Why has the South African economy underperformed since the end of Apartheid?

Kaveh Pourvand, 26 June 2013

An inevitable consequence of Nelson Mandela being critically ill in hospital is discussion of his legacy. No one doubts the profound political achievement of ending Apartheid and establishing democracy in South Africa. However, the country’s economy has not performed as well as may have been expected since 1994, when Mandela became president.

There has been modest growth at an average of 1.2 per cent between 1995 and 2008. While this is comparable with African and Latin American growth rates over the period, it is way behind East Asian growth rates. South Africa also suffers from very high unemployment. The official rate was 25.2 per cent in the fourth quarter of 2012. (Compare this to Vietnam, which has an unemployment rate of 1.81 per cent.) Real wages have not risen significantly since the transition to democracy.

Dani Rodrik points out that according to free market orthodoxy, South Africa should have performed much better. The country has ensured macro-economic stability, maintaining low levels of inflation and public debt. There have been no nationalisations or large scale asset redistributions. On the contrary, the 1997 Growth, Employment and Redistribution Act facilitated large scale privatisation and restructuring of state assets. The country has been kept open to international trade and capital flows. Yet events have not turned out as expected.

Rodrik’s paper (hyperlinked above) explains why. He compares South Africa to Malaysia. In 1988, the two countries were both medium-sized economies dependant on mining and marked by racial divisions with an ethnic majority controlling the polity and ethnic minority controlling the economy. They then had virtually identical output per head. Yet, Malaysia has maintained 8 per cent GDP growth since 1988. The reason is that Malaysia has successfully increased its manufacturing base through export growth while South Africa has deindustrialised. Manufacturing’s share of the labour force in Malaysia increased from around 8 per cent in the mid-1980s to 16 per cent a decade later. In South Africa it fell from 12 per cent in the mid-1980s to less than 7 per cent in 2000. In 2004, exports’ share of GDP was more than 80 per cent in Malaysia but only 12 per cent in South Africa.

Manufacturing tends to be much more productive than services. By increasing their manufacturing base through export growth Malaysia has grown their economy much faster. It has also led to much higher employment and better paid jobs.

Why did Malaysia succeed in increasing its industrial base when South Africa could not? The answer,  Rodrik points out, is industrial policy.

Unlike free market South Africa, the Malaysian government had an active programme of tax, trade and labour market interventions to expand and diversify the productive base of their economy. Some of these ventures failed, such as the ill-fated attempt to create a national car company in the 1980s. But the successes, in electronics for example, more than paid for the failures.