Economic Development and Growth of South Africa

Introduction

• Economic growth and development play a crucial role in determining the welfare and economic wealth of a country. Economic growth refers to an increase in an economy’s productive capacity over a period of time and it measures the ability of an economy to produce the demanded goods and services. It can be identified as natural, human capital, physical/technological and institutional factors. Conversely, economic development refers to the process whereby there is a sustained increase in the general welfare of the citizens in the economy. Commonly, economic growth leads to economic development through higher incomes, improved economic indicators and higher government revenues. GDP growth is a measure of the change in the level of production achieved in the economy over a period of time, and is strongly held as the most accurate indicator for determining economic growth. A common measure of economic development created by the United Nations, is the Human Development Index (HDI). The HDI measures economic development based on four major aspects: Life expectancy at birth, mean years of schooling, expected years of schooling and gross national income per capita.

• This presentation today will focus on South Africa’s economic growth and development during the time frame of 1994-1999 and analyse and evaluate the two strategies which the South African government undertook to improve economic growth and development. These strategies include, Reconstruction and Development program (RPD) and Growth, Employment and Redistribution (GEARS). It will also discuss the effectiveness of these strategies and how it can be implemented to existing developing countries to enhance their economic growth and development.

ApartheiNO! (a brief economic history of South Africa)

South Africa’s economy has been heavily influenced through their abundant natural resources like gold, diamond and other valuable minerals. The mining industry provided South Africa the foundation to create one of the strongest economies in the world, however due the apartheid era, they were unable to take advantage of their edge. As mentioned during this era, the unethical government distorted their policies to aid the rich minority and exclude most South African citizens. This corruption and political instability effected the SA economic growth and development negatively as basic needs for majority of the population weren’t met, like education, healthcare and equitable income distribution. The apartheid era also caused trade barriers as SA had the inability to access international markets. SA’s strict protectionism laws prevented the country to utilise their comparative advantage to properly export to other countries. The lack of these intuitional factors caused South Africa to caught in a poverty trap as seen in graph 1.

WE NEED A HERO

Enter, Nelson Mandela, one of the most prominent figures in SA history, who fought for democracy and played a major role in changing the economy. After spending 27 years in prison, he was released and was a catalyst in ending the apartheid era. In 1994, he became president and his government implemented two strategies in order to promote economic development and growth

1: RDP                                            

• The reconstruction and development program was implemented by the Mandela administration in 1994 with the aim of eradicating the apartheid and building a greater democratic society with equality. To help finance the RDP, the government sold some of their national assets to private citizens, requested the businesses to have programs for on-the-job training and employer subsidies of housing, transport and education. They also re-entered the international market after years of isolation from the Apartheid. The RPD is grouped into 4 major policy programs, these include: Meeting basic needs, developing human resources, building the economy and finally democratising society.

Meeting Basic needs: Healthcare and Infrastructure

• In meeting basic needs, the government focused on the domestic factors of health and infrastructure in order to facilitate economic development and growth.
• For health care, the government provided a large investment package into hospitals and its health care program.  The improvement for their healthcare does not correlate with South African’s life expectancy at birth, as it decreased from 62% to 57% between 1994-1999^[1]. This decrease is due to the emergence of Aids that hindered this health measure. (Graph on PowerPoint)
• The Government also focused on improving the infrastructure, as it would foster economic growth by increasing productivity. The government ensured that 1.75 million homes had been connected to the national electricity grid, while the proportion of rural homes with electricity grew from 12% to 42%^[2].

 Human Resources: Education and Empowerment of Women

• In human resources, the government emphasised on the institutional factors of education and empowerment of women.

• The RDP also valued education as a mean of improving economic development and economic growth within an economy.  Investment in education will increase the skills of the workforce, as more people will have easier access to higher levels of education. A more efficient and effective workforce enabled the economy to increase Aggregate Supply, and as result achieve higher levels of economic growth. The SA government improved the curriculum, upgraded school facilities and provided Financial support to students. Increasing the adult literacy rate from 82% in 1994 to 85%^[3] in 1999. (see graph)
• Possibly – Achieving higher levels of gender equality will not only provide a more favourable economic environment for women to enter the workforce, but will also increase an economy’s economic growth by increasing the participation rate of women from 44%- 49%^[4] (see graph)

       Building The Economy: Trade Liberation, Indebtedness and taxation

• For building the economy, the government implanted the Washington Consensus.

• Over the course of this five-year block, the South African economy aligned their aims with those of the Washington Consensus. The Washington consensus is a policy package suggested by the IMF, which emphasise the importance of further integration with the global economy as a mean of improving the state of the economy.
• In 1994, South Africa had high levels of debt that was holding them back from further integrating into the global economy. By tightening fiscal policy in accordance with the Fiscal Responsibility act of 1994, South Africa saw debt diminish, thus instigating greater investment in capital. Furthermore, the simplification of the FDI registration procedure also saw an increase in capital inflows into the economy. This increase in capital saw the productivity of the economy increase and accounts for the high GDP from 1994-1995 But Asian crisis slumped SA back to lower growth.^[5] The original increase is caused by policy changes in an attempt to further integrate with the global economy.
• Greater integration with the global economy has seen significant improvements in the welfare of South Africans, and the country’s economic development as a whole. The first steps towards higher levels of economic development were lifting millions of South Africans above South Africa’s national poverty of US$1.25 a day. The social welfare program, implemented in 1994, reduced poverty levels, aided by the redistribution of income through means-tested transfer payments. But with enormous levels of debt, how could they afford this sudden rise in transfer payments?
•  QUESTION TIME, COULD IT BE A
• Tax reform. The Washington Consensus suggests tax reform, as a mean of integration with the global economy. This is done through broadening the tax base, such as taxing land, wealth, and more assets, whilst cutting marginal tax rates, in order to redistribute income more efficiently and effectively. From 1994-2000, the South African population living below the national poverty line dropped from 16% to just 9%^[6], as a result of tax reform.
• (graph on power point of poverty line)

 Democratic: political stability and legal system

• Before 1994, South Africa suffered from political instability which prevented the economy from making advancements in its economic growth and development. This final programme aims to create a democratic state where SA has political stability as well as a functioning legal system. In this programme the government introduced a new law, ensuring there is an election every 5 years in which everyone can vote. The government also set up other mechanisms for public participation like public hearings, community police forums and school governing bodies.
• This program will also focus on the legal system within SA. A fully functioning and honest legal system is essential for facilitating social development. The government tightened its rules and regulations to ensure the fair and just treatment for the South African population.

GEARS

Although the RDP played a major role in facilitating economic development throughout the economy, its impact on economic growth was limited. The government then decided to introduce a macroeconomic policy framework called the Growth, Employment and Redistribution (GEAR) strategy in 1996 in order to stimulate growth and meet social investment needs. This macroeconomic policy aimed to preserve internal balance, by maintaining low levels of inflation, exchange rate stability and undergoing of further trade liberalisation. GEARS involved introducing Foreign Direct Investment (FDI) and implementing trade strategies such as export promotion and joining bilateral and regional agreements to stimulate economic growth.

FDI

 FDI is Investment in a business by an investor in another country for where a foreign investor has control in the company, indicated by owning 10% or more of the business. FDI is widely considered as a long-term Investment, as the investor often plays a pivotal role in the operation of the company. In the GEAR strategy, FDI was heavily stressed, as it can help address the saving deficiency, provide much needed employment and add to SA’s governments tax revenues to fund their social developments. The introduction of greater FDI inflow improved FDI inflows, but the suffered a sharp decrease in 1997 (see graph 5.1) due to the budget deficit. South Africa’s FDI in ratio with their GDP was far less superior in comparison to other countries as it only managed 1.5% of their GDP. (see graph 5.4)

Export promotion

Another way to stimulate economic growth, the SA government used a trade strategy called Export promotion. Export Promotion is an outward orientated growth strategy, which further focus on international trade. The growth is achieved through increasing exports and export revenue which will lead to increasing GDP and growth in exporting domestic and exporting markets. When South Africa became a democracy in 1994, they liberalised trade and capital flows which in turn allowed export-led growth to take place. This export promotion leads South Africa to become in a dominant position out of the 12 SADC (South African Development Community) countries in 1997. South Africa had the highest GNP per capita ($3400) and national GNP of $130.2 Billion dollars.^[7]

Trade agreement:

• Another trade strategy the government implemented was joining trading blocs. In 1996 South Africa a qualified membership in the Lomé Convention, the bloc gives African, Pacific, and Caribbean countries preferential access to the European markets. The more opportunity a country has to trade with others, they will stablish greater relations and it will aid in their quest for further development as a whole.

Effectiveness and Adaption of Strategies for Current Developing Countries

The implementation of the two strategies of RDP and GEARS have without a doubt contributed to the re-emergence of South Africa’s economy. Between 1994-1999, the re-entering of international markets and liberalising trade has improved economic growth of the economy as a whole. Throughout this presentation, the composite and indicators factors suggests that the strategies implemented by South Africa were successful to some extent in achieving their economic objectives. However, SA was unable to alleviate poverty, reduce the unemployment rate and achieve an equitable distribution of income. They also suffered from a breakout of HIV, which hindered their progression on the HDI index (from 0.72-0.70)^[8]. Developing countries in the global economy should implement strategies similar to the RDP and GEARS and ensure the improvements in institutional factors, trade liberalisation and trade strategies in order to facilitate the required changes to foster higher levels of economic growth and development thus enabling the economy to transition from a developing economy to an emerging economy.

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