Question 1

The history of the ANCs economic policy after 1994 is divisible into two distinct periods: the Reconstruction and Development Program (RDP) from 1994 to 1996; and the Growth, Employment and Redistribution program thereafter (GEAR). Macroeconomic policy through the period was characterized by prudent public financial policies emphasizing tax reforms and debt containment, though with different spending priorities between RDP and GEAR. The RDP defined five policies with the dual goals of: promoting growth of aggregate demand by reducing income and wealth inequities through redistributive schemes; and restructuring the supply side of the economy to expand productive capacity. Policies to encourage urban and rural development and land reform were demand focused, while RDPs industrial strategy and support for small enterprises fixed supply side weaknesses and were to boost job creation, the fifth priority. These policy priorities were made concrete with goals such as the promise to build one million low cost homes; redistribute 30% of agricultural land; provide portable water, adequate sanitation and health care to every person by 2000; and job creation through public works. The RDPs supply side goals were left on the wayside. The policy shift from RDP to GEAR was one of emphasis away from development of domestic demand, towards stimulation of industrial output through exports. Tight monetary policy was combined with a targeted approach to government deficit reduction. The goals were to attain 6% growth in 2000, stabilize inflation below 10%, reduce the fiscal deficit to 4% of GDP, boost domestic savings up to 21.5% of GDP and cut the balance of payments deficit to 2%. Whereas lip service continued to be paid to redistribution, the real thrust of policy was to liberalize trade and restructure public sector spending and wage restraints to contain inflation. Although exports were prioritized, import tariffs were also lowered to ease the pain caused by the Rands 20% devaluation in 1996. GEAR included ingredients borrowed from the East Asian economic model: tax incentives to stimulate investment, funds to boost small and medium enterprises in vital industrial clusters and a strengthening of competition policy. Pre-1994, the ANC was opposed to the concentration of economic power in the hands of the elite few whether white or black. Yet, the actual policies of the ANC government post-1994 departed greatly from the partys previous socialist orthodoxy. Calls for a redistribution of wealth to the non-whites and nationalization were muted in practice. This was a pragmatic choice since the ANCs European models of socialism in France, Greece and Sweden had fared poorly, and neo-liberalist economic policies were ascendant. One may criticize the ANCs economic policy for not meeting fundamental goals such as reducing unemployment (which rose from 20% in October 1994 to 25.8% in September 2000), reducing inequality (the Gini coefficient rose from 0.596 in 1995 to 0.635 in 2002), and restructuring of the economy away from capital intensive industries (instead, labor intensive industries like textiles are in decline). Worst of all, South Africas national debt was not contained, but expanded from 190bn Rand in 1994 to 376bn Rand in 1999. Nonetheless progress had been made: the rise of growth rates to 3% per annum between 1994 and 2003 (according to the UNDP). Inflation fell from the 14% average from 1980 to 1994 to 5% by 2000. Fiscal discipline did little to help with employment and development priorities but the budget deficits did shrink. In the context of South Africas vulnerabilities in the global financial markets, the ANCs focus on maintaining credibility and market access by hewing close to the IMFs recommendations was probably inevitable. However, the emergence of a black elite while the working class descended deeper into poverty (400.000 formal sector jobs lost) reflects a profound failure - GEAR has despite its name, failed in terms of economic growth, creation of quality jobs, and redistribution. (Exhibit 11c shows the emergence of the black elite by 1996.)

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Question 2
South Africas unemployment problem may be traced to: the policies of the Apartheid government that have damaged the educational attainments of a majority of the population and depressed other indicators of human capital; labor force rigidities due to unionization; labor laws that favored insiders who were predominantly white; dependence on mainly extractive industries; and slow economic growth. The South African labor force grew by over 4.2% per annum with 2% due to population growth and the rest because of higher labor force participation (from 56.4% in 1995 to 61.8% in 1999 according to the October Household Surveys from StatsSA). This newly empowered, newly equal work force ran up against low economic growth of 2.44% per annum on average between 1996 and 2000 (Exhibit 5). Economic growth was simply too anemic to absorb the expanded labor force (Figure 2) and we see the effects as a ballooning unemployment rate and a fall in the median household income for both Africans and Whites (Exhibit 7). Union activity and rigid labor laws again adding to labor force inflexibility and thence structural unemployment, held the ANCs planned economic renaissance back. The ANCs leadership was beholden to the Unions for political support and could not easily reduce wage levels in unionized industries. The governments attempt to create new jobs with lower wages, and more austere benefits only increased the divide between the insiders and outsiders in the new South Africa. As shown in Figure 1, labor productivity growth in the private sector lagged wage growth in 1998 despite the fact that real GDP growth was only 0.7% (Exhibit 12). Thus South Africa had a surplus arguably of relatively st th unskilled workers and a deficit of skilled workers reflected in the higher household incomes of the 81 to 100 percentile of households in 1996 even as other household incomes fell. (Exhibit 7) Social decay endemic in highly unequal societies such as South Africa explains some of the unemployment. Crime rates were high in South Africa relative to peers such as Zimbabwe and the Russian Federation that had undergone similarly wrenching economic transformations (Exhibit 17). As the search for legitimate jobs and crime rate are i inversely related , formal employment rates in South Africa were possibly further depressed. The HIV epidemic that overtook the economy was concentrated in the working age population and affected the ability of many to work as well (Exhibit 18). Government spending on education was around 22% (Exhibit 10a) of GDP between 1997 and 2001, but the legacy of Apartheid compounded the difficulties of the economic restructuring conducted under GEAR to liberalize trade, deregulate and privatize state owned companies. Generations of black Africans educated for their opportunities in life cannot quickly adapt to the demands of a less regimented, service economy dependent on skilled labor. The lack of labor mobility was heightened by the geographical segregation of the country under the Population Registration Act, even after it was repealed; the fact was that laborers from poorer areas could not afford housing in areas with job opportunities. The relatively high price of hiring in the formal sector within South Africa has placed the burden of unemployment disproportionally amongst the informal sector especially since the insider-outsider segmentation is so stark due to Apartheid. The government has to tackle labor market regulations to cut the burden of labor costs for small and medium enterprises and encourage formal employment growth, perhaps by working with Chinese advisors on tactical measures to suppress militant unions. Second, the crime rate and HIV epidemic should be tackled by empowering the citizens to form local policing communes in partnership with the police and through working with international aid agencies on public health reforms. Finally, but most importantly, economic growth has to rise but the drivers of growth have to be diversified away from the mining and manufacturing sectors. Public works programs that are focused on developing renewable power infrastructure that will enhance productivity and reducing the economys dependence on oil and coal would be supported by the World Bank financially and absorb part of the unemployment whilst increasing the narrow skill base.

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Question 3
For the period under consideration (1980-2010), South Africa began as a bifurcated economy, combining aspects of heavily industrialized nations with aspects of a poor agricultural one. Kuznets had shown in 1955 that the the shift of population between sectors at first produces a widening in inequality and then a narrowing, thus one may expect that South Africa would demonstrate the operation of Kuznets dual economy dynamics. Instead of the classical U-Shaped Kuznets curve, our empirical study shown in Figure 3 comparing GDP per capita with a proxy indicator of inequality (Gini Coefficient) shows a concave relationship between the two variables. Acemoglu and Robinsons hypothesis (A&R) that political and institutional transformations in the West were instrumental in reducing inequality appears to apply in South Africas case. The change of political leadership in South Africa did not as we have shown in the previous two sections result in a redistribution of income to the masses since political power remained concentrated in the hands of the elite. Up to the present time, the political unrest in South Africa due to rising economic inequality remains muted, staying the hand of the young black elite on the economic till and postponing the radical reforms needed to placate the masses. This is an argument for the case that our dataset is too short as the radical reforms inevitable under A&R have yet to take place. If we buy this argument then South Africas growth is mired at a low level due to the autocratic disaster, where the powerless poor slave away with little accumulation of wealth and civil society is too weak to initiate revolution. Taking the other point of view assumes implicitly that South Africas inequality is holding back growth, which is equivalent to saying that the nation was at the inflection point (maxima) of the Kuznets curve. This assertion is supported perhaps by Figure 4, where we do observe the peaking of inequality in 2006 and a slight decline since accompanied by a rise in per capita income. However, the presence of an empirical Kuznets curve itself does not prove a causal relationship between inequality and lower income. According to Robert Barros study of inequality , high inequality impedes growth in low income nations (with per capita income below US$2000 in 1985 terms, South Africas GDP per capita exceeds this) whereas it boosts growth in higher income and wealthier nations, which apparently supports the thesis that slow growth in South Africa is due to inequality. Yet Barros study shows that growth is positively correlated to: macroeconomic stability, low government consumption, the rule of law, and stock of human capital as measured by years of secondary and higher school attainment, low fertility rates and the ratio of investment to GDP. Compared to all these other factors, inequality itself is a minor variable. Poor countries are perhaps affected by tight credit markets which hold back the entrepreneurial endeavors of the less wealthy whereas the rich countries have better credit conditions. If Barros arguments are sound, then the recipe for South Africas medicine must include measures to curb government spending, target low inflation, raise the standard of education, and increase investment. These were precisely the measures taken by the government under the GEAR regime with less success than one might expect. The missing ingredient for the recipe may be greater credit liberalization to overcome the tight credit conditions of iv the nation. Aron and Muellbauer have built a consumption model that reveals the monetary transmission channels in South Africa. They conclude that credit liberalization measures like allowing pension-secured mortgages was important in driving up domestic consumption, and GDP growth. The 1998 Asian Financial Crisis and Russian default had however constrained credit amongst South African households and the tightening of bank supervision after the collapse of Saambou Bank amongst other prudential policies further limited credit. This gives us a potentially conflicting policy recommendation: the Reserve Bank should avoid short term interest rates increases as these tend to reduce consumer spending and through indirect effects affect asset prices and income expectations. How one may conduct monetary policy to limit inflation in the presence of such a constraint is left unsaid by Aron and Muellbauer. In practice, only low inflation periods would permit use of credit easing as an instrument of growth.
iii ii

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Supporting Appendices Figure 1. Based on Exhibit 19. Private sector wages shot past productivity gains in 1998.
Percentage change (1995 Base) 12 10 8 6 4 2 0 -2 1995 1996 1997 Year Productivity changes Public sector wage changes Private sector wage changes 1998 1999 2000

Figure 2. Employment cannot keep pace with population growth. Population size deduced from Real GDP/Real GDP per capita in Exhibit 12. Employment statistics reproduced from Exhibit 5. 0.00% -0.50% -1.00% 2.15% 2.13% 2.11%

-1.50%
-2.00% -2.50% -3.00% -3.50% -4.00%
Employment (non agricultural, primary axis) Population growth (secondary axis) 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 -0.70% -1.70% -3.70% -3.20% -2.90% 2.11% 2.11% 2.12% 2.12% 2.12% 2.12% 2.13% 2.13% 2.00%

2.09%
2.07% 2.05% 2.03% 2.01% 1.99%

Employment (non agricultural, primary axis)

Population growth (secondary axis)

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Supporting Appendices
Figure 3. GDP Per Capita versus GINI Coefficient in South Africa between 1980 and 2010. Best fit 3rd order polynomial implies a concave relationship instead of the classic convex relationship (inverted U) that Kuznets curves take.

Does the Kuznets Curve exist in South Africa? Evidence is negative.

GINI INDEX WORLD BANK (1993-2010), LACHMAN & BERCUSON (1980-1993) 70 65 60 55 50 45 6500

y = -1E-09x3 + 3E-05x2 - 0.3337x + 1105.9 R = 0.17064

7000 7500 8000 8500 9000 GDP PER CAPITA PPP (WORLD BANK) 9500 10000

Figure 4. GDP Per Capita versus GINI Coefficient in South Africa between 1993 and 2010. Best fit 2nd order polynomial implies a convex, classic U-Shaped Kuznets Curve.

Kuznets Curve: 1993 to 2010

GINI COEFFICIENT WROLD BANK 68 66 64 62 60 58 56 6000 6500 7000 7500 8000 8500 9000 GDP PER CAPITA PPP (WORLD BANK) 9500 10000

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Supporting Appendices

END NOTES

Kenneth Burdett, Ricardo Lagos, Randall Wright, Crime, Inequality and Unemployment, The American Economic Review, Vol 93, No 5, Pg 1764-1777 ii Daron Acemogly and James A. Robinson, The Political Economy of the Kuznets Curve, Review of Development Economics, 6(2), 183-203, 2002 iii Robert J Barro, Inequality and Growth in a Panel of Countries, Journal of Economic Growth, 5: 5-32 (March 2000) iv Janine Aron and John Muellbauer, Wealth, Credit Conditions and Consumption: Evidence from South Africa, September 2011, Proceedings of Special IARIW-SSA Conference on Measuring national income, wealth, poverty and inequality in African Countries, Cape Town, South Africa
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