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The Saga of South Africa's Economy

Tags Legal SystemTaxes and SpendingPolitical TheoryProduction Theory

04/27/2004Harry Valentine

It was 10-years ago this month when South Africans of all races elected Nelson Mandela as their nation's first democratically-elected, post-apartheid president. South Africa's previous president, F.W. deKlerk, showed unprecedented statesmanship by having undertaken the bold move to end that nation's apartheid regime.

By the early 1990's and the economic and political collapse of the former USSR and Soviet bloc, the South African government could no longer justify its brutal enforcement of apartheid as a means by which to combat the threat of a Soviet-inspired communist takeover of South Africa. The official end of apartheid offered the prospect of new hope for a nation of disenfranchised people who were oppressed as a result of the combination of the color of their skin and their ancestral heritage.

South Africa's system of apartheid became officially institutionalized after the Anglo-Boer war. In 1910, one of the Boer generals who fought against the British, General Louis Botha, became the Prime Minister of the Union of South Africa. The Union of South Africa's economy initially depended heavily on such labor-intensive industries as mining and agriculture.

Large numbers of relatively poorly educated non-white South Africans became the nation's single largest source of labor. The high demand for low-cost, low-skilled non-white labor which was abundant in the labor-intensive economy, made racial segregation easy to introduce and initially easy to enforce. Wage rates were based on racial background, that is, white workers were paid more than black workers doing the same work.

Before 1920 and during the early years of apartheid, the majority of the small number of educated non-white South Africans saw the white-dominated economy and apartheid as having resulted from a free-market capitalist economy. They subsequently looked to communism and socialism as the ideologies that would offer equality and opportunity to South Africa's oppressed non-white people. Pro-socialist pamphlets circulated among literate African workers before 1920. Before the onset of World War Two, South Africa had a communist party and a socialist party called the Unity Movement. At the present day, a sizeable segment of South Africa's population still sees Marxism as the road to economic relief and prosperity.

When Mandela was elected to govern South Africa in 1994, he appointed elected parliamentarians such as communist party leader Joe Slovo to high-ranking government posts. South Africa now has a high rate of taxation, restrictive labor laws, is Africa's largest welfare state and has Africa's largest, most politically well-connected and politically influential labor union movement. As a result of the new South Africa's restrictive labor laws and affirmative action policies, a large number of educated white South Africans chose to emigrate to other nations. This response angered and dismayed former president Mandela, who had previously acknowledged that South Africa needed its educated white population to help rebuild the nation's economy.

Affirmative action achieved in the new South Africa what job apartheid had achieved in the old South Africa. In the old South Africa, certain professions had been reserved for "whites only," meaning that only qualified and educated white people could be hired to fill selected vacant posts during the 1960's and 1970's. As a result, large numbers of educated non-white South Africans that included professionals as well as trained and qualified non-white tradespeople, emigrated abroad to where greater freedom of opportunity was available to them in several other nations. The more recent emigration of entrepreneurial types from South Africa has impacted on the unemployment rate.

At the present day, an estimated 42% or 8-million employable non-white South Africans are unemployed. The unemployment among this segment of the population is higher today than at any time during the apartheid era. During the mid-1970's, the United Nations revealed that despite apartheid and despite South Africa's disparity in wage rates, black people in South Africa earned a higher per capita annual income than black people living elsewhere in sub-Sahara Africa. During the 1980's and early 1990's, the anti-apartheid movement promoted the concept of "revolution before education," encouraging thousands of non-white students to abandon their formal schooling.

Many mainly non-white South Africans have never attended a school, including thousands in the 20 to 30 age group who are deemed to be unemployable in an economy that presently has little need for an abundance of unskilled manual labor. This situation has contributed to South Africa's skyrocketing crime rate which has reached epidemic levels. Following South Africa's ban on gun ownership, disarmed citizens in record numbers have fallen victim to crime, including to armed gangs of criminals. This crime epidemic has not only overwhelmed a police force coping with low morale and a high officer suicide rate, it has also discouraged foreign as well as expatriate entrepreneurs and business people from bringing new investment into South Africa, to further develop and grow the economy.

South Africa's present day economics minister, Trevor Manuel, is a firm believer in Keynesian economic theory and regards it as the economic system that best offers hope for his nation's economic future. He rejected the idea of an all-out socialist economic system since his days as an anti-apartheid freedom fighter. The economic policies upon which he intends to build South Africa's economic future, are based mainly on a Keynesian framework.

It may be of little relevance to South Africa's post-apartheid era government that Keynesian economic theories formed the economic basis of apartheid after the late 1950's. Keynesian theories have long been discredited, refuted and debunked by such noted free-market economists as F.A. Hayek, Ludwig von Mises, Murray Rothbard and Henry Hazlitt. During South Africa's apartheid era, Ludwig Lachman introduced several progressively thinking young South African minds to the rudiments of the free-market economic system when he taught economics at the University of the Witwatersrand.

During the early part of the 20th century, as the policy of official apartheid became institutionalized, technical innovations that gradually and progressively increased labor productivity, began to be introduced into South Africa's fledgling economy. As the mechanization of South Africa's growing industrial base increased, productivity increased as did earnings and savings in a variety of industries, allowing new wealth to be created.

After the Nationalist Party was elected to office in 1948, state spending on apartheid increased, but not enough to stall economic growth. The standard of living for a wide cross-section of working South Africans gradually improved through the early and mid 20th century, steadily raising the status and salary levels of several job categories. Under apartheid, white South Africans benefited the most. By the early 1960's, the South African government enacted its job apartheid policy that protected higher-status, preferred job categories for "whites only."

This mercantilist/Keynesian practice of job market-entry restriction caused many educated, trained and qualified non-white South Africans to emigrate from South Africa, beginning in the early 1960's. By the late 1970's, White-owned businesses discovered the downside to job apartheid, when they were forbidden by law from hiring qualified non-white candidates, despite an absence of suitable white applicants. Several businesses revised job titles so as to hire non-white candidates, who would perform professional level duties. As a result, a growing number of white South Africans were to discover that their job security and even the competitiveness of the companies they worked for, often came to depend on the ability and skill of their educated, non-white colleagues.

The South African government eventually revised the job apartheid laws, allowing businesses to hire qualified non-whites for previously reserved occupations. Technological progress continually increased business and industrial productivity and as a result, steadily increased the demand for increasing numbers of qualified job candidates. By the early 1980's, increasing numbers of educated, middle-class black professional people began to achieve prominence in South Africa's economy. Work place apartheid gradually began to disintegrate. At this point in time, an increasing number of white business owners came to realize the extent to which the viability of their businesses depended on their non-white employees and their non-white customers.

By the mid to late 1980's, large state expenditures causing massive debts were being incurred in administering and refining apartheid, including maintaining independent black states inside South Africa. Massive military expenditures were also being incurred at this point in time to defend the decaying apartheid system from its opponents. Massive amounts of money (savings) that could otherwise have been used to create new wealth, were wasted by the government of P.W. Botha and his defense minister General Magnus Malan, who claimed that they were defending South Africa from a communist-inspired take over, ignoring the fact that most communist countries were on the brink of economic collapse.

South Africa's epidemic of state spending to prop up a decaying apartheid system during its final years, reflected comments published by Keynes in General Theory about the alleged economic benefits of state spending. If Keynes's theory was valid, then an economically prosperous and viable economic system based on apartheid, complete with independent black states (homelands) inside South Africa, should still have been functioning at the present day. South African government spending to defend apartheid during the 1980's perhaps inflicted more damage on South Africa's economy than the economic sanctions imposed on South Africa could ever have achieved. Excess state spending during apartheid's last years incurred a massive deficit that now impedes economic growth in the post-apartheid South Africa.

South Africa's post-apartheid era leadership needs to heed two ideas from the previous regime, one being that excess state spending becomes economically destructive in the long term, the other being that economic regulation fails to achieve in the long term what policy planners intend to achieve in the short term. During South Africa's early post-apartheid years, government officials and people connected to them embraced Keynesian spending theory with overwhelming enthusiasm. They are alleged to have misspent, misallocated and malinvested such astronomical sums of money that claims of high-level corruption abounded in South Africa. That spending windfall did next to nothing to create the needed wealth that was essential to regrow South Africa's economy.

South Africa's long term economic future appears bleak due to the policies that the nation's government has already enacted. The disarming of the civilian population has left it at the mercy of armed criminals. Its economic regulations have restricted badly needed wealth creation and economic growth, while the Keynesian spending spree achieved a similar end.

South African government officials have put their trust in the policy guidelines and loans from the IMF, but the projects they funded have not created any new wealth in South Africa's economy. The water development project they funded is resulting in mass evictions of South Africa's unemployed and poor people. In view of these developments, the South African economy may be expected to languish in the doldrums for a few more years, until some senior government officials finally, if ever, read through the pages of Human Action or of Man, Economy and State, or both.



Contact Harry Valentine

Harry Valentine is an economic researcher who lived in South Africa for several years. His libertarian and free-market commentaries are here.

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