently coming out of a ferocious and destructive civil war with heavy international involvement. They both had similar per capita incomes according to conventional statistical measure. But in Ghana, these incomes were tied into the wealth based on foreign-owned mines and on the growing of cocoa trees, whose fruit was at its peak in terms of the prices it fetched. This, together with the felling of tropical forest, proved to be a very inadequate basis for further accumulation (Amin 1973).2 By some measures, Ghana has not advanced much in the subsequent half-century. By contrast, Korea was beginning a far-reaching national process which has led to broadbased wealth accumulation, as well as the creation of some great fortunes and dramatic improvement in social indicators for the majority. In classic form, moreover, Korea has ceased to be a peasant nation and most of its

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population now live in cities and, if they are of working age, likely to be represented on a payroll. Industrialisation and urbanisation have taken over (Amsden 1989). The Republic of Korea’s weight in world affairs is much greater than that of aid-dependent Ghana. The point here is that, whether or not we term it ‘freedom’, there is a very broad awareness in this line of thinking that development must involve an economic core, but is not narrowly economic alone. There is some transformational process that Korea has experienced which Ghana has not. Moreover, and equally importantly, if countries such as Korea and in their day Japan, Germany, France or Britain ‘developed’, it was a process that contained suffering as well as ease, loss as well as gain, although certainly some historic experiences have been less painful than others. Development is not a win-win situation. There is very little reason to think that further economic changes will not bring similar wrenching transformations. To use the word ‘capitalism’ in this text is not intended to suggest that socialism, state-led development, is immune to these bittersweet processes. The harsh history of the Soviet Union was for its time an amazingly rapid process of developmental formation, transforming basic features of the lives of the population that bears this out most acutely. The processes of industrialisation in post-war east-central Europe (especially the countries with low living standards and little modern industry previously) and the convulsive changes going on today in China also make this obvious. In this context, talking about modernisation or industrialisation might be more justifiable than capitalism, if more open to different interpretations; these terms were once more frequent and more consistently used than development – and not without good reason. In South Africa, given the poverty to which the large majority of black people were born within sight of apparent development and affluence, it is understandable that people are reluctant to tabulate the dark side of development in their anxiety to grasp the good things of life; most articulate commentators very much want to hold onto an idealised notion of the past – indigenous knowledge, so-called ubuntu – and imagine that it can cohere with development. Writers who are broadly critical of the ideology and practice of development are of interest to only a few and their critiques unfortunately passed over far too readily.3 A rare exception, however, that can be superficially taken as merely a critique of development hucksterism, but actually runs deeper, infuses the work of perhaps black South Africa’s

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most eminent living writer, Zakes Mda (see, for example, 2000). Mda explores wittily and observantly the foibles of development, South African style. This book, which does not aspire to any easy fix on attaining development, wants to introduce the subject to readers especially by proposing that development is a process, not an event, and it is fraught with failures, with tension and with loss as well as gain, in South Africa as much as elsewhere. It also wishes to remind readers that development has been a historic process and its particular characteristics have a great bearing on the present, both because of the consequences of the past that are still with us and because patterns of accumulation in the South African economy are often still ploughing the furrows laid down during its classic period of industrialisation. This is not an anti-development account, however. Without seeing modernisation as a painless or contradiction-free process, it essentially advocates unashamedly for a process of modernisation that runs deeper than what has been so far promoted. It leans towards seeing exclusion from change as being worse than participation and tries to promote participation on as wide as possible a basis. It does mean as well to open up debate on what a genuine transformation, not merely an exchange in the racial leadership of the society or a disastrous slump fired up by chauvinistic racial nationalism as in contemporary Zimbabwe, might be like in South Africa. This introduction is not really the place to debate those processes in detail, but it seeks at least to restore to importance a few major ideas which must govern such a transformation. * * * We might start with Thabo Mbeki’s well-known 2003 speech as president of the country reinserting economic dualism as the chief way of understanding South African society. Here he proclaimed the existence of two distinct South African economies. On the one hand, there is a reasonably well-educated, dynamic, adaptive society that is well situated for further advance in the global division of labour. This society remains largely, if no longer entirely, white, a point Mbeki thinks of the greatest importance. Then there is the large world of poverty, exclusion and humiliation which remains the lot of most, if far from all, black people: the ‘second economy’ (Hirsch 2005). Mbeki here essentially revives the dualist approach which dominated the vision of critical liberal economists in the apartheid era (Houghton 1971

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or, for a more subtle interpretation, Nattrass 1981). At some level, this is the common wisdom everyone sees and senses if they walk South African earth. There is the temptation to compartmentalise two historical processes entirely, one successful and normal and one unsuccessful and diseased, and to see South Africa’s problem as one of ‘uplift’ where well-meaning social transfers will take the second economy up to the level of the first. But what is the relationship between the two economies? The radical critique, which started in the late 1960s, aimed at dismantling dualism entirely. In a particular moment which helped to define the launching of that critique, the late Harold Wolpe raised this connection. Cheap labour, propped up through the maintenance of a section of rural South Africa along so-called tribal lines, was precisely what fed and made possible the systematic, profitable pursuit of deep-level mining, which in turn provided the capital that was applied to the creation of a modern state and directly and indirectly fed the industrialisation of South Africa through the first half of the twentieth century. It was the migrant labour system, especially on the mines, which established this connection. Wolpe, however, argued that rural South Africa was becoming less and less capable of sustaining cheap labour paid below reproduction level. In his view this is why apartheid was instituted under the National Party government, determined to preserve whites-only rule intact: that is to say that Bantustans replete with subaltern elites and development policies needed to be created in the hopes of propping up the system and keeping black people in large numbers at a distance from the cities (Wolpe 1972). It would not be unreasonable to see this as the most stimulating and important idea in the development of sociology in South Africa up to that time and much of what follows has essentially been a commentary. There are many qualifications and ramifications that follow these lines but for the purposes of this introduction, four alone will be mentioned. First, rural South Africa was categorised not only by land left to African communal ownership and the stewardship of chiefs; most of it was in fact owned by whites who relied on pre-capitalist social relationships, what can be called – as long as we realise that the kindly associations with the word need to be largely removed – paternalism. While wages have increasingly entered into those relationships, as Astrid Boehm and Stefan Schirmer suggest in Chapter 10 of this volume, they have never entirely replaced older ways of organising life on the land. The legal basis for them was in some respects

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removed during the apartheid years but only entirely since 1994 and not with the practical effects intended. Indeed, even in South African cities, African townships were administered along authoritarian lines that echoed the rural model, a pattern that broke down fairly definitively in the 1980s but has yet to be replaced with a vibrant local government system. Second, political scientists have been particularly indebted to the polemical volume written by Mahmood Mamdani, Citizen and Subject: Contemporary Africa and the Legacy of Late Colonialism (1996), which has placed the duality of South African life on a somewhat different plane. In particular, Mamdani makes clear that once modified to provide a cheap and reliable system of law and order, the Bantustan system and its predecessors was not merely a way to rule South Africa, but it also had profound implications for the social system and the way individuals conceived their relationship to the wider society. His fears that the ramifications of dualism could sink the liberation project of the 1980s were fortunately not borne out but big problems remain. For Mamdani, the question of how to transform subjects into citizens has been fundamental to his understanding of the problems of post-colonial Africa and post-apartheid South Africa. It is not difficult to move a step towards the inference that it is only citizens who are going to make the transition to a different and more prosperous way of life. The assumptions about development, in fact, are about the creation of citizens. In Chapter 8 of this volume, Buntu Siwisa conceptualises problems of development implementation specifically in terms of the lack or breakdown of what he calls social citizenship. The other points to be drawn here are more directly economic. Third, there is the hypothesis, associated with the work of Ben Fine and Zavareh Rustomjee, contemporaneous with Mamdani, that South African economic development is governed economically by the logic of a ‘minerals-energy complex’ largely internalised by the state. While the effective large-scale mining and processing of minerals required an infrastructure, at the technical heart of which lay the generation and application of large quantities of cheap energy, primarily derived from coal which has become a more and more important mined commodity itself, this has created a set of connections, forms of dominance and material relationships that define a particular technical growth path within capitalism. Unlike some developing countries, South Africa has never been a very effective producer of consumer commodities and much of its industrialisation has served only the internal

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market.4 Development has been paid for by and depended on the modalities of deep-level mining (and what is required to keep it profitable), other resource-extracting activities, and the tentacles of the financial empires created by mining operations (Fine and Rustomjee 1996). This brings us to the final, not unconnected point. The minerals-energy complex has made possible a successful capital accumulation trajectory sustaining a significant middle class, while excluding the majority of South Africans from the perspective of all the conventional human resource indicators. If we look at South African development from the point of view of education and skills, it ranks amazingly poorly; this in turn relates to what is frequently pointed out: the extreme inequality of the society, especially measuring the bottom half of the population by most indicators against the top decile (tenth) or two.5 For succinctness and elegance in understanding this dire situation, readers can turn to Charles Feinstein’s 2005 economic history and to Jeremy Seekings and Nicoli Nattrass’s systematic and economically informed historical sociology (2005). Feinstein points to the serious negative implications of this kind of growth path as it narrows despite the wealth it has produced in the past. These last assessments have become much clearer and much easier to make in the wake of the collapse since 1994 of the political fortifications guarding white rule that continued to define the white minority as the unquestioned core population of South Africa. When we turn to these very real and big questions, it puts into a somewhat new light much of the critical literature on the African National Congress (ANC) government under Nelson Mandela (1994–99) and then Mbeki (1999– 2008). This literature, notably the often very powerful writing of Patrick Bond and Hein Marais, has occupied most of the bookshop table (see, for example, Bond 2000 and many subsequent books and articles; Marais 1998). The chief weakness of this thrust of thinking in my view, apart from an idealisation of what the ANC was like before 1994, lies in a tendency to encourage conspiracy theories of subversion.6 My interest is to turn away from a superficial, if by no means irrelevant, critique which sees the limitations of ANC efforts at structural transformation in terms of some kind of conspiracy or skulduggery on the part of white masterminds of evil, i.e. the Washington Consensus of the International Monetary Fund (IMF) and the World Bank and its multiple allies, and return to thinking about the classic model of South African development that Wolpe, Martin Legassick and others formulated and still others have pertinently elaborated.

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One might start by looking at the process through which Washington Consensus thinking became so influential. Alan Hirsch, a long-time servant of the ANC governments since 1994, has emphasised the need for a defensive strategy for the fledgling democracy. South Africa’s increasing level of indebtedness and its dependence on the good will of powerful conservative states in a very right-wing world were perhaps here determinant (Hirsch 2005). Partly this reflected the collapse of the possibility of reliance on that other world – the Soviet Union – which for many was no doubt a model in the years in exile during apartheid. What took place there was not merely a question of political collapse due to a lack of political democracy in the Communist bloc. It also signalled changes in the way goods are produced and their sale organised, changes that made the classic model of development pinioned on capital goods industries and heavy-duty infrastructure one that was increasingly out of date. At the same time, intensifying international competition under the wings of ever larger Western-based corporations makes it difficult to shelter from new trends in capitalism. The ANC cadres in exile may also have been expecting that they would eventually rise to power without any serious impediments in a glorious victory. Relatively suddenly, they were faced with a very different model that required a so-called elite pact, which could only work if based on compromise and a capacity for moderation and absorption (Moore 2006; Ghai 1991). The few key trained people, such as Mbeki himself and later finance minister, the formidable Trevor Manuel, may have been driven by a hatred for National Party rule and the apartheid system but they had simultaneously lost any real faith in pursuing an autonomous radical economic model. And they were suddenly the ones in command of the levers of power. It is true that the Washington Consensus represented a widely available and heavily sold discourse of knowledge and we all know – since Michel Foucault, if we did not before – that knowledge, and control of knowledge, is power. The diplomatic wisdom of an Oliver Tambo, who led the ANC in exile, which worked hard to avoid any controversial policy commitments that might cut into its solidarity campaigns, also worked against the formation of cadres seriously planning reconstruction in a democratic South Africa. Loyalty to long-serving individuals rather than to policies has been typical in ANC governance, while the South African Communist Party (SACP) has tended to confine its critical views to international solidarity issues and very broad general perspectives not easy to pin down in practice. It is also true

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that the dominant model won out against an essentially Keynesian (i.e. redistribution orientated) left-wing policy agenda promoted by a far more politically marginal set of economists – many of whom were, as the jibes had it, only well-meaning foreigners.7 Many activists in South Africa thought that the Reconstruction and Development Programme (RDP), a key instrument in promoting the 1994 election victory, largely designed by non-governmental organisations (NGOs) sympathetic to the ANC, constituted a powerful focus for more radical change. However, the RDP was a set of critical analyses of social circumstances in South Africa that showed no way forward in terms of emphasis or priority and no basis for independence from the larger context of a fiscally constrained economic policy that from the beginning allowed only limited space for attacking those circumstances. In particular, there was little attempt to forge economic policies directly linked to structural transformation of any sort – ‘growth through redistribution’. Indeed, the economic policies of the Mandela government showed marked continuity with the planning paradigm proposed under F.W. de Klerk, his National Party predecessor. Eventually the RDP became an ill-defined unit in the Office of President Mandela and it was subsequently dissolved. The National Economic Development and Labour Council (NEDLAC), in which the state was supposed to consult with civil society – i.e. community organisations, business and labour – was at first promoted as a form of corporate governance that might override conventional parliamentary structures in pursuing transformational goals; it evolved quickly into at best a moderately useful talk-shop with very limited influence on state policymaking. Potentially, the trade unions and notably the Congress of South African Trade Unions (COSATU) constituted a barrier to the state acting on its own. An assessment of COSATU’s interventions after 1994 suggests its importance for raising, on many occasions, and with reference to many specific but key policies, a perspective that criticises assumptions about competitiveness and globalisation as justifications for questionable legislative decisions. COSATU has stood up for more action against unemployment, a less business-orientated educational policy and generally more inclusive policies that would benefit the working class. It has notably supported the idea of a Basic Income Grant (BIG). Nevertheless, it is difficult to conclude that it has the capacity, will or strength to formulate counter-policies that

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move from generalities to clear and differently aimed trajectories (see COSATU 2004). The chief problem with the Washington Consensus cannot seriously be held to be financial rectitude; that has been a necessity for every type of government in the longer term, including the Soviet Union in its heyday and those influenced by it. The ANC was surely not wrong to concern itself with the implications of dependence that growing indebtedness may have brought about after 1994. The question is not how the state should become a source of unlimited largesse but rather what end its rectitude serves, the profits of banks and boards of directors or some structured national purpose. The real limitations of ANC policy have not been the product of ill will or corruption, although they certainly do involve the limited capacity of ANC cadres untrained for promoting momentous shifts in the making of policy. Implementation of policy is a large acknowledged problem in the new South Africa. Implementation alone, however, is a superficial way of understanding the dilemmas of development in this country, as we return to the key critical studies identified above; the problems also lie, possibly more profoundly, with conceptualisation. However, it would also be incorrect to see South Africa’s post-apartheid policies purely in terms of a Washington blueprint. Where local politics dictated other solutions, they sometimes trumped so-called international wisdom. For instance, of the institution of trade union legislation, that fiery opponent of GEAR (Growth, Employment and Redistribution), the instrument that came to be the red flag of Washington Consensus orthodoxy inflaming the left, trade union leader Zwelinzima Vavi says: Our interventions have made a significant difference. These include the negotiation of a worker-friendly constitution, the adoption of progressive labour legislation, including the promotion of trade unions and collective bargaining, and the extension of basic protection to the most vulnerable workers [and] the defense and further consolidation of our labour dispensation in the face of concerted attacks by business, and attempts to introduce retrogressive amendments (COSATU 2004). What could be more inimical to the way the World Trade Organization (WTO) bureaucrats interpret globalisation?

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Nor can the long shadow of the World Bank explain the emphasis, a growing one, on redistribution through the spread of infrastructural services or free homes, a set of policies that has met with mixed results and reception but is hardly orthodox. According to the latest census calculations, government grants are the main source of income amongst the poorest 50% of the population – not salaries, not the informal sector and certainly not peasant livelihood activities. On the one hand, South Africa’s unequal property and income patterns are extreme, but on the other hand, Seekings and Nattrass (2005) demonstrate that for a country of its income level, South African redistribution patterns are unusually generous. Many critical international NGOs talk about the downtrodden of the world who earn less than $1 a day. All South African pensioners are entitled to an income, by the standards of the exchange rates of the end of 2007, of about three times that. Nor is this deviation particularly unique: shrewd international observers have noted elsewhere that the apparently inevitable rules that govern globalisation continue to show more leeway for clever holders of niches in the international economy than this implies (Ong 2006). One might point out that the terms of the debate shifted during Mbeki’s second term in office: GEAR was no longer a cloak for policy. The Mbeki government presided over sober deflationary budgets that promoted South African business interests. However, GEAR failed to attract much foreign investment or to protect the currency very successfully; for some years it was marked by low economic growth figures, disinvestment and job losses, as Stephen Gelb demonstrates in fact and figure in Chapter 2 of this volume. With substantially lowered indebtedness and a return to moderate growth figures after many years, the state has become more generous in its redistribution policies and openly abandoned some aspects of the GEAR period, notably the drive for privatisation, which in any event was quite partial and arguably more about the enrichment of a class of black pro-ANC entrepreneurs than a genuine interest in pushing back the state. Several authors in this book, notably Gelb, consider the formal abandonment of GEAR and the adoption of ASGISA (Accelerated and Shared Growth Initiative for South Africa), which passed as a blueprint in the 2006–08 years at the end of the Mbeki presidency. However, the broad lines of policies, which this chapter argues are not simply enforced by a Washington-based conspiracy, have not changed and the challenges in the name of development that the state faced in 1994 are certainly still with us.

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Probably the most insidious aspect of the supposed international consensus has been its acceptance, as a permanent given, of a dualism that bears considerable resemblance to the supposed double nature of the South African economy. Internationally, even conservative and reformist notions of development after 1945 contained the shadow, as suggested above, of holistic transformation of society. The debate was over whether such notions were realistic as opposed to more extreme makeovers based on political revolution. Classic macro-studies considered the long-term trajectories of such countries as Brazil and India and looked at the capabilities and class character of the state in post-independence Africa. It was this debate that was forcibly shut down after 1980. The language of development discourse has changed in the West into one where structural changes of a deeper nature are neglected or rejected as impractical and impossible and the social side of development policy, the charity and hand-out element, is glorified as ‘poverty alleviation’ and turned into the progressive side of things with a dualistic separation between the two.8 As Bob Shenton brought out in our workshop discussions, international social work is tending to take over a ‘professionalised’ and ever less subversive development studies. Where once the definition of development suffered from being too narrowly economic, it is now impoverished by almost leaving the economic out entirely. For South Africa, this is inimical. This is a country that needs a sense of development that is holistic and is tied in closely to an understanding of its broader social and economic history. At a superficial level, who can disagree with Mbeki as with his liberal predecessors? Dualism makes the greatest sense for any intelligent observer of South African society. And with the demise of so-called Fordist labour market practices in their South African form, with the restructuring of the market so as to lead to a downturn in industrial employment (or at best stagnation), isn’t a further problem the creation of a permanent underclass unable to benefit from mobility and unable to mobilise effectively beyond sharp, and sometimes very violent, local actions?9 The Marxist dream of a unified working class, achieving consciousness of its potential through the opportunities created by mass industrialisation, is not sustainable without substantial modification. Scattered and often inchoate protest by the socalled multitude might lead to populist leadership assuming power but is no substitute for any coherent process of transformation.10 These same problems are being faced by regimes with a deep interest in transformation, such as those in Brazil and Venezuela, which also have substantial fiscal resources

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(and far more dedicated and substantially trained cadres in various development fields) but also struggle to find actual practical solutions suitable to the global environment of the early twenty-first century. Internationally the question of creating a better life and an effective new role as citizens, thus enacting Sen’s vision of freedom, from the tens of millions emerging from peasant worlds and so-called traditional cultural practices (who clearly are not going to form communities based on industrial demand or on the basis of patriarchal male-led families) is arguably the central problem of today’s world, certainly the central human problem facing development as a practice. In another sense too, Mbeki was certainly right: South Africa cannot isolate itself from these general problems through inward-looking solutions that disregard the deep connections our economy and society have with changes in the larger world. We cannot recreate the past. Moreover, South Africa, and here the government’s conception is equally valid, must also and inevitably be the engine that takes at least the small and much weaker states of southern Africa forwards. We have to learn from and interact with socalled globalisation and to learn from successful interventions. This means accepting that as much as globalisation offers opportunities, it also contains dangers and raises new barriers to real transformation. Thus I find much of the talk about ubuntu which assumes that the African traditional inheritance contains convenient answers to the problems of modern life soft, if not outright reactionary, a deflection away from the hard issues. There is little salvation in ubuntu if we are seriously engaged in a project of modernisation, even if indigenous local knowledge might at times provide some with an attractive idiom for this process. Maybe it is mentalities and ways of accessing knowledge, not shifts in tariff legislation or the ownership of basic services, that have to give way. Mary Galvin, in Chapter 7 of this volume, suggests for instance that the possibility of major changes at the micro-level depends on the extent to which there actually are new forces from below willing to challenge custom, while in Chapter 15, Mark Hunter reminds us that it is seizing forms of modernity that powerfully engage the masses, rather than recoveries of tradition. The mass of southern Africans will have to come to terms with the culture and mentality that goes with that project, not only its mechanical and cybernetic materialities abstracted from human agency and cultural change. The suggestion here is that the writers above all believe intensely in the need for transformation to

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be first and foremost that sort of modernising project. This is the human content of a new economic growth path – inevitably. Perhaps the first point to make here is that there is a need first and foremost for human agents of change on a large scale. It is going to be necessary to develop cadres who can use the schools, the media and real local knowledge, coming from or being stationed in every municipality, every significant spatial community, to lead the modernisation drive that can help mould or stimulate a population that can respond effectively to global trends. No mere computers or tinned media voices can possibly act as a substitute. Plans, for instance, to cope with the effects of the HIV and AIDS pandemic could include very significantly ways of promoting biomedicine and an appreciation and general understanding of science, as well as the formation of crèches and other institutions that could serve as caregiving safety nets and generate new ideas amongst large numbers of people. There was much potential for the development of such cadres in the United Democratic Front (UDF), the chief anti-apartheid vehicle of the 1980s. This was unfortunately snuffed out by its dissolution in 1994. The UDF in the 1980s was a noisy and creative agency with substantial diversity and the potential to engage a wide range of actors for change. In subsequent years, activists have been absorbed and assimilated into an existing, at the top end overpaid, civil service which lacks any serious transformative purpose and which the state can discipline only with difficulty. By contrast, it is clear that the youth is characterised by extremely high levels of anti-social behaviour, criminality and a descent into AIDS infection. Indeed comrades in the 1990s often retained their attraction to violence but dropped any kind of political commitment (Krämer 2007). Even those remaining completely dedicated to a struggle-based ideal of transformation have increasingly had to operate within straitjackets that limit their potential to generate new ideas and discussion. It is often said that bureaucracies have this insidious effect on revolutions, and South Africa (which cannot be said to have actually experienced a revolution) is certainly no exception. In Chapter 6 Edgar Pieterse presents a masterful assessment of why the state, to take a cliché, seems to lack the capacity to implement fine ideals. He considers the limits imposed by the 1994 compromise, the retention of informal influence by fixed interest groups and the extent to which new interest groups have taken on the colour of the old within the bureaucracies. There was a vision of what a transformed South African city

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should be in terms of desegregation, compaction, access and opportunity but no real mechanism has ever developed to override existing structures to bring that vision to pass. Certainly the problems of implementation are closely linked to the whip hand that imposes what Alison Todes, Amanda Williamson and Pearl Sithole label centralised decentralisation (see Chapter 14) and often misreads the real needs of people at the base very substantially. Galvin, at the opposite extreme of rural KwaZulu-Natal from the metropolitan bounds of Cape Town that concern Pieterse, provides an important corrective here; she stresses that whatever the good intentions of the state or of NGO intervention activists, the ground has to be readied through a background of activism and mobilisation for any kind of significant social change. * * * In the next few pages, a few key areas of weakness in a holistic developmental project will be outlined. First and perhaps foremost is the character of South Africa’s schools, a basic issue which is not discussed in any significant way here, but is an essential underlying foundation. If we follow Feinstein and insist that overcoming our deficiency in human capital, in the quality and capacity of what South African citizens can do, education is basic. Yet, if we go back to the much-vaunted RDP document of 1994 we will find that education occupies less than a page, less space than the subject of sport. Moreover there is a crude assumption that what is at stake is simply equalising the educational budget, not the standards, discipline and orientation of the schools. This is astonishing. On the one hand, while all schools get equal state subsidies, those subsidies are very small; the successful schools overwhelmingly depend on massive private subsidisation by parents. The absorption of the large Bantustan and Department of Education and Training education establishments into a deracialised system without any ethos of discipline and upgrade, without any culture of scientific inquiry, has largely been a failure. Graeme Bloch, once a prominent intellectual associated with the Cape Town UDF, began a recent article in the Mail & Guardian of 1–7 February 2008 saying, ‘South Africa must face up to the fact that our schools are a national disaster’. This has more recently been stressed as well in speech and writing by Mamphela Ramphele, a former doctor and anthropologist, ex-vice chancellor of the University of Cape Town and most recently of the World Bank. A recent survey of secondary schools in dozens of countries

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focusing on mathematics and science was unable to find anywhere in the world, including on the African continent, which ranked lower in achievement than the so-called Model A schools (Reddy 2006). A regional research survey by the South African Institute of Race Relations explored the fact that ‘South African [primary] schools are among the worst in Africa’, examining English as well as quantitative skills. Although this was stated in Business Day of 8 November 2008, such information is not often brought to the attention of the public; international comparisons are embarrassing. We now have an education budget in which 90% goes to salaries. The limited bureaucratic controls on competence and performance have largely disappeared as an apartheid shackle. Model C schools, permitted to sustain far higher quality education based on fee payment agreed to by selfperpetuating parental communities, teach a significant number of black as well as white students, but inevitably only cater to a relatively small minority and perpetuate the painful inequality of the past in a form only questionably less stark.11 As a result, only a very thin trickle of young people coming out of these systems have the skills or mentality that will allow them to operate effectively in the kind of career jobs, administrative and technical situations, which can actually carry not only the country but also themselves and their families forwards. This couples with ANC racial policies that insistently promote blacks to such jobs in the public sector and are obsessed with removing white males from decision-making positions of power. Through pressures exemplified by the voluntary but heavily touted black economic empowerment (BEE) system, which tries to promote black participation in business ownership and management, even the private sector is substantially affected. This is a formula designed to promote mediocrity and corruption. It would be unfair to surmise that ministers of the calibre of Kader Asmal, Naledi Pandor and Blade Nzimande working in education policy are unaware of the situation, but there is thus far little general willingness to understand that it represents a crisis and that its resolution is central to any kind of serious development strategy. A second area for debate is urban policy, which is touched on by a number of our contributors. The ANC government has opened the cities up to all with complex consequences. Moreover, the rapid growth of a black middle class and the demographic decline in the white population are opening up city life to previously excluded elements while established townships, especially in the bigger cities, have greatly increased their social amenities

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and profited from the extension of urban infrastructure. In Johannesburg especially, the ANC must also be credited with major efforts to revive a decayed city centre. There are successes in changing existing patterns up to a point. However, there is certainly a need to redirect urban policy in terms of integration of the working class into city life more fully. One aspect of this is the increasingly noted contradiction whereby the state fails to provide mass employment or some substitute payment while expecting the public as consumers to pay for impressively extended services. The most recent state community survey highlights achievements in terms of primary school attendance, access to piped water and flush toilets. Here overall figures for South Africa are now approaching the highest levels attained in countries generally defined as Third World. Yet poor advice from so-called international best practice dominated by corporate influence goes hand in hand with the greed of those benefiting from state contracts to create a situation which is not merely illogical but brings about bitter, often violent, resistance that has actually led to significant loss of life in recent years (McDonald and Ruiters 2005; Ballard, Habib and Valodia 2006). Here the interests of new accumulators, as well as existing corporate interests, rather than those of the broad public, dominate. For some observers, such as Patrick Bond and Molefi Mafereka ka Ndlovu in Chapter 4 of this volume, the answer lies in a new politics based on popular resistance. By contrast, Buntu Siwisa, in Chapter 8, looking at struggles over the provision of reticulated clean water, while aware of the failings of the state’s delivery roll-out, is equally sceptical of these politics, thinks they are partly headless and partly self-serving and sees the answer elsewhere. There is an urgent need to create a workable system that poor people understand as fundamentally just and also provides for the sustainability of service infrastructure. Apartheid was by definition a spatial policy that assigned room to people based on their skin colour, eventually modified to some extent by income. Inevitably the end of apartheid tied into pressures for significant human movement that reflects the perceptions of South Africans as to where they can provide themselves with a better living. It hardly seems necessary to explain that this inevitably attracts them to cities with rapid economic growth rates. In particular, the cities of Gauteng province, especially Johannesburg and Pretoria, and the Cape Town area

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have experienced rapid in-migration since 1990 although the patterns of human movement in South Africa are quite complex. How to expedite the urbanisation of new layers of people with more ambition and hope than resources? How to turn migrants into citizens who can understand how to participate in representative forms of government? How to create a symbolic language of participation and inclusion that accepts the need to compromise between the urges of different classes in society? These problems are also in desperate need of action following more integrated thinking with strong developmental implications for the burgeoning cities. If education policy is bedevilled by the felt need of the ANC to empower teachers and administrators from a mediocre and essentially dysfunctional system and to move extremely fast on placing cadres in positions that exude status and power, the same could be said of housing policy to some extent. Mbeki often made his feelings clear: housing policy, and this has meant the construction of perhaps two million so-called RDP houses, must foreground the need for black people to overcome the humiliation of living in shacks. Having houses that, as much as possible, mimic white suburban houses in respectability is the priority. The problem is that the inhabitants so often lead very irregular family lives with unpredictable incomes and a scarcity of stable jobs: they simply lack the money to sustain suburban comforts. The result are uncomfortable compromises: houses that are sometimes poorly constructed, very small and inevitably located on the cheapest land the state can find, sometimes very inconvenient for participation in the urban economy. The taxi revolution (which of course has empowered a stratum of black entrepreneurs and employs many black drivers) has driven out thoughts of an integrated public transport policy which would serve masses of people and tie cities or regions together in line with a housing policy. It was in the second Mbeki term that the minister of housing, with claims at a breakthrough in new policy, launched the Gateway scheme, intended to create denser housing, economically sustainable for working people, near the N2 freeway that leads from the airport to the city centre in Cape Town. This has been a colossal failure thus far that exemplifies the problems. The quality of the housing (built by the corporate private sector) has been badly compromised and yet there is no stable working class (like that which classically brought on genuine housing shortages as in post-war Britain or industrialising revolutionary Russia) that can pay for sustained higher quality. In the meantime, thousands of poor people who have been

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squatting in what is termed the Joe Slovo informal settlement have been displaced with the possibility only of removal to Delft, a distant Cape Flats township notorious for poor-quality housing profitably built by the building industry. In Chapter 6 of this volume, Edgar Pieterse, whose focus lies in Cape Town, brilliantly captures the way incremental delivery has been encapsulated in existing patterns of social division, even if racial exclusion is no longer part of the agenda. The government has yet to evolve effective rental property schemes and it continues to cold-shoulder informal settlement upgrades on the assumption that this is unworthy of the new South Africa. A realistic policy that can take people forwards is needed. It might even be suggested that the state should place its money into transport and direct employment creation rather than following the chimera of handing out free houses in response to a supposed housing shortage. Gateway symbolises this: as activists complain: ‘There is a big open space between the existing N2 Gateway housing and our informal settlement. This is where government wants to build bond housing for those earning more than R7 500 a month, which is quite out of our range as many of us are unemployed’ (Mzwanele Zulu in Amandla 2, October 2007). When polled, members of the public invariably turn to unemployment and crime, not to inadequate housing, as the most fundamental problems they see around them. Perhaps their instincts at this basic level are correct? These contradictions are certainly played out in the sphere of provision of electricity and water reticulation, themes written about extensively elsewhere and in this volume by Bond and Ndlovu and by Siwisa. There is an argument that, by making many houses of this quality available to poor women with dependents, a positive social benefit has ensued, but it is one that does not connect to any wider sense of socialisation, as is pointed out incisively in this volume by Shireen Hassim in Chapter 13, Mark Hunter in Chapter 15 and especially by Alison Todes, Amanda Williamson and Pearl Sithole in Chapter 14. Formal policies have to link up to initiatives from below, NGO activities and locally based activists. They have to connect to social policy that ties in to adult education and improved schooling as well as health education and family policy but also, through surveillance and building up neighbourhood ties, a struggle against the extraordinary high rates of violent crime from which everyone suffers and which, taken on a local or national scale, has a huge effect in braking economic development. Crime rates must be assumed to stand as well for widespread attitudes to

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law and order which also need to change in order to allow for economic development to diffuse and involve the population more widely. It should probably be added, because it is not often acknowledged, that statistics since 2001 suggest that unemployment, whether contracting or expanding somewhat, is certainly expanding less than poorly paid employment. The problem is not simply lack of jobs but payment according to market relationships set up in earlier times, market relationships which countless opponents of apartheid pointed out in studies that earmarked the harsh forms of exploitation typical of the South African growth path. Labour market policy continues to preside over a situation where jobs which are genuinely unskilled, but also where skill is not recognised, are paid very poorly compared to those affixed to educational qualification and status. Why should cleaners or cashiers make so little compared to all white-collar workers? If there remains a worker in this category absolutely central to the economy, just as in Wolpe’s day, albeit less numerous and not tied in to gold, it is surely the miner. Yet miners, often hired today on some kind of contract basis, earn less in buying power than they did fifteen years ago, in a job which is normally reasonably well paid in many countries. In Chapter 10, Astrid Boehm and Stefan Schirmer point to the problems created by instituting a minimum wage which substitutes for paternalist relations but does not actually create a living wage for farm workers. Minimum wage legislation is in good part due to the intervention of COSATU, but it lacks the ability to make a better way of life real in such situations; legislation is not enough. Over the past decade, more and more attention has been paid to the idea of a skills shortage.12 The old apprenticeship system has virtually died and the attempt by the state to create a work-related skills programme under the aegis of the ministry of labour, the Sector Education and Training Authorities (SETAs), has been adjudged by many as marginal and dominated by ‘low-level training’ where modest bureaucratically set targets are relatively easy to reach but also basically irrelevant (Johnston 2007). Again, the real bull has yet to be grasped by the horns. Attempts through so-called outcomes based education (OBE), a trend borrowed wholesale from far wealthier countries, without anything like the apartheid inheritance, to make schooling more practical have been poorly executed and are largely despised even within the education bureaucracy itself; the kind of sophisticated project required to make such a system work is not a current possibility in a country that needs to work extremely hard on diffusing the traditional education basics.

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COSATU, in the formative years of its components, struggled to create a more humane world of work that could sustain a world of citizens (Friedman 1987; Seidman 1994). Cannot the relatively prosperous trading conditions of recent years be used to resume progress in this direction? But of course, not everyone can, or should be, living in the big cities. Urbanisation policies that take South Africa forward need desperately to be combined with integrated rural development policies that can improve life for the majority of small-town and country dwellers. There is a need to manage urban departures, to provide security and build livelihoods through advancing non-agricultural activity and projects which in turn depends on a systematic and well-informed state presence throughout the countryside. Increasingly, rural policy has been equated with racially defined land ‘reform’, despite an impressive literature that demonstrates how little land transfer actually does, in isolation from a host of other necessary measures to empower poor rural people (Walker 2004; James 2007; Ntsebeza and Hall 2007). The needs of the rural poor can be measured, to quote our workshop guest, Henry Bernstein, by the fact that African cultivators increasingly are becoming too poor to farm. Here again the contradictory mesh of market-led philosophy and the political urgency of redistribution clash; a central issue raised in Chapter 9 of this volume by Deborah James. In Chapter 12 Harald Witt points out additionally that technological fixes, ultimately benefiting some market forces, remain an apparently solid but in reality ineffective way of channelling rural transformation. Inevitably, secure life on the land requires both very effective forms of farmer self-organisation and a myriad of state interventions. You can’t take subsidies away from more marginal white farmers, have them leave and then seriously expect equally or more marginal black farmers to thrive under the same circumstances. Witt proposes, for instance, the desirability of subsidising peasant farmers systematically. Rural policy should move away from a simple exploitative view of available resources to one that makes healthier use of that resource base, more varied and even perhaps intensive. Rural life also has to build new connections with the city and the national economy in ways that make it more attractive and economically functional, not necessarily based on agriculture. Interestingly, this is indeed happening for the well-resourced white middle class in favoured regions, especially the hinterland of Cape Town stretching along the coasts and into the Karoo, but it needs far more creative assistance to reach further and start to build a better life for the majority of potential rural citizens.

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Instead, change in the countryside is often dominated by a racialised fantasy of land reform (which, if genuinely developmental, ought strictly to be about farm size or creating a more even playing field between owners and workers, as suggested by Boehm and Schirmer), a moderate and somewhat marketised version of the vengeful and economically disastrous fast-track land reform taking place after 2001 in Zimbabwe. Transfers in land ownership must be subordinated to a broader policy of struggle against rural poverty, a diffusion of state cadres in the countryside, policing, use of media and schools, promotion of modern ideas about health, equality between sexes, as well as encouragement for rural people to organise themselves democratically and securely.13 Security is important in two senses. The situation where economic activity can barely take place due to a virtual collapse of law and order is one aspect. We often read about farm murders: uncertain property relations and widespread theft can also make most economic initiatives impossible in a former Bantustan milieu (Hebinck and Lent 2007). In addition, while the state needs to support black and white entrepreneurs so their tenure on the land is less fragile through the formation of networks of public and private partnerships, there is equally a need to support economically variegated forms of living in rural areas. The countryside in the twenty-first century is not going to be dominated purely by farm activities; allied and complementary economic activities are already essential. It is also critical to remember that large numbers of rural people live, and will continue to live unless they leave the land entirely, in the former Bantustan homelands and their problems certainly cannot be solved by transferring them to white-owned farms at substantial distances from their present residences. Here again, needs are distinctive in different areas, require more than just agricultural improvement and tie in to the state’s dependence on Mamdani’s world of chief and subject (1996; see also Galvin in Chapter 7 of this volume; Ntsebeza 2005; Oomen 2005). A focus on shifting land ownership from white to black without being tied to wider reforms will merely recreate the impoverished living conditions of the old ‘black spots’ of the early apartheid era. Integrated rural development will exclude almost everyone if it is narrowly fixed on creating black commercial farmers out of the current marginalised rural population, as James stresses in Chapter 9. Wishing people from one side of a divided society into another is just not good enough.

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Democratisation of these areas requires a wide-ranging development policy based on local knowledge.14 In this sense, the local economic development philosophy current in international thinking, by allowing a focus on the local and the particular, is a potential breakthrough although its Eurocentric emphasis on the role of the private sector is completely unrealistic in much of South Africa. Above all, we need to bring skilled and intelligent people in large numbers into every municipality who can conscientise them and convince people that change is possible, a tall order of change that will take a long time to germinate. This book also addresses the essential need to move from dinosaur project development that fitted the minerals-energy complex model but whose deficiencies in terms of environmental cost and increasing technological backwardness, as well as their inability to employ large numbers of lesseducated South Africans in those forms that are typical of contemporary conditions, are increasingly obvious. It could be said that South Africa has a strong tradition of a developmental state aimed at harmonising the interests of the private sector and the public as the state defines it, but the modalities that governed that way of operating are increasingly directing us in ways we should not want to be replicating. Bond and Ndlovu, David Hallowes and David Fig in this volume give us powerful markers pointing the way here.15 The new South Africa should not be about replacing white with black executives, but about thinking through new alternatives to, for example, the intensifying pre-1994 emphasis on a wide-ranging high-quality arms industry that built on the social skills typical of the world of apartheid (Henk 2006). This is becoming more obvious in terms of the gradually deepening international energy crisis, which casts cold comfort on industrialisation based on subsidised and energy-intensive coal fuel. Backward South African executives have treated green innovation as some kind of incomprehensible politically correct fashion; new ideas here have come to the fore very late. The South African electricity shortages manifest from 2006 onwards and reaching crisis proportion at the end of 2007, considered in Chapter 5 by Fig, have finally brought home this folly, as well as the extent to which South Africa falls behind countries likely to bring about key changes to their benefit with reference to energy and global warming. Fig observes South Africa moving from very limited interests in large-scale plans for renewable energy to panic planning on an uncertain knowledge base when suddenly a public clamour arises. Plans for dinosaur mega-projects that belong to the

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minerals-energy complex past, such as the aluminium plant intended to be the key economic investment in a huge project to build up Coega harbour near Port Elizabeth (which will guzzle cheap energy, provide a handful of jobs but bring in an initial thrust of foreign investment with easy profits for various contractors), may have to be put on ice. In this volume, we have consciously taken environmental issues very seriously. In Chapter 3 Hallowes paints a poignant picture of the costs of development in one region in terms of human well-being, notably in the field of health, and in the future of a vulnerable landscape, in terms of what he calls ‘environmental justice’. In Chapter 4 Bond and Ndlovu remind us of the key importance of national water policy on a dry sub-continent, which may become drier as global warming intensifies. In Chapter 11, Cherryl Walker, known for her commitment to land restitution, suggests that there are cases, here looking at Lake St Lucia, where the general good of maintaining environmental standards should override both business interests and those of groups hoping to claim particular benefits for themselves from politicised resources. Corporate interests, largely international at source, promise a better future for small farmers in a context where the chemicals they produce become a required part of agriculture. However, as Harald Witt points out in Chapter 12, given the vulnerability of the land and the difficulties small farmers face, innovations need to be very thoroughly monitored and considered with scepticism. His views coincide with those of Fig and with Ndlovu and Bond over the dependence of the South African growth path on ‘techno-fixes’ (quick fixes derived from apparent technological miracle innovations). Several of the contributions in this volume put an important emphasis on gender issues, and rightly so, since they are absolutely vital to the direction of social change. There is a clear need to give equal opportunities to women as independent actors in ways that can also nurture young people in secure environments. Areas of policy such as housing and the labour market are vitally important here. Gender equality is promoted strongly in the South African Constitution and there is a continued need to give life to these ideals by taking seriously and targeting the actual gender environment in this country. But the social context of production requires systematic thinking about social reproduction rather than women’s representation in Parliament and other bodies whose individual leaders earn big salaries. Women’s rights and the empowerment demands of the ANC Women’s League are not enough: there is equally the need to develop social and family possibilities

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that promote the raising of children in ways other than handing young people over to grandparents, into providing crèches, schools and other institutions that have a real educative function and that create a stable basis for life in spatial communities where market value dominance has so far only offered poverty. Alison Todes, Amanda Williamson and Pearl Sithole, Shireen Hassim, Deborah James, Mark Hunter and others consider the issue of gender in South African development from a number of different angles and show that what exists now is only a reduced and dehumanised skeleton of a vision of equality. The problem lies not with rights talk, which, as this introduction emphasises from the start, coincides well with neo-liberalism to whose most attractive aspect it speaks. However, rights talk does not make interventionist social policy happen by itself. It is also true, and this reiterates a theme that underlines most contributions in this book, that there is virtually no feminist movement on the ground to develop strategies and frame demands that would forward women’s interests and improve gender relations. Hassim is perhaps the most prominent amongst those who have defended the view that a significant women’s movement had a real impact during the key transition years, but she joins others in seeing those embers largely extinguished now (Hassim 2006). The authors collected here differ on the centrality of autonomous movements from below in sympathy with debates internationally, but they clearly have an important, even if insufficient, role to play. In the last two years of its tenure, the Mbeki government signalled a declining confidence in the potential of foreign investment and privatisation and advertised itself as promoter of industrialisation with state-led impetus welcomed. In early 2008, it became obvious to the public that electrical provision for maintenance, let alone development, in South Africa was in serious trouble as a result of a wave of enforced power cuts. The failures of privatisation have, according to many critics, had much to do with the failure of Eskom, the national electricity parastatal whose policy debates focused for years on planning for privatisation, not fulfilling national power needs effectively. However, this message has so far not achieved much compared to the juggernaut represented by Trevor Manuel’s ministry of finance (now Pravin Gordhan’s) and its overall scepticism towards solutions outside the international financial institutions’ market perspective. The developmental state, if one can return to this paradigm which was probably most effectively carried out in the 1940s and 1950s in the interests of a development path we

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are now in some respects rejecting, will require far more than rhetoric to take on some reality. Ben Fine has recently commented on the promotion of the idea of a developmental state by stressing: the close relationship between gold, iron and steel production still remains at the core of South African industry . . . policies have continued to make financial speculation extremely profitable as opposed to leading economic activity . . . a determination to succeed also requires a political conflict with those in control of the economy (Amandla 2, October 2007). It can be argued, moreover, that the conflict would be not merely with the captains of industry but also potentially with the BEE appointees who are now equally dependent on the existing system rather than, as may have been intended, a new breed of South African capitalist. This is not to gainsay the importance of the return of the developmental state to the stage as a debating point. What choices will now be made as the Mbeki era ends?16 Gelb, Hassim, Pieterse and the minerals-energy complex critics in this volume all in one grand sense write the same thing: the dualism that concerns Mbeki rhetorically is not really being challenged; changes taking place are welcome, real and significant but occur on a market-dominated growth path that reproduces that dualism as a matter of course. Many of the contributors here are comfortable using the term ‘neo-liberal’ to describe this context. By contrast, this introduction promotes the need for a vision that integrates change in the first and second economies in defiance of the dichotomy between an idealised version of market-led, globalisation-friendly business growth and a charitably intended poverty alleviation, turned into a substitute for development. One needs devoted cadres who work for the government as well as all manner of independent agents for change on the ground. The long-term goal is actually finding what struggle literature once loved to address as ‘the way forward’, long-term plans that build. As a matter of course, this approach must accept that what is desirable is a tall order that will take a very long time and always face contradictions. The development of a large community of individuals able to study and debate development issues in South Africa is itself a major task that has a very long way to go, although it has advanced if one observes public discourse over the years since 1994. This is the first stage which this book means to stimulate. However, the

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consequences of faltering in political and developmental terms and of foreshortening understandings of transformation into simply exchanging a capable but very conservative white bureaucracy for a black one without clear moorings might not merely build antagonisms and stifle possibilities but, on reaching a dead end, bring about historic regression. This introduction has tried merely to suggest and not to reiterate the many-sided and rich contributions here but it is only an introduction; hopefully the chapters that follow open up more space for advancing debates and a learning process while restoring concern for the big questions inherent in South African development issues.

Notes
1. This understanding became more prevalent from the 1970s onwards (see Arndt 1981). 2. Although much that is very interesting on colonial and post-colonial economic activity in the Gold Coast region and elsewhere in West Africa has been written since, Amin’s schematic critique of the cash-crop ‘miracles’ of West Africa has never been bettered for clarity as an introduction. 3. For an internationally well-known example, see the collection edited by Majid Rahnema and Victoria Bawtree (1997). For some powerful assessments of where development comes from, see M.P. Cowen and R.W. Shenton (1996) and Gilbert Rist (1997). 4. Not so surprisingly, the biggest success in South African consumer capitalism has been the growth and virtual monopoly role of South African Breweries, now one of the biggest international players in beer brewing. The forthcoming work of Anne Mager will make this story clearer. 5. The well-known Gini co-efficient measures the relationship between the top and bottom deciles. 6. Although to be fair, the new version of Marais being published has little left of this and Bond too has shifted towards a more internal and theoretical orientation in his numerous more recent publications. 7. For a defence, see Jonathan Michie and Vishnu Padayachee (1997). Padayachee was among those involved in the Macroeconomic Research Group (MERG). 8. Obviously those working in this paradigm have contributed important micro-studies and are by no means without insights of their own. If the critique of the Third World state has gone much too far and is often extremely crude, understandings of its real limitations and foibles have been enriched by the anti-statist phase so fashionable in the 1980s and 1990s especially.

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9. For a thoughtful introduction to changes in the industrial labour market, see Eddie Webster and Karl von Holdt (2005) and Franco Barchiesi (2007). Von Holdt’s Transition from Below is an excellent monographic introduction to the subject (2003). For a longer assessment of the social movements in urban areas, see my essay ‘The State of South Africa’s Cities’ (2006). 10. For a sympathetic attempt to theorise the empire and the multitude, see Michael Hardt and Antonio Negri (2000). 11. This aspect is captured in the work of, for instance, Linda Chisholm (see 2007) but redress only partly captures the problem. 12. The work of André Kraak on skills is particularly useful; for example, see what he and others have written in McGrath et al. (2004). 13. For an important essay that makes this point but takes a somewhat different tack, see Stephen Greenberg (2003). The situation on white-owned farms is handled with breadth and depth by Doreen Atkinson (2007), a work focused on the southern Free State. Her ideas parallel those of Boehm and Schirmer on many points. 14. For an impressive survey that considers possibilities, with reference to the former Ciskei, see Hebinck and Lent (2007). 15. For a more conservative but very well-researched consideration of energy issues, see Winkler (2009). He emphasises that no potential solution is comprehensive or ideal. Electric power in particular is considered by a wide range of authors in McDonald (2009). 16. The same issue of Amandla also highlights a long interview with the newly appointed deputy minister of trade and industry, Robert Davies, who certainly promotes encouraging ideas along some of the lines suggested in this introduction. His appointment and subsequent events signal an openness to critical ideas within the ANC.

References
Amin, Samir. 1973. Neo-Colonialism in West Africa. Harmondsworth: Penguin. Amsden, Alice. 1989. Asia’s Next Giant. New York: Oxford University Press. Arndt, H.W. 1981. ‘Economic Development: A Semantic History’. Economic Development and Cultural Change 29 (3): 457–66. Atkinson, Doreen. 2007. Going for Broke: The Fate of Farm Workers in Arid South Africa. Cape Town: HSRC Press. Ballard, Richard, Adam Habib and Imraan Valodia, eds. 2006. Voices of Protest: Social Movements in Post-Apartheid South Africa. Pietermaritzburg: University of KwaZuluNatal Press. Barchiesi, Franco. 2007. ‘South African Debates on the Basic Income Grant: Wage Labour and the Post-Apartheid Social Policy’. Journal of Southern African Studies 33: 561–76.

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Bond, Patrick. 2000. Elite Transition: From Apartheid to Neoliberalism in South Africa. London: Pluto Press. Chisholm, Linda. 2007. ‘The Migrating Meaning of Race and Redress in Education in South Africa, 1994–2006’. In Racial Redress and Citizenship in South Africa, ed. Kristina Bentley and Adam Habib, 230–62. Cape Town: HSRC Press. COSATU (Congress of South African Trade Unions). 2004. Cosatu Policy Submissions 1994–2004. Cape Town: COSATU Parliamentary Office, CD. Cowen, Michael P. and Robert W. Shenton. 1996. Doctrines of Development. London: Routledge. Feinstein, Charles. 2005. An Economic History of South Africa: Conquest, Discrimination and Development. Cambridge: Cambridge University Press. Fine, Ben and Zavareh Rustomjee. 1996. The Political Economy of South Africa: From Minerals-Energy Complex to Complex Industrialisation. Boulder: Westview Press. Freund, Bill. 2006. ‘The State of South Africa’s Cities’. In State of the Nation: South Africa 2005–2006, ed. Sakhela Buhlungu, John Daniel, Roger Southall and Jessica Lutchman, 303–32. Cape Town: HSRC Press. Friedman, Steven. 1987. Building Tomorrow Today: African Workers in Trade Unions 1970– 84. Johannesburg: Ravan Press. Ghai, Dharam, ed. 1991. The IMF and the South: The Social Impact of Crisis and Adjustment. London: Zed Books. Greenberg, Stephen. 2003. ‘Land Reform and Transition in South Africa’. Transformation 52: 42–65. Hardt, Michael and Antonio Negri. 2000. Empire. Cambridge: Harvard University Press. Hassim, Shireen. 2006. Women’s Organizations and Democracy in South Africa: Contesting Authority. Pietermaritzburg: University of KwaZulu-Natal Press. Hebinck, Paul and Peter Lent. 2007. Livelihoods and Landscapes: The People of Guquka and Koloni and Their Resources. Leiden: Brill. Henk, Dan. 2006. South Africa’s Armaments Industry: Continuity and Change after a Decade of Majority Rule. Lanham: University Press of America. Hirsch, Alan. 2005. Season of Hope: Economic Policy under Mandela and Mbeki. Pietermaritzburg: University of KwaZulu-Natal Press. Houghton, D. Hobart. 1971. ‘The South African Economy 1865–1965’. In Oxford History of South Africa, Vol. 2, ed. Monica Wilson and Leonard Thompson, 1–48. Oxford: Oxford University Press. James, Deborah. 2007. Gaining Ground: ‘Rights’ and Property in South African Land Reform. Johannesburg: Wits University Press. Johnston, Sandy. 2007. The Skills Revolution: Are We Making Progress? Centre for Democratic Enterprise, CDE in Depth 6. Kraak, André, ed. 2004. Shifting Understandings of Skills in South Africa: Overcoming the Historical Imprint of a Low Skills Regime. Cape Town: HSRC Press. Krämer, Mario. 2007. Violence as Routine: Transformations in Local-Level Politics in KwaZuluNatal (South Africa). Cologne: Rüdiger Köppe.

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Mamdani, Mahmood. 1996. Citizen and Subject: Contemporary Africa and the Legacy of Late Colonialism. Princeton: Princeton University Press. Marais, Hein. 1998. South Africa: Limits to Change. London: Zed Books. McDonald, David, ed. 2009. Electric Capitalism. Cape Town: HSRC Press. McDonald, David and Greg Ruiters, eds. 2005. The Age of Commodity: Water Privatization in Southern Africa. London: Earthscan. McGrath, Simon, Azeem Badroodien, André Kraak and Lorna Unwin, eds. 2004. Shifting Understandings of Skills in South Africa. Cape Town: HSRC Press. Mda, Zakes. 2000. The Heart of Redness. Oxford: Oxford University Press. Michie, Jonathan and Vishnu Padayachee, eds. 1997. The Political Economy of South Africa’s Transition: Policy Perspectives in the Late 1990s. London: Dryden Press. Moore, David. 2006. The World Bank: Development, Poverty, Hegemony. Pietermaritzburg: University of KwaZulu-Natal Press. Nattrass, Jill. 1981. The South African Economy: Its Growth and Change. Cape Town: Oxford University Press. Ntsebeza, Lungisile. 2005. Democracy Compromised: Chiefs and the Politics of the Land in South Africa. Leiden: Brill. Ntsebeza, Lungisile and Ruth Hall, eds. 2007. The Land Question in South Africa: The Challenge of Transformation and Redistribution. Cape Town: HSRC Press. Ong, Aihwa. 2006. Neoliberalism as Exception: Mutations in Citizenship and Sovereignty. Durham: Duke University Press. Oomen, Barbara. 2005. Chiefs in South Africa: Law, Power and Culture in the Post-Apartheid Era. Pietermaritzburg: University of KwaZulu-Natal Press. Rahnema, Majid with Victoria Bawtree, eds. 1997. The Post-Development Reader. London: Zed Books. Reddy, Vijay. 2006. ‘The State of Mathematics and Science Education: The Schools Are Not Equal’. In State of the Nation: South Africa 2005–2006, ed. Sakhela Buhlungu, John Daniel, Roger Southall and Jessica Lutchman, 392–418. Cape Town: HSRC Press. Rist, Gilbert. 1997. The History of Development from Western Origins to Global Faith. London: Zed Books. Seekings, Jeremy and Nicoli Nattrass. 2005. Class, Race and Inequality in South Africa. New Haven: Yale University Press. Seidman, Gay. 1994. Manufacturing Militance: Workers’ Movements in Brazil and South Africa, 1970–85. Berkeley: University of California Press. Sen, Amartya. 1999. Development as Freedom. London: Oxford University Press. Thompson, Edward Palmer. 1963. The Making of the English Working Class. London: Gollancz. Von Holdt, Karl. 2003. Transition from Below: Forging Trade Unionism and Workplace Change in South Africa. Pietermaritzburg: University of Natal Press. Walker, Cherryl. 2004. ‘ “We Are Consoled”; Reconstructing Cremin’. South African Historical Journal 51: 199–223.

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Webster, Eddie and Karl von Holdt, eds. 2005. Beyond the Apartheid Workplace. Pietermaritzburg: University of KwaZulu-Natal Press. Winkler, Harald. 2009. Cleaner Energy, Cooler Climate: Developing Sustainable Energy Solutions for South Africa. Cape Town: HSRC Press. Wolpe, Harold. 1972. ‘Capitalism and Cheap Labour in South Africa: From Segregation to Apartheid’. In The Articulation of Modes of Production from Segregation to Apartheid, ed. Harold Wolpe, 289–319. London: Routledge and Kegan Paul.

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2 Macroeconomic Policy and Development
From Crisis to Crisis
STEPHEN GELB

IN ORDER TO UNDERSTAND development in South Africa, it is essential to understand the country’s economy, economic policy and economic performance. The economy had performed very poorly from the mid-1970s up to 1994. Gross domestic product (GDP) growth averaged only 3.3% per annum in the 1970s and 1.2% in the 1980s, and a fierce policy-induced recession intended to cut inflation meant that growth between 1990 and 1993 was !0.6% per annum. When the post-apartheid era began in 1994, the expectation was that economic growth would quickly improve, but fifteen years later, the optimism at the time of transition has been unfulfilled: only limited progress has been made in raising growth while distributional equality has remained stagnant at best. In the first decade of democracy, GDP growth averaged only 2.9% per annum but, taking account of population growth of 2% per annum, per capita income barely increased at 0.9% per annum. Between 2004 and 2007, growth averaged 5.06% per annum, before dropping back to 3.06% in 2008 in the context of the global financial crisis. In June 2009, the official unemployment rate was 23.6%.1 In 1995, 32% of the population was living on less than $2 per day. This proportion rose to 34% by 2000 (Hoogeveen and Özler 2005), before declining to 24% by 2005. Using a poverty line of R322 per capita per month in 2000 prices, determined by the cost of a ‘basic needs’ basket of goods and services, 52.5% of the population was in poverty in 1995 and 53% in 2000. This number decreased to 47% in 2005, still an inordinately high proportion. These data indicate that between 2000 and 2005 there was an improvement in alleviating poverty, and the larger decline in the $2 per day numbers compared with the R322 per month numbers suggests that those deepest in

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poverty had improved their situation somewhat more than those at slightly higher incomes.2 Notwithstanding the improvement, poverty remains extreme; in fact, inequality measures have deteriorated. The most common measure of inequality, the Gini co-efficient, is calculated by Haroon Bhorat, Carlene van der Westhuizen and Toughedah Jacobs (2009) to have increased (i.e. worsening inequality) from 0.63 in 2000 to 0.69 in 2005.3 The official calculation of the Gini for 2005 was 0.73 (Statistics South Africa 2008), making South Africa certainly amongst the two or three most unequal countries recorded globally. More illuminating perhaps is that the richest 10% of the population received 51% of total household income, while the poorest 10% received a mere 0.2% of the total; the ratio of average income between the two groups thus amounted to a massive 255:1. The richest 20% of the population received 68.8% of the total income, compared with the poorest 20% obtaining only 1.4%, a ratio of 49:1. The poorest 40% of the population received only 6.5% of total household income. An estimated 660 000 households reported no income at all from either work or social grants (Statistics South Africa 2008). To be sure, there has been stability in some key economic variables: consumer price inflation was below 8% almost continuously between 1996 and 2007, compared with 15.3% in 1991 and 9% in 1994, before reaching a peak of 13.6% in mid-2008 in the face of rising oil and food prices on global markets. The fiscal deficit was reduced from 7.3% of GDP in 1993 to below 3% from 1999 and to a surplus in 2006–07 and 2007–08. Yet it is fair to ask, first, whether this represents macroeconomic success, since the international financial situation has been extremely volatile, with three currency crises between 1996 and 2001, and marked fluctuations in capital flows. Second, even if overall performance is regarded as successful, it could be asked whether the price has not been too high, given the poor performance of output and employment growth. This chapter examines macroeconomic policy and performance in South Africa since 1994. First is a discussion of the transition period because this shaped the policy choices of the democratic government. Next, I describe macroeconomic policy since 1994, which has been articulated through a series of frameworks – the Reconstruction and Development Programme (RDP); Growth, Employment and Redistribution (GEAR); and the Accelerated and Shared Growth Initiative for South Africa (ASGISA). This

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section of the chapter looks first at fiscal policies and then turns to monetary and exchange rate policies. I then examine macroeconomic performance, looking at investment, savings and the balance of payments. The fourth section assesses ASGISA, which was adopted in 2005 in the context of the global commodity boom, as well as the policy response to the 2008 global financial crisis and recession.

The political economy of crisis and transition The origins of post-apartheid policies are found in the economic crisis which started during the 1970s and was characterised by a structural slowdown in economic growth reinforced by political problems (Gelb 1991). The slowdown was triggered by the global recession following the collapse of the Bretton Woods monetary system and the 1973 ‘oil shock’. In South Africa, spontaneous wage strikes from 1973 and student uprisings from 1976 added to slower growth by causing capital flight, while also forcing the government to relax some of the restrictions on the urban black population. The growth slowdown continued during the 1980s, despite a brief respite when the gold price rose more than $800 in 1980–81. Fixed investment dropped from more than 25% of GDP in the 1970s to about 18% in the mid-1980s. Productivity growth in manufacturing declined from 2.3% per annum in the 1960s to 0.5% in the 1970s and !2.9% during the first half of the 1980s. Despite slower growth overall, some sectors prospered. Macroeconomic policy favoured mining exports, but raised manufacturing import costs and lowered profitability. Financial institutions enjoyed a short-term profit boom as mergers and acquisitions rose and foreign corporations disinvested. Ownership concentration and the economic power of white big business increased: by 1990, six conglomerates centred on mining and finance controlled companies with 80% of the market capitalisation on the Johannesburg Stock Exchange. An international anti-apartheid campaign calling for trade sanctions and disinvestment gained momentum as political upheaval increased during the early 1980s. In 1985 international creditors recalled South African public sector debt after the government declared a state of emergency. The capital outflows required for debt repayment further tightened the balance of payments constraint on growth, since investment depended on imports of capital equipment and intermediate goods. These economic pressures helped to shift South African business by 1989 to support democratisation as the

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corporate sector reluctantly recognised that higher growth depended on access to international capital flows, which in turn depended on an acceptable political settlement to end apartheid. The crisis reshaped the black class structure and civil society as well. Extreme inequality between races, which was characteristic of the high apartheid period from 1948 to the end of the 1960s, was moderated during the 1970s, as more black people with education and skills found work: employment in the services sectors grew and technical and white-collar occupations increased their share of the labour force in all sectors. The number of black people in middle-class occupations grew at a rate of more than 6% per annum, nearly trebling between 1970 and 1987, when 19% of employed black people were in middle-class jobs and black people comprised nearly 25% of the middle class, with Coloureds and Indians making up another 18%. However, there was increased class differentiation and inequality within race groups after 1975 (Crankshaw 1997; Seekings and Nattrass 2005). Layoffs rose and job creation amongst low-skilled black people was nonexistent. Unemployment amongst black people was unofficially estimated at 11.8% in 1970 and 20.8% in 1980, with job losses primarily amongst unskilled black workers in manufacturing and construction. The growing urban black professional middle class organised politically and socially through professional and business bodies as well as media and cultural associations, while a powerful trade union movement emerged, organising semi-skilled and unskilled black workers both in the workplace and outside it, working with community organisations and women’s and students’ groups. The exiled nationalist movement, the African National Congress (ANC), provided strategic focus to support internal political opposition, while also mounting a low-key armed struggle and leading international boycott pressures. As the 1980s proceeded, both black organisations and white power-holders outside the state increasingly recognised their common interest in establishing non-racial democracy. In 1989, black trade unions and white big business campaigned together for the first time against state repression in industrial relations, a major step not only towards non-racial democracy but also to a negotiated transition rather than a handover of power by a defeated apartheid state to a victorious liberation movement. The form of the transition reflected the prevailing balance of class power at the time and defined the possibilities and limits of the negotiated outcome. The start of formal political negotiations gave impetus to an already lively

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debate about post-apartheid economic policy, which took place in a proliferation of conferences, workshops and meetings. Negotiations propelled the emerging black middle class to the forefront of the black opposition by providing this group with substantial new political resources, including much enhanced space to engage in the economic policy process. The economic debate was not a tabula rasa from which any outcome could emerge, the dominant policy to be decided simply by political contestation amongst the contending parties. In fact there were certain ‘structural imperatives’ reflecting the economic context in which the transition took place and which all sides had to address. First, the foremost priority for all sides was an immediate revival of growth, which would require a significant increase in domestic fixed investment and therefore also in foreign capital inflows to supplement meagre domestic savings. The conventional wisdom of the early 1990s was, for better or worse, strongly in favour of liberalisation of the financial and goods markets to allow free (or at least freer) flows between the domestic economy and the rapidly globalising international economy and argued that capital inflows required liberalisation. The leftwing tradition in which the ANC was rooted opposed liberalisation in favour of relatively closed markets and emphasised the macroeconomic destabilisation that would likely result from ‘opening up’. This was the correct emphasis, as shown below, but it was not politically credible in South Africa at the time. The anti-apartheid forces had argued from the 1960s and successfully during the 1980s that South Africa’s exclusion from international trade and capital flows was essential, so as to reduce economic growth and thereby force white people to the bargaining table. The effectiveness of this strategy made it very difficult for the ANC to argue just a year or two later that growth could now be reinvigorated without foreign capital inflows. This political fact overdetermined the outcome of the crucial economic debate on liberalisation and South Africa’s engagement with globalisation. Similarly, even if a major economic role for the state was desirable (and it certainly was desirable for most in the ANC), this would be possible only as a longer-term goal: raising domestic investment in the short term required establishing business confidence amongst domestic and foreign private investors. Very soon after their unbanning, black opposition leaders acknowledged the growth and investment imperatives facing South Africa and moved to reassure domestic and foreign investors, while insisting on the need to address apartheid’s distributive legacy for reasons of social and

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political legitimation. As Nelson Mandela expressed it during the ANC’s very first public meeting with organised big business after its unbanning (and three months after endorsing nationalisation in his first speech on his release from prison): ‘We [the ANC] have no desire to go out of our way to bash them and to undermine or weaken their confidence in the safety of their property and the assurance of a fair return on their investments’ (Mandela 1990). He went on immediately also to articulate a redistributive priority for the ANC: ‘But we believe that they too must be sensitive to the fact that any democratic government will have to respond to the justified popular concern about the grossly unequal distribution of economic power’, in which the focus was deracialising the ownership and management of the existing large corporate sector, notwithstanding that this affected ‘the sanctity of private property’. The ANC was also strongly mindful of the threat posed by ‘macroeconomic populism’ – excessive fiscal spending leading to hyperinflation – to the sustainability of its own long-term project, as illustrated by the fate of the Unidad Popular government of Chile in 1973 and of the Sandinista government of Nicaragua in the early 1980s, two progressive governments with popular support which had fallen, at least in part, as a consequence of the problems resulting from unsustainable public expenditure programmes. The process and modalities of the economic policy debate were crucial to the way in which specific reforms were introduced. The phase from the unbanning of the ANC to the first democratic election was long – four years – and, unlike the Constitutional negotiations, the economic policy debate was decentralised, unco-ordinated and unofficial. There was no centralised or coherent political or technical co-ordination (on either side) and therefore considerable space and autonomy for policy initiatives to proliferate, often promoted by small interest groups. One example is the deregulation of the Johannesburg Stock Exchange, which was initiated by the Exchange itself in 1992 and legislated in 1994 with, it would seem, no discussion with the ANC. Although the ANC increasingly behaved like a ‘government in waiting’ and insisted on veto power over new government policies and processes, it did not have sufficient personnel or experience to control the many initiatives that were under way. At the same time, the existing state became increasingly incoherent and disorganised and similarly without capacity (and unwilling) to co-ordinate policy. Many state bureaucrats actively participated in the broad

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economic policy debate, but also in initiatives aimed at shaping and limiting options available to the future government. Inherited stock of physical capital was neither devalued nor was its ownership affected in the course of the transition. In this sense, South Africa differed from other transitions where capital assets and their owners were either physically destroyed by war, or politically defeated by revolution, or forced to depart the economy through decolonisation. South Africa’s existing capital stock was substantial and diverse. The well-developed manufacturing sector was dominated by capital-intensive resource-based materials processing sectors (basic metals, chemicals, pulp and paper), which as a result would be the main beneficiaries of a shift towards export-led growth. Almost the entire private capital stock was owned by white business, a group that thus retained substantial power. The size and structure of the capital stock limited the scope and pace of shifting output and technology to more labour-intensive paths and of shifting capital asset ownership away from a white monopoly. A ‘basic needs’ policy with wide support amongst the ANC and its trade union allies was initially formulated in 1990 and later elaborated as the RDP, the ANC’s 1994 election manifesto (ANC/COSATU 1990; ANC 1994). Despite its great attractiveness in principle, based on its direct focus on reducing inequality, this approach was not feasible in the economic and political circumstances of the new democracy. The policy centred on small and medium producers, especially new black entrepreneurs, selling labourintensive consumer goods into low-income domestic markets. The set of technology, labour and output choices in production which this implied could not be adopted overnight, while even far-reaching positive discrimination in the post-apartheid capital market would only impact on the racial distribution of assets over an extended period. Furthermore, the basic needs policy was unlikely to avoid significant macroeconomic instability in the course of implementation because it did not directly address the import dependence and export failure of apartheid-era manufacturing. An accommodation – or implicit bargain – soon emerged in the unofficial economic negotiations, reflecting a consensus over three policy objectives: maintaining macroeconomic stability (particularly in regard to low inflation and fiscal deficits), reintegration of South African trade and finance into international markets, and capital reform to deracialise ownership and management in private and public sectors. Large differences remained over specific policies to achieve these goals and detailed discussion was significantly

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influenced by the prevailing international conventional wisdom. In the early 1990s, for example, trade and capital account liberalisation and low fiscal deficits were a sine qua non for international capital inflows. However, the main elements of this bargain have shaped economic policy since 1990. Economic policy shifts since 1994 During the constitutional negotiations, the ANC’s strategy emphasised stability, including reassuring white people to prevent a flight of capital and skills. The approach to economic issues reflected the same considerations, with the central bank governor and minister of finance from the pre-1994 government at first retaining their positions. Detailed policy formulation to implement the implicit bargain started well before the 1994 elections, with ANC officials increasingly included as constitutional agreement was reached. As noted though, there was little policy co-ordination across issues relating to international trade in goods, financial markets and labour markets. Many reforms formulated before 1994 by officials from the previous government and/or narrow interest groups were legislated before the ANC got into government or immediately after. In the macroeconomic arena alone, by the end of 1994, and notwithstanding that the RDP was official policy, fiscal deficit targeting had been explicitly adopted, central bank independence was enshrined in the Constitution, commitments on trade liberalisation had been formally agreed in the General Agreement on Tariffs and Trade (GATT), legislation had been passed opening the banking sector and the Johannesburg Stock Exchange to foreign participation and capital controls on non-residents had been scrapped. Capital reform had started in 1993, with the first transfer of equity by Sanlam to selected black beneficiaries and other firms soon following. The economic policy shift was effectively ‘locked in’, since even if the ANC had been able to assess all these policy reforms and decide what needed to be reversed, their reversal would have resulted in a massive loss of investor confidence, capital flight and a substantial rise in the cost of capital. During 1995, disappointment grew about the limited improvement in growth and employment achieved by the RDP and the government decided that a macroeconomic stimulus was necessary. This would have been possible via either currency devaluation or fiscal expansion. While policy discussion was still under way in February 1996, the first post-apartheid foreign exchange crisis hit. Net capital inflows dropped from R11.2 billion in the second half

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of 1995 to R2.7 billion in the first half of 1996, while the nominal exchange rate depreciated by 18%, making devaluation redundant. The sense of crisis shifted priorities, so that when the new macroeconomic policy framework was announced in June 1996 – named the Growth, Employment and Redistribution (GEAR) strategy – its immediate goal was to stabilise the foreign exchange market and restore capital inflows. According to the GEAR policy, growth was to be achieved by raising both foreign direct investment and domestic fixed investment through more ‘credible’ macroeconomic policy, understood to imply an emphasis on tighter fiscal and monetary policy.4 Additional objectives included increased exports through a stable real exchange rate and enhanced competitiveness from labour market reforms, skills training and accelerated tariff reform. However, as many emerging markets have discovered since the early 1990s, adopting and sticking to the ‘right’ policies – often restricting economic activity even when domestic conditions support relaxation – has not avoided external volatility and destabilisation (Krugman 1995). South Africa’s macroeconomic circumstances were dominated for many years by foreign exchange crises in 1996, 1998 and 2001, each involving a capital flow reversal and exchange rate collapse. Growth, fixed investment, savings and the balance of payments have been adversely affected by inconsistent signals from the interest rate and exchange rate, offsetting the intended boost from lower fiscal deficits and inflation rate.

Fiscal policy This is the economic policy success story since 1994. The new government inherited a difficult fiscal position due to vast spending in the dying days of apartheid, when the old government tried to buy support from black people and ensure white supporters’ future well-being. The deficit rose from 1.4% of GDP in 1991 to 7.3% in 1993 and government debt from 29% of GDP in 1990–91 to 47% in 1994–95. Since 1994, the government has completely reorganised the budgetary and expenditure processes and introduced improved systems of financial planning, expenditure management, reporting and accountability, which have resulted in much greater capacity to direct and control spending. Together with the adoption of strict fiscal deficit targets from 1994, these reforms contributed to the deficit’s steady decline to below 3% of GDP in 1999. The fiscal deficit was one of the few GEAR targets actually

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achieved, perhaps because a powerful ministry – the National Treasury – had direct control over the policy instrument. However, other indicators, such as the primary surplus (revenue less non-interest expenditure), suggest fiscal policy has been erratic. Real non-interest expenditure grew 7.8% per annum between 2001 and 2004, after real cuts of almost 2% per annum the previous three years. However, the primary surplus actually declined from 3.14% in 2001–02 to 1.32% in 2003–04, suggesting that, although somewhat relaxed, fiscal policy remained contractionary during the 2001 currency crisis and its aftermath. This underlines that there are limits to the degree to which fiscal policy expansion can be used to stabilise economic activity when capital inflows suddenly reverse and the exchange rate declines. However, from its low point in 2003–04, the primary surplus then expanded to 3.49% in 2005–06 and 3.44% in 2006–07; that is, the policy stance was contractionary (appropriately counter-cyclical) during the period when GDP growth was strongest. With the onset of the current global crisis, the primary surplus has plummeted to an expected deficit of !4.9% for 2009–10 (National Treasury 2010). It is easier for policy to respond to a demand-induced contraction. Lower interest rates and fiscal deficits from 1999 to 2000 cut public debt from close to 50% of GDP to 22.4% in 2008–09, lowering interest payments and fiscal space for increased social spending. This had risen by 23.8% in real per capita terms between 1993 and 1997, with significant redistribution across income and racial categories: per capita spending on the lowest income quintile increased by 28% and on the next two quintiles by 56% and 31% respectively. The expansion of the social grant system would have increased spending on the lowest quintile significantly after that point. Between 1995 and 2000, average per capita social spending rose 14.1%, but for black South Africans the increase was 20.6%, while for white people there was a decrease of 6.6% (Van der Berg 2001, 2009). The functional distribution of spending remained relatively stable between 1995 and 2009 with social service spending close to three-fifths of government current noninterest spending. Education accounts for 40–45% of social service spending, with health and welfare each receiving about one-fifth and the remainder going to housing, land reform and water and sanitation programmes. To address inequality, the outcome of government spending is critical. We can distinguish programmes that distribute money to poor people to supplement current incomes or provide public goods and services which

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supplement current consumption, where government has been reasonably effective, from programmes which require asset transfers to the poor for housing or land reform, or ongoing service delivery to enable poor people to build assets, such as in education, where success has been limited. In the first category, social assistance programmes have wide coverage. In 2008–09, the government spent 10.7% of its non-interest expenditure on social security grants, an amount of R70.73 billion, equivalent to 3.3% of GDP.5 Grants were provided to 12.4 million direct recipients, about one-quarter of the population. The number of recipients grew by 11.8% per annum between 2004 and 2008, and even in the richest province, Gauteng, grants were provided to about one-sixth of the population (National Treasury 2008). The total income from social grants as reported by households in 2005–06 was R56.8 billion, equivalent to 6.1% of gross household income. However, amongst households in the lowest income decile, grant income was about 75% of household income and in the second-lowest decile, about 70% (Statistics South Africa 2008). By 2002, a free water grant to poor households was available to 57% of the population, which rose to 66% in 2004 and 82% in 2008. Another 5.25 million people gained access to the water allowance between 2004 and 2008, and yet another 4.6 million are scheduled to receive it by 2011. Outside the Organization for Economic Cooperation and Development (OECD) countries, South Africa has perhaps the highest proportion of its population covered by social assistance, a significant achievement. Clearly, grants and free transfers of goods and services such as the basic water allowance are a crucial supplement to poor people’s current incomes and so play a crucial role in alleviating poverty by supporting poor households’ consumption. By contrast, in programmes to create jobs and to enable poor people to build assets – two approaches to sustainable poverty reduction – outcomes have been less successful, even where expenditure shifts have been significant. In education, overall state spending increased by about 2.25% annually in real terms between 1995 and 2006 and spending per pupil was equalised across races soon after 1994. However, a strong correlation remains between pass rates and pupils’ races. One reason has been that schools have been allowed to raise revenue via fees for additional teachers and facilities, so that formerly white schools in more affluent areas have in general been able to provide better-quality education than schools in townships or informal settlements.6 The apartheid backlog in education has not been effectively

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addressed: in 2002, eight years into the new government, 40% of schools were inadequately supplied with classrooms and/or electricity, while 49% were without textbooks. In other words, the improvement in equality of educational inputs has been of limited scope and equality in outcomes has not improved. In a 2003 test of reading skills for Grade 6 learners in the Western Cape, 35% overall were performing at the required level. However, the scores differed starkly, depending on which schools learners attended – more than 80% of learners at formerly white schools (who were not necessarily white) met Grade 6 standards, but only one-third of learners at formerly Coloured schools and only 4% at formerly black schools did so (Taylor, Fleisch and Shindler 2008). It remains extremely difficult for poor black people to acquire education to use as an asset to leverage their engagement in the economy – jobs, business opportunities and so on – to produce future income. Other crucial assets for poor people are housing and land, both key RDP programmes. Between 1994 and 2003, 1.48 million houses were built, an average of 470 per day, and between 2004 and 2008, another 1.1 million were built. Without diminishing the magnitude of this achievement, there remained an acknowledged shortage of 2.1 million houses. Housing experts have criticised the government for a narrow focus on quantitative targets, undervaluing housing quality, physical durability and also the diversity of housing demand and broader community development. Land reform budgets have fallen well short of needs. Despite a 30% target by 2014, only 1% of farm land had been transferred by 2002, and 4.7% by 2008.7 Between 1994 and 1998, overall public investment rose in real terms by 9% per annum and from 3.7% to 6% of GDP, but then declined, given the broadly contractionary fiscal stance. After the 2001 budget, public investment grew by close to 10% annually. Nonetheless, public capital spending remained below 5% of GDP between 1992 and 2005, compared with 10% of GDP during the crisis-ridden 1980s.8 Within its overall stance of capping public investment, the government emphasised social rather than economic infrastructure and the former grew faster than the latter between 1994 and 2001. Since 2005, in the context of ASGISA and the 2010 Soccer World Cup, this has been reversed and the parastatals responsible for infrastructure services have undertaken huge capital maintenance, refurbishment and expansion programmes. In 2008, public investment reached 7.5% of GDP.

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Success in fiscal policy has been significantly assisted by the huge improvement in tax revenue collection. The South African Revenue Service was modernised, resulting in greater efficiency, a wider tax base as more people were drawn in and greater taxpayer compliance. From 1998–99 to 2002–03, the number of individual and company taxpayers each grew about 12% per annum. Tax revenue rose from a low of 22.6% of GDP in 1995–96 and has remained just below the GEAR-specified ceiling of 25% since 2001– 02. Improved revenue enabled reduction of tax rates, but 86% of the R72.8 billion of forgone taxes between 1994–95 and 2004–05 were allocated to personal income tax cuts for the middle classes, supporting higher consumption spending, rather than alternatives such as public investment, public spending on the poor or lower business taxes to support job creation. The income tax burden – the share of aggregate personal income paid in tax – fell from almost 15% to below 12% in 2002, before rising from 11.9% in 2006 to 12.9% in 2008.

Monetary and exchange rate policy In any economy most monetary authorities would choose, if they could, to have three conditions simultaneously: an open capital market to enable access to external finance, a stable nominal exchange rate to support international trade and the ability to adjust interest rates to meet domestic objectives (such as output growth and price stability). However, these three conditions constitute a ‘trilemma’: only two can be adopted simultaneously, at least in the medium term, so policy authorities must decide which one to abandon. Until 1994, South Africa’s capital account was closed, with exchange controls and a dual exchange rate (commercial and financial rand rates) to discourage capital outflows and disinvestment. Domestic business strongly favoured liberalisation of exchange controls to facilitate capital outflows, and by 1994, the Reserve Bank had also committed to this path. As noted above, the ANC had little option but to go along with this, given its long history of advocating economic sanctions against the apartheid regime. The two-tier currency was abolished in March 1995, removing restrictions on foreign owners of capital, and three-quarters of the foreign exchange control regulations on domestic investors were eliminated by 1998. In 1995, branches of foreign banks were allowed to operate and the Johannesburg Stock Exchange admitted foreign brokers. By 2000, there were twelve foreign bank

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branches and 61 representative offices in South Africa. Inflows of direct foreign investment have also been encouraged by the establishment of promotion agencies to woo foreign multinationals and more liberal regulatory regimes in most infrastructural services. After opening the capital markets, the Reserve Bank initially tried to avoid the trilemma and to pursue all three objectives. The Bank was anxious about excessive inflows, which can cause price inflation and exchange rate appreciation thereby damaging international competitiveness. Between July 1994 and June 1995, there was a net inflow of R18.6 billion (about 3.8% of GDP), compared with the accumulated net outflow of R50 billion between the debt standstill in 1985 and 1993. Capital account liberalisation in March 1995 was also intended to reduce net short-term inflows by offsetting large gross inflows with capital outflows. Capital inflows were used to increase foreign exchange reserves, enabling the Reserve Bank to reduce its large ‘contingent liabilities’ of $25.8 billion in the forward foreign currency market, which were a source of financial weakness. Up till August 1998, the Reserve Bank raised real interest rates to hold back inflation and ‘sterilised’ net capital inflows, keeping them offshore to limit money supply growth and also to restrict inflation. The nominal exchange rate was slowly depreciated to enhance competitiveness while avoiding inflation. Trying to avoid the trilemma was an optimistic strategy and possible only if net capital inflows were large and had long-term maturities. This was the case between March 1995 and January 1996 and again between September 1996 and April 1998. But an open capital market meant that net inflows were susceptible to abrupt reversal, which occurred in both February 1996 and May 1998, the first triggered by domestic political uncertainty and the second in the wake of the Asian crisis. Expecting a rand depreciation, foreign portfolio investors’ herd-like behaviour – rushing to sell rand-denominated assets to avoid losses in their own currency – produced a self-fulfilling prophecy. In both episodes, the Reserve Bank tried to stem the outflow by selling dollars into the market and increasing its future commitments to buy dollars, a costly and ultimately wasteful exercise. In September 1998, these commitments were roughly the same as in March 1995, but about $25 billion in foreign currency had been spent in the interim and foreign exchange reserves had dropped to dangerously low levels. At the same time, real interest rates were hiked – about 2.5% in 1996 and a full 7% in 1998 – in a vain effort to attract foreign portfolio capital back to the

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economy. In both crises, the rand eventually restabilised at levels about 20% below the pre-crisis level and net capital inflows rose. Late in the 1996 crisis, the GEAR policy statement was issued to address (portfolio) investor credibility. GEAR explicitly committed government to all three trilemma objectives. But in September 1998, the Bank decided that the costs of trying to achieve all three objectives were too high and policy entered a new phase. Capital account liberalisation was not put in question, but the priority on low inflation meant that exchange rate stability was abandoned in favour of monetary policy autonomy. This was formalised with the introduction of inflation targeting from February 2000. The target is set by the minister of finance while the Reserve Bank uses interest rate adjustments to meet it. The initial target was 3–6% by April 2002. Although inflation inertia had broken by 1993 and the consumer price index dropped steadily from 10% until 2000 (helped by tariff liberalisation and increased product market competition after 1994), the rand’s nominal depreciation of 25% in late 2001 pushed up prices and the inflation target was missed. Nominal interest rates had dropped after 1998 but the Reserve Bank raised them during 2002 to restore price stability; by late 2003, it had met the target and interest rates began dropping again. As in 2002–03, interest rate increases are often appropriate within an inflation targeting regime but their timing is often at odds with the stage of the business cycle. This underlines the rigidity of inflation targeting which focuses on a single objective, the price level, ignoring the need for output stability in the real economy. Between mid-2001 and 2005, the rand was possibly the most volatile currency in international markets, which further reinforced the negative impact of higher interest rates. In 2001, a third rand crisis occurred, the causes of which remain unclear despite an official inquiry. In real tradeweighted terms, a slow 25% depreciation between late 1998 and August 2001 was followed by a sudden depreciation of another 25% in three months and then by a 45% appreciation over eighteen months to mid-2003. Capital flows were equally unstable, with five abrupt and large reversals in two years from mid-2001, a period of increased turbulence on international financial markets, with the dotcom bubble bursting, 9/11, rising commodity prices, the Iraq war and the dollar weakening. On the other hand, floating the exchange rate enabled the Reserve Bank to eliminate its forward exchange rate contingent liabilities (with additional help from foreign borrowing by government) and rebuild official foreign exchange reserves, which reached

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$35 billion by July 2008. This strengthened South Africa’s financial health and led to an upgraded rating from international credit agencies. However, the positive financial impact must be counterbalanced by the conclusion that policy has, intentionally or not, privileged financial concerns over production and portfolio investment over fixed investment. Throughout the decade, exchange rate volatility has meant inconsistent signals from the exchange rate to producers of tradables, increasing uncertainty and encouraging ‘waiting’ in production and investment decisions. At the same time, interest rate policy has been concerned narrowly with lowering inflation, so that it is hard not to conclude that domestic price and fiscal stability have been achieved only at the expense of external instability, giving the lie to the repeated claims by the monetary and fiscal authorities that macroeconomic stability has been achieved. Indeed, the governor of the Reserve Bank argued that volatility was a ‘fact of life’ beyond the Bank’s control: Volatility is, of course, part of our economic system. Cycles of boom and bust, ‘irrational exuberance’ and gloom, occur from time to time . . . Uncomfortable as this might be for central banks focusing on inflation and stability, it is inevitable and we have to live with it – sit tight, grit our teeth and suffer in silence (Mboweni 2001).

Macroeconomic performance Fixed investment is critical for economic growth, in the short term through its positive effect on aggregate demand, and in the medium to longer term through raising the economy’s supply capacity and thus its potential growth rate. In South Africa, fixed investment growth fluctuated markedly after 1993. Until 1996, it rose strongly in response to GDP growth and the confidence-boosting impact of democracy, but between 1997 and 2002, the period during which the GEAR policy operated, currency volatility dominated fiscal discipline and low inflation, resulting in a sluggish investment growth rate of only 2.4% annually. From 2003, spurred by the global commodity boom which raised the demand for South Africa’s natural resource-based exports and the associated currency appreciation which lowered the cost of imported machinery, investment recovered strongly, averaging 11.3% annual increases through 2008. In the longer-term perspective, even though profitability and productivity in the private sector improved significantly during the second half of the 1990s, private investment averaged only 12.1% of

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GDP between 1994 and 2003, compared with more than 13% in 1982, 14% in 1988 (after the foreign debt standstill) and an average of 10.6% between 1990 and 1993, when the economy was in deep recession and the political situation in deep uncertainty. It was only after the global commodity boom was strongly under way that the private sector responded, with an investment rate of 14.8% between 2004 and 2008. As noted above, the gap in investment demand was not filled by public sector investment, which until 2005 remained below 5% of GDP. Total fixed investment rose above 20% of GDP only from 2006. Poor private sector investment until 2003 was partly due to sluggish aggregate demand in the face of contractionary fiscal policies, exchange rate volatility and interest rate fluctuations. Low business confidence and the reluctance to make long-term financial commitments was also related to uncertainty about the socio-political environment, which may in turn have reflected anxiety that the future operating environment would be affected by South Africa’s high level of inequality (Keefer and Knack 2000; Gelb 2001). Certainly the concern expressed by the corporate sector during 2006– 07 about ‘regime change’ within the ANC and a trade union-influenced leadership could be interpreted as worry about policy moving in a strongly populist direction from 2009. National savings since 1994 have ranged from 14.5% to 16.9% of GDP, well below 1980s levels. Policy since 1994 has been premised on the neoclassical economic view that savings are a constraint on investment and growth: the tight fiscal stance from 1993 was justified by the government arguing that there was a need to raise public savings. These were negative during the early 1990s spending spree, but averaged 2.6% of GDP between 1999 and 2002 and 3.6% between 2005 and 2008. However, it is debatable that investment was in fact held down by low domestic savings, since the latter exceeded investment in all but two years between 1994 and 2005 and corporate savings were sufficient to finance corporate investment. At the same time, the propensity of corporations and households to save from income may have dropped, so that income growth yields a smaller volume of savings than in the past. Corporate savings have declined as a share of GDP since 1996, notwithstanding a rise in net profit from 24.7% of GDP in the 1980s to 31.1% since 1994, suggesting higher dividend payouts in preference to retained earnings to fund investment. The corporate financial balance (the difference between the sector’s savings and its own investment) dropped from a surplus of 2.24% of GDP between 1994 and 1998 (when

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corporate investment was low) to 1.01% between 1999 and 2003, when investment began to pick up but savings did not, to a deficit of 3.3% of GDP between 2004 and 2008, as investment strengthened further but corporate savings declined to only 11.5% of GDP. During the 1980s, households’ average savings were 2.8% of GDP, but by 1998 this had dropped to below 1%, and over the full period of 1995–2008 household savings averaged less than 0.5% of GDP. This period reflected a substantial increase of consumption out of income compared with the 1980s and, after 2006, households dis-saved. Consumption growth of 4.4% per annum after 1994 was faster than the growth of both GDP and of household disposable income per capita, which grew at only 0.83% per annum. After 1993, household wealth rose with declining inflation and rising asset values (especially of housing), and this ‘wealth effect’ supported a consumption spurt in the mid-1990s which continued as interest rates declined from 1998 and lowered household debt levels. From 2004, consumption growth of 7.1% per annum was again supported by wealth effects, linked to the global housing and equity price bubbles during this period, but also driven by the growth of the black (upper) middle class and its catch-up in living standards. In the balance of payments, reopened access to international borrowing from 1993 enabled South Africa to return to the normal position of developing economies of a current account deficit and net capital inflows. The current account deficit is equivalent to the domestic financial balance, the difference between domestic investment and domestic (national) savings. As noted, the financial surplus of the corporate sector largely offset the financial deficit of the public sector until 2002, so that, even though household savings were low, the aggregate domestic financial deficit remained small. In other words, the current account deficit between 1994 and 2004 was well below 2% of GDP and easily manageable, even being in surplus during 2001–02. In 2003 though, the public sector’s investment began to rise while corporate investment also rose and its saving dropped from 2004. As a result, the deficit on the domestic financial balance and the current account of the balance of payments grew from 3.2% of GDP in 2003 to 6.3% in 2006 (its highest level since 1982). At this point it was already a looming constraint on overall growth, irrespective of the international economic situation, though it continued to rise to 7.4% in 2008 when the global financial crisis hit.

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The current account balance can be seen as the sum of the trade balance (including goods and non-factor services) and the factor services balance. Looking at the balance of trade first, both imports and non-gold exports had risen by more than 60% and 80% respectively to more than 29% of GDP between 1993 and 2002, but the strong rand and the growth in investment pushed imports upwards from 27.1% of GDP in 2004 to 38.5% in 2008.9 Volume indices show that imports grew very rapidly until 1997 as trade liberalisation occurred and then levelled off, before surging after 2002, rising by 80% through 2008. Higher exports – partly driven by currency depreciation – include a much larger share for manufactured goods, though these are largely materials processed from natural resources. Gold exports declined during the 1990s: the gold production index dropped 28% from 1986 to 1999 and gold exports dropped from 6% to 4% of GDP between 1993 and 2002. In 2003, the gold price (in dollar terms) was at the same level it had been in 1993 and it rose to reach almost 2.5 times this level up to 2008. Nonetheless, gold exports contributed only 2% to GDP in 2008, half the 2002 level. The overall trade balance was consistently in surplus until 2003, averaging just over 1% of GDP between 1995 and 1998 and rising to around 4% of GDP in 2001 and 2002. Since 2004 there has been a trade deficit each year and since 2006 this has been above 3% of GDP. A deficit in factor services (which includes interest and dividend payments to foreign corporations) has been a problem for the South African economy for decades and the main concern in relation to a balance of payments constraint. Between 1994 and 2003, the factor services deficit was in fact smaller in absolute terms than during the 1980s – 20% lower in US dollar terms – even though it rose as a share of GDP from 2.2% in 1995 to 3.1% in 2000 and 4.3% in 2008. This was largely due to dividend payments to foreign investors, which have risen from around one-fifth of the overall factor services deficit in 1993–94 to well over four-fifths during 2005–08. It is not clear how much of this increase is due to the relocation offshore of major South African corporations such as Anglo American, SABMiller and Old Mutual and how much is due to payments by ‘genuine’ foreign investors. Other important components of the factor services deficit have been the increase in foreign portfolio investment in the Johannesburg Stock Exchange – and the consequent rise of dividend outflows – and the more recent net outflow of foreign aid from South Africa (more than 1% of GDP since 2005).

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In the capital account, net capital inflows exceeded the current account deficit in the periods 1994 to 1999 and 2004 to 2007 and in these years would have contributed to financing higher domestic fixed investment, had the latter been stronger.10 In three of the four years between 2000 and 2003, there were net outflows from South Africa. Instead, capital inflows have been used to build foreign exchange reserve stocks. Because South Africa has highly developed financial markets, the largest component of inflows has been portfolio inflows, which are generally volatile. These have been much larger than more stable inflows, such as direct investment and bank loans. By 2000, gross non-resident transactions (purchases plus sales) represented 52% of turnover on the equity market and 23% on the bond market. Between 1995 and 2002, South Africa received two-thirds of gross market-based capital flows to sub-Saharan Africa and 101% of net portfolio equity flows. South Africa’s share of all developing country inflows was 3.3% and 22% respectively. In contrast, inflows of foreign direct investment since 1994 have been disappointing, with gross inflows averaging $1.86 billion per annum between 1994 and 2002. Since then, there have been a few very large partial acquisitions of South African corporations, particularly of two of the large commercial banks, which have increased gross foreign direct investment inflows, but nonetheless South Africa differs from other middleincome countries in receiving far smaller direct investment than portfolio inflows.11 Firm surveys confirm that foreign direct investment inflows have been small: in 2000, the median capital stock of recent foreign investors in South Africa (firms which had entered after 1990) was estimated at only $2 million (Gelb and Black 2004). Gross foreign direct investment inflows are also offset by fairly substantial outflows so that there were net outflows of direct investment in five of six years between 1994 and 1999 and also in 2004 and 2006.

A new growth path? Global boom and meltdown Not only has recent growth been low, but its pattern has been ‘unequalising’. Significant shifts in the sectoral composition of output and of trade between 1990 and 2003 have led to a ‘skills twist’ in the labour force, where jobs have been created for high-skilled workers at a relatively rapid rate while unemployment amongst low-skilled workers has grown. Output shares of mining and manufacturing have declined while that of services increased, with transport, communications and financial services growing particularly

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strongly. Within manufacturing, labour-intensive sectors (food and beverages, textiles and clothing, and footwear) grew far slower than capital-intensive materials-processing sub-sectors such as basic metals, wood products and chemicals. The shift to more capital-intensive sectors was linked in part to international trade. Between 1993 and 1997, import penetration in labourintensive sectors rose from 55.5% to 67.5%, driven by trade liberalisation and squeezing domestic production and employment. At the same time, the share of exports from capital-intensive sectors rose from 56.1% to 60.8%. Overall, the composition of merchandise exports shifted from minerals to basic pro-cessed goods and machinery and equipment after 1990, reflecting increased domestic processing of natural resources (Edwards 1999; Lewis 2001). From 2003, the government acknowledged that inequality and poverty had not been addressed during the post-apartheid era. President Thabo Mbeki argued that South Africa comprised ‘two economies’: The ‘third world economy’ exists side by side with the modern ‘first world economy’ . . . [but is] structurally disconnected from [it] . . . [To] end the ‘third world economy’s’ underdevelopment and marginalisation . . . will require sustained government intervention [and] resource transfers . . . includ[ing] education and training, capital for business development and . . . social and economic infrastructure, marketing information and appropriate technology (Mbeki 2003: 2–3). Government policy-makers talked of ‘building a staircase’ from the second economy to the first, suggesting that the European Union’s ‘structural funds’ to address regional disparities offered a useful model for first-economy resources to be channelled to the second economy. In 2005, a new policy framework was adopted, titled the Accelerated and Shared Growth Initiative for South Africa (ASGISA), which aimed to halve the number of the population in poverty by 2014.12 Nominally based on the ‘two economies’ concept, ASGISA targeted massive expansion of infrastructure and skills: planned spending on infrastructure amounted to nearly 5% of GDP per annum up to 2010, with a parallel increase in the scale of human resources allocated to skills development and education. ASGISA intended to boost employment by prioritising the tourism and business process outsourcing sectors, both labour-intensive export sectors with opportunities for small

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and medium-sized businesses.13 ASGISA acknowledged macroeconomic volatility as a significant potential constraint but offered no policy to manage it. From a poverty-reduction perspective, ASGISA had several difficulties. The ‘two economies’ concept explicitly assumed there were no linkages between the first and second economies, ignoring interactions between growth and inequality. But not only is growth unequalising – that is, first-economy growth widens the gap between the two economies – in addition, the social consequences of the second economy may well reduce first-economy growth, for example by damaging investor confidence. This suggests that uplifting the second economy may require significant restructuring of the first economy, which could involve challenging established interests. Second, almost all the extensive infrastructure spending programmes outlined by the public sector since 2005 have been aimed at reducing the costs of doing business in the first economy, rather than extending infrastructure services to those in the second economy. Third, much greater policy priority would have to be given to small and medium enterprises than had been true since 1994, despite oftstated intentions by government to increase support, both financially and organisationally. A central obstacle in the way of both increased numbers of small and medium enterprises in South Africa and of higher survival rates is the low supply of entrepreneurs. As a result of black economic empowerment (BEE) and labour market affirmative action policies, potential black entrepreneurs are far more likely to opt for managerial or professional positions in the (formerly white) corporate sector with a reasonably secure and substantial salary, than for the high-risk, low-reward path (at least in the short to medium term) of starting a small business and hoping to grow it into a medium-size business. Fourth, the proposed ‘staircase’ linking the two economies involved asset-building programmes such as skills development, which the government had not been able to successfully implement, as noted above. It was overambitious to assume that these programmes would attain sufficient reach to meet the employment and poverty targets by 2010. Finally, and most significantly, financial resources were unlikely to be adequate. The social grants systems had already committed a high level of resources to poverty alleviation, expenditure which could not simply be redirected to finance asset-based programmes. In other words, additional finance was necessary and, in 2005, ASGISA appeared to assume a plentiful supply, notwithstanding that ‘easy’ fiscal gains from tax and revenue

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collection reform were levelling off. There was also limited political will amongst both black and white middle classes, the bulk of taxpayers, to accept higher taxes to support transfers to the poor, as indicated in the debate on proposals to introduce a basic income grant (BIG) (Seekings 2002). On the other hand, the economy grew at 4.5% in 2004 and 4.9% in 2005, as the world economy enjoyed an extended boom. Global commodity prices rose driven by Chinese and Indian demand – indexed in dollar terms with the value in 2000 of 100, the oil price was at 343 in 2008 and the platinum price at 290. South Africa’s overall terms of trade rose by 19% between 2000 and 2008. This pushed up South Africa’s export earnings, the rand slowly but steadily appreciated after early 2002 and the risk premium on South African bonds declined significantly. Many believed that the South African economy had turned a corner and established itself on a higher growth path. Domestic interest rates dropped from 17% at the end of 2002 to 10.5% in mid-2005 and asset prices rose as rapidly as elsewhere in the world, so that wealth effects drove up consumption. The latter was further reinforced by the rapid growth of the black middle class, which released pent-up demand for housing and consumer durables.14 Even as ASGISA was published and despite the benefits to South Africa of the global commodity boom, warning signs were evident that first-economy growth might not be able to provide the extra resources the programme implied. Consumption-fuelled growth sucked in imports, which grew nearly 10% in 2003 and 15% in 2004. In early 2006, the current account deficit had reached 6.4% of GDP, its worst level since 1982, and it continued to rise through 2007 and 2008, even before the onset of the financial crisis. By early 2007 the housing price bubble in the United States had begun to slow down, and over the next eighteen months the cracks in the international financial system widened, until the collapse of Lehman Brothers in September 2008 plunged the world officially into a financial crisis. The withdrawal of credit and especially of trade finance from the real economy accelerated the contractionary impact of the financial collapse and by the end of 2008 almost all OECD countries were in recession mode, followed in early 2009 by most emerging markets. In South Africa, real GDP declined during the fourth quarter of 2008 and the first quarter of 2009. Hardly had the recession been formally acknowledged before there was talk of recovery and a return to normality. Such optimism ignores the structural imbalances in the world economy which underpinned the financial crisis, in particular

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the interdependency between developing Asia and the OECD and especially China and the United States. In the wake of the Asian financial crisis of the late 1990s, Asian countries, with China in the lead, created large foreign exchange reserve holdings to insure themselves against a repeat of that crisis, which had led to their depending on the West and specifically the International Monetary Fund (IMF) for support. This reinforced the long-standing commitment to export-led growth, supported by low domestic consumption and correspondingly very high savings in the Asian economies. At the same time, by channelling their reserves into dollar-based assets, they helped support declining interest rates and rising asset prices in the United States and other Western economies and so contributed to the asset price bubble and rising consumption driven by wealth effects, the perception amongst households that they can consume more (and borrow more as well as save less) as the rising values of their home and other durable assets have left them wealthier. At the end of 2008, China had the largest foreign exchange reserves of any country, an estimated $2 trillion, of which about 70% was held in dollar-denominated assets. China was not only providing cheap manufactured goods for US consumers, but in effect also saving on their behalf. Once the world was in recession, the interdependency between China and the United States became a trap, in the sense that neither could afford for China to withdraw suddenly from dollar assets – if China were to do so, the United States would have difficulty financing its imports and be forced to raise interest rates and cut domestic spending, leading to an even more serious contraction, while as the dollar crashed, a large chunk of the value of China’s foreign assets would also disappear. The United States cannot afford to be the engine of growth for the world by importing more because this would require even larger capital inflows and put the country deeper into debt, at a time when it is running an increasing fiscal deficit to try to stimulate its own economy. The other large-deficit countries, such as the United Kingdom and France, are in a similar position. What is needed is for trade surplus countries – led by China – to shift to domestic-led growth, increase their imports and support exportled growth in the deficit countries. While there has been some movement in this direction, particularly China’s own $600 billion stimulus and the weakening of the dollar after mid-2009, the structural economic conditions underlying the financial crisis persist. In particular, the Chinese yuan remains

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essentially tied to the dollar, so that as the latter has weakened, so has the former and Chinese exports continue to grow. The idea of normal service resuming – that with some reform of financial and banking regulation and fiscal stimulus in a few countries, the world economy would quickly return to the global boom conditions of 2003–07 – was never credible. Rather, as many commentators have pointed out, this is a crisis of capitalism, that is, a crisis in the form of capitalism, the growth model which has reigned supreme for the past 30 years, labelled the ‘free-market model’ by its enthusiasts and ‘neo-liberalism’ by its critics.15 Of course, this does not mean that capitalism is facing imminent collapse but that it is confronted with yet another turning point: for sustainable growth to resume, a new growth model will have to be constructed. Today’s crisis is different from the last one, which was triggered by the oil price hikes of 1973 and 1979 and a slow decline of long-run growth via stagflation, rather than a sudden financial implosion followed by a collapse of demand for goods, as we have had more recently. As also pointed out by many commentators, events during 2008–09 paralleled the stock market crash in 1929 and the onset of the Great Depression. It took the world more than a decade and a major war to recover economically, primarily because a new growth model for the international economy required internationally co-ordinated action and global economic leadership. The latter requires more than marshalling collective action amongst leading states; it requires leadership in the sense of a government being willing and able to carry a disproportionate share of the cost of stabilising the global economy, not only its own economy. Just as the United States was the only country during the 1930s able to play this role, but was for a long time reluctant to do so, so today China is the only candidate to be global leader, but is similarly reluctant and perhaps not yet ready for this part. The issue that most worries the Chinese government is the effect of global recession on domestic political stability via rising unemployment – this will not be alleviated by China raising imports and cutting exports to assist other countries. It is going to be very difficult for China to shift to domestic consumption-led growth in the course of a slump, while also maintaining or even increasing employment. In addition, there is a real question as to whether its financial system can manage global lending responsibilities at this stage of its development. As a result of China’s hesitancy to address the world’s problems before its own, we should not expect a rapid or smooth resolution

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of the global crisis. A growth recovery may occur, but the question to be asked is whether it will be widespread and sustained, or brief, weak and unstable.

Conclusion At the outset of this chapter I asked whether the reductions in the fiscal deficit and the inflation rate during the past decade can be taken to represent macroeconomic ‘success’, given the volatility in the external accounts over the same period, and second whether this ‘success’, if it be so judged, came at too high a price in the form of low growth of output and employment. This chapter has answered the first question in the negative and the second in the affirmative. The ASGISA framework suggested that the (Mbeki) government had reached similar conclusions, even if the latter strategy did not adequately address the problem. Jacob Zuma won political power within the ANC before the crisis became evident, partly through the support of those who wanted government to make the issues of inequality, poverty and employment its top priorities. By the time the Zuma administration took over, the crisis was in full swing and is likely to persist through the next South African election in 2014 and perhaps longer. Until now, opinion-makers in South Africa have indulged in a certain amount of self-congratulation about the impact of the crisis on the economy. South Africa escaped the financial meltdown because of our excellent financial regulations, we are told. Even though we have been badly hit by the collapse of world trade and production, we had the foresight (or good fortune) to have initiated a major infrastructure repair and expansion programme before the crisis hit. So unlike many other countries, we had public sector investment taking over as a growth driver even as exports faltered. The tone associated with these arguments is reminiscent of the view that South Africa had achieved macroeconomic success, which in turn led to improved growth from 2004. Furthermore, it ignores the potential pitfalls in the strategy to address the crisis. Almost all the infrastructure spending programme is supposed to be undertaken by state enterprises and it is now emerging that their weak balance sheets make most of them unable to do the job. The government is also not in a position to foot the bill, given falling tax revenues at the same time as rising demand for spending. As a result, projects are being delayed and postponed across the board and it is unclear how big the stimulus from infrastructure will ultimately be.

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The government has announced the major expansion of job-creation and job-support initiatives, of training schemes and the like. The crisis is spoken of as an ‘opportunity’ to reskill and upgrade the workforce. But are these programmes sufficient, and even more worrying, are they efficient? In other words, is their scale ambitious enough for current circumstances? And, based on its past record, will the public sector actually be able to implement these programmes even at the planned scale? Basic systems in government are not working and yet they are facing even more pressure from these programmes. A third risk is the likelihood of increased volatility of capital inflows from our traditional sources, given more intense competition for financial resources in a capital-poor world. In South Africa it is not clear that we have abandoned what was in some sense the core feature of our macroeconomic policy over the past decade and a half, the implicit assumption that if we got high marks on financial investors’ good behaviour chart, we would be rewarded with high economic growth. This chapter has underlined the flaws in this assumption, though they hardly need further emphasis in the wake of the financial and economic crisis. Beyond these issues, it needs to be asked whether the government is being bold enough in its strategy to address the slump. True, the fundamentalist preoccupation with inflation as the greatest threat to economic well-being has dissipated to some extent, as reflected in the shift from budget surplus to budget deficit, and the central bank’s interest rate cuts through most of 2009, despite its acknowledgement that inflation will be out of the target range until late 2010. To some extent this follows the lead of the United States, the United Kingdom and other countries, though South Africa started cutting rates well after the authorities in those countries. There is still serious unease about running a fiscal deficit and barely any support for what is an irresistible case for allowing the rand to depreciate. Yet even conservative institutions such as the US Federal Reserve Bank and the Bank of England have during the past year acted boldly to adopt quantitative easing (‘printing money’) and are calling for a fundamental shake-up of their financial systems.

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Notes
1. The official rate in September 2007 was 23%, at which point the broad unemployment rate (including those no longer looking for work) was 34.3%. Statistics South Africa no longer reports the broad unemployment rate. 2. All 2005 data in this paragraph are from Bhorat, Van der Westhuizen and Jacobs (2009); $2 per day is equivalent to R174 per month in 2000 prices. 3. The Gini co-efficient ranges from 0 to 1, with 0 indicating complete equality and 1 complete inequality. 4. The idea of ‘credibility’ rests on the argument that governments have strong incentives to commit to lower inflation to induce investment and then (after investment occurred) to renege on the commitment to improve their chances of re-election. Therefore investors would only commit their resources if they believed a government’s commitment to lower inflation was ‘credible’ and would not be reneged upon (Kydland and Prescott 1977). Neither the ‘credibility’ argument nor the GEAR document makes any distinction between investment in financial and real assets, though these have very different growth impacts (Gelb 1999). 5. By comparison, in 1980 the Western European average was 1.54% of GDP (Van der Berg 2001). 6. Preventing formerly white schools from charging fees to try to maintain their quality of education has, of course, had no impact on improving quality in poorer schools. 7. Data in this paragraph on housing are from Rust (2003), National Assembly (2008) and Silverman and Zack (2008) and on land reform from Aliber and Mokoena (2003) and Minister L. Xingwana, cited in Centre for Development and Enterprise (2008). 8. Of course, the public investment rate before the debt standstill was affected both by low GDP growth and by the apartheid government’s efforts to boost growth via higher spending. 9. Here imports and non-gold exports mean an aggregation of goods and non-factor services and measured as shares of GDP. 10. Net capital inflows are labelled ‘Balance on financial account (5688J)’ in the South African Reserve Bank’s quarterly bulletins. 11. In this respect, South Africa is an outlier compared to other emerging markets (Ahmed, Arezki and Funke 2005). 12. ASGISA’s formal launch was in February 2006 but the document was circulated during late 2005. 13. Business process outsourcing refers to both call centres and back-office data processing where there is no telephonic contact with customers. 14. The proportion of black people in the middle class is now estimated at 55%, compared with 25% fifteen years ago. 15. To my mind, neither tag was accurate or very helpful.

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References
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Lewis, Jeffrey D. 2001. ‘Policies to Promote Growth and Employment in South Africa’. World Bank Informal Discussion Papers on Aspects of the South African Economy, 16. Mandela, Nelson. 1990. ‘Options for Building an Economic Future’. Investment Analysts Journal 33: 7–10. Mbeki, Thabo. 2003. ‘Letter from the President: Bold Steps to End the “Two Nations” Divide’. ANC Today 3 (33), 22 August: 1–3. Available at www.anc.org.zaancdocs/ anctoday/2003/at33.htm. Mboweni, Tito. 2001. ‘Volatility in the Currency Markets and Its Impact on Monetary Policy’. Address to ACI, Pretoria, 14 May. National Assembly. 2008. ‘Department of Housing Budget Vote 2008/9, L.N. Sisulu, 28 May 2008’. National Treasury. 2008. ‘2008 Budget Review’. ———. 2010. ‘2010 Budget Review’. Rust, Kecia. 2003. ‘No Shortcuts to Progress: South Africa’s Progress in Implementing its Housing Policy, 1994–2002’. Institute for Housing in South Africa, Johannesburg. Seekings, Jeremy. 2002. ‘Welfare in Wonderland? The Politics of the Basic Income Grant in South Africa, 1996–2002’. Development Policy Research Unit (DPRU) conference paper. Seekings, Jeremy and Nicoli Nattrass. 2005. Class, Race and Inequality in South Africa. New Haven: Yale University Press. Silverman, Melinda and Tanya Zack. 2008. ‘Housing Delivery, the Urban Crisis and Xenophobia’. In To Go Home or Die Here: Violence, Xenophobia and the Reinvention of Difference in South Africa, ed. Shireen Hassim, Tawana Kupe and Eric Worby, 147– 61. Johannesburg: Wits University Press. Statistics South Africa. 2008. ‘Income and Expenditure of Households 2005/6: Analysis of Results’. Report No. 01-00-01. Taylor, Nick, Brahm Fleisch and Jennifer Shindler. 2008. ‘Changes in Education since 1994’. Paper commissioned by the Office of the Presidency. Van der Berg, Servaas. 2001. ‘Trends in Racial Fiscal Incidence in South Africa’. South African Journal of Economics 69 (2): 243–68. ———. 2009. ‘Fiscal Incidence of Social Spending in South Africa 2006’. Report to National Treasury.

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