Volume 11, No.4 - Nov -Dec 2002
COSATU's perspective on the economy
In recent inputs on COSATU economic policy by ANC leaders, there has been a lot more heat than light. For example, the paper by Jabu Moleketi and Josiah Jele - Two strategies of the national liberation movement in the struggle for the victory of the national democratic movement - effectively argues that COSATU has:
Ignored and underplayed the successes of government policy, while presenting it wrongly it as a free-market strategy
Demanded unsustainable growth in government services and, by extension, the budget
Called on government to make unrealistic demands on capital, which would lead to a decline in both domestic and foreign investment and, as a result, slower growth and rising unemployment.
This approach caricatures COSATU's concerns, rather than contributing to a serious exchange of views. We need a more systematic, in-depth discussion of economic policy in the Alliance to find a way forward to meet the needs of our people.
That was the conclusion of the Ekurhuleni Summit, where the Alliance agreed to develop common positions on strategic issues to take to the Growth and Development Summit, now scheduled for April 2003.
The socio-economic crisis
For most South Africans, liberation brought huge political and social improvements. Democracy in itself empowers our people and gives them wide opportunities and rights, including in the workplace. Moreover, government has improved basic infrastructure and social services in black communities, which were long denied under apartheid.
But in economic terms, for many households the gains have been offset by rising unemployment. Nearly every African family now has some unemployed members. Unions have experienced at first hand the loss of members due to downsizing in manufacturing, mining and the public sector.
Statistics South Africa point to a deepening problem.
oblessness rose from 16% of the labour force in 1995 to almost 30% today. That is far higher than any other middle-income country reporting to the International Labour Organisation. The number of unemployed has risen from around two million to over four million.
Unemployment has hit hardest amongst African youth and rural people. For young people under 30, the unemployment rate was 47% in 2001. The results of rising unemployment emerged graphically from a recent Statistics South Africa report on incomes and expenditure - Earning and Spending in South Africa - which showed that between 1995 and 2000:
The share of the poorest 60% of households in the national income fell from 17% to 15%, with the biggest decline amongst the poorest households;
The average African household income fell by 19%, to R26 000 a year;
Average white household incomes rose by 16%, to R158 000 a year.
According to these official data, the vast majority of our people saw falling real incomes between 1995 and 2000, although a few enjoyed substantial improvements. Overall, the equalities left by apartheid have actually got worse.
These trends have been associated with a falling share for workers in the national income, while profits have increased. The share of wages and salaries in the national income declined sharply after 1998. This trend forms part of a long-term decline in labour's share in incomes since the early 1980s.
In the past year, soaring food prices have added to the difficulties facing working-class households. The maize price has doubled in the past year, and food prices overall rose over 20%. In contrast, the prices of other goods and services only increased by 10%.
To some extent, as Statistics South Africa emphasises, improved government infrastructure and services have offset the fall in incomes. Between 1995 and 2000, more households got formal housing, piped water and electricity for lighting.
Many more children are in school; access to public clinics and hospitals has improved substantially, and policing has been beefed up in black communities. But the share of households with flush toilets and electricity for cooking and heating actually declined.
Access to services, 1995 and 2000
Service Percentage of households with access to service
1995 2000
Formal housing 66% 73%
Electricity for
Lighting 64% 72%
Cooking 55% 54%
Heating 54% 51%
Piped water 79% 84%
Flush toilet 57% 56%
Source: Statistics South Africa, Earning and Spending in South Africa, 2002, Chapter 2, relevant tables.
While important, the improvements in government services do not offset the increased poverty resulting from soaring unemployment. Lower incomes also make it harder for households to pay for services. This is one reason for the decline in the use of electricity for cooking and heating, as well as large-scale evictions and cut-offs of electricity, telephones and even water in many communities.
Given the huge burdens joblessness imposes on our people, COSATU and the ANC have consistently said that government policy must do more to ensure the economy creates jobs.
To develop effective strategies, however, we need to understand the causes of the current situation. Certainly one factor behind rising unemployment has been slow growth, based on low employment. But structural problems have been even more important in preventing job creation.
Slow growth, low investment and worse work
Slow economic growth is obviously one cause of rising unemployment and poverty. The main problem is low investment, which is far below the levels needed to ensure rapid economic growth. We have seen, not substantial increases in output, but efforts to raise productivity - and downsize employment - in order to survive against growing international competition.
As a result, we have lost formal work and gained 'jobs' that are in fact disguised unemployment - unproductive, poorly paid and highly insecure.
As the following table shows, although South Africa still has a relatively high gross domestic product (GDP) per person, between 1995 and 2000 it lagged behind other middle-income developing countries in overall growth and even more in investment. The growth in GDP in real terms was barely enough to maintain output per person.
At 16,5% of GDP, investment was far below the rate needed for faster growth, which is at least 20%. Exports grew faster than the GDP, but still lagged other middle-income countries.
Economic performance of selected countries, 1995-2000
South Africa Middle income countries Of which:
Poland Korea Malaysia Chile Hungary Turkey BrazilIncome per capita
in 2000 $PPP191603660900017300454091001199070307300Average ratio -
investment2/GDP 16.525.030.832.039.529.921.225.120.5Average annual
growth in:GDP2.53.95.14.84.74.54.03.82.3Exports5.28.98.216.810.28.317.110.86.1Exports:GDP, 2000326.332.746.351.9125.543.058.529.89.3Source: Data kindly provided by Dr Simon Roberts of Wits University. Calculated from World Bank Global Development Indicators, via TIPS.
Notes: 1. Income per capita is for 2000. 2. Growth fixed capital formation 3. Exports are measured in gross output terms, while GDP is based on value-added, hence export: GDP ratios can exceed 100%, as for Malaysia.
As the following table shows, growth and investment initially rose quite rapidly after 1994, sank back in the late 1990s - when government cut its spending as well as tariffs - and recovered in the early 2000s.
Growth and investment, 1990-2001
GDPTotal investment Of which:GovernmentParastatalsPrivateAverage annual growth1990-19940.3%-1.4%-7.5%14.4%2.0%1994-19973.4%8.5%15.1%10.4%7.8%1997-19991.4%-1.6%-4.3%3.4%-2.5%1999-20012.8%1.8%-3.9%-12.5%5.9%Source: Calculated from, Reserve Bank, long-term time series on national accounts, electronic database at www.resbank.co.za
A rising net outflow of capital out of the country contributed to low investment. It occurred through both investment by South African companies and, increasingly, the repatriation of profits. The loss of profits soared from the late 1990s as some of the largest South African companies moved their headquarters abroad.
In contrast, foreign investment into South Africa remained highly unstable, with a very large decline in 1999-2000. It seems foreign investment into South Africa has not really recovered, though the figures are heavily distorted by the restructuring of Anglo American in 2001.
Foreign capital flows and investment, 1993-2001, in billions of rand
Year Investment abroad by SA companiesForeign investment into SAOutflow of profits from SA19931,88,811,019945,713,212,1199512,632,414,6199615,629,018,0199740,870,520,8199842,860,124,5199951,2102,428,8200028,528,837,4200183,5199,4151,1Note: 1. The figures on capital inflows and outflows for 2001 were heavily distorted by the restructuring of Anglo American. The available evidence for the start of 2002 suggests that foreign investment into and out of South Africa has in fact grown very little since 2000. Source: Reserve Bank, long-term data series on the balance of payments and national accounts, electronic database at www.resbank.co.za
Slow growth and low investment have been associated with formal job losses and a decline in the quality of work. To the extent the economy has created jobs at all, they have been low-level, insecure and very poorly paid. Thus, the average income from work declined substantially between 1995 and 2001, as the following table shows.
Earnings by income category, 1995a and 2001
Note: The cut off point of R1000 in nominal terms in real terms means a 45% lower income in 2001 than in 1995. R1000 in 2001 was worth only R690 in 1995 rand.
Income category Total, in thousands % Of total1995200119952001R0283260%3%R1-R9993 6533 93235%36%Over 10006 6196 57564%61%Total10 30010 833100%100%Source: For 1995, Statistics South Africa, October Household Survey, 1995, Table 2.3; Labour Force Survey September 2001, Table 3.10.
In short, overall economic performance in recent years has been at best disappointing. The more relaxed fiscal policy of recent years has seen some improvement in growth, but investment remains far too low to bring about rising employment. At the same time, the opening of the economy has seen a decline in formal jobs, worse conditions for the employed, and rising overall unemployment.
Defining a development strategy
Despite some bright spots, economic developments since 1994 underline the need to address the structural crisis in the economy. COSATU has long called for a strong development strategy, led by the state and geared to restructuring the economy to create jobs and end poverty.
In contrast, in key areas of economic policy, government strategies have aimed at freeing up markets and cutting the budget, in the context of a nearly exclusive emphasis on increasing exports.
The historical context
Historically, colonialism and apartheid shaped South Africa's growth path, so that:
The economy depended on mineral exports, which sustained import-substitution industrialisation. The focus on mining and refining limited the ability of the economy to create jobs, fostered inequality in incomes and wealth, and did little to reduce import dependence.
Companies targeted exports and the domestic high-income group, with little effort to supply the basic needs of the poor. Low wages for the majority of workers limited the domestic market.
Vast disparities emerged in economic, political and social terms between 'homeland' areas and the 'RSA'.
Major inequalities in income and wealth emerged - far more than in most other middle-income countries. On the one hand, capital was dominated by financial and mining capital. Local capital was also strong in commercial agriculture, manufacturing and the parastatals. South Africa enjoyed very high levels of foreign investment compared to the rest of Africa, mostly indirectly in mining and directly - often in partnership with local firms - in manufacturing. Meanwhile, black workers were repressed, forced into migrant labour and denied qualifications. Black people, and Africans in particular, were denied access to capital, infrastructure and land as well as education.
The state supported this growth path by providing infrastructure for formal industry and white communities, maintaining high tariffs and, through the apartheid system, ensuring cheap labour.
This historic growth path began to fall apart from the mid-1980s. On the one hand, gold mining faced stagnant prices and rising costs. On the other, mass opposition led to a substantial capital flight. Then, after 1989, the rapid opening of the economy undermined local production in many areas, notably clothing and equipment, although it opened the door to exports for a few sectors - mostly arms and auto.
A framework for development
In response to this situation, COSATU continues to call for the development strategy, essentially contained in the RDP. It argues that the state must intervene to enhance equality of wealth and incomes, since only that can unblock economic growth. The state must lead the restructuring of the economy in terms of production structure and ownership. To that end, it must co-ordinate economic and social policies.
In essence, the RDP strategy aims to combine growth and redistribution by:
Increasing government spending on infrastructure and services for the poor. Higher productivity would result from improved education, health and security, as well as from the opportunities provided for home-based production by access to electricity and water. At the same time, the strategy would strengthen the domestic market for basic necessities, such as housing and food, providing a major stimulus to investment.
Establishing an industrial strategy to restructure the economy so as to enhance employment as well as growth and investment. The strategy would have to promote labour-intensive sectors. These sectors include agriculture and food processing, as well as other light industry; projects up- and down-stream from mining and petrochemicals; and public and private services.
Supporting new centres of capital, particularly through collective ownership, and enhancing the access of the majority to productive assets and skills. Potential new centres of economic power include the parastatals as well as producer co-ops and small and micro enterprise. The RDP saw land reform as one critical way to increase the productive assets of the rural poor.
Consistently strengthening democracy in both the state and the economy. Only structures that empower the Alliance constituencies can stop the dominant centres of capital from blocking efforts to restructure the economy.
Government's approach to date
Government's policy in response to the crisis has been contradictory. We can define four key elements:
A commitment to alleviate poverty by redirecting government spending on basic services for the poor.
Introducing new laws to ensure labour rights and skills development, effectively tearing down one of the main pillars of apartheid.
Highly restrictive fiscal policies, especially in 1996-99, which led to substantial real cuts in expenditure, so that overall government spending fell by about 10% per person. These policies have been somewhat relaxed in the past two years. Projections suggest that by around 2005 we will return to the 1996 level of spending per person.
Programmes that free up markets in many areas, notably by cutting tariffs, deregulation, and restructuring state assets primarily by bringing in foreign partners and/or private competition.
Clearly, these strategies are highly contradictory. The commitment to improving services for the poor has been hamstrung by budget cuts and the commercialisation of the parastatals. Taken as a package, the government approach has failed to ensure rapid growth or generate employment.
A major shortcoming in the government's approach is its reliance on 'competition', which necessarily means markets, to drive growth. Yet the private sector has little immediate incentive to address the deep-seated structural problems that undermine investment and growth.
The argument for competition starts with the assumption that markets force producers to minimise costs and meet consumer needs. Government interference - through tariffs, price controls, parastatals, even taxes - stalls this mechanism, lowering productivity and growth.
In the same vein, where resources are allocated through non-market mechanisms, for instance in the public sector or through collective ownership of land, there is no pressure to ensure efficiency.
But the market mechanism won't work in South Africa. Specifically, we face four major market imperfections:
Mass poverty aggravated by rising unemployment since 1990;
Producers' failure to capture the long-term gains associated with improvements in basic services, and therefore to carry them out for the developmental role of the state;
Most of the formal sector focusing exclusively on large-scale enterprise and the high-income group;
High levels of concentration in key markets, including finance, mining, most manufacturing industries and maize storage and trading.
In these circumstances, deregulation, commercialisation and privatisation are unlikely to bring about broad-based development. Indeed, the experience so far demonstrates the need for stronger state action to lead development.
Increasingly, proponents of market-driven strategies argue that the international balance of forces leave no other choice. That argument, however, ignores both the experience of other countries and the fact that international capital does not dictate the details of policy.
Even in a unipolar world, there is considerable scope for regulation of markets and a more realistic fiscal strategy. Where the Alliance has taken a unified position, as with the Mining Development Act and the Financial Sector Summit, local business has agreed to transformative measures.
In any case, capital is not likely to support economic growth much more if developmental measures are not in place. South Africa's experience, like many other countries', suggests that capital will not invest heavily while massive inequalities remain and economic growth is slow.
High levels of foreign investment have occurred almost exclusively in countries that accelerated development through decisive state interventions to equalise incomes and wealth and restructure the economy - even though business never welcomed these measures.
In short, the crisis-ridden state of the South African economy requires a pro-active, state-led strategy that can overcome the distortions left by apartheid, addressing poverty directly as part of a coherent economic and social development strategy. This does not mean that the state will replace private capital, but rather it will drive the restructuring of the economy to benefit all our people.
COSATU's proposals
These are COSATU's proposals in key areas of economic policy.
Restructuring the economy requires strategies for industry and agriculture that will explicitly address the structural problems left by apartheid. That means they must focus on addressing poverty and enhancing employment, although of course support for export industries should continue. Key components would include:
Greater emphasis on producing basic necessities for the poor, with closer integration between economic programmes and social measures for the poor;
Support for new centres of capital - especially co-ops and the state sector, as the main forms of collective ownership - as well as small and micro enterprise;
In this context, support for relatively labour-intensive activities in to create jobs.
Sector summits are critical for mobilising stakeholders around strategies to achieve these aims. But the government (and the ANC) must give leadership based on a strong developmental vision.
Historically, the parastatals formed the backbone of government efforts to restructure the economy, both by packaging investment (through the IDC and DBSA) and by providing infrastructure.
COSATU supports restructuring the parastatals, to back up economic and social strategies that serve the majority of our people. For this reason, it has opposed the privatisation of basic services and called for a systematic analysis of the developmental impact of restructuring proposals.
Unfortunately, current policies on state assets seem likely to undermine broader developmental aims. Department of Public Enterprises documents reveal an overwhelming belief that the introduction of competitive markets and private managers should drive the restructuring of the parastatals.
The overall picture has been one of undermining the control of the democratic state, job losses, rising prices and worsening service provision, particularly for working people and the poor.
A major concern remains the tendency for government to leap into restructuring without any real analysis of the implications for our developmental aims, as was shown clearly in Spoornet. When, at the insistence of organised labour, research was finally conducted into government's proposals, they turned out to be financial and economically unsustainable.
In contrast, in protracted negotiations on electricity, we have yet to receive a clear analysis of the effects on poverty, growth and employment of proposals to privatise a substantial share of generation.
In terms of fiscal policy, COSATU argues that the current more expansionary stance must be strengthened if we are to drive development effectively. Of course, no one supports spending on a scale that risks unsustainable debt. The question is rather what constitutes a sustainable range.
By world standards, both our deficit and taxes are low relative to GDP. A moderate increase in taxes and borrowing - say, by 1% each relative to GDP - would considerably expand the budget. If government spends the funds in ways that reduce unemployment and stimulate growth, taxes and borrowing would ultimately fall again relative to GDP.
On monetary policy, COSATU is very concerned that the practice of enforcing inflation targets through interest rate increases has proven extremely damaging to growth and employment, without controlling inflation. The main cause of inflation is the rapid, speculative increase in food prices since November 2001.
Raising interest rates in this context is likely to cause further economic stagnation without controlling inflation. More generally, the whole policy of inflation targeting tends to prioritise fighting inflation over other social aims, and should be reviewed.
Finally, in the past few months, accelerated inflation in food, including maize, meat and dairy products, has become a major cause for concern. COSATU's research demonstrates that speculation by storage and trading companies is a major factor behind the soaring price of maize.
In turn, speculation was made possible by the rapid deregulation of agriculture, despite highly concentrated ownership, especially of storage facilities and trading. Thus, three companies control 72% of maize storage.
In these circumstances, the food-price monitoring committee proposed by Cabinet must adequately represent working people and the poor in general, and have effective tools to fight profiteering.
Conclusions
COSATU's disagreements with government's economic policy reflect the growing difficulties facing workers and the poor, primarily as a result of rising unemployment. As long as government does not prioritise urgent remedies to these difficulties, neither social stability nor rapid economic growth are possible.
