Economic Policy in South Africa

Past, Present, and Future *

By

Haroon Bhorat, Alan Hirsch, Ravi Kanbur and Mthuli Ncube

December 7, 2013.

Contents

1. Introduction
2. Economic Development in South Africa since 1994
3. Macroeconomic Policy
4. Structural Transformation
5. Poverty, Inequality and Unemployment
6. Conclusion: Challenges and Policies for the Future
References

*
Editors introduction to the forthcoming Oxford University Press Oxford Companion to the Economics of South
Africa

1
1. Introduction

In 1994 South Africa saw the end of Apartheid. The new era of political freedom was
viewed as the foundation for economic prosperity and inclusion. The last two decades have seen
mixed results. Economic growth has been volatile. While inequalities in public services have
been reduced, income inequality has increased, and poverty levels have remained stagnant.
Throughout this period, there has been vigorous debate on economic strategy, with the
appearance of programs with acronyms like RDP, GEAR and, most recently, the NGP. Behind
the acronyms lie basic and unresolved differences on an appropriate strategy for an economy like
South Africa, with a strong natural resource base but with deeply entrenched inherited
inequalities, in particular across race.

As the twentieth anniversary of the transition to democracy approaches in 2014, the

economic policy debates in South Africa are in full flow. They combine a stock taking of the
various programs of the last two decades with a forward-looking discussion of strategy in the
face of an ever open but volatile global economy. This volume contributes to the policy and
analytical debate by drawing together perspectives on a range of issuesmicro, macro, sectoral,
country wide and globalfrom leading economists working on South Africa.

The economists invited are from within South Africa and from outside; from academia
and the policy world; from international and national level economic policy agencies; and from
the private sector. The contributors include recognized world leaders in South African economic
analysis, as well as the very best of the younger crop of economists who are working on South
Africathe next generation of leaders in thought and policy. Other than the requirement that it
be analytical and not polemical, the contributors were given freedom to put forward their
particular perspective on their topic.

This overview is not and should not be a mere summary of the 50 or more entries in the
volume. Rather, it represents the editors own perspectives on South Africas economic
trajectory and the ongoing debates on economic policy. It draws on but goes beyond the entries
in this volume. Section 2 begins with a broad account of the evolution of the economy since
1994. Section 3 focuses on macroeconomic policy, including fiscal, monetary and exchange rate
policy. Section 4 turns to the question of structural transformation and the range of sectoral
issues to which it gives rise. Section 5 takes up perhaps the most important element in the current
debateshow to address the problems of unemployment, inequality and poverty. Section 6
concludes the paper.

2
2. Economic Development in South Africa Since 1994

Since the onset of democratic rule, through to the end of 2012, the South African
economy recorded an average annualized growth rate in real GDP of 3.28%. Specifically, the
period under review will show that 73 of the 76 quarters in the period 1994-2012 recorded
positive economic growth. The 3-year period 2005-07, represented the economys most
successful growth spurt, as annualized real GDP growth rates exceeded 5% in each consecutive
year. It was only in the 2008-2009 period that the economy suffered from the consequences of
the global financial crisis, as growth was negative on average for 2009. The recession, despite
being short-lived has had as we show in detail below - significant labour market consequences
which the South African economy is still trying to recover from. Importantly however, the
period prior to the recession, represents probably the longest period of uninterrupted positive
economic growth in South Africas modern history.

This growth however, belies the key set of structural changes that the economy has
undergone in the post-1994 period. These structural shifts are manifest in four key outcomes:
Firstly the share of Mining in GDP stood at 11% in 1994, but has steadily declined over an
eighteen year period to its current 5% in 2012. In short, the share of Mining in national output
has more than halved in the post-apartheid period. Secondly, the Manufacturing sector has
remained stagnant. From constituting 19% of total output in 1994, it was marginally below this,
at 17% of real GDP in 2012. Thirdly, the key sectoral growth engine in this period has been the
financial & business services sector, as the latter witnessed a rise in its share of national output,
from 17% in 1994 to 24% in 2012 a seven percentage point increase. Finally, one other subtle
increase in the share of GDP, emanated from the Transport and Telecommunication sector,
driven in large part by the revolution in the mobile phone industry in South Africa and the rest of
Africa.

In essence then, the South African economy has moved from its dependence on the non-
renewable sector - historically a key contributor to employment and growth generation - to an
economy now very much defined by a globally competitive and highly sophisticated financial
and business services sector. Indeed, the Global Competitiveness Index of the World Economic
Forum, ranks South Africa 3rd from the 144 economies in in the world in terms of financial
market development (World Economic Forum, 2013). In contrast, the economies of Brazil,
Russia, India and China rank 46, 130, 21 and 54 respectively. Despite this high level of
financial sophistication, South African manufacturing remains an inadequate contributor to both
employment and GDP. Whilst, the average middle income country yielded a manufacturing
share of GDP at 21.2%, and the estimate for upper middle-income economies was 22.5% (World
Bank, 2013) the figure for South Africa as noted above is 17% having declined from its
contribution in 1994. The lack of a dynamic, job-generating and competitive manufacturing
sector must therefore remain one of the key growth challenges in the South African economy.

The period since 1994 was marked most notably by South Africas full re-entry into the
global economy. This re-entry also saw South Africa embark on a rapid process of trade
liberalization, which yielded a sharp increase in export and import volumes. Data for the 1994-
2012 period shows that on the basis of the index of real export volumes, non-gold exports more
than doubled over these years. It remains true however that even outside of South Africas high
share of commodity exports, manufactured exports from South Africa readily contain a high
3
share of primary commodities as inputs. In essence, South Africas export profile continues to
be natural resource and capital-intensive in nature. An export strategy and trajectory based on
labour-intensive, job-creating products, is certainly not a feature of the South African economy.
Import demand continues to be procyclical with investment and GDP, as imported inputs
finance South Africas growth cycle.

Compounding this truncated export profile is a growth cycle in South Africa, built on
running regular current account deficits, financed through short-term capital flows. Short-term
capital flows in turn, have often aided the appreciation of the Rand, which has hurt exporters.
The presence of such Dutch Disease effects in the South African economy, together with an
often highly volatile currency, serve as important externally driven constraints on the economys
growth trajectory.

Ultimately then, despite an apparently impressive growth record in the post-1994 period,
South Africa continues to suffer from significant real economy constraints. The changing
structure of the economy, wherein the manufacturing industry is essentially employment-
dormant; a homogenous export profile and an unstable currency are only some of the growth
dynamics which have beleaguered this economy.

The upshot of the above growth pattern though has been to generate very particular
employment, poverty and inequality outcomes for the economy. We turn first to some of the
data on employment in the post-1994 period. Over the period 2000-2008 for example, the data
shows that the simple output employment elasticity stood at about 0.69, meaning that for every
1% increase in GDP, employment increased by 0.69%. This stands in sharp contrast to the post-
crisis period (2008-2012), where a 1 percent increase in growth led to a 0.16 percent decline in
employment. Put differently, this data shows that for the post-crisis period while average
annual GDP growth stood at 1.9 percent, employment in this period declined by 0.3 percent. In
absolute terms the data show that 2001-12 have seen considerable growth in total employment,
from 11,2 million in 2001 to 13,7 million in 2012. The impact on the labour market of the
recession though was profound: From a peak in employment of almost 14,1 million in 2008Q4,
the economy lost more than 1 million jobs, and by 2010Q3 employment had plummeted to levels
last seen in 2006. Thus, the global crisis of 2008/2009 resulted in the expansion of employment
in the South African economy over the 2006 to 2008 period being completely nullified by the
end of 2010.
Employment growth trends in South Africa thus broadly followed GDP growth trends in
the post-2000 period, though employment growth was generally lower than GDP growth.
Furthermore, it appears that during harsh economic times such as the 2008/2009 recession, the
negative growth response of employment is much more pronounced than the shrinkage in GDP.
The results above imply both that GDP growth rates would have to accelerate to much higher
levels in order to deal adequately with South Africas poverty and unemployment problems, but
also that global economic difficulties appear to have a sharp and relatively long-lasting impact on
South Africas labour market. 1

1
There is also a view that the rapid growth of domestic household credit may have also contributed to the real
economy effects of the recession

4
 Despite this labour market churn, South Africas key labour market constraint that of
the economys inordinately high unemployment rates - remains. Unemployment rates in 2001
thus stood at almost 30 percent of narrowly defined labour market participants and 41 percent of
broadly defined labour market participants. Importantly though, both narrow and broad
unemployment rates declined between 2001 and 2007 when the economy was growing relatively
quickly: By 2007, the narrow rate of unemployment stood 6 percentage points lower at 23
percent while the broad rate of unemployment stood 5 percentage points lower at 36 percent. In
turn- in the period between 2008 and 2012, when the economy was severely hit by the global
recession, both the narrow and broad rate of unemployment rose from 23 to 25 percent and 27 to
33 percent respectively. Put differently, by 2012, a third of those who were willing and able to
work but not necessarily actively searching for work, could not find jobs in the South African
economy.

Employment estimates over the period 2001-2012, suggest five broad trends. Firstly, that
workers in the primary sectors were losers in the period: The Agriculture and Mining sectors
were the only two sectors which experienced declines in employment in the period as more than
half a million jobs were lost in Agriculture in the period between 2001 and 2012, while more
than 200 thousand jobs were lost in Mining. Job losses in Agriculture were driven in the main
by the promulgation of the minimum wage in this sector (Bhorat, Kanbur, Stanwix, 2012).
Secondly, this period (and indeed that for the post-1994 period as a whole) is characterized by a
lacklustre performance in the manufacturing sector. Manufacturing employment grew by just
over 100 000 jobs in the 11-year period, and as a consequence, the sectors share of employment
dropped from 14.5 percent to 12.7 percent in the period. Thirdly, the real driver of relative and
absolute employment growth in this period has been within the tertiary sector. Hence, the
financial services and community services sectors created 782 thousand and 1 million jobs
respectively in the period. The community services sector must be singled out here: This sector
employed almost 18 percent of the workforce in 2001, and its relative growth performance
resulted in the sector accounting for more than 40 percent of the increase in employment in the
period. The results for the tertiary sector give way to a fourth important sub-trend since 2000,
namely that public sector employment (which is dominant in community services) has grown
very rapidly, at the expense of private sector employment. Fifthly and finally, financial services
employment growth reveals, upon more detailed statistical analysis, the growth of temporary
employment service providers as a source of alternative contract employment amongst firms
wanting to bypass the labour regulatory regime.

These sectoral employment shifts in turn, were matched by employment shifts at the
occupational level, which remained biased towards highly skilled workers. Data for the period
2001-2012 thus indicate that the employment growth rate for high-skilled occupations was
double the overall employment growth rate, while the growth rates for medium and unskilled
jobs were at 0.6 and 0.8 of the overall growth rate respectively. The absolute numbers show that
1,1 million high-skilled jobs were created in the economy between 2001 and 2012, while the
number of medium and unskilled jobs grew by 768 thousand and 613 thousand respectively.
Thus, although workers across the skills spectrum shared in employment growth in the period,
skilled workers in particular benefitted most, in both absolute and relative terms. In turn,
medium-skilled workers were the relative losers in the period.

5
 Given the above sectoral and skills-biased employment shifts (in many senses a
continuation of a long-run trend for the South African economy) and the pattern of economic
growth noted above, it is important to assess the impact of this growth and employment dynamic
on poverty and inequality outcomes in the society. Utilising Income and Expenditure survey
data based on two national poverty lines, the derived estimates suggest that at the aggregate
level, as well as for individuals living in African-and Coloured-headed households, poverty as
measured by the headcount index declined significantly (yet modestly) between 2005 and 2010 2.
Specifically, at the upper bound poverty line, the aggregate headcount rate declined by close to
seven percentage points from 52.7 percent to 45.9 percent. At the lower line the decline was
slightly smaller at just more than six percentage points, from 39.6 percent to 33.4 percent.

Relative poverty, as measured by the poverty gap ratio also declined over the five year
period. At the R577 line, the poverty gap at the national level declined by four percentage points
to 20.4 percent in 2010, while the poverty gap according to the lower bound line declined by
three percentage points to 12.7 percent. Overall, these results suggest that the average poor
persons position relative to the poverty line improved irrespective of the choice of poverty line.
The slightly magnified decline in both poverty measures at the higher line, however, suggests
that the poorest of the poor did not experience the largest relative improvement in their levels of
consumption expenditure, but rather those who were considered poor at a higher poverty line.

While individuals living in African households experienced an improvement in their

levels of poverty relative to the other three race groups, African individuals still account for the
majority of the poor in the country, irrespective of the choice of poverty line. For example, in
2010, almost 55 percent of this population group were considered poor according to the upper
bound line, while 28 percent of Coloureds were considered poor at that line. In addition, the data
show that in 2010, of the just more than 23 million South Africans who were poor according to
the R577 a month poverty line, more than 94 percent, or almost 22 million individuals, resided in
African headed households. The results according to the gender of the household head confirm
that those living in female-headed households remain relatively poorer than individuals living in
households headed by males. In fact, by 2010, the headcount rate for households headed by
females was at both lines almost 15 percentage points higher than the corresponding rate for
male-headed households.

The trends in income inequality based on post-2000 data for South Africa, have
consistently pointed to a sharp rise in the Gini coefficient, using various measures of income and
expenditure across a series of nationally representative surveys. Specifically, Bhorat and Van der
Westhuizen (2012 found that the Gini coefficient, calculated using per capita expenditure
estimates from the 1995 and 2005/06 IES, increased from 0.64 in 1995 to 0.69 in 2005. Using
alternative datasets 3 and per capita income, Leibbrandt, et.al. (2009) found that the Gini

2
All poverty measures have been calculated using individual per capita household consumption expenditure, and the
indicators are based on the standard Foster, Greer and Thorbecke class of poverty measures (Foster et al, 1984). Two
national poverty lines have been utilised, an upper-bound line of R577 (in March 2009 prices) per person per month
and a lower bound line of R416 (again in March 2009 prices) per person per month
3
The 1993 South African Integrated Household Survey from the Project for Statistics on Living Standards and
Development (PSLSD), conducted by the Southern African Labour and Development Research Unit (SALDRU)
and the 2008 National Income Dynamics Survey, also conducted by SALDRU.

6
coefficient increased from 0.66 in 1993 to 0.70 in 2008. While the estimates were slightly
different, the trends were similar.

The results however, based on the IES data for 2005-2010, very tentatively suggest a
possible reversal of the post-apartheid trends in inequality. Based on per capita expenditure, the
data suggests that South Africa experienced a decline in inequality between 2005 and 2010.
Specifically, the Gini coefficient decreased from 0.696 in 2005 to 0.66 in 2010. The data by
race, however, shows no statistically significant changes between 2005 and 2010, implying that
the inequality within the four population groups did not change over the period. In 2010, the
difference in the Gini coefficients for Africans and Coloureds is not statistically significant,
suggesting that the levels of inequality within these two race groups were relatively similar. The
values of the Gini coefficients are 0.581 for Africans and 0.542 for Coloureds. Both these
cohorts display significantly higher levels of inequality than Asian and Whites, with the Gini
coefficients for the White population the lowest at 0.450.

In line with the result at the national level, all individuals irrespective of the gender of the
household head experienced a decline in their levels of inequality between 2005 and 2010. The
Gini coefficient for male-headed households declined from 0.689 to 0.647, while the estimate for
female-headed households declined from 0.653 to 0.619. In both years the difference between
the two Gini coefficients was not statistically significant, suggesting that the distribution of
expenditure was relatively similar in male-and female-headed households.

3. Macroeconomic Policy

Following the section above, which presents the overall economic development of South
since 1994, it is pertinent to outline the macroeconomic policies that created the macro-
environment for implementation of development objectives. In this regard we outline the fiscal,
monetary, inflation, exchange rate, and balance of payments aspects of macroeconomic policy.

Fiscal policy in South Africa is anchored on the principles of being countercyclical and
ensuring long-term sustainability, in an environment of weakening economic growth. The
budgeting framework is typically based on a three-year horizon, in the quest to balance these two
principles. The budget framework, as pronounced in the Medium Term Budget Policy Statement
2013, seeks to support programs that enhance the social wage, cap spending, limit the growth of
the wage bill of government, improve efficiency, and shift borrowing to capital and investment
expenditure. The impact of this would be to reduce the budget deficit over the medium term.

South Africas debt profile remains sustainable, due to an effective debt management
strategy. The net debt is expected to stabilize at 44 percent of GDP in 2017/18. However, the
fiscal deficit needs to be monitored closely. In the fiscal year 2012/13 the budget deficit was 4.2
percent of GDP and expected to be 4.2 percent again for the fiscal year 2013/14. Total
government revenue was 28.3 percent of GDP in 2012/13 fiscal year, compared to 27.9% in
2011-2012 Government expenditure was 32.5% of GDP in 2012-13 up from 29.9% in the

7
previous fiscal year. It seems the increased deficit has to do with the implementation of
countercyclical measures designed to support economic growth and employment creation.

The single most important source of government revenue is tax revenue, which amounted
to 89.6% of total revenue in the fiscal year 2012/13, for example. In monetary terms, tax revenue
collected through the South Africa Revenue Services (SARS) was ZAR 813 billion in the fiscal
year 2012/13. Within tax revenue, the three largest contributors are personal income tax,
company income tax and value added tax, which contributed 33.9%, 19.5% and 26.5%,
respectively, in the fiscal year of 2012/13. Personal income tax remains strong due to high wage
settlements. Reduced consumer demand due to slower economic growth, and weaker tax
collection have capped domestic VAT and excise duties. At the local government level, local
government revenues come largely from grants from central government and municipal utilities,
and other charges.

The largest component of current expenditure remains the wage bill which the
government aims to cap, going forward with the 3-year public sector wage agreement suggestive
of this intention. The wage bill for both national and provincial government employees was 35
percent of total expenditure in 2012/13. In the planned implementation of the National
development Plan (NDP), expenditure will supposedly focus on investment in infrastructure,
spatial development, rural development and enhancing competitiveness. Expenditure on
infrastructure is expected to rise over time to ZAR 3.2 trillion over the next 10 years. The
Presidential Infrastructure Commission will oversee the delivery of the various projects.

Prior to 1981, South African monetary policy consisted mainly of direct controls, which
ranged from credit ceilings; cash reserve requirement and interest rate controls. Between the
1960 and 1981, the liquidity asset ratio-based system was used with quantitative restrictions on
interest rates and credit. The aim of these direct controls was to deal with inflation by curbing the
growth of monetary aggregates (see Aziakpono and Wilson(2010) and Ncube and Ndou (2013)).
In the year 1977, the De-Kock commission was formed which resulted in the shift to market
oriented monetary policies. 4 The De-Kock Commission recommendations included the use of an
accommodation monetary policy, which was complemented by open market operations, and
variable cash reserve requirements. 5 There was therefore a mixed system during this transition
period of 1981-85 (Leape and Ncube (2009))

From 1986 to 1998 a pre-announced M3 monetary target was used, with the use of the
discount rate in influencing the market interest rate. From 1998, the Reserve Bank shifted to
using daily tenders of liquidity through repurchase transactions. Monetary growth guidelines and

4
shift in policy orientation from control regime to
5
The accommodation policy included variations in terms and conditions taking the form of changes in quantities of
liquidity provided to market and the interest rates costs of accommodation. This included using discount policy
known as accommodation policy was complemented by open market operations, variable cash reserve requirements.

8
target ranges or core inflation 6 were announced every three years. It became more difficult to
target money supply due to financial liberalization and the increasing openness of the capital
account since 1995 (Aziakpono and Wilson (2010) and Ncube and Ndou (2013)).

In February 2000, the South Africa Reserve Bank (SARB) adopted a new framework
based on inflation targeting. Initially, the inflation target was consumer price inflation, excluding
mortgage rates, and the use of a repo system. The target was changed to headline-inflation in
January 2009. The South African government sets and adjusts the inflation target, meaning that
the central bank does not have goal independence but has operational independence in monetary
policy. Thus the central bank can use any available monetary policy instrument in the pursuit of
the inflation target. At the time of adopting inflation targeting, the central bank also changed its
exchange rate policy, and moved away from intervening in the foreign exchange market except
in continuing to buy foreign exchange to supplement the foreign exchange reserves.

On recent developments, the slight improvement in real economic activity, in the second
quarter of 2013, led to an acceleration on money supply growth to 12.5 percent annualized
compared to 7.7 percent in the first quarter. Over a twelve-month period, broad money growth
(M3) accelerated to 10 percent in April 2013 compared to 5.2 percent in December 2012, but
then moderated to a level of 7.4 percent in July 2013. This general growth in M3 deposits was
due to growth in deposits by households and corporate sector, in an environment of financial
markets volatility, where cash holdings were preferred risky-securities holdings. Growth in
deposit holdings grew negatively in the fourth quarter of 2012, but then grew positively by 14
percent and 15.8 percent in first and second quarters of 2013, respectively.

In the first and second quarters of 2013, banks total loans and advances to the private
sector saw moderate quarter-to-quartergrowth rates of 8,5 per cent and 8,7 per cent respectively 7.
This was a slowdown in credit extension growth from what has been experienced in the last four
years. The household sector accounted for 53 per cent of the overall increase in total loans and
advances in the second quarter of 2013 and the corporate sector for 47 per cent. The general
slowdown in credit extension was due to the high level of personal debt, uncertain global and
domestic growth prospects and weak labour market conditions.

On interest rates, the Monetary Policy Committee (MPC), by July 2013, had kept interest
rates to a three-decade low level of 5 per cent per annum. The objective of the MPC, in this
tough economic period, has been to balance the need to support the weak economic recovery
against the risk of rising inflation, in face of a weaker and volatile domestic currency. Short-term
money-market rates remained fairly constant during the first eight months of 2013. On the other
hand, longer-term and forward-looking money-market rates rose sharply, in May 2013, due a

6
The repo system involves regular repurchase transactions between SARB and the banks clients and caters for
shortfalls in bank liquidity using a borrowing window for Reserve Bank related to various securities that are
tendered to the bank on daily or intraday basis.
7
See South African Reserve Bank Quarterly Bulletin, September 2013.

9
deteriorating inflation outlook, and domestic currency depreciation. The yield curve slope, thus
steepened.

Coming to the prime lending rate and the predominant rate on mortgage loans, this has
remained at 8,50 per cent since July 2012. The announcement of possible QE tapering in the US,
saw the South Africa government bond yield rise to 8.05 percent (R208 maturing in 2021) from
an all-time low of 5.78 percent in mid-May 2013. Going forward, the risk of QE tapering in the
US may put upward pressure on yields of long-term government bonds.

Prior to 1979, South Africa followed a fixed exchange rate regime with the Rand pegged
either to the US dollar or British pound sterling. From 1979, a more flexible exchange rate and
dual exchange rate system was adopted. The process was based on the announcement of the
official exchange rate daily, as determined by market forces, while the financial exchange rate
was applied to non-resident portfolio and direct investment transactions. The introduction of the
dual exchange rate system was meant break the direct link between domestic and foreign interest
rates, and insulate the capital account from unmanageable outflows. Subsequently, the dual
exchange rates were unified, following De-Kock commission recommendations. In 1983-1985,
South Africa experienced a debt standstill crisis, which resulted in the reintroduction of dual
exchange rate system and reintroduction of the financial rand, and the tightening of capital
controls for residents. The dual currency lasted until March 1995.

The South African Reserve Bank had a policy of intervention in the foreign exchange
market. It intervened in both the spot and forward foreign exchange markets. On some occasions,
made use of an oversold foreign exchange position (NOFP) as intervention tool, which has since
been abandoned. During the period 1979-1988, the SARB intervened, partly to maintain the
profitability and stability in gold mining industry. However, after August 1989, the objectives of
SARB changed as it actively sought to stabilize the real effective exchange rate to support
international export competitiveness of country. The effectiveness of the intervention was tested
in 1994, when the country experienced of huge capital outflows in 1994.

With the introduction of the inflation-targeting framework in February 2000, exchange

rate management ceased to become a priority. The exchange rate is market determined, with
volatility being influenced by terms of trade and capital flow shocks due to quantitative easing
globally, and also domestic factors such as political and economic shocks (see de Jager and Kahn
in this volume). The rand seems prone to overshooting its fair value. Short-term portfolio flows
have funded a persistent current account deficit. For example, the investment by foreigners in
domestic government binds increased from 13 percent in 2008 to about 36 percent in September
2013.

Looking at the valuation of the rand, de Jager and Kahn (this volume) show that the
currency, relative to the equilibrium exchange rate, was undervalued at the beginning of the
financial crises in 2008, and has depreciated since, to an undervalued position of 10 percent, in

10
the second quarter of 2013. The degree of undervaluation seems to have inflationary
consequences. The currency is expected to remain volatile and face depreciation risk, as the US
institutes QE tapering. Risks of lower growth, credit-rating down grades and domestic political
issues and labor unrest, all put pressure of currency volatility, going forward.

After the Soweto 1976 uprisings, import surcharges were applied above the normal tariffs
on imports, in order to alleviate pressure on the current account. The surcharges were removed in
1980, when the gold price increased substantially, bolstering the current account. The import
surcharges were reintroduced in February 1982 to November 1983, which did not alleviate
pressure enough on the current account, as it remained in deficit. The current account deficit led
to sharp depreciation on the rand. The import surcharges were only phased out after 1995, during
a much broader trade liberalization programme following the Uruguay Round of the GATT.

After the elections of 1994, which ushered a new South Africa and the removal of
international trade sanctions, capital inflows increased, and this was accelerated by the removal
of exchange controls for non-residents in March 1995. The adoption of new growth plan in
around 2010, suggests that net trade balance could be the main driver of economic growth. The
plan identified the exchange rate as being important and the monetary policy playing a much
bigger role, in driving growth.

On recent developments, the trade deficit over the first half of 2013 was 2.6 percent of
GDP and the terms of trade declined. The value of imports increased by 15.8 percent in over the
first half of 2013, while the value of exports only increased by 14.2 percent. The main
contributors to import growth are mineral products (fuel), chemicals, plastics, rubber, machinery
and transport equipment. On exports, exports to China have been increasing and now match
exports to the Southern Africa Development Community (SADC) at about 12 percent of total
exports, in first half of 2013. SADC accounted for 22.4 percent of manufactured exports, in the
first half of 2013. Exports to the EU are still the largest share at about 20 percent of total exports,
as of first half of 2013, having declined from over 30 percent in 2000.

The current account deficit, it stands at about 6.5 percent of GDP, and is expected to
remain above 5 percent into the medium term due to investment growth staying above growth in
domestic savings. Over the medium term, transfers to the South African Customs Union (SACU)
members, namely Botswana, Lesotho, Namibia and Swaziland, will amount to about 1 percent of
GDP.

The first 9 months of 2013, also saw a drop in net purchase of domestic bonds by foreign
investors, dropping to R37 billion, compared to R76 billion over the same period in 2012. On the
equity market, the same period saw a net inflow of R26 billion in 2013, compared to a net
outflow of R5 billion in 2012. The general decline in infows are due to the possibility of tapering
of quantitative easing in US, which resulted in a rise in US bond yields and an outflow of capital
out of emerging markets in general, coupled with a weaker domestic economy in South Africa.

11
FDI into South Africa, in the first of 2013 amounted to R16.9 billion, largely driven by long-
term loan financing that international companies are extending to their domestic subsidiaries.

On 23 February 2000, South Africa adopted inflation-targeting as a monetary policy

framework. From 2003, the SARB adopted a continuous target to be achieved on monthly basis.
During this period, the bank targeted Consumer Price inflation excluding mortgages interest
costs. In October 2008, the SARB announced that it would target changes in consumer price
inflation, as from January 2009. An inflation band of 3-6 percent is targeted, with variable
success. A low of 1.4 percent in was recorded in 2004 and a high of 11.5 percent in 2008. The
inflation targeting period has seen period of prolonged economic growth, suggesting a negative
relationship between the two variables.

On recent developments, in July 2013, consumer price inflation breached the 3-6 percent
target band for the first time since April 2012, reaching a level of 6.3 percent. Major contributors
to inflation included higher transport costs and food prices, among others. While inflation is
expected to decline going forward, the weaker domestic currency poses risks higher inflation.

Overall, South Africas economic growth is expected to remain modest in 2013, and was
2.5 percent in 2012 down from 3.5 percent in 2011. 2013. (See Africa Economic Outlook, AfDB,
2009-2013). The economy is still experiencing pressure from the global economic slowdown,
and domestic structural bottlenecks, including labor unrest. The SARB has limited room to
manoeuvre in stimulating economic growth through easier monetary policy. In the long-run,
success in the implementation of the National Development Plan, could unlock the economys
potential within an inclusive growth agenda.

4. Structural Transformation

It is widely agreed that the economic and social order which prevailed during the
Apartheid era of 1948-1994, as well as the period of segregation which preceded it, favoured a
cheap labour system for the South Africas mines and farms and blocked the structural
transformation of the South African economy. It was hoped by many that the transition to
democracy in 1994 would loosen the economic shackles of apartheid and herald an era of
stronger economic growth, based on a transforming economy. However, transformation achieved
under democracy has been below expectations. Particularly since the onset of the global financial
crisis, South Africa has returned to a familiar pattern of underperformance. This could be a result
of poor policies in leading up to and/or in response to the crisis, and it could also be a product of
the fact that the structural transformation that many had hoped for has not happened yet.

What are we looking for in the structural transformation of South Africa? In the tradition
of development economics, some of the key changes would be a shift from agriculture to
industry, increasing scale of productive units, and shifts in the structure of consumption. In South

12
Africa these transitions are long completedindeed many would argue that the increasing
average size of enterprises and the shift in consumption patterns have gone further than they
should have (Worgetter, this volume, on firm size). And yet, as noted in previous sections, South
African remains a country where poverty is declining slowly, inequality is extremely high, and
production and trade patterns have not shifted from the relative predominance of raw materials
exports and the importation of high value added manufactures.

Probably the most important structural shift that symbolises the movement of an
economy from factor driven to efficiency driven to innovation driven in the language of the
world competitiveness index (Sala-i-Martin and Artadi 2004) or from extractive to inclusive
growth in the typology of Acemloglu and Robinson (2012), is the deeping of investment in
capital, both in physical capital and human capital.

We will take up the issue of education in detail in the next section, pointing to the
disappointing performance in education despite significant public expenditure. The very
substantial racial and gender imbalances in skilled and managerial roles in the workplace in no
small part result from the poor quality of supply of skills, though they are certainly result from
residual racial and gender prejudices. (Posel, this volume) The role of women in the economy
grew rapidly in the first decade after apartheid, but the poor representation of women in
management and the large wage gap between men and women in similar roles point to the
prevalence of prejudice. (Posel, this volume). Equally pertinent is the concentration of women in
more precarious forms of employment. For black men and women and for women in general
South Africa is far from meeting the Spence Commission test of equality of opportunity
(Commission on Growth and Development, 2008).

Investment in capital stock fell to astonishingly low levels in the late apartheid period,
with gross fixed capital formation (GFCF) falling to a low level equilibrium of about 15% of
GDP. A significant part of the decline came from the withdrawal of public sector from
infrastructure investment, as rising current expenditure obligations and stagnating revenue
squeezed the capital budget. It took a long time for this to turn around in the post-apartheid
period, and GFCF only began to rise 10 years after the transition. This led to constraints on
growth in several ways, including electricity shortages that emerged in 2008 which have held
back investments in energy intensive economic activities.

Investment rose to over 20% of GDP briefly in 2009 and 2010, but has drifted down
again, though still above late apartheid era levels. Huge backlogs remain, and even after building
around 3 million low income houses, housing conditions for the poor are inadequate and 2.1
million households do not have adequate homes (Savage, this volume). Poor spatial development
plans, the cheap-outlay high-long-term social cost model of apartheid, and poor public transport
facilities, have led to a high cost of reproducing labour.

13
 Perhaps the clearest symptom of the lack of transformation of the South African economy
is the mediocre performance of the manufacturing sector which has continued to decline as a
proportion of GDP since 1993. Few high value added manufactures are produced or exported;
the motor industry is an exception having received systematic industrial policy support from
government.

Several of our authors argue or show that one of the main causes of the lack of
competitiveness of the industrial sector is the highly concentrated oligopolistic structure of the
South African economy (Manuel, Sharma, Worgotter, Fedderke, this volume). Fedderke points
out that margins for the oligopolies have grown since 1994, along with the shrinking of margins
for smaller businesses. Worgotter notes that the industrial structure has contributed to very poor
levels of competition, by OECD standards. Other contributors to the poor environment are the
nature of the involvement of the state in network industries (also discussed by Levy), and heavy
product market regulation.

Worgotter argues that in the rent distributing industries, high margins are shared with
unionised workers, a point that Fedderke makes too. In addition, Worgotter argues that South
Africa raises much less revenue from non-renewable resource extraction, which adds to the other
effects of Dutch disease. Unless the incentive structure of the economy shifts, competitive
industrialisation will elude South Africa. Competition law was strengthened and the Competition
Commission is effective, but Worgotter suggests that its mandate is too limited, and its tool-kit is
too small.

Outside of the extractive sector, innovation is limited in its impact on economic growth
and job creation. Though South Africa has a reasonable share of GDP devoted to research and
development, both Kaplan and Fedderke point out that this has not had a significant impact on
output. Government has not steered funds sufficiently effectively to encourage industrial
innovation and the emergence of a significant number of growing innovation based firms. This is
in spite of a relatively high scientific output.

One of the most overtly transformative policies of the democratic South African
government was the Black Economic Empowerment (BEE) strategy. Initially the government
focused on the promotion of black people into positions of greater responsibility in the economy,
in the public and private sector. Later, more attention was given to the transfer of ownership of
economic assets to black South Africans on the legitimate grounds that apartheid artificially
blocked accumulation by black people, that broadening ownership would underpin democracy,
and that it could also give a new dynamism to the economy as Mandela had hoped as early as
1955:

'the breaking up and democratisation of these monopolies would open up fresh fields
for the development of a prosperous, non-European bourgeois class. For the first time in
the history of this country, the non-European bourgeoisie will have the opportunity to

14
 own in their own name and right mills and factories, and trade and private enterprise will
boom as never before' (Mandela 1956: 49).

Manning (this volume) shows in her entry that the BEE strategy has had very limited
success because empowerment is far too narrow in scope and because it engenders a cluster of
rent-seeking rather than entrepreneurship. Notably, BEE has failed to produce a significant
number of successful entrepreneurs in the manufacturing sector. Sharma refers to South Africa as
the cappuccino economy white cream over a large black mass, with some chocolate sprinkled
on top.

Small business development remains a stated objective of government, but the resources
devoted to it have had little impact and the oligopolistic structure of the economy has not created
an environment conducive to fast growing small and medium businesses. In addition to facing
the power of oligopolies and cartels, small business have to contend with a regulatory
environment that poses risks to employers of labour in regard to dismissal procedures. Red tape,
corruption and crime provide further disincentives (Rankin, this volume), especially in poorer
communities.

One of the chief strategies used by the democratic government to raise the competitive
temperature in South Africa was to reduce tariffs in line with its commitment to the Uruguay
Round of the GATT. Analysts looking at the outcomes of the reforms found links between tariff
reform and greater dynamism in manufacturing (Jonsson and Subramanian, 2000, and Edwards,
this volume), but the effects were limited. The limited impact on competition and dynamism
might be because tariff reforms in the 1990s were not continued during the 2000s, and/or
because other factors such as labour market constraints and/or the volatile exchange rate
discouraged investment in export-oriented manufacturing. At the same time, trade reform in
wage goods sectors motivated by the general welfare effects on living standards led to a sharp
decline in employment in labour intensive industries such as clothing, textiles and footwear. So,
while wage goods were cheaper to the extent permitted by oligopolistic markets, the positive
dynamic effects were limited and the negative effects on employment were severe.

As a result, non-traditional exports are weak with the exception of the motor industry
which operates under an unusually strong incentive regime. Commodities are still a large
proportion of exports and trade is extremely pro-cyclical in relation to global growth trends.
Overall, exports are relatively weak. The result is that growth which requires higher levels of
investment is reliant on capital inflows, and as there is hardly any green-field FDI (Black, this
volume), most investment is portfolio investment in bonds and stocks. The dependence of the
economy on short-to-medium term capital inflows for growth tends to reproduce dependence on
the resource sector and powerful, publically-quoted oligopolies in the services sector.

The result as Rankin, Fedderke and others point out, is a low rate of improvement of
productivity, low levels of competition and low levels of innovation. Except in periods of

15
exceptional economic growth, employment creation is limited and the condition of structural
unemployment inherited from the late apartheid period remains.

To draw on the language of Acemoglu and Robinson (2012), while it would appear that
inclusive political institutions have emerged in South Africa, economic institutions remain
extractive. The process of economic reform began in 1994 with the transition to democracy, but
structural transformation still has a long way to go.

5. Poverty, Inequality and Unemployment

Human development indicators in South Africa show a contrasting picture when

comparing income and non-income dimensions. Many non-income dimensions of welfare have
improved. Access to basic serviceshousing, water, sanitation and electricity-- has increased.
Measures of poverty and inequality based on asset indices that incorporate these factors show an
improvement in the post-apartheid period. 8 However, the picture for income dimensions is
somewhat different. As shown in Section 2, inequality has increased over most of the post-
Apartheid period, and the poverty reduction performance has been lacklustre. Further, racial
imbalances in the income dimensions of well being continue to be severe.

The inability to move poverty, inequality and unemployment, and continued racial
imbalances in these, is a major feature of South Africa over the past twenty years, and a central
focus of debate on economic policy. The persistence of poverty and inequality has happened
despite efforts by the state to address the issue through transfers. Several papers show that
without state grants poverty and inequality, and inter-racial differences, would be even higher. 9
Why is the market distribution of income in South Africa so unequal, and what policy
interventions other than transfers could improve the situation?

A simple framework for understanding the distribution of income begins by thinking of

income a combination of assets and the returns to these assets. The major asset, in general and
particularly for the poor, is their labor power. Labor income explains the bulk of household
income. This is true around the world, and South Africa is no exception. In South Africa wage
income (including self-employment income) accounts for 70% of income. Decompositions of
inequality by income source show that labor income accounts for 85% of inequality. 10 Thus the
evolution of income inequality and poverty depends on a combination of trends in access to labor
income, and inequality of the labor income itself. Access to labor income earning opportunities is
of course related to unemployment and the role of the informal sector, while inequality of labor
income itself depends on the distribution of skills, and the distribution of returns to skills.

8
Bhorat et. Al. (2006), Leibbrandt et. al., (2006), Woolard and Woolard (2007)
9
Leibbrandt and Levinsohn (2011), Bhorat and van der Westhuizen (2011) and Leibbrandt and Woolard (2011)
10
Leibbrandt, M., Woolard, I., Finn, A. & Argent, J. (2010)

16
 The structural reasons for persistence of income poverty and inequality in South Africa
thus boil down to (i) inequality in skills, primarily education, (ii) inequalities in the returns to
skills, (iii) unemployment and (iv) low productivity and low labor income in the self-employed
informal sector. Correspondingly, the policy responses to address the issues can also be
classified under the same headings. There are of course cross-linkages between these entry
pointsfor example, levels of education are strongly correlated with unemployment.

Of the four explanations of the evolution of income distribution, perhaps the one over
which the government has least control is the distribution of returns to education. South Africa is
part of a global trend of growing inequality in these returns. While there is a debate on the
relative contribution of this phenomenon to growing income inequality in the US and elsewhere,
there is consensus that it is a significant explanatory factor in rising inequality. And while the
phenomenon is not fully understood in detail, skill biased technical progress has been identified
around the world as the cause for sharply rising wage premiums for educated labor. 11

Given the global trend in returns to education, a policy priority for the government must
be to lift up the lower end of the distribution of educational attainment so that those currently at
lower incomes can benefit from the rising returns. The governments record on this front is
decidedly mixed. While the government spends a relatively high share of GDP (4%) on
education, the outcomes are disappointing. Since the end of apartheid more Africans are moving
from primary to secondary school, but the rates of graduation from secondary school have barely
shifted since 1994. Test scores are low on average relative to other countries, but at the same
time there are enormous inequalities between schools in rich and poor areas. In poor areas there
is considerable grade repetition, which in turn leads to overcrowding. 12 Measured in standard
school quality benchmark tests, South Africas schools have very poor performance by global
standards; measured in proportion to the cost of education, the result is particularly poor (Muller,
2013).

The structural inequalities across race and income groups are only further exacerbated in
higher education. The post-school systems are also weak. While there are some good
universities, the system as a whole is not producing sufficient graduates in key skill categories;
this was undoubtedly a constraint on growth in the first decade of the 21st century. Even more
serious is the relatively small number of suitable graduates emerging from vocational and
technical training colleges.

11
See for example, Kanbur and Zhuang (2012)
12
Lam and Branson (this volume)

17
 Education has an effect on income only when the person with that education becomes
employed. But high unemployment remains a scourge and, not surprisingly, is correlated with
poverty and is major contributor to inequality. Further, youth unemployment is a major driver of
the overall levelthe unemployment rate for 15 to 30 year olds in 2010 was a staggering 42%. 13
There is vigorous debate in South Africa on the causes of high levels of unemployment, with
some emphasizing demand side factors and other highlighting supply side reasons.

One straightforward way of increasing demand for labor is through public sector
employment. There is much discussion of, and support for, public works schemes as a temporary
safety net. The different components of the Expanded Publics Works Programme, including the
Community Works Programme that is being piloted, are being assessed. It is likely that they will
be expanded, along the lines of Indias Mahatma Gandhi National Rural Employment Guarantee
Act. 14 However, it is also recognized that Public Works Programmes are a safety net and cannot
be a permanent solution to absorbing the growing number of entrants to the workforce, where
attention will have to focus on the private sector.

On the private sector demand side, the issue in South Africa is not just the relatively low
economic growth rate over the post-Apartheid period, but also its low employment intensity. It is
a well known argument in South Africa and elsewhere that various labor market rigidities, in
particular high wages and constraints on dismissing workers once hired, lead to low employment
elasticities and prevent growth from being translated into employment gains. A counter argument
is that the laws themselves are not unusually rigid relative to global benchmarks, but that the
institutions of implementation are inefficient (Bhorat and Van Der Westhuizen, 2009). The
political economy of South Africa means that this is a contentious issue, and policy attempts to
address the high wages indirectly, for example through employment subsidies for youth
employment, will be hotly debated. Among the technical arguments deployed are that a youth
wage subsidy will not create new employment but will simply change the composition of
unemployment by displacing adult workers by youth workers. However, measures to introduce
such subsidies have recently been passed.

Attention has also naturally turned to more supply side oriented explanations and
interventions. One such explanation is that of a skill mismatch. The idea here is that South
African unemployment is higher than it should be because the skills demanded by employers are
not those being produced by the schooling and training system. The poor functioning of the
colleges of Further Education and Training is a major concern in this regard, and the contribution
of the Sector Education and Training Authorities is much discussed in policy circles. If the
demand side route to reducing unemployment is blocked, then these supply side interventions are
bound to be the major focus of interest.

13
Mlatsheni and Leibbrandt (this volume).
14
Philip (this volume)

18
 A key concept in supply side explanation of unemployment is that of the reservation
wage. Simply put, the wage being offered in employment is not high enough to attract the
unemployed person to take up the jobunemployment is preferable. Thus it is not that the wage
is too high to reduce unemployment by increasing demand for labor, but that it is too low to
reduce unemployment by inducing the unemployed to move to employment. One study found
that with appropriate controlling of other factors, more than three quarters of males and more
than half of females have stated desired wages that are above those they could get (with their
skills and background) in a moderate sized firm. 15 But such findings are also disputed by
technical researchers, and in general by the seeming absurdity of the notion that the unemployed
would not be prepared to work for wages that paid them more than his next best alternative.

There is, however, a structural reason linked to the particular history of South Africa
which makes the reservation wage hypothesis particularly relevant. As is well known, the
residential and work patterns in South Africa owe a lot to apartheid period segregation policies.
The African population was confined to certain areas, from where they undertook often long
commutes to work. The transportation structure and patterns conformed to this basic design. This
residential pattern has not changed much in the twenty years since the end of apartheid.
Employment opportunities are mainly to be found outside the townships where most Africans in
urban South Africa live. The high pecuniary and non-pecuniary costs of transportation require
that the wage in employment be high enough to be compensated for these costs. Hence the
seemingly peculiar outcome that despite only low earning opportunities in the townships, the
residents are not willing to take up jobs that pay high in gross terms, but not sufficiently high
once the costs of transportation are subtracted. 16

The answer to this structural problem is not easy, and not likely to be solved overnight,
since it was created over several decades in deliberate fashion. Investing and job creation in the
townships themselves is problematic, again because of the structural feature that little of the
income spent in the townships stays there. An assessment of the impact of the Community Work
Program in Diepsloot shows significant direct effects, but that the multiplier impacts are
relatively small because of the leakages of demand to outside the township. 17 There is hope,
however, that these multipliers may increase over time through these and other interventions
such as the setting up of industrial parks nearby. In any event, reducing the distance to work is an
important element in addressing the supply side of South Africa unemployment.

The high levels of open unemployment in South Africa are a surprise to many working in
other developing countries such as India, where the informal sector is much larger. In these
countries, policies towards the informal sector and informal employment is a major component
of the policy discourse, and this is increasingly so in South Africa. 18 There is now a consensus

15
Rankin et al (2010)
16
World Bank (2012)
17
Davies and Van Seventer (2012)
18
Valodia (this volume)

19
that there are a whole range of barriers to setting up in the informal sector, with a particular focus
on national and local regulations, many of them dating to the apartheid era. These discriminate
against self-employed activities, activities which could provide income earning opportunities for
the unemployed. 19 A number of specific policy interventions are possible, as exemplified in the
transformation of the Warwick Junction area of Durban, but this must begin with a change in the
policy making mindset, which views informality as a problem to be swept aside, rather than a
sector to be engaged with to generate employment possibilities.

Addressing poverty, inequality and unemployment in South Africa will require many
policy instruments and interventions. High rates of growth, and employment intensity of that
growth, are central. Encouraging employment intensity requires demand side and supply side
policy reforms and direct interventions. The supply side encompasses efforts on skill matching as
well as addressing the particular spatial pattern of work and residence in South Africa. The
demand side includes a change in the mindset which restricts informal employment, and
temporary safety nets through public works programmes. Finally, redistribution of market
incomes through state grants, and better deployment of public expenditure for access to services
is also key. South Africa has had significant successes in some areas, but education remains a
channel through which inequalities continue to be perpetuated and strengthened.

6. Conclusion: Challenges and Policies for the Future

The end of apartheid in 1994 promised a new beginning for South Africa, with political
freedom and inclusive development for all South Africans. The focus of this volume, and of this
overview, is on the economic record and the economic prospects of post-apartheid South Africa.
The record is a mixed one. A start has been made in addressing many of the basic inequalities in
health, education and housing that were the hallmark of apartheid economics. Growth is stronger
than before and poverty is lower, access to education and health care is much stronger, access to
infrastructure services is hugely improved, and a strong social safety net cushions poverty for the
very poor. But unemployment remains high, especially among young Africans, and income
inequality has increased. Economic growth has been volatile and lacklustre, as South Africa has
had to cope with the consequences of global crises.

During the post-apartheid period a series of economic policy packages has been
introduced, including the GEAR, ASGISA, the New Growth Path and the National Development
Plan. Several others have been stillborn, including the thoughtful report prepared by the team
assembled by Dani Rodrik and Ricardo Haussmann in 2006-07, the National Growth and
Development Plan developed in the RDP office in 1995-96, and the report of the Labour Market
Commission, also delivered in 1996. The GEAR was implemented over a period of time, but
only in part.

19
Skinner (2008)

20
 Considering that South Africa is a young nation built on a complex and very challenging
political economy, expectations that the new government would get everything right quickly
were nave.The rest of the packages which were actually launched have not been driven
consistently by government. While the National Development Plan appears to have the support
of the ANC government and many in the broader community (though not those on the left of the
trade union movement), its limitations are that it is not much more than a framework to guide
policy to 2030, and that it is not yet evident that the government or the ANC have a systematic
approach towards its implementation.

Regulatory uncertainty has affected investment levels in sectors such as mining and
networked industries in particular. The shortfall in electricity generation since 2008 was the most
dramatic outcome of this uncertainty. High telecommunications costs and limited broadband
access have also been symptoms of weak. Alongside this, in rhetoric of government and the
ruling party the concept of a developmental state is often conflated with increasing state
participation in the economy. The combination of the waning credibility of governments
economic plans with regulatory uncertainty and confusion about the role of government in the
economy has weakened the credibility of government plans, and has reduced investors
confidence in the leadership of the South African economy. The challenge to roll back poverty,
unemployment and inequality becomes all the more difficult in this context.

Perhaps the most important short term challenge of government is to win back credibility
in its economic policymaking and implementation. The easiest way to do this would be the same
way as it credibility began to be won, at great cost, in the 1990sthough the firmer
implementation of macroeconomic commitments, especially in the realm of fiscal policy. Budget
deficit targets have been exceeded every year since 2009this pattern needs to be broken.
Monetary policy is now more crediblethe system of inflation targeting has been consistently
followed, though there was greater flexibility in the application of the policy after the global
financial crisis began. However, some a real commitment to reserve accumulation and the
introduction of some targeted macro-prudential measures could reduce the volatility of the price
of the currency and lessen its impact on the domestic economy, especially for the non-traditional
tradable sector.

It would also be valuable if it were clear that government was prioritising capital
expenditure and was firmly committed to limit the growth of, current expenditures, especially on
the government wage bill. But this needs to be taken further, towards greater coherence in
economic policy as a whole. The appearance that economic policy is made sector by sector
without any strong centre needs to be reversed.Strong leadership is needed on regulatory
coherence in order to ensure that infrastructure services and good, cheap and reliable, and
certainty should be established on what exactly the government means by a developmental
state. It should not necessarily mean more state ownership in the economy which some in the
ruling alliance say it should, but it should include for effective measures to counter-act the
oligopolistic forces in the economy that restrict competition and innovation.
21
 An appropriate definition of the developmental state would in South Africa necessarily
include an overarching social pact and perhaps a series of sub-pacts between business,
government and labour to support investment, innovation, and the emergence of dynamic small
and medium. This could lead to a new, more meaningful form of economic empowerment. A
well designed and strongly led social pact could conceivably also remove some of the key
obstacles to investment such as the antagonistic industrial relations environment in the private
and public sectors.

Perhaps the biggest challenge is to fix the basic education system and, further, to expand
post-school training opportunities in colleges and universities. Evidence increasingly suggests
that not only do resources need to be allocated better, from salaries to learning materials, but also
that the total envelope for education is not high in comparative termscertainly when measured
in expenditure per learner. 20 So, education commitments could increase. But the fundamental
challenge is to improve the quality of management of schools and the provincial administration
systems, which will allow for more rapid improvements in teacher performance.

The extraordinarily damaging legacy of the apartheid spatial framework is a further key
challenge that has not yet been adequately addressed. Cities need to be made into more liveable
places for the poor and more efficient economic activity hubs. The effective implementation of
good housing and public transport policies within a reforming spatial development framework is
absolutely critical, city by city.

As long as the gap between the demand and supply of labour remains so large special
measures must be taken to reduce the negative social effects of widespread unemployment,
especially among young people. Effective public employment programmes, public works
programmes and community work programmes, which are able to build social capital need to be
strengthened and expanded. Other medium term interventions such are special training and
employment promotion schemes for young people should be well designed and well managed.

There has been vigorous debate on economic policies, for a country with a unique
historical legacy of structural inequality having to navigate the often unforgiving forces of
globalization and global markets. The entries in the volume reflect that debate, and those
uncertainties. Our task has not been to summarize those entries. Rather, we have provided our
own perspective on the challenges faced by South Africa. Our conclusion is that clarity on goals
combined with pragmatism in means is the best stance for South African policy makers. The
basic economic goal is clearit is to generate inclusive economic growth which leads to broad
based development and addresses the inequalities which are the burden of apartheid. On means,
we do not think it serves South Africa well to be dogmatically statist or marketist. The real
issue is in what combination, and this will vary across time, space and sectors. There are some
areas, such as health and education, where state involvement is crucial, but efficient

20
OECD (2013) Economic Survey South Africa 2013 and Muller (2013).

22
implementation, and learning through experimentation, is key. There are other areas, primarily in
production, which are best left to market forces, but appropriate regulatory frameworks are
essential.

Of course this broadly pragmatic stance leaves open ample room for debate, discussion
and disagreement. This is bound to be the case, especially for a country with a history like that of
South Africa. We hope that this volume will contribute to this lively discourse as South Africa
enters its third decade of freedom.

23
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