South Africa Economic and Financial Policy in the 1990’s

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During the 1990s, the South African economy exhibited an uncertain trend, passing from a period of deep recession to a fragile but nonetheless positive recovery for a country that, during most of the 1980s, had lived in conditions of economic stagnation. This cyclical trend of the economy fully reflects the delicate transition of the South Africa from the apartheid regime towards a fully democratic system, with the inevitable complexity of the problems linked to the redefinition of priorities and objectives of economic policy and, above all, with the imperative need to proceed with a correction of the profound social and economic imbalances accumulated over the years by the policies of racial segregation.

On the economic level, the legal system of apartheid has produced negative effects especially in terms of economic and distributive equity. Discrimination against the black population, especially with regard to property rights and access to social and collective services, led to one of the most pronounced inequalities in the distribution of income in the world and an increase in unemployment rates at levels ranging between 30 and 35 % of the active population (which, however, would be lower if we also consider the informal sector of the underground economy, which is very extensive in the South Africa). On the strictly productive level, the effects of apartheid they were more indirect and resulted in the creation of an exaggerated protectionist system placed under strict state control. The need to circumvent the risk of economic sanctions by the international community led the authorities to incentivize investments, often inefficient, in the import-substitution sectors, and to erect a system of high tariff barriers to protect the industry from international competition. The competitive capacity of the manufacturing sector was then penalized by an oligopolistic market structure that revolved around a few, gigantic industrial conglomerates mainly linked to the mining of gold and diamonds. In the second half of the 1980s, the 75% of the capitalization of the Johannesburg stock exchange was controlled by five financial holding companies, and only one of these, the Anglo-American Corporation, owned more than 20 % of the shares traded on the exchange. Furthermore, the consequences of apartheid on financial flows and foreign investments in the country were very serious. The relentless exodus of foreign investors, caused by growing conflict in the workplace and increasing political instability, was compensated for for a time by the massive use of short-term bank credit by the South African monetary authorities. But the progressive reduction of the maturity of the debt (in 1984 about two thirds of the external debt had a maturity of less than one year) and the interruption of credit lines by the International Monetary Fund (IMF) led to a progressive unsustainability of the debt. In the first half of 1985, an abrupt capital outflow from the country, triggered by the dramatic rise in episodes of political violence, caused the value of the rand to drop sharply in the currency markets and forced the country’s central bank (South African Reserve Bank) to ask for a new deadline in the payment installments of the debt. Faced with refusal from creditor banks, the country plummeted in August 1985in a serious financial crisis which, in addition to re-imposing the introduction of the double currency system (which provided for a ‘commercial rand’ and a ‘financial rand’ placed under the control of the authorities) abolished just two years earlier, forced the South Africa to renegotiate his debt. New restrictions on access to international financial markets, following the sanctions decided in 1986 by the United States government with the Comprehensive Antiapartheid Act and by the European Economic Community with the ban on investments and foreign trade, they subsequently forced the South Africa to rely completely on its gold reserves and on the formation of current account surpluses to meet the obligations to pay the foreign debt. Thus, as an importer of capital, the South Africa found itself after 1985 in the burdensome position of net exporter, a situation which it could maintain only by halving the growth rate of real GDP, which reached a modest average value of 1 in the 1980s., 5 % per annum.

The start of the dismantling of the apartheid legal system in the early 1990s coincided with a sharp deterioration in the domestic economic situation. In the period between 1989 and 1993, gross domestic product fell incessantly, plunging the South Africa into the most severe recession of the entire century. The decline in GDP was also associated with a progressive deterioration of the internal financial framework, traditionally characterized by balanced public budgets, which, in 1993, brought the government deficit to GDP to over 7 %. Some significant improvements were recorded only in terms of the fight against inflation, which fell in 1993 below 10 % after having maintained values ​​between 15 and 20 % for many years. However, these results were only possible thanks to the strong monetary tightening implemented by the South African Reserve Bank and the consequent contraction in domestic demand. Generally speaking, the weakness of the South African economy resulted from the distortions of the productive system and the long period of commercial and financial isolation from the rest of the world inherited from the apartheid regime. But also other factors of a different nature, such as the sharp slowdown in world economic growth which took place between 1991 and 1993, the steady fall in the price of gold and the severe droughts that have hit the country’s agricultural sector hard have contributed to the deepening of the crisis. Another element of economic instability, which played an important role in the prolongation of the recession, arose from the uncertainties about the future economic structure of the South Africa that emerged from the negotiations between the government and the opposition parties for the definition of the new institutions of the country.

One of the indispensable conditions for the effective democratization of the country and for the attribution of the same rights to all citizens was the overcoming of the profound gap that separated the living conditions of the white minority from those of the black majority. But on the timing and methods of achieving this goal, a rift had arisen between the nationalist party of WF De Klerk in government and the ANC (African National Congress) of N. Mandela supported by the main South African trade union, COSATU (Congress of South African Trade Unions). The latter proposed, in fact, an income redistribution program centered on centralized management of financial resources, directed towards investments aimed at the development and nationalization of large private industrial concentrations. This strategy was opposed by the government, which in addition to accentuating the rigor of fiscal policies had accelerated the program of liberalization of the economy and, above all, had implemented legislation in defense of the interests of the white minority against the threat of land expropriation. Stalemate in negotiations and a strong wave of strikes against the government in the first half of 1992had fueled a climate of uncertainty about the orientations and future priorities of economic policy, which had led to a massive exodus from the country of capital, managers and professionals and a consequent fall in the level of internal investments, which in 1992 dropped to 15 % of the GNP, one of the lowest ever recorded in the country.

After the victory in the 1994 general elections, Mandela’s ANC abandoned its programs of nationalization and state control of the economy. The strategy of the new government, on the other hand, aimed at the formation of an internal macroeconomic framework favorable to the growth of private investments, through the adoption of rigorous monetary and fiscal policies, and a plan aimed at the progressive dismantling of restrictions on foreign trade and to capital movements. The fight against social and distribution inequality was instead entrusted to an ambitious program, the Reconstruction and Development Program (RDP), which provided for an articulated plan of interventions in the infrastructure and social services sector.

The program, adopted in 1994, consisted of a list of 22 projects aimed at ensuring free health and welfare services for the more than 2 million people living below the subsistence level, to supply electricity to 80 % of the population who it still lacked energy sources, to supply drinking water to over 12 million people and to guarantee housing for 9 millions of homeless. Priority objectives also included equal access to education and a more equitable distribution of land in favor of the black population. The program relied completely on internal financial resources, through budget cuts that mainly affected the defense sector, so as not to hinder the goal of fiscal consolidation and to avoid the use of foreign debt for the financing of programs of a social.

Overall, the first years of Mandela’s government led to some remarkable economic results. The complete abolition of trade and financial sanctions, decided by the UN in 1994 at the explicit formal request of Mandela himself, favored a new inflow of capital from abroad and released credit lines from international economic institutions such as the Monetary Fund. international and the World Bank. Also due to a halt in the outflow of capital from the country, the net balance of financial flows and direct investments has reversed since 1994, transforming the South Africa back into a capital-importing country. This enabled the government to further liberalize the currency market with the removal, in March 1995, of the dual exchange rate system and the abolition of the financial rand. In terms of commercial relations, the South Africa has begun to forge closer ties with the main industrialized countries and has opened new relations with Asian countries. After years of almost complete isolation, the South Africa entered the WTO (World Trade Organization) and the British Commonwealth (from which it was expelled in 1961), and also entered into numerous trade and monetary agreements (such as the South African Common Monetary Area, the South African Custom Union, the Southern African Development Community) as well as the Lomé Convention between the European Union and the countries of Africa, the Pacific and the Caribbean.

As regards economic growth, between 1994 and 1995 GDP increased by more than 3 %, and in 1996 it exceeded 4 %. Despite the marked improvement compared to previous years, the income trend proved insufficient both to finance the expensive projects of the RDP program, without compromising the objective of reducing the public deficit, and to halt the continuous increase in unemployment and between 1995 and 1996 went up by 4 percentage points (based on official estimates which also include the shadow sector of the economy). The uncertainties about the economic outlook and the worsening of expectations on the trend of the public deficit and inflation have accentuated the volatility of capital flows and transformed a tendential depreciation of the rand, which occurred in the first months of 1996, into a real and own currency crisis, which ended in May of the same year in a heavy devaluation of the currency on all the main foreign exchange markets. To stem the depreciation of the currency, the South African Reserve Bank intervened by increasing the official discount rate which reached very high levels. For South Africa society, please check

In July 1996 the government decided on a change in economic policy by downsizing, on the one hand, the objectives of the RDP plan and, on the other hand, by launching a new program, Growth, Employment and Redistribution (GEAR), focused on achieving a GDP growth target of 6% per annum and on further measures to liberalize the economy which included greater loosening of exchange controls and capital flows, the reduction of customs tariffs (especially on intermediate goods destined for the industrial sector), the application of tax incentives to stimulate investment and the introduction of greater wage flexibility on the labor market. On the macroeconomic level, it was then decided to tighten fiscal policy, with an acceleration of the public deficit reduction program, and for greater independence granted to the South African Federal Reserve. in the management of monetary policy for anti-inflationary purposes. While the new economic policy program has garnered the support of the International Monetary Fund and the World Bank, it has created a profound rift between the ANC and its main ally, COSATU, which criticized the approach. excessively liberal program. Contrary to the premises and growth expectations of the GEAR plan, the country’s economic development slowed down sharply after 1996, until it came to a complete halt in 1998. The main brake was the Asian economic crisis of October 1997, which reduced South African exports of agricultural products and gold and triggered a new speculative wave on the rand in early 1998, made even more virulent by the removal of restrictions on the transfer of capital abroad.

To stem the massive capital flight and stop the rand’s continuing devaluation on the currency markets, monetary authorities have raised interest rates once again from 19 % to as high as 25 %. The South African Reserve Bank thus managed to stem the devaluation, but paid a very high price in terms of economic growth. Since the end of 1998, the economy has shown some signs of recovery, prompted by the gradual easing of monetary tightening. In fact, interest rates were brought back to pre- crisis levels in the first half of 1999.

The economic policy orientation of the new government led by M. Mbeki, who took office in May 1999, nevertheless remained in line with the guidelines outlined by the GEAR program. The fight against inflation (which fell to 6.5 % in 1999) and the reduction of the public deficit (which stood at – 2.9 in 1999% of GDP) remained the priority objectives of the government, which also launched a privatization plan, placing on the market shares of the shares of some important public companies (including the electricity company Eskom, the public company for exploitation for commercial use of Safcol forest resources, as well as the South African post office). The new government also reiterated its resolution to proceed more decisively with the reform of the labor market, proposing the introduction of greater flexibility in wage bargaining. Overall, the prospects for the South African economy, while remaining largely linked in the short term to the trend in the price of gold and commodities and the volatility of financial flows, appear to depend, over a longer time horizon.

South Africa Economic and Financial Policy

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