Country Growth Model - South Africa

Oluwasegun Popoola

Long Run Growth (The South African Experience)

Popoola Oluwasegun Oluwatoyin

Term Paper for Advanced Macroeconomics (ECON 801)

May 2007

Abstract Growth has been defined severally in different economic forums and literature. South Africa‘s long run growth experience is not too different from that recorded by many other nations of the world. Expectedly, there has never been any consensus on the main factor that drove economic growth till date. One striking observation however, is that the interplay of the forces that drive economic growth must have induced the unprecedented wave of growth that the economy witnessed from the 1900s to the late 1960s. The 1970s marked the beginning of a world wide slowdown in economic growth which would last for another two decades. In the 1980s, the South African economy was shut out of the world as a result of its apartheid regime and it would take another decade before international sanctions were lifted after concerted efforts by the political leadership to restore democratic institutions in the early 1990s. This paper focuses on three main areas: describes South Africa‘s long-run growth experience; ascertain whether South Africa has grown through capital accumulation or TFP and; present relevant aspects of the Solow model and/or endogenous growth theory in the light of the South African growth experience.

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Introduction Purpose Growth has been defined in several ways but in general terms, economic growth refers to the expansion of the national income—the total production of goods and services of a country over a given period. Economic growth is usually measured by the pace of change of gross domestic product (GDP) after adjustment for inflation also known as real GDP1. Variances between the long-run and short-run definitions of growth are therefore a function of time (emphasis mine).

This topical issue which has elicited world wide interest will definitely continue into the future as researchers continue to find ways and means of discovering and interpreting long run growth drivers and its effects on diverse economic models.

The goal of this paper therefore is to: Describe South Africa‘s growth experience; Ascertain whether South Africa has grown through capital accumulation or TFP and; Present relevant aspects of the Solow model and/or endogenous growth theory in the light of the South African growth experience.

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Definition obtained from http://www.canadianeconomy.gc.ca/English/economy/economic_growth.html

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Historical Background, Politics and Demography South Africa is located at the southern tip of the African continent (See Appendix 1) and gained its independence from the United Kingdom on May 31, 1910; but was never really independent until the 1990‘s when the apartheid2 era came to a complete halt.

South Africa has a bicameral parliament encompassing ninety members of the National Council of Provinces (the upper house); four hundred members of the National Assembly (the lower house). Currently, South African politics is dominated by the African National Congress (ANC), which received 69.7% of the vote during the last 2004 general election and 66.3% of the vote in the 2006 municipal election.

South Africa is a nation of over 47 million people of diverse origins, cultures, languages, and beliefs. Based on the 2005 statistics, Black Africans constitute 75.4% of the entire South African population, while the whites are 14.3%, colored at 8.8%, and Indian or Asian at 2.5%. South Africa has a yearly population growth rate of -0.40%, a worrisome trend attributed to the prevalence of the Acquired Immune Deficiency Syndrome (AIDS) pandemic which is conservatively estimated at 21.5% in the adult population.

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Apartheid refers to an official policy of racial segregation involving political, legal and economic discrimination among different ethnic groups.

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South Africa’s Growth Experience Pre Democratic Era (1900 – 1994) and Literature Review South Africa displayed strong potential for catch up in the early 1900 and was a likely member of the ―convergence club‖ as described by Dowrick and Delong (2005). They argued that South Africa was almost certainly converging on the richest countries with per capita GDP in South Africa rising from 30% of the US per capita GDP in 1913 to 38% by 1950 (Heston, Summers et al., 2002; Maddison, 2002). By 1994, however, GDP per capita in South Africa was 26% of the comparable figure for the USA (Heston, Summers et al., 2002) and in Dowrick and DeLong‘s (2005) judgment, South Africa had fallen out of the convergence club.

Scholars on economic history in South Africa can be divided into two main camps, the long-termdecline group on one side and the boom-crisis-and-stagnation group on the other. The boomcrisis-and-stagnation narrative of economic growth in South Africa describes how the economy emerged from the promising start provided by the diamond and gold mining industries of the lateVictorian period to follow a path of diversifying industrialisation, partly under the direction of a state-led import substitution strategy.

This strategy was a success in the post-War era when the South African economy was thought to be one of the fastest growing in any international comparison (Lundahl, 1999), or as Hobart Houghton claimed: ―The South African economy with that of Japan probably had the highest growth-rate in the world at the time‖ (Hobart Houghton, 1978: 213).

The South African economy recorded not only high, but rising; GDP growth rates and low inflation in the mid-1940s to the late 1960s (see Appendix 2). In South Africa, as elsewhere (Maddison, 2002), this post-war boom ended during the seventies, a decade that has turned out to

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be a ―watershed in recent South African economic history‖ or so Jones and Inggs (1999:1) argued.

In South Africa, the turning point between boom and subsequent stagnation has variously been identified as 1965 (Fallon and Pereira de Silva, 1994), the mid-seventies (Abedian and Standish, 1992; Lundahl, 1999), or 1976 (for example, Jones, S. and Inggs, 2003), but the message is invariably that the South African economy, having reached a plateau of prosperity, subsequently experienced first, stagnation (during the seventies), and, then, decline during the eighties. In Pritchett‘s (2000) taxonomy of growth experiences, South Africa is classified as a ―mountain‖, i.e. a country where (per capita) growth proceeded at rates above 1.5% p.a. prior to a structural break, after which per capita growth turned negative.

Various reasons have been given for the relative stagnation of the economy since the seventies (McCarthy, 1993; Jones, C.I. and Inggs, 1999; Jones, S., 2002; Jones, S. and Inggs, 2003): extensive government regulations and interventions exacted not only static costs, but also undermined the dynamic efficiency of the labor market and of business investment; the maintenance of the political system also entailed, so it seemed, an increasing fiscal burden; civil unrest domestically and political pressure internationally created a hostile business environment; the gold mining sector experienced a sustained decline, despite brief periods of buoyancy; finally, the import substitution strategy that had, apparently, been central to South Africa‘s robust economic growth, had run out of steam by the seventies.

By the early 1980s, South Africa had completed the relatively easy initial phase of import substitution, but the economy had not successfully diversified and remained dependent on imported capital goods and the economy failed to evolve along an export promoting path. The impact of international sanctions also led to a massive decline in the economy.

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The dismantling of apartheid structures and the lifting of foreign sanctions prior to the democratic transition which began in the early 1990s was therefore greeted by optimism.

Post Democratic Era (1995 – 2007) South Africa‘s democratic transition in the early 1990s3 created expectations of a dramatic turnaround in the country‘s economic performance. Trade and financial sanctions and internal political opposition to the apartheid government had contributed to the poorest ten-year growth performance (1984 – 1993) since the Second World War (Appendix 2). The removal of these constraints was widely expected to transform the country‘s economic performance.

In the light of these expectations, South Africa‘s growth experience between 1998 to date (see Appendix 2) can be aptly described as eye popping relative to other African countries such as Nigeria, Algeria and Egypt which were at different levels of decline largely as a result of poor leadership, failure of the import substitution policy and the impact of Dutch disease.

Today, South Africa‘s GDP accounts for around 25% of the entire continent‘s GDP. The country leads the continent in industrial output (40% of total output); mineral production (45%) and electricity production (over 50%). Key sectoral growth drivers include manufacturing, tourism and higher value-added manufacturing and service industries.

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South Africa‘s first and all inclusive government was inaugurated in 1994.

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Key Growth Drivers South Africa provides a safe haven for businesses to operate due to the well structured and effective process which the country has in place for the protection of intellectual property, which includes:- ―South African Patents Act, 1978 (Act 57 of 1978)‖, ―Trademark Act, 1993 (Act 194 of 1993)‖, ―Copyright Act, 1978 (Act 98 of 1978)‖ and the ―Designs Act, 1993 (Act 195 of 1993)‖. Infringement of any of these legal provisions carries very heavy penalties and possible jail terms.

South Africa was rated the most competitive economy in the sub-Saharan region and the most attractive country in Africa to invest by World Economic Forum‘s 2004 annual global competitiveness Index owing to a decade of comprehensive institutional reform and sound economic management embarked upon by the government coupled with solid credit ratings4 implying less risk for investors and cutting the cost of capital.

Strong and stable political institution with democratic governance in place has also fuelled the unprecedented economic growth rate witnessed recently.

The existence of an established infrastructure and economic base that rivals that of any developed country with great potential for further growth and development. The structure of the economy has been transformed from a natural-resource based economy to a more

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In August 2005, Standard & Poor‘s raised South Africa‘s long term foreign currency credit rating citing the country‘s economic stability, reduced vulnerability to external shocks, moderate debt burden and stable political institutions. Rival agency, Fitch had South Africa on a positive ratings watch while Moody‘s upgraded South Africa‘s credit rating in January 2005.

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modern, dynamic and resilient economy in which higher value-added manufacturing and service are thriving.

Hosts the 18th largest exchange – Johannesburg Stock Exchange (JSE) in the world by market capitalisation (some R3.3-trillion as of September 2005). The JSE's rules and their enforcement are based on global best practice, while the JSE's automated trading, settlement, transfer and registration systems are comparable to that found in any developed part of the world.

Development Indicators

South Africa ranks as one of the first fifty wealthiest nations of the world by account of its GDP per capita adjusted for purchasing power parity. Other macroeconomic indicators in appendix 4 indicate that the country is the fastest growing nation in the African continent.

Challenges

The International Monetary Fund (IMF), in its 2005 annual country assessment describes South Africa‘s path to economic recovery in the following words: ―The economy is now growing strongly, inflation has been lowered and has become more predictable, public finances have been strengthened, and the external position has improved markedly.‖ ―The expansion in economic activity has created additional jobs.‖

Undoubtedly, South Africa's position in the region and the country's strong economic performance has benefited the rest of Africa tremendously. Other African countries such as

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Nigeria have benefited from the South African economy. Telecommunications giants such as MTN, Telkom SA etc. have established their presence in several parts of Africa.

However, serious economic challenges such as persistent high unemployment, poverty, large wealth disparities, spiraling crime rate and a high incidence of HIV/AIDS will continue to affect long term growth in the economy.

Conclusion While arguments continue over how the South African economy fared, one can readily come to terms with the fact that the South African growth experience has been driven by a combination of several factors including capital (i.e. earnings from the exportation of gold, platinum and copper); strong institutional framework (i.e. stable political system and rule of law) and early education (engendered by the early white settlers); the abundant supply of disenfranchised, low-wage and unskilled labor from South Africa and neighboring countries 5 which produced cheap coal – the cheapest in the world during the 1970s to generate cheap electricity which powered South Africa‘s industrialization.

The country has not only proved to be a model state for the African continent but has become a launch pad for some of the largest foreign direct investment (FDI) to other parts of Africa. Companies with origin in South Africa such as MTN, Avis Rent A Car, Anglo America, Sasol, Old Mutual, De Beers etc. have established presence in other parts of the world besides the African continent.

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Migration from South Africa‘s close neighbors such as Zimbabwe, Namibia and long distance neighbors such as Zambia provided cheap labor that worked in the coal mines.

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References

Black, A., Manufacturing development and the economic crisis: restructuring in the eighties‘, Social dynamics, 13, 1 (1987), pp. 47-59.

Coleman, F.L., ed., Economic history of South Africa (Pretoria, 1983).

Moll, T., ‗Did the apartheid economy fail‘? Southern African Stud., 17 (1991), pp. 271-291

Moodie, T.D. with Ndatshe, V., Going for gold, men, mines and migration (Berkeley, 1994).

Nattrass, J., ‗The South African economy: its growth and change” (Cape Town, 1981).

Preston-Whyte, E. and Rogerson, C., eds., South Africa’s informal economy (Cape Town, 1991).

The US Central Intelligence Agency (CIA) web site.

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Appendices (1) Map of South Africa

Source: The CIA web site

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12 Years Jan-06

Jan-04

Jan-02

Jan-00

Jan-98

Jan-96

Jan-94

Jan-92

Jan-90

Jan-88

Jan-86

Jan-84

Jan-82

Jan-80

Jan-78

Jan-76

Jan-74

Jan-72

Jan-70

Jan-68

Jan-66

Jan-64

Jan-62

Jan-60

Jan-58

Jan-56

Jan-54

Jan-52

Jan-50

Jan-48

Jan-46

GDP

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(2) GDP at Market Prices (Constant 2000 Prices)

GDP @ Market Prices (Constant 2000 Prices) In 'Million Rands

1,400,000

1,200,000

1,000,000

800,000

600,000

400,000

200,000

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(3) GDP per Capita (Constant 2000 Prices)

GDP Per Capita @ Market Prices (Constant 2000 Prices) in Rands 30,000

25,000

GDP Per Capita

20,000

15,000

Series1

10,000

5,000

Jan-06

Jan-04

Jan-02

Jan-00

Jan-98

Jan-96

Jan-94

Jan-92

Jan-90

Jan-88

Jan-86

Jan-84

Jan-82

Jan-80

Jan-78

Jan-76

Jan-74

Jan-72

Jan-70

Jan-68

Jan-66

Jan-64

Jan-62

Jan-60

Jan-58

Jan-56

Jan-54

Jan-52

Jan-50

Jan-48

Jan-46

0

Years

(4) Macroeconomic Indicators Official name: Republic of South Africa Capital: Pretoria Total land area: 1 219 912 square kilometres (471 011 square miles) Total coastline: 2 798 kilometres (1 739 miles) Population (2006): 47.4-million Currency: The rand. R1 = 100 cents Total GDP* (actual, 2005): R1 539-billion (US$227.7-billion) Total GDP (purchasing power parity, 2005): US$540.8-billion Real GDP growth (2005): 5.1% Inflation (CPIX, 2005): 3.9% Official languages: Afrikaans, English, isiNdebele, isiXhosa, isiZulu, Sepedi, Sesotho, Setswana, siSwati, Tshivenda and Xitsonga Provinces: Eastern Cape, Free State, Gauteng, KwaZulu-Natal, Limpopo, Mpumalanga, Northern Cape, North West, Western Cape * Based on an average 2006 exchange rate of R1 = US$6.76.

Source: Statistics South Africa

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(5) South Africa‘s Inflation Rate (Data Source: Statistics South Africa)

(6) GDP Growth in South Africa (Data Source: Statistics South Africa)

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