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Introduction
In February 2007, Statistics South Africa 3 announced that the real GDP of South
Africa had increased by 5.6% (annualized) in the fourth quarter of 2006, which was
well above market expectations. The South African economy had been growing
continuously since 1998, making it the longest economic upswing in the countrys
history. Business too was booming, with consumer demand growing at a fast pace.
The country was seeing a rapid increase in the number of inbound tourists as well.
Having tripled the number of overseas visitors since 1994, it (the tourism industry) is
regarded as being ready for a second phase of growth, 4 said a report in the Financial
Times (Refer Exhibit I for more information on South Africa).
However, the impressive numbers hid some harsh realities. Around 50% of South
Africas population continued to live below the poverty line and the country had an
unemployment rate of more than 25%. The economic disparity between population
groups in South Africa was wide and usually manifested itself along racial lines.
Analysts attributed this disparity to the apartheid system, a race-based discrimination
policy practiced by the government between 1948 and 1994.
South Africa held its first multi-racial election only in 1994. The elections brought the
African National Congress (ANC) to power. The ANC government took several
policy initiatives to achieve its goal of bridging the economic gap between the white
and non-white sections of the population. It initially focused on social issues, with the
launch of the Reconstruction and Development Programme (RDP). However, in 1996,
with the Growth, Employment, And Redistribution (GEAR) policy, the government
decided to concentrate more on wooing foreign investment and on encouraging trade
and industry.
Despite some success in poverty alleviation, the economic disparity between the
population groups was expected to persist for many years to come and many analysts
blamed the governments shift in policy for the slow change. Meanwhile, the
government had been unable to contend with the growing menace of HIV/AIDS, with
an estimated 5.5 million5 South Africans infected with the deadly virus. The high
crime rate was another issue that required immediate attention.
2
3
4
5
Ernest Harsch, South Africa Tackles Social Inequities, Africa Recovery, www.un.org,
January 2001.
Lucky Jones, Risks Remain for South Africas Economy, www.bbc.co.uk, April 14, 2004.
Statistics South Africa is a government body responsible for collecting, producing, and
disseminating official statistics as well as for conducting of a census of the population.
Good Times in SA: Financial Times, www.southafrica.info, June 12, 2006.
According to UNAIDS estimates (2005).
544
Exhibit I
Indian
3%
9%
Black
79%
With deaths caused by HIV/AIDS increasing, the net growth rate of the population
has fallen into negative territory (-0.4%). The infant mortality rate is high at 60.6.
The life expectancy too is low at 42.7 years. Literacy, however, is high at around
86%.
Compiled from various sources.
Background Note
According to archeologists, South Africa had been inhabited by humans for thousands
of years. Farming communities began settling along what later came to be called the
Limpopo river as early as in the 2 nd Century. The first records of Europeans reaching
the shores of present day South Africa date back to the 15 th Century. In 1485,
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International Business
Bartholemeu Dias, a Portuguese explorer who was trying to find a sea route to India,
circumnavigated the South African cape. He named it Cabo do Boa Esperanca or
Cape of Good Hope.
The Dutch East India Company6 set up a provision station in Table Bay (Cape Town)
for passing ships in 1652. Beginning in 1657, the company authorities alloted arable
lands in the region around Cape Town (also referred to as Cape Colony) to some of its
employees who were freed from service to pursue farming. In this period, slaves were
brought from Benin and Sulaweisi (Indonesia) to work on the farms. By the 1700s, the
Dutch farmers (referred to as trekboers) began spreading to the interior regions of
South Africa. As a result, the natives were ousted from their lands. The African
natives, especially the Khoisan (the original inhabitants of South Africa), and the
Xhosa people (immigrants from East Africa), resisted the settlers, which resulted in
bloody conflicts that sometimes lasted for several months. However, the Dutch settlers
were able to eventually overpower the African natives, some of whom fled while
others ended up working for the Dutch settlers as servants. By the mid-1700s, the
Dutch government began encouraging orphans and menial workers from Holland to
migrate to the Cape.
In 1795, the British gained control of the Cape from the Dutch. In 1820, the British
government sent unemployed people from Britain to South Africa, to settle down in
the regions between the Cape and Xhosa-dominated territories.
In 1828, following a wave of anti-slavery sentiment in Britain, the British authorities
in South Africa passed an ordinance guaranteeing equal civil rights to all residents of
the Cape Colony, irrespective of their race. In 1834, Britain proclaimed emancipation
for the slaves in all its colonies. However, the slave-owners in the Cape Colony
opposed the decision. So, the British government provided compensation money to
them. The compensation money had a positive impact on the local economy, with
several new business establishments being created with this money in this period.
However, despite their freedom, the ex-slaves had no choice but to become wage
laborers in the newly industrializing economy, where they were, more often than not,
exploited.
Some trekboers, however, refused to obey the British ordinance and decided to move
east and live independently, away from British-governed areas. They moved, along
with their slaves, to a region called Natal (now KwaZulu-Natal), which brought them
in confrontation with the Zulu tribes. The trekboers managed to defeat the Zulus,
though skirmishes continued for several months. Meanwhile, the British authorities,
fearing repercussions in the Cape, annexed Natal, which already had a small British
settlement in Durban. The trekboers, however, established two independent republics
Orange Free State and Transvaal in the region. By the mid-1850s, almost all of
South Africa was under white domination. In 1853, the Cape Colony was granted a
representative legislature by Britain.
In the late 1860s, deposits of alluvial diamonds were discovered along the Vaal River.
The discovery had a major impact on the South African economy. Port facilities were
upgraded to facilitate diamond mining and consequently, coastal cities such as Cape
Town, Port Elizabeth, East London, and Durban experienced an economic boom. In
1872, the Cape Colony was granted self-governance. Orange Free State, Transvaal,
6
The Dutch East India Company (or Vereenigde Oostindische Compagnie) was established
in 1602 as a trading concern. It is considered one of the first multinational corporations. It
had trading outposts in Persia (now Iran), Siam (now Thailand), Canton (now in China),
Formosa (now Taiwan), Malacca (now in Malaysia), Chinsura, Bengal (in India), and
Southern India. It was formally dissolved in 1800.
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International Business
Exhibit II
The Aims and Objectives of the ANC
To unite all the people of South Africa, for the complete liberation of the
country from all forms of discrimination and national oppression
To end apartheid in all its forms and transform South Africa as rapidly as
possible into a united, non-racial, non-sexist, and democratic country based on
the principles of the Freedom Charter
To defend the democratic gains of the people and to advance toward a society
in which the government is freely chosen by the people according to the
principles of universal suffrage on a common voters role
To fight for social justice and to eliminate the vast inequalities created by
apartheid and the system of national oppression
To build a South African nation with a common patriotism and loyalty in
which the cultural, linguistic, and religious diversity of the people is
recognized
To promote economic development for the benefit of all
To support and advance the cause of national liberation, womens
emancipation, development, world peace, disarmament, and respect of the
environment
To support and promote the struggle for the rights of children
Source: African National Congress Constitution, www.anc.org.za.
548
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International Business
The late 1970s and 1980s saw many world powers, especially the US and the UK,
starting to put economic pressure on the South African government over its apartheid
policies, which seemed to have become even more repressive over time (Refer
Exhibit III for a comparison of the status of blacks and whites on some
parameters in 1978).
Exhibit III
A Comparison of the Status of Blacks and Whites under
Apartheid in 1978
Blacks
Whites
Population
19 million
4.5 million
Land allocation
13 percent
87 percent
<20 percent
75 percent
360 Rand
750 Rand
Doctors/population
1/44,000
1/400
20 (urban)
40 (rural)
2.75
$ 45
$ 696
1/60
1/22
Source: www-cs-students.stanford.edu.
The Export-Import Bank of the US10 prohibited loans to firms exporting to South
Africa in 1978. The International Monetary Fund (IMF) 11 prohibited loans to South
Africa in 1983. The US passed the Comprehensive Anti-apartheid Act in 1986,
imposing economic sanctions on South Africa. The UK followed suit. In 1986, the
European Economic Community (EEC) imposed a ban on trade and investment in
South Africa. The South African economy suffered the most when a group of
international banks, led by Chase Manhattan, decided in 1985 to withdraw short-term
credits. Not only did the banks stop grant of new loans but they also demanded
immediate repayment of all outstanding debts. The result was a severe debt crisis. The
1980s were also a period of intense droughts, with agriculture being severely affected.
These developments had an adverse effect on the economy, which recorded an
average annual growth of 1.5% in the decade. With population outpacing GDP
growth, the per capita income fell by around 10%.
The last years of apartheid were a time of social and political turmoil. Civil unrest and
violence resulted in the government declaring an emergency in June 1986, which
continued till 1990. In the 1990s, the apartheid system finally gave way to the process
of democratization.
10
11
The Export Import Bank of the US is the official export credit agency of the US. Its mission
is to assist in financing the export of US goods and services to international markets.
(Source: www.exim.gov.)
The IMF is an organization of 185 countries, working to foster global monetary cooperation,
secure financial stability, facilitate international trade, promote employment and sustainable
economic growth, and reduce poverty.
550
12
13
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International Business
The government set up a special cabinet committee (SCC) to implement the program.
A core committee (CC) was also set up to support the SCC. The CC comprised
ministers, deputy ministers, and directors-general of finance and state expenditure,
public administration, constitutional development, and public works. The office of the
president was also to aid the CC.
A fund, called the RDP Fund, was created to finance the various programs and subprograms under the RDP. The fund secured finances from various sources. The
government reassigned to the fund some part of the budgetary allocations to various
government departments. International and domestic grants were also a major source
of finance. Revenues from state lotteries as well as from the sale of state assets were
diverted to the fund. Also, the funds surplus was invested in investments, the interest
on which went back into the fund. The government allocated Rand 14 2.5 billion in the
1994-95 budget to the RDP Fund. In 1995-96, the amount increased to Rand 5 billion.
The plan was to increase the allotment up to Rand 12.5 billion in 1998 and beyond.
The RDP fund was to finance projects that would have a long-term effect on society
such as housing for the homeless, running water, electricity, and sewerage systems for
millions of homes across the country, infrastructure such as roads, and free education.
It also aimed to create jobs and redistribute land so as to tackle unemployment and the
economic inequalities (Refer Exhibit IV for the socio-economic objectives of the
RDP).
Exhibit IV
Rand is the currency of South Africa. US$ 1 = Rand 6.76 (as of 2006)
552
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International Business
Unlike the RDP which put the stress on reducing the economic inqualities between the
races, the GEARs stress was more on job creation. And for creating more jobs, the
government decided to expand the private sector. Therefore, the policy suggested
lowering the interest rate and reducing corporate taxes to stimulate higher private
investment. The government was also to reduce its consumption expenditure, relax
foreign exchange controls16, and reduce tariffs. GEAR envisaged increasing nonmineral exports and attracting FDI17. The government felt that with improving foreign
investor confidence, FDI inflows into South Africa would increase.
16
17
18
19
The new rules allowed non-resident South Africans to maintain foreign currency denominated
deposits with South African banks. South African corporates were allowed to preserve foreign
currency earnings for up to thirty days of accumulation (Earlier, they were allowed to retain them
only for up to seven days).
Foreign direct investment (FDI) is defined as an investment involving management control
of a resident entity in one economy by an enterprise resident in another economy. FDI
involves a long-term relationship reflecting an investors lasting interest in a foreign entity.
Ernest Harsch, South Africa Tackles Social Inequities, Africa Recovery, www.un.org,
January 2001.
The exchange rate crisis of South Africa in 1996 forced the SARB to sell massive amounts
of foreign reserves. The central bank was left with only US$ 942 millions in foreign
reserves in 1997. In 1997, the inflation rate was also high, at 8.9 percent. With investors
losing confidence in emerging markets following the Asian crisis, the rand depreciated in
1998 (from 4.61 per US $ in 1997 to 5.53 per US $ in 1998). In response to these
developments, the central bank raised its repurchase rate (the rate at which the reserve bank
charges commercial banks to borrow from it) from 14.8 percent to 22 percent. As the
foreign reserve situation stabilized, the Reserve bank later decreased the repurchase rate to
11.75%.
554
1993
31.2
1994
31.5
1996
35.6
1998
38.6
2000
36.9
13.0
20.0
21.0
26.1
25.8
Exhibit V
South Africa: Main Economic Indicators (1995-2000)
Year
1995
1996
1997
1998
1999
2000
Exchange rate
(Rands per US$)
3.63
4.29
4.61
5.53
6.11
6.93
Inflation
8.8%
7.4%
8.9%
6.9%
5.2%
5.3%
Current account
-2,205
-1,180
-2,273
-2,157
-640
-575
Exports*
30,701
30,263
30,171
29,264
28,267
31,630
Imports
-27,404
-27,508
-29,848
-27,208
-24,554
-27,320
Foreign reserves
(US$ millions)
2,820
942
4,799
4,357
6,353
6,083
GDP at market
price (R bn)
548.1
617.9
685.7
783.9
800.6
888.1
(US$ millions)
* Major export items include Platinum, pig iron, gold, and copper.
Source: International Monetary Fund, International Financial Statistics, and South
Africa Central Bank.
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International Business
However, some analysts were of the view that the GEAR policy brought about
macroeconomic stability at the expense of growth. And without growth, the
government was unable to reduce poverty or income disparities. They argued that by
cutting down on expenditure, and reducing corporate taxes, the government was in
fact excarberating the economic inequalities in the population. A COSATU20 policy
document in 2000 concluded, The GEAR brought about deep cuts in government
spending between 1996 and 1999. As a result, efforts to improve services to the poor
suffered, despite the continued reprioritization of spending from the rich to the
poor.21
Felicity Gibbs, national manager of Operation Hunger 22 said, I worry about
GEARit appears to enrich the already rich. The way it is being implemented
possibly, the poor people are remaining where they are, and in fact are getting
worse.23 A WEFA24 report on South Africa in January 2001 also had something
similar to say The poor did not enjoy any benefits of the redistributed wealth. In
fact they are even worse off.25 Official statistics released by the government also
clearly indicated that the whites continued to remain a majority among high income
earners and that very few blacks were able to enter the high-income group (Refer
Exhibit VI for the break-up of high-income and low-income earners according to
race in 2001).
Exhibit VI
Colore
Indiand
3% 9%
White
21%
Black
67%
White
84%
21
22
23
24
25
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Exhibit VII
RDP Achievements between 1994 and 2000
Water
Housing
Electrification
Telephones
Poverty relief
Health
600 new clinics, free health care for pregnant women and
children under 6
Public works
Land
26
27
28
The APF was established in July 2000 in Cape Town. The APFs role is to unite struggles
against privatization in South Africa.
Poverty in Post Apartheid South Africa, www.waronwant.org, July 23, 2003.
Ernest Harsch, South Africa Tackles Social Inequities, Africa Recovery, www.un.org,
January 2001.
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International Business
With economic inequalities along racial lines remaining very much a part of South
African society, the government passed the Broad Based Black29 Economic
Empowerment Act, 2003, which came into effect in April 2004. The document said:
Unless further steps are taken to increase the effective participation of the majority of
South Africans in the economy, the stability and prosperity of the economy in the
future may be undermined to the detriment of all South Africans, irrespective of
race.30 The Act empowered the minister of trade and industry to issue codes of good
practice31 and to publish transformation charters to promote black economic
empowerment in South Africa. The legislation also resulted in the establishment of the
Black Economic Empowerment Advisory Council (BEEAC).
Around this period, the government introduced the Black Business Supplier
Development Programme (BBSDP). The BBSDP was an 80:20 cost-sharing cash
grant incentive scheme, which offered support to black-owned enterprises in South
Africa. In 2005, the government assisted 577 black-owned businesses with grants of
around Rand 29 million.
The main policy objectives were:
A substantial increase in the number of black people who had ownership and
control of existing and new enterprises
A significant increase in the number of black empowered and black-engendered
enterprises
A significant increase in the number of black people in executive and senior
management positions.
The minister of trade and industry issued the codes of good practice. For example,
Code 100 (Ownership Scorecard) required that blacks should own at least a 25% stake
(+ 1 vote) in a company. Code 200 (or Management Scorecard) was concerned with
black representation at senior executive levels (40% in the top management and 50%
in the Board) and Code 300 (Employment Equity Scorecard) dealt with the
representation of blacks at all levels of management senior management, middle
management, and junior management. Code 400 required companies to spend 3% of
their payroll on improving the skills of blacks. Similarly, Code 500, Code 600, and
Code 700 referred to Preferential Procurement, Enterprise Development (which
encouraged corporates to support initiatives that facilitated access to loans, seed
capital, training), and Socio-Economic Development (which measured the socioeconomic contributions of entities) respectively. Enterprises which followed these
codes were eligible for licenses and concessions.
Despite these programs, the unemployment levels among the blacks remained high.
And more than any other factor, this was due to the low levels of growth in the
economy. David Cowan, economist, Economist Intelligence Unit, said in 2004,
Three per cent is not the worst rate by African standards. But 3% is not big enough
to generate jobs. It just about keeps you where you are. The question now is whether
the government can boost the rate.32
29
30
31
32
558
Outlook
South Africa was a unique country in many ways. While some regions in the country
had infrastructure and prosperity levels comparable to those of developed countries,
other regions were worse off than the least developed countries. There were extreme
disparities in income and wealth among the race groups, as a consequence of the
apartheid system. However, even thirteen years after the death of apartheid, these
disparities remained as glaring as ever. Though in 2005 and 2006, South Africas
economy grew by around 5%, poverty and unemployment rates were still at high
levels. As of March 2006, the unemployment rate was at 25.6% (Refer Exhibit VIII
for major economic indicators and unemployment levels in the 2000s).
33
34
35
36
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International Business
Exhibit VIII
Economic Indicators in the 2000s
S.
No.
Economic Indicators
2001
2002
2003
2004
2005
2006
2.7
3.6
2.8
3.7
4.3
4.5
CPI*
5.7
9.2
5.8
1.4
3.9
5.4
National Debt
(% GDP)
41.4
37.1
35.7
35.8
35.1
32.8
External current
account balance (%
GDP)
0.1
0.7
-1.5
-3.2
-3.7
-4.9
12.13
8.64
6.64
5.64
6.33
Unemployment (in %)
30.5
26.2
26.7
25.6
37
The Economic Policy Institute (EPI) is a non-profit, non-partisan think tank that seeks to
broaden the public debate about strategies to achieve a prosperous and fair economy.
(Source: www.epi.org)
38
The Gini coefficient, developed by Italian statistician Corrado Gini, is a measure of inequality
of a distribution. It is defined as a ratio with values between 0 and 1. It is usually used as an
income inequality metric, with 0 corresponding to perfect income equality and 1
corresponding to perfect income inequality.
39
Tony Avirgan, South Africas Economic Gap Grows Wider While Brazils Narrows
Slightly, www.epi.org, April 19, 2006.
40
According to the World Health Organization.
560
Exhibit IX
GINI Coefficients for South Africa and Brazil, 1995-2002
Exhibit X
Ranking of Countries on the Basis of Number of People Living with
HIV/Aids
Rank
Country
Prevalence
Rate^
South Africa
5,300,000
21.5%
India*
5,100,000
0.9%
Nigeria
3,600,000
5.4%
Zimbabwe*
1,800,000
24.6%
Tanzania
1,600,000
8.8%
Ethiopia
1,500,000
4.4%
Mozambique
1,300,000
12.2%
Kenya
1,200,000
6.7%
Congo
1,100,000
4.9%
10
USA
950,000
0.6%
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International Business
Crime was also a serious concern (Refer Exhibit XI for crime rates in South Africa
and some other countries). Since 1994, large numbers of immigrants had been
arriving from other African countries, seeking employment and a better life in South
Africa. However, with local unemployment at high levels, there were fears of civil
unrest and of crime rising further.
Exhibit XI
Murders*
Rank
Country
Murders per
1000 people
Columbia
0.617
South Africa
0.496
Jamaica
0.324
Venezuela
0.316
Russia
0.201
Robberies*
Rank
Country
Robberies per
1000 people
Spain
12.32
Chile
6.92
Costa Rica
4.79
South Africa
4.44
Estonia
3.56
* UN Survey 1998-2000
Source: www.nationmaster.com
The government was aware that its first priority was reducing poverty and creating
new jobs. None of the great social problems we have to solve is capable of resolution
outside the context of the creation of jobs and the alleviation and eradication of
poverty,41 said President Mbeki. The government was quite optimistic that it would
be able to halve unemployment and poverty by 2015. Our second decade of freedom
will be the decade in which we radically reduce inequality, and virtually eliminate
poverty. We know now that we can do it,42 said Ngcuka.
41
42
Ernest Harsch South Africa Marks a Decade of Freedom, Africa Renewal, www.un.org.
July 2004.
Asgi-SA: Accelerated Growth for All, www.southafrica.info, 2006.
562
2.
3.
Economic Policy and South Africas Growth Strategy, www.treasury.gov.za, March 19,
2007.
4.
5.
6.
7.
Tony Avirgan, South Africas economic gap grows wider while Brazils narrows
slightly, www.epi.org, April 19, 2006.
8.
9.
Lynne Thomas and Jonathan Leape, Foreign Direct Investment in South Africa,
CREFSA, London School of Economics, www.lse.ac.uk, October 2005.
10.
Edmond J. Keller, The Challenge of Enduring and Deepening Poverty in the New
South Africa, www.international.ucla.edu, May 2005.
11.
12.
13.
14.
Tim Bucknell, Hannah Lee, Patty Skuster and Mary Thornton, Changing Gears: South
Africa and the Growth Employment and Redistribution Strategy of 1996, wwwpersonal.umich.edu, April 15, 2002.
15.
Ernest Harsch, South Africa Tackles Social Inequities, Africa Recovery, www.un.org,
January 2001.
16.
17.
IMF Concludes Article IV Consultation with South Africa, www.imf.org, September, 1998.
18.
19.
20.
www.stassa.gov.za.
21.
www.southafrica.info.
22.
www.reservebank.co.za.
23.
www.mbendi.co.za.
24.
www.cia.gov.
25.
www-cs-students.stanford.edu.
26.
www.nationsencyclopedia.com.
563