Economic Policy and Development in South Africa

This publication was originally written for Shared Interest, a U.S. NGO that serves as a catalyst for change in South Africa by providing access to credit for black people otherwise considered "unbankable." Since 1994, this social investment fund has helped create more than 12,000 small businesses, 18,000 jobs and 64,000 low-cost homes – benefiting 400,000 South Africans, 75 percent of them women. This paper presents the government policy and the debate about policy as the country seeks to meet the Millennium Development Goals including halving extreme poverty to halting the spread of HIV/AIDS.

A Decade of Democracy:

Economic Policy and Development in South Africa

By Richard Knight, March 19, 2004

South Africa is the most developed and modern country in Africa with extensive natural resources, a developed agricultural sector and significant manufacturing. Gross Domestic Product (GDP) in 2002 was $104.2 billion - larger than any other country in Africa. Real GDP growth has averaged 2.7% since 1995. Gross National Income (GNI) per capita is $2,520, more than 5 times the average for all of Sub-Saharan Africa. But South Africa has one of the highest income disparities in the world. The country suffers from chronic unemployment and one the highest rates of HIV/AIDS in the world. Some 50% of South Africa’s people live in poverty; at least seven million people live in shacks in informal settlements.

Legacy of Apartheid

Under apartheid, the economy was dependent on foreign investment and technology. The government imposed inward-looking economic polices including protectionist policies aimed at limiting the impact of sanctions and promoting white business. Blacks were denied basic economic rights – they could not own land, accumulate wealth or conduct business in “white” areas. The apartheid economy was one of white wealth and black poverty.

Poverty in South Africa
Race	Classified As Poor
Africans	61%
Coloureds	38%
Indians	5%
Whites	1%
Progress Report, Welfare, 1999 cited in National Report on Social Development 1995-2000

The apartheid economy in the 1980s was negatively impacted by political isolation, sanctions and disinvestment, including the outflow of foreign capital as companies withdrew and the cut off of international bank loans. The economic and political crisis of the 1980s resulted in stagnant GDP growth, falling formal sector employment and a decline total investment as a percent of GDP from nearly 26% in 1980 to about 15% in 1994, a rate that has remained fairly constant.

Since the early days of colonial rule, poverty and unemployment have been much higher for South Africans of color. Today, according to the South Africa government’s National Report on Social Development, 1995-2000, 61% of Africans are classified as poor compared to just 1% of whites. The unemployment rate for Africans is 42.5% compared to 4.6% for whites.

The Congress of South African Trade Unions (COSATU) noted in 1992: “While Africans make up 76% of the population, their share of income amounts to only 29% of the total. Whites, who make up less than 13% of the population, take away 58.5% of total income.”

Overview

GDP, 2002 ($ billions)	$104.2
GNI per capita, 2002	$2,520
World Bank

In 1994 the government of national unity, led by the African National Congress, inherited a country of gross racial inequities with high chronic unemployment. The economy has grown every year since 1994, an improvement over the 1980s. The budget deficit has been reduced and inflation has declined. Significant progress has been made in education, health care, housing and providing basic services. But poverty continues to be widespread, income disparities remain, unemployment has increased and many people lack necessities. As government notes in its review the successes and challenges in Towards a Ten Year Review published in October 2003, “two economies” persist in the country. “The first is an advanced, sophisticated economy, based on skilled labour, which is becoming more globally competitive. The second is a mainly informal, marginalised, unskilled economy, populated by the unemployed and those unemployable in the formal sector.”[1]

The Economy Today

South Africa’s economy has had positive economic growth every year since 1994. Real GDP grew an average of 2.7% between 1996 and 2003. With population growth of about 2% per annum, real per capita growth has been positive, meaning the average South African grew wealthier, although this benefit has not been evenly distributed. Income disparity remains - in 2000, the poorest 20% of households received 1.6% of total income, a smaller percentage than in 1995.

Gross Domestic Product, Inflation and Budget Deficit
	1996	1997	1998	1999	2000	2001	2002	2003*
GDP, current market prices, R millions	617,954	685,730	738,926	800,769	888,454	983,450	1,120,895	NA
Real GDP Growth	4.3%	2.6%	0.8%	2.0%	3.5%	2.7%	3.6%	1.9%
GDP per capita, % change	2.1%	0.5%	-1.3%	-0.1%	1.5%	0.7%	1.6%	NA
Inflation	7.3%	8.6%	6.9%	5.2%	5.4%	5.7%	9.2%	5.8%
Budget Deficit % GDP, FY	-5.1%	-5.0%	-3.7%	-2.8%	-2.2%	-2.0%	-1.5%	-1.1%
NA = Not Available FY = Fiscal year. * GDP Preliminary South African Reserve Bank, Statistic SA

When the democratic government came to power in 1994 it abandoned the inward looking policies of the past. Tariffs were cut substantially and local business faced increasing exposure to foreign competition and the forces of globalization. The result was that local businesses either closed or had to modernize (improve business processes and introduce new technologies) and become more competitive – produce more goods with fewer workers.

Jobs and Unemployment

The government notes that the economy has created some 2 million jobs since 1995. The number of those employed increased from 9,287,000 in 1996 to 11,565,000 in 2003, a 24.5% increase.[*] But as South African companies were forced to become more productive to survive and the number of jobs in the formal sector declined.

“Rapid growth in the size of the population cohort leaving school and entering the labour market, increased economic participation of women and migration from rural to urban areas are amongst the factors of the present demographic transition that underlies this expansion of the economically active population”

Medium Term Budget Policy Statement, November 2003

Despite this increase in the number of jobs, South Africa suffers from chronic unemployment which has increased from 20.3% in 1996 to 30.5% in 2002. Using the expanded definition, which includes discouraged job seekers, unemployment in this period has increased from 33% to 41.8%. The chronic structural nature of unemployment is demonstrated by the fact that 70% of the unemployed have been jobless for over a year and almost 60% have never been employed. People under 30 face an unemployment rate of 61%. The jobless rate is far higher than in other lower-middle income countries.

There are a number of reasons for growing unemployment including population growth of about 2% per year, urbanization and increasing labor market participation by women. The economically active population using the expanded definition of unemployment has increased from 13,853,000 to 19,986,000, a 44% increase. The labour force participation rate – the percentage of the population aged 15 to 65 years which was economically active – is 56.9%. The labour absorption rate – the percentage of the working age population which is employed – is 39%.

Employment, March 2003
Sector	Thousands	Percent
Formal Sector, excluding commercial agriculture	7,358	63.6%
Commercial Agriculture	865	7.5%
Informal Sector	1,845	16.0%
Subsistence & Small Scale Agriculture	420	3.6%
Domestic Service	1,005	8.7%
Unspecified	72	0.6%
Total Employed	11,565	100.00%
Statistics SA, DTI

Of those employed, 63.6% work in the formal sector excluding commercial agriculture. The formal sector includes all businesses that are registered. Some 16% of those employed work in the informal sector excluding subsistence and small scale agriculture. The informal sector consists of those businesses which are unregistered. They are generally small in nature, and are seldom run from business premises, using instead homes, street pavements or other informal arrangements. About 8.7% of those employed work as domestics. There is considerable difference by race - 93.6% of whites work in the formal sector compared to 62.3% of Africans. More then 25% of employed Africans work in the informal sector and a further 11.4% as domestic workers where wages are far lower than the formal sector.

Unemployment Rate
	1996	1999	2000	2001	2002
Strict Definition	20.3%	23.3%	25.8%	29.5%	30.5%
Expanded Definition	33.0%	36.2%	35.9%	41.5%	41.8%
Statistics SA including October Household Survey (1996-1999), Labour Force Survey (2000-2002); Labour Market Review, Dept of Labour, May 2003.

Jobs are a major issue in South Africa. In its election manifesto the ANC promises by 2014 to reduce unemployment by half. Partly this will be achieved through an expanded public works program. The manifesto notes the government can create some employment in the public service, public works programs and encouragement of labor-intensive methods in parts of the economy but that “long-term employment depends largely on higher rates of private investment; it depends on strategies for growth in key sectors of the economy; it depends on joint skills development and learnerships in both the public and private sectors to provide work experience.”[2]

Income by Sector – March 2003
Monthly Income	Formal	Informal	Total
None	0.4%	14.0%	3.0%
R1-R500	8.4%	39.7%	18.9%
R501-R1000	14.4%	21.5%	17.2%
R1001-R2500	28.7%	14.1%	24.1%
R2501-R8000	30.7%	5.8%	23.1%
R8000+	8.8%	1.4%	6.6%
Don't know/refused	8.3%	3.4%	6.7%
Unspecified	0.2%	0.2%	0.3%
Total	100.0%	100.0%	100.0%
Total includes domestic and unspecified which are not included in formal or informal. Stats SA.

About 40% of those employed earn less than R 1,000 ($143) per month. Wages in the informal sector are significantly lower than in the formal sector. Nearly 54% of those employed in the informal sector make less than R500 ($70) per month. Workers in the informal sector often remain poor since they tend to work in survivalist activities such as street sellers. Many of those in the informal sector are small or micro-business owners, 89% of whom are African.

Economic Policy and Debates

In its 2004 election manifesto the ANC outlines Vision 2014 – Forward to the Second Decade of Freedom, that includes a series of targets and objectives including: a) reduce unemployment by half through new jobs, skills development, assistance to small businesses, opportunities for self-employment and sustainable community livelihoods b) reduce poverty by half through economic development, comprehensive social security, land reform and improved household and community assets and c) provide the skills required by the economy, build capacity and provide resources across society to encourage self-employment with an education system that is geared for productive work, good citizenship and a caring society.

Given the level of poverty and unemployment, government policy has sometimes been controversial. Often the strongest critics of government policy have been the allies and members of the ANC, including the Congress of South African Trade Unions (COSATU). One expression of that has been the People’s Budget, produced annually for four years by COSATU, South African Churches Council (SACC) and South African NGO Coalition (SANGOCO).[3]

Reconstruction and Development Programme

In the early 1990s unions, the civic movement and social organizations began to develop a plan for social transformation needed for post-apartheid South Africa. A process developed which involved extensive consultations within the ANC, its allies and a wide range of experts that resulted in 1994 in the Reconstruction and Development Programme (RDP). The RDP aimed at addressing the many social and economic problems facing the country. A key aspect of the RDP was that it linked reconstruction and development. The RDP recognized that all the problems (lack of housing, a shortage of jobs, inadequate education and health care, a failing economy) are connected. It proposed job creation through public works — the building of houses and provision of services would be done in a way that created employment. The five key programs were: meeting basic needs, developing human resources, democratizing the state and society, building the economy and implementing the RDP.

Selected RDP Goals
Principals An integrated and sustainable approach to harness all the countries resources towards redistribution and development. A people driven process which would be inclusive of all regardless of race, sex, urban, rural, rich or poor and lead to the empowerment of people Promotion of peace and security. Nation building to unify the country and promote national and regional interests. Linking the need for reconstruction of society with development that serves the interests of people and is not seen as purely economic growth Democratizing the state and society
Housing: Provide well-located and affordable shelter for all by the year 2003. Build one million houses in five years	Water: Supply 20 to 30 liters of clean water each day to every person in two years and 50 to 60 liters per day within five years from a point no more than 200 meters from their dwelling.
Electricity: Supply 2.5 million more households and all schools and clinics with electricity by the year 2000.	Health care: Give free medical care to children under 6 years and to homeless children; improve maternity care for women; organize programs to prevent and treat major diseases like TB and AIDS.
Land reform: Implement land reform based on redistribution of residential and productive land to those who need it but cannot afford it and restitution to those who lost land because of apartheid laws.	Job Creation through public works: A national public works program to provide basic needs such as water supply, sewerage and roads and at the same time create jobs, particularly in poor and rural areas.
Social security and social welfare: A new system to provide for all people regardless of their race, gender or physical disability. A pension system to meet the needs of workers in the formal and informal sectors.	Education and training: Literacy for all, equal opportunity, 10 years of free and compulsory education, class sizes of no more than 40 pupils, training workers to meet the challenges of the new political and economic conditions.

Macroeconomic Policy

When the government came to power it saw the need to stabilize the economic situation. In 1996 the government adopted a five year macroeconomic policy called the Growth, Employment and Redistribution (GEAR). GEAR aimed at strengthening economic development, broadening employment, and redistributing income and socioeconomic opportunities in favor of the poor. The key goals of the policy as originally outlined were economic growth of 6% in the year 2000, inflation less than 10%, employment growth above the increase in economically active population, deficit on the current account and the balance of payments between 2% and 3%, reduction of the budget deficit to below 4% of GDP.

“Poverty can be defined as the inability to attain a minimal standard of living, measured in terms of basic consumption needs or the income required to satisfy them. It is conventional to draw up a ‘poverty line’ reflecting the monetary value of consumption which separates the ‘poor’ from the ‘non-poor’. For South Africa this cut-off point can be defined by considering the poorest 40% of households (about 19 million people or just under 50% of the population) as ‘poor’, giving a monthly household expenditure level of R353 per adult equivalent.

“Most of the poor live in rural areas: while 50% of the population of South Africa is rural, the rural areas contain 72% of those members of the total population who are poor. The poverty rate (which is the proportion of people in a particular group or area falling below the poverty line, and which measures how widespread poverty is) for rural areas is 71%. The poverty gap (which is the annual amount needed to uplift the poor to the poverty line by means of a perfectly-targeted transfer of money, and which measures how deep or intense poverty is) was about R28 billion in 1995, and 76% of this was accounted for by the rural areas.”

Poverty and Inequality in South Africa,

Inter-Ministerial Committee for Poverty and Inequality, May 1998

The government has significantly lowered the budget deficit and inflation. But South Africa’s growth rate remains at about 3%, far short of the 6% goal which is seen as necessary to reduce unemployment.

One of the most outspoken critics of GEAR is COSATU. COSATU says that GEAR has failed to deliver the promised economic and job growth or significant redistribution of income and socio-economic opportunities in favor of the poor. They say GEAR, with its focus on stringent monetary and fiscal targets, conflicts with the goal of the RDP of growth based on job creation, meeting people's needs, poverty reduction and a more equitable distribution of wealth. COSATU notes that the government is committed to higher spending on basic service and spending did increase between 1994 and 1996. This, however, was followed by decreased spending following the adoption of GEAR.

“The GEAR brought about deep cuts in government spending between 1996 and 1999. As a result, efforts to improve services to the poor suffered, despite the continued reprioritisation of spending from the rich to the poor.”

COSATU, July 2001

The government acknowledges GEAR’s stringent limits on expenditure impacts on the ability to meet social development goals of the RDP. As the South African National Housing code notes “The most significant goals of GEAR in respect of our capacity to implement the housing programme are those that have to do with availability of funds for housing. GEAR is clear about promising tighter fiscal policy measures, which are being brought about by a cut in government expenditure and a more cost-effective civil service.”

The debate over macroeconomic policy has quieted as government shifted its policy to one of increased spending. The budget deficit is projected by the government to be -3.2% in 2004 and -3.1% in 2005, up from -1.1% in 2003

“Fiscal policy since 1994 has gone through three phases. Between 1994 and 1996, government increased spending in real terms more or less at the rate of economic growth. In 1996, with the introduction of GEAR, government began to cut the budget. From 2000, it has again begun to grow the budget at between 1% and 3% more than population growth.”

People’s Budget 2005 - 2006

In 2001 Thabo Mbeki announced the Micro Economic Reform Strategy which states that, although necessary, macroeconomic stability is not sufficient to achieve growth and equity in the South African economy. Consequently, it identifies certain high-level microeconomic reforms that are necessary within the economy. It focuses on such issues as technology, human resource development, access to finance and infrastructure (including transport, telecommunications, energy and water) and on equality issues such as Black Economic Empowerment, women empowerment, small business development, employment and geographic spread. Priority growth sectors are clothing and textiles; mining, metals and minerals; automotives and transport; chemicals; tourism, agriculture, information and communication technology; cultural industries; services; and aerospace.

“A key point to note regarding the job market is that while many unskilled workers are unemployed, there is a shortage of suitably skilled workers which is a constraint on expansion.”

Towards A Ten Year Review

The Micro Economic Reform Strategy serves as the basis for the Integrated Manufacturing Strategy that argues that “an integrated and advanced manufacturing sector in South Africa can be leveraged to generate higher levels of economic growth, employment creation, and the reduction of economic inequalities throughout the entire economy.”[4]

Black Economic Empowerment

The RDP included a commitment to Black Economic Empowerment (BEE). The government defines BEE “as an integrated and coherent socio-economic process that directly contributes to the economic transformation of South Africa and brings about significant increases in the numbers of black people that manage, own and control the country’s economy, as well as significant decreases in income inequalities.”[5]

In March 2003 the government augmented its BEE policy the publication of a strategy document South Africa’s Economic Transformation – A Strategy for Broad-Based Black Economic Empowerment. In August 2003 the government introduced a bill in Parliament to create an enabling framework for the promotion BEE. The bill enables the government to “issue guidelines and codes of good practice on BEE, as well as establish a BEE Advisory Council to advise the President on the implementation of BEE and related matters.”[6]

The government uses various tools to promote BEE, such as procurement, regulation, financing, and institutional support. The Department of Trade and Industries provides a range of grants and incentives to enterprises. It is also considering new schemes and amendments to existing schemes including supplier development, micro-enterprise development, support for skills development, and the acquisition and development of new technology.

“The Broad-Black Economic Empowerment strategy is a necessary government intervention to address the systematic exclusion of the majority of South Africans from full participation in the economy. The defining feature of Apartheid was the use of race to restrict and severely control access to the economy by black persons. The accumulation process was one of restricted wealth creation and imposed underdevelopment on black communities to ensure that they were, in the main, suppliers of cheap labour…

“Government’s strategy for broad-based black economic empowerment looks beyond the redress of past imbalances to situating BEE as a powerful tool to broaden the country’s economic base and accelerate growth, job creation and poverty eradication.”

South Africa’s Economic Transformation – A Strategy for Broad-Based Black Economic Empowerment

The government has created a number of lending facilities for small, micro and medium enterprises (SMMEs). Khula Enterprise Finance Limited was established in 1996 to facility access to credit of SMMEs. Khula makes loans or provides loan guarantees through intermediaries such as commercial banks, retail financial intermediaries and micro credit outlets which provide loans to SMMEs. Khula is expanding its outreach programs with the emphasis turning to the formal micro, very small and small enterprises. More than 1.5 million people have benefited directly or indirectly from Khula's assistance.[7] However, Khula is confronting major cost recovery and delivery issues and is being redesigned. The Industrial Development Corporation is also involved in funding the transfer of ownership, management and control to black people. Equity stakes in a number of listed companies were sold to black investors.

“The constituencies recognise that aggregate levels of fixed direct investment are a crucial driver of growth and that the current levels are insufficient to achieve the desired growth and employment rates. Investment in productive assets and services, especially in labour-absorbing sectors, and investment in social and economic infrastructure, remain at levels well below what our society needs. The current investment rate, at around 15% of the GDP, is too low. Significantly increasing the levels of investment remains a key objective in the years ahead.”

Growth and Development Summit

Agreement, June 7, 2003

Growth & Development Summit

In June 2003 a Growth and Development Summit (GDS) was held at which government, business, labor, and community representatives agreed to work together to promote higher rates of investment, expand employment and promote people-centered development. An expanded public works program was agreed to that will provide 750,000 short term job opportunities over the next five years. Such jobs can provide poverty and income relief through temporary work for the unemployed to carry out socially useful activities. GDS endorsed an expansion in public investment initiatives to develop and maintain economic and social infrastructure by government, state-owned enterprises and developmental institutions, in order to facilitate growth, improve productivity, create jobs and promote urban and rural development. The Summit also agreed that small enterprise promotion, and especially the development of black-owned small enterprises, is a crucial component of job creation in the economy.

The GDS noted that “[i]t is increasingly difficult for young people to find work - partly because there are not enough jobs, and partly because the young do not have the skills that are in demand in the labour market.”[8] Business and the government have agreed to register at least 72 000 unemployed learners in learnerships by May 2004, an increase from 26,000. The GDS also committed those attending to support the government’s Broad-based Black Economic Empowerment Strategy.

“Of the 2.6 million people benefiting from social grants in 1994 — over 1.6 million were older people and only 60 000 were children from the Coloured, White and Indian communities. Today, the total number of children in receipt of social grants in all communities exceeds 4.4 million. As we speak, approximately 4.2 million children receive the child support grant, 190 000 the foster care grant and 75 000 the care dependency grants.”

Dr Zola Skweyiya, Minister Of Social Development, February 2004

Social Grants

An important and successful tool for the government in reducing poverty is social grants. In 1994, racially based social grants inherited from the apartheid regime that totaled R10 billion were distributed to 2.6 million recipients. Of these over 1.6 million were older people and only 60 000 were children predominately from the white, Coloured, and Indian communities.

“Research shows that grants are exceptionally well - targeted .The poorest 20% of households receive the largest amount from grants, not just as a proportion of income, but also in absolute terms. Fully two-thirds of the income for the poorest quintile is attributable to state transfers.”

“Overall, social grants have the potential of reducing the number of individuals in poverty from 42% to 24%. Although great progress has been made in registering recipients, the full impact of these grants will only be realised when all eligibles are registered.”

Towards a Ten Year Review

Today government equitably distributes R34.8 billion (nearly $5 billion) in social grants to more than 7.7 million beneficiaries: the aged, young children in poor households, people with disabilities and others. Some 4.4 million children receive social grants, including 4.2 million who receive the child support grant in some 2.9 million poor households. The real value of these grants has increased above the rate of inflation. Recently the government decided to extend child support grants to the age of 14 by 2006 which will add an additional 2.2 million children.[9] In 1993 there were 13 disability grants per 1,000 compared with 29 per 1,000 today. The government, working with NGOs, is embarked on a campaign to ensure that all people eligible for social grants, especially children, are registered and thus receive the grants to which they are entitled. The Department of Social Development is also working to expand Home-Based/Community-Based care and support to children and families affected by HIV/AIDS and the consolidation of the Poverty Relief Programme to focus on sustainable development. About 4.5 million children benefit from the Primary School Nutrition Programme. The government is in the process of consolidating grants delivery into a new Social Security Agency and expenditure is expected to grow significantly over the next few years.

In July 2001 a group of 12 organizations announced the formation of a Basic Income Grant (BIG) Coalition. They proposed a grant of R100 per month (about $14.30) for all South Africans, indexed to inflation. In a declaration they noted “At least 22 million people in South Africa — well over half the population — live in abject poverty. On average they survive on R144 [$20] per person per month.” They estimated a R100 monthly grant would double the amount available for consumption by people in the poorest 29% of the population and close the poverty gap by more than 80%. They proposed the grant be financed by a progressive taxation system and estimated net costs after tax offsets would be R20 to R25 billion annually. Endorsers of the platform, now 26 organizations, include Black Sash, COSATU, the South African Council of Churches, the South African National NGO Coalition (SANGOCO), the Southern African Catholic Bishops’ Conference and the Treatment Action Campaign.

“With full take-up of a Basic Income Grant, the number of poor South Africans excluded from the social security system is reduced to zero.”

“Analysis indicates that the Basic Income Grant has the potential, more than any other possible social protection intervention, to reduce poverty and promote human development and sustainable livelihoods.”

“Moreover, in the view of the Committee, income support of this nature would assist the poor to access Government services, thereby improving the effectiveness of many service delivery programmes and social policies.”

Consolidated Report of the Committee of Inquiry into a Comprehensive Social Security System for South Africa, May 2002

The idea of a Basic Income Grant received important support in the Consolidated Report of the Committee of Inquiry into a Comprehensive Social Security System for South Africa (also known as the Taylor Committee), which was released by the Minister of Social Development in May 2002. The report found that the economy was unlikely to create enough jobs (formal and informal) and as a result a system based on “tiding people over” until they found employment was not sufficient to reduce poverty. The report notes that there is no income support program for older children, adults between 18-59 years and no general assistance for households where no one is employed. “The existing social security programmes do not adequately address the problem of poverty,” notes the report. “Half of the poor live in households that receive no social security benefits at all, and the rest remain poor in spite of the benefits they receive.” Existing social security programs reduce the average poverty gap by 23 per cent. The ‘poverty gap’ gives an estimate of the extent of poverty, by adding, for each household, the amount by which income falls below the subsistence line. By contrast BIG would reduce the poverty gap by 74% and free an additional 6.3 million people from poverty. The report found that BIG was affordable and administratively possible and suggested a phased introduction to address these concerns.[10]

“Provinces are expected to spend R65 billion on education, R41 billion on health and R48 billion on social grants and welfare services in 2004/05. Much of the additional R26,3 billion allocated over the 2003 forward estimates will go to the comprehensive response to HIV and Aids, further extension of social assistance to the poor and procurement of complementary inputs such as textbooks and other materials in school education”.

Trevor Manuel, Minister of Finance

Despite the findings of the Taylor Committee the government has not been won over. Minister of Finance Trevor Manuel, in his February 2004 Budget Speech, said he had sympathy for the underlying intent of BIG but that “Government’s approach, however, is to extend social security and income support through targeted measures, and to contribute also to creating work opportunities and investing further in education, training and health services. This is the more balanced strategy for social progress and sustainable development.”

Impact of HIV/AIDS

An estimated 4.7 million people in South Africa are HIV-positive. Every day in 2002 some 600 people died of AIDS, or more than 200,000 in the year. Between 400,000 and 500,000 people have reached the stage where they should be on anti-retroviral treatment to save their lives. An estimated 30,000 people were on anti-retroviral treatment by the end of 2002.[11]

“In the absence of a cure for AIDS, prevention remains the cornerstone of the country’s response to HIV and AIDS. The current range of prevention strategies includes provision of barrier

methods, voluntary counselling and HIV testing, prevention of mother-to-child-transmission (PMTCT), post-exposure prophylaxis (PEP), syndromic management of STIs, TB management, and a large and sustained information, education and communication campaign.”

“There is currently no cure for AIDS. The best that an AIDS management programme can achieve is to prolong the lives of people living with HIV and AIDS, so that they can remain productive members of society.”

Operational Plan for Comprehensive HIV and AIDS Care, Management and Treatment for South Africa,

November 19, 2003

It is extremely difficult to assess what the near and long term economic impact of HIV/AIDS will be on the South African economy. A study by ING Barings Bank predicts that the economic growth rate over the next decade is likely to be 0.3 to 0.4 percentage points lower every year resulting in a real GDP being 17% lower in 2010 than it would have been in the absence of AIDS. Many of those infected are of working age. AIDS is likely increase the shortage of skilled workers and produce bottlenecks in the economy. “More than 40% of manufacturing companies say HIV/AIDS is biting into profits, according to a survey by the Bureau for Economic Research and the South African Business Coalition on HIV/AIDS,” reported Business Day.[12] Families and government will have to redirect resources toward health care and care for orphans.[13]

In November the government adopted a Comprehensive HIV and AIDS Care and Treatment Programme, including the provision of anti-retroviral treatment, which could reduce the impact of HIV/AIDS. The goal of the program is to provide all South Africans and permanent residents who require comprehensive care and treatment for HIV and AIDS equitable access to this program within their local municipal area within a period of five years. Western Cape has 13 sites providing treatment. Gauteng will start implementing the program on April 1 and the Free State on May 1. But the government is behind on its initial goal of treating 53,000 people by the end of March 2004.[14]

Projected Number of Patients Receiving Anti-Retroviral Drugs
Year	Starting	Cumulative
2003/04	53,000	53,000
2004/05	138,315	188,665
2005/06	215,689	381,177
2006/07	299,516	645,740
2007/08	411,889	1,001,534
2008/09	551,089	1,470,510
Department of Health

The government plans to establish at least one accredited service point in every health district (in each District or Metropolitan Municipality) by the end of the of 2004 and within a period of five years to provide all South Africans who requires comprehensive care and treatment for HIV and AIDS equitable access to the program within their local municipal area. Government expenditure on drugs, staff and infrastructure and expected to rise sharply. The government’s goal is to be treating 53,000 people with anti-retroviral drugs in 2003/4, rising to nearly 1.5 million in 2008/9.[15] According to the projected budget in the operational plan, about one third goes to the purchase of anti-retroviral drugs and the rest goes to new staff, laboratory testing, nutrition, health system upgrades, program management, capital investment and research.

Prevention remains at the core of government policy. Studies show that education results in higher condom use. Condoms are available free at all health clinics and the government is expanding supply through non-traditional outlets – like clubs, shebeens and spaza shops. The government distributed some 400 million male condoms on 2003/04, a 14% increase over the previous year. A program to prevent mother to child transmission of HIV through the provision of Nevirapine is also expanding.

“To date, there are less than 2,500 people on the national ARV programme country-wide - and nearly all of them are in the Western Cape. The National Department of Health has admitted that it will miss its target for the end of March. TAC believes the primary reason for the failure to meet this target is the Minister of Health's lack of political will. Her justification for delaying treatment is that the tender process for antiretroviral medicines is not complete and therefore these medicines will only be available in the public health system by the end of June. But there are mechanisms in South African law allowing for emergency procurement without tender that the minister could use to secure an interim supply of ARVs.

Treatment Action Campaign

March 16, 2004

Government expenditure by national departments on HIV/AIDS programs has increased from about R30 million ($4.3 million) in 1994 to R342 million ($49 million) in 2001/02. In February 2004 the government announced a further R2.1 billion ($300 million) is to be allocated for the comprehensive response to HIV and AIDS, including provision for anti-retroviral treatment programs, in 2004/5. Expenditure is further set to increase to at least R3.6 billion ($500 million) in 2005/06.[16]

Critics such as the Treatment Action Campaign (TAC), which campaigned for years for the government to provide free anti-retroviral drugs, complain that the government has been slow in responding to the AIDS pandemic. The government responds that it was only recently that drug companies lowered the price sufficiently and that much other work needs to be done producing training manuals, treatment protocols and expand laboratory services.[17] The government claims it is behind in it schedule to provide anti-retroviral drugs because of the legally mandated tender process to purchase the drugs. TAC responds that the law allows the purchase of an emergency supply. “Many hospitals have the capacity, they just don't have the medicines,” commented TAC treasurer Mark Heywood in February.[18]

Formal Sector Overviews

Agriculture

South Africa’s agriculture accounts for about 3% of GDP. It represents about 11% of employment, 7.5% in the commercial sector and 3.6% in subsistence and small scale farming. Much of the country is dry and agricultural production is vulnerable to drought. There was a significant fall in crop production in 2003, especially in maize, due to adverse weather conditions. South Africa is largely self-sufficient in agricultural products but because of drought sometimes has to import grains. Agriculture products account for between 7% and 8% of exports. Some 1.3 million hectares is irrigated and almost 50% of the country’s water is used for agriculture.[19]

There are some 60,900 commercial farming units in South Africa. These are almost exclusively white-owned and include most of the land which is most suitable for commercial crop production.[20] In 1996 the average size of commercial farms was 1,349 hectares. Commercial farms employ 734,000 people, about 9% of those employed in the formal sector.[21]

Subsistence farming, by contrast, is largely African farmers on mostly on communal land in the former homelands. It employs some 792,000 people, 30% of those employed in the informal sector of the economy.[†] It was estimated in 2000 that 52% of those employed in the rural areas of the former homelands work on farms. Most of these were on plots of less than one hectare.[22]

The government has set the goal of redistributing 30% of commercial agricultural land to blacks by 2015. The Land Redistribution for Agricultural Development program adopted by the government in 2001 provides grants to blacks to purchase land or to acquire a lease option for commercial agricultural purposes and to obtain fixed assets, equipment that improves the value of the land and production inputs for the development of the land that is acquired.

Manufacturing

Manufacturing contributes some 18.5% of GDP and has grown faster than the overall economy - some 4% per year between 1994 and 2002.[23] Manufactured goods make up 38% of exports, up from 25% in 1994. Yet despite this growth, employment has decline from 1,427,045 in 1994 to 1,270,647 in 1992.

“Over the past seven years vehicles and transport equipment contributed materially to growth in manufacturing exports. Vehicles and transport equipment as percentage of total exports of manufactured goods doubled from 12 per cent in 1996 to 24 per cent in the first three quarters of 2003. This increase came mainly from the growth in the volume of vehicle exports, which increased at an average annual rate of 41 per cent from 1996 to the third quarter of 2003. The volume of total vehicle production increased at an average annual rate of 3 per cent over this period. Vehicle exports as a percentage of total vehicle production increased from 3 per cent in 1996 to 26 per cent during the first three quarters of 2003.”

Quarterly Bulletin, South African Reserve Bank, October 2003

The automobile industry is an example of this trend - growth in output but a decline in employment. The automobile industry has been transformed into one of South Africa’s major exporters, much of which is sent to the U.S. Exports include both vehicles and components. Catalytic converters account for 40% of component exports, where South Africa has the advantage of local production of platinum group metals.[24]

In 2001, the industry's exports to the United States rose by 387%, to $359 million. In 2002 they grew again, to $572.9 million. These exports to the U.S. are considered “AGOA exports,” which means they enter the U.S. duty free.

General Motors will likely add to this growth in automotive exports. GM withdrew from South Africa in 1987 and its former subsidiary was renamed Delta Motor Corporation. In 1997 GM reacquired a 49% in Delta. In January 2004 it announced it was acquiring the other 51% of Delta, which will be renamed GM South Africa. Delta’s production remains largely for domestic consumption – the company’s vehicle exports account for only about 1% of the South Africa’s total vehicle exports. Delta also exports parts. GM will continue a planned R1.5 billion ($213 million) capital investment program which includes a focus on product and export development programs.[25]

This growth, however, has not led to more employment. According to the National Union of Metalworkers of South Africa, which represents most auto workers, the number of jobs in automobile and auto-component manufacturing fell by 16,200 between 1995 and 2001.[26]

In the longer term, South Africa’s success in vehicles and parts exports is challenged by the growing exports from China and India. Also, AGOA expires in 2008 and if it is not renewed South African exports will lose a cost advantage.

Manufacturing - Average Total Number of Employees
1994	1995	1996	1997	1998	1999	2000	2001	2002	2003*
1,427,045	1,431,008	1,456,393	1,396,429	1,350,784	1,315,723	1,296,166	1,262,623	1,270,647	1,249,048
*First quarter only. All others a four quarter average. Dept. of Trade & Industry

Mining

Mining remains an important part of the South African economy. South Africa has significant deposits of base and precious metals, coal and diamonds. This includes a large percent of the world’s reserves of many key commodities including manganese (80%), chrome (76%), platinum-group metals (56%), gold (52%), and vanadium (44%).[27] South Africa is a significant producer of uranium, mostly as a by-product of gold production at Vaal Reefs.

There has been strong demand for many minerals including from a rapidly growing China. Mining contributed 8.1% of GDP in 2002, up from 7.5% of in 2001. Primary mineral exports accounted for 32.9% of South Africa’s total export revenue in 2002, including gold which accounted for 12.6%. However, mineral exports have been declined from 49.9% of exports in 1993 as a result of the decline of the gold-mining industry.

Gold in South Africa is produced by deep, hard rock mining and is very expensive to produce by world standards. As a result a number of mines have closed. South Africa’s gold production has declined from 619.5 metric tons in 1993 (27% of world production) to 395.2 metric tons (15.3% of world) in 2002.[28]

“The problem for the mining sector is that the appreciating rand has more than neutralised the increases in US$ commodity prices. In 2003, despite higher US$ commodity prices the 26% stronger Rand has resulted in declines in the rand prices for gold (-15%), platinum (-9%) and coal (-9%). Rand revenues for mining will be down by about R20 billion in 2003.”

Roger Baxter, Chief Economist,

Chamber of Mines

The problems have been increased in the past year by appreciation of the price of the rand, which reduces the amount companies receive for exports. The average dollar price of gold increased from $310 an ounce in 2002 to $364 in 2003, a 17% increase. But the rand appreciated 28%, reducing the rand price of gold from R 3,248 per ounce to R 2,735.[29] While this has hit all commodity exports it has taken a greater toll on gold mines because of the high cost of production. This is a reversal of the situation in 2002 which saw an increase 20.3% in foreign income in rand terms as a result of a 22.2% depreciation in rand/dollar exchange rate.[30]

Total production of platinum group metals has increased from 200 metric tons in 1998 to 239.6 metric tons in 2002. Employment in that period has increased from 90,000 to 111,460. Output is projected to increase100% over the next five years.[31]

South Africa produced 220,212,491 metric tons of coal in 2002 of which 31% was exported. Coal output is also projected to increase both for domestic consumption for power generation and export. An expansion of the Richard’s Bay Coal Terminal will raise its coal handling capacity by 10 million tones to 82 million tones allowing increased exports especially to China.[32]

Employment in the mining industry declined by 193,704 between 1994 and 2002, the equivalent of about 10% of people currently employed in the formal sector excluding agriculture.

The mining industry represents 4% of employment. Gold accounts for 43% of mining industry’s work force, platinum group metals 22.6%, coal 17% and diamonds 5.4%.

Employment in the mining industry has declined from 610,794 in 1994 to 417,045 in 2002. The 2002 figure is actually an improvement of about 10,000 over 2001. As a result the number of people employed in mining as a percent of the economically active population has declined from 4.5% to 2.6%. This is largely the result of the decline in the gold industry. The number of people employed gold mines has declining since the 1980s, going from 392,327 in 1994 to 199,259 in 2002. A Gold Crisis Committee consisting of the government, the National Union of Mineworkers and the Chamber of Mines, is working to restructure the industry and save jobs. Employment in the coal mines has declined in this period from 60,187 to 47,904. Employment in the platinum group metals has increased from 97,643 to 111,460.[33]

Mining- Average Total Number of Employees
1994	1995	1996	1997	1998	1999	2000	2001	2002
610,794	598,123	569,069	553,116	466,663	436,464	416,781	407,152	417,045
Source: Dept. of Minerals and Energy

The mining industry is still largely controlled by whites. In line with it’s policy to promote black economic empowerment, in October 2002 government set the goal that historically disadvantaged South Africans should control 15% of mines in five years and 26% in ten years. A number of black owned companies have acquired mines or significant stakes in mining companies. In March 2002, De Beers sold its Kamfersdam Mine to the New Diamond Corporation, a BEE company. Mvelaphanda Holdings through various subsidiaries has acquires a 19.4% of Trans Hex, South Africa’s only listed diamond company, and a 22.5% interested in Northam Platinum Ltd.[34]

Conclusion

Economic growth, poverty reduction and job creation remain key goals of economic policy. The South African government has made significant progress in meeting the goals of the RDP: providing housing, basic services, health care and land reform. The lives of millions of people have been improved.

South Africa has had continued economic growth every year since 1994. But due population growth, urbanization and increased labor force participation the current growth rate is insufficient to reduce unemployment. Though jobs have been created in the informal sector they have been lost in the formal sector. A large number of jobs have been lost in the mining sector. Despite increased output there has been a loss of formal sector jobs in manufacturing.

“The advances made in the First Decade by far supersede the weaknesses. Yet, if all indicators were to continue along the same trajectory, especially in respect of the dynamic of economic inclusion and exclusion, we could soon reach a point where the negatives start to overwhelm the positives.”

Towards a Ten Year Review

Government programs have had a real impact on reducing poverty. Through its housing subsidy program at least seven million people have been housed. The government’s programs to provide free basic water and free basic electricity have also had a tremendous impact. Social grants, especially to the elderly and children, have benefit nearly 8 million people and, if fully implemented by getting all eligible people registered, could almost cut the poverty rate in half. The government’s HIV/AIDS program is beginning to have a real impact and the provision of anti-retroviral drugs will prolong lives.

“And so when we talk of development, and building capabilities, and empowering our people, these are the lives, these are the experiences, that we seek to change. These are the reasons why the Growth and Development Summit last year set a target of halving the unemployment rate by 2014. These are the reasons why President Mbeki has challenged us to increase the number of people in society who depend for their livelihood, not on social grants, but on normal participation in the economy. But these are also the reasons why we are progressively extending the social security system, with a focus particularly on the needs of children, who cannot be expected to provide for themselves.”

Trevor Manuel, Minister of Finance

South Africa remains a divided economy  vast majority of the poor are black and most of the wealthy are white. South Africa’s income disparity is the highest in the world. Blacks suffer higher rates of unemployment and poverty than whites. The government’s Black Economic Empowerment policy has the potential to promote economic growth and address historical inequalities that were created by 300 years of colonialism and apartheid.

Reducing the high rate of unemployment is crucial to reducing poverty. There is no easy answer to South Africa’s structural unemployment. But government policies, including increased public and private investment, expanding education and skills training, job creation through infrastructure development and support for small, micro and medium size business are an important start.

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Richard Knight is a New York City based consultant on Africa, human rights and economic justice. He previously worked at the American Committee on Africa/The Africa Fund. His web site is www.richardknight.com.

Population and use of racial classifications: Africans make up 79% of the population, white 9.5%, Coloureds 8.9% and Indians/Asians 2.3%. The term Black in this paper is used to describe all those not classified as white. In terms of the use of racial classifications the following from Statistics South Africa should be born in mind: “Population group describes the racial classification of a particular group of South African citizens. The previous government used legislation to impose this type of classification, to divide the South African population into distinct groupings on which to base apartheid policies. For quite a different reason it remains important for Stats SA to continue to use this classification wherever possible. It clearly indicates the effects of discrimination of the past, and permits monitoring of policies to alleviate discrimination. Note that, in the past, population group was based on a legal definition, but it is now based on self-perceptions and self-classification. An African/black person is someone who classifies him/herself as such. The same applies to a coloured, Indian/Asian or white person.”

Exchange rate: Rand to dollar exchange rate used is the average monthly average August through December 2003 average. $1 = R0.143164. Conversions of large numbers are approximate.

Exchange Rates August – December 2003 (averages)
	Aug.	Sept.	Oct.	Nov.	Dec.	Average Aug.-Dec.
SA rand per U.S. dollar	7.3922	7.3246	6.9637	6.7287	6.5159	6.98502
U.S. dollar per SA rand	0.13527773	0.136526	0.143602	0.148617	0.153471	0.143164
South Africa Reserve Bank

Sources: Much of the information here comes from national and provincial government web sites including those of the Statistics South Africa (Statistics SA), the Government Communication and Information System (GCIS) and various national departments available at www.gov.za. I have also used information from the South Africa Reserve Bank available www.reservebank.co.za. Other web sites include the ANC (www.anc.org.za), the Basic Income Grant Coalition (www.big.org.za), COSATU (www.cosatu.org.za), the National Labour and Economic Development Institute (www.naledi.org.za), the Treatment Action Campaign (www.tac.org.za) and UNAIDS (www.unaids.org). I have occasionally used sentences or phases without footing each or placing them in quotes, especially in descriptions based on government web sites.

Spelling: There are minor differences between South African English and U.S. spelling of words. In quotes of text and titles from South Africa the original spelling has been used.

[*] The employment statistics from different periods are not strictly comparable. Up though 1999 they were based on the October Household Survey. From 2000 forward they are based on the Labour Force Survey.

[†] These employment figures must be viewed with caution. They are based on the Labor Force Survey. The September 2001 survey showed 359,000 people employed in subsistence agriculture, the February 2002 survey 792,000 and the March 2003 survey 420,000. This wide variation is in part due to the nature of the survey. A survey in 2000 indicated that there were 943,000 farming operations in the former homelands.