The economy is a central issue in South Africa’s 2019 elections. This reflects not only the generally disappointing rate of economic growth since 1994 but also the fact that the economy has grown (slowly) down a growth path that has not been pro-poor.
Slow economic growth
Between 1994 and 2014 the South African economy did grow steadily, with the exception of the sharp downturn of 2008-09. The GDP grew in real terms by an average 3 per cent per year. Population growth meant that real growth per capita was much lower. Nonetheless, by 2014 real gross national income per capita was about one-third higher than in 1994. Even taking into account population growth, the economy grew in real terms by more than was needed to raise the poorest half of the population above what the government called its “upper bound poverty line” (of about US$4 per person per day). In other words, if the government had been able to redistribute reasonably efficiently the benefits of economic growth to the poor, then income poverty could have been eliminated over twenty years without any reduction in the real incomes of the non-poor below their level at the end of apartheid.
The economy might have grown faster still, given that much of this period was one of a long global boom with high commodity prices. The growth rate of the South African economy was slow compared to most other similar economies. Over twenty years, South Africa’s economy grew at only just over half the rate of the ten most similar economies. Since 2014, economic growth has slowed further, to an average of only 1 percent per year; this is less than the population growth rate, such that GDP per capita has fallen in real terms.
The benefits of South Africa’s modest growth to 2014 accrued mostly to the better off, with the already rich becoming even richer. A fast-growing proportion of the rich and super-rich were black South Africans, who benefitted from the opportunities that opened up after apartheid. Patrice Motsepe became a dollar billionaire, and an estimated eight thousand black South Africans had become dollar millionaires by 2013. Professionals, managers, and most skilled and white-collar workers enjoyed rising real incomes. But little of this growth trickled down to the poor. Income poverty remained widespread, despite the steady expansion of social grants. Crucially, South Africa has a low employment rate (i.e. the employed population as a proportion of the total population aged 15 and above) and an exceptionally high open unemployment rate, with more than one in three working-age adults wanting work but not working. In this, South Africa is a global outlier.
The path not followed
The economy grew along a path that was not pro-poor, primarily because it failed to create work for low-skilled, unemployed men and women.
South Africa is an extreme example of the kind of “surplus labour” economy discussed in the 1950s by W. Arthur Lewis (who was the only economist of African descent ever to win the Nobel prize). Lewis thought extensively about the path along which agrarian societies in the Caribbean, Africa and elsewhere could develop. Lewis focused on the structural changes needed in societies with what he called “unlimited supplies of labour” or “surplus labour”. In these societies, labour can move out of the peasant farming sector without affecting production there, into low-productivity capitalist sectors, including industrial sectors such as clothing manufacturing, if wages in those sectors are low in line with productivity. As capitalist economies grow, Lewis argued, they will reach a turning-point at which labour becomes scarce, labour will shift into higher-productivity sectors and wages will rise.
Lewis’s model was reflected in the economic history of East and South-east Asian countries. The economies of Korea, Hong Kong and now China developed through job creation in labour-intensive manufacturing sectors before these economies reached the Lewisian turning-point and wages began to rise. In contrast, in South Africa and across much of Southern Africa, labour has moved out of agriculture but into open unemployment rather than into labour-intensive capitalist sectors.
South Africa’s industrial sectors have become more and more capital- and skill-intensive. The demand for less skilled labour in these sectors has collapsed. Economists refer to the effect of economic growth on employment as the “employment elasticity” of growth. An employment elasticity of 1 means that, when the economy or sector grows by (say) 2 percent, employment grows at the same rate, i.e. by 2 percent. If the employment elasticity is more than 1, then economic growth results in a faster rate of job creation. If the employment elasticity is less than 1, then employment rises more slowly than economic growth.
In an economy with surplus labour, the goal of job creation requires a high employment elasticity of growth. Only when the economy reaches the Lewisian turning-point should raising wages become more of a priority than creating jobs.
In developing economies, economic growth can generate lots of short-term jobs in sectors such as construction. Sustainable job creation on a large scale generally requires, however, job creation in labour-intensive manufacturing sectors such as clothing manufacturing. To create jobs on a large scale requires taking advantage of global markets, i.e. producing labour-intensive products for export – as many Asian countries have demonstrated.
In South Africa, the employment elasticity of growth in manufacturing has probably been negative, i.e. less than zero. Firm data suggest that the employment elasticity of growth in manufacturing was -0.7. Data from labour force surveys suggest an employment elasticity of growth in manufacturing of only just below 0. Even if we accept the labour force survey data, the conclusion is that rising manufacturing output has not resulted to any overall job creation in manufacturing.
In sectors such as clothing, indeed, output has risen whilst employment has fallen dramatically, to barely more than 50,000. This is little more than one-hundredth of the number of jobs in clothing production in Bangladesh. Tiny Lesotho has almost as many clothing jobs as South Africa. Madagascar has many more.
Declining employment in labour-intensive sectors like clothing helps to explain why, in the South African economy as a whole, employment has grown much more slowly than the economy. The overall rate of job creation was insufficient to absorb new entrants into the labour market let alone reduce unemployment.
The employment elasticity of growth has been low in South Africa – and probably negative in manufacturing – because policy-makers have ignored W. Arthur Lewis’s insights. Faced with massive surplus labour, policy-makers should have been promoting labour-intensive sectors, such as clothing manufacturing. Instead, policy-makers have been pursuing the goal of high-wage, high-productivity, “decent” work, without much or any regard for the costs in terms of both actual job destruction and obstacles to large-scale job creation.
South African government policies result in a paradoxical situation: even when industrial output grows, employment does not expand. Instead, firms invest in more capital- and skill-intensive technologies. Accelerating economic growth does not raise the demand for labour in industrial sectors.
Job creation and the elections
This is not what South Africa people themselves want. Every poll of public opinion since 1994 points to job creation being the top priority of South African citizens. South African citizens would like to see high-wage jobs being created but most believe that any job is better than nothing. The most recent Afrobarometer survey in South Africa (in 2018) asked a representative countrywide sample to choose between two statements: (1) “It is better to have no job than to have a job with a low wage” and (2) “Any job is better than not having a job”. Fewer than one in five people (17 percent) agreed or agreed strongly with the first statement. More (19 percent) agreed with the second statement. And a massive 60 percent agreed strongly with the second statement.
In the 2019 elections, as in every previous election, the African National Congress (ANC) has promised to create jobs, end poverty and build a better life for all. Its 2019 election manifesto was titled “Let’s Grow South Africa Together”. The section on the economy is by far the longest in the manifesto.
Whilst the ANC promises pro-poor growth (“radical socio-economic transformation … to serve all people”), the reforms that it proposes do not address the underlying challenges. There are vague promises that a “capable, developmental state” will use industrial and investment policies (including prescribed assets for pension funds) to facilitate reindustrialisation. The manifesto repeatedly points to the introduction of a national minimum wage, which will supposedly benefit millions of low-paid working people. This is a recipe for further capital-intensification. Industrial policy hitherto has revolved around capital subsidies, and the national minimum wage has been set at a level that precludes labour-intensive industrialisation.
The manifesto largely turns its back on export markets. The ANC would “apply targeted tariffs and non-tariff measures where necessary to protect and incentivise labour-intensive industries, including agriculture, clothing, textile and footwear and other manufacturing industries.” Tariffs protect domestic producers in the small domestic market will not assist South African producers to expand in export markets. The ANC envisages also that jobs will be created primarily through boosting local demand for goods. The only sop to export-oriented growth is a promise that the ANC would “consider the establishment of a Special Economic Zone for clothing, textile, and footwear.”
At one point, the ANC manifesto refers to the target of 8 million net new jobs by 2030. Even this would not be enough to eliminate unemployment, given new entrants into the labour market. More prominence is given to the figure of 275,000 jobs to be created per year. Over eleven years (i.e. by 2030), this would amount to only just over 3 million jobs.
The ANC will win the 2019 elections, because enough voters remain loyal to the ANC and have confidence that the new president will govern more effectively than his predecessor. But the ANC has no real plan to steer the economy down a more labour-intensive growth path, no real plan to tackle unemployment, and thus no real plan to tackle poverty.