South Africa and the global economic crisis

by Ebrahim-Khalil Hassen

Assistant Editor Laura Fano interviewed Ebrahim-Khalil Hassen, who could not attend the launch of Development 52.3 ‘Beyond Economics’ in New York, on the effects of the global economic crisis in South Africa. Ebrahim is an independent researcher and a part-time research associate at the Centre for Poverty, Employment and Growth at South Africa’s Human Sciences Research Council.

LF What was the main impact of the global economic crisis in South Africa?

EKH The most immediate impact of the global economic crisis in South Africa has been in the area of employment. South Africa has a very high unemployment rate. The official data showed a rate of 23.6 % in June 2009. The broad (or unofficially rates) set the figure as high as 32.5%. The reasons for the impact of the global economic crises on employment is due both to retrenchments as firms cut costs with the drop in the demand for goods and services. The credit squeeze due to the crisis means that loans are not readily available from banks, forcing firms to choose between either retrenchment or closure. As a result firms and some government institutions have stopped hiring, and the private sector has moved to more part-time and flexible work arrangements.
Another impact of the crisis is in public expenditure. South Africa’s new Finance Minister, Pravin Gordhan, has budgeted for a 7.6% deficit to try to keep social services intact but the consolidated government expenditure has seen its slowest increase since 2000. If inflation remains high, there is likely to be a real cut in social services spending, unless government’s budgets are significantly reprioritised.
Taken together increased unemployment and a less expansive fiscal policy could mean increases in the national poverty rate. There are indications that as the impacts of the crises moves from manufacturing to services, the female unemployment rate and poverty rates are likely to increase.

LF South Africa is now considered one of the new emerging powers and the dominant view is that its economic policies have proved successful. What is your opinion on this?

EKH I think the jury is still out on whether South Africa has been a success in terms of economic policies. For me a couple of features stand out. Income inequality has been resilient to all the changes in economic policy. This is doubly important because according to the official Development Indicators, South Africa is one of the most unequal countries in the world. Income inequality remains a significant problem. The inequality profile shows not only what one would expect in terms of a racial distribution of wealth given our history of apartheid, but also evidence of a more class based society as both the bottom 10% and top 10% of income earners becomes more racially mixed.
In terms of creating a more equal society, South Africa’s economic reforms have not been a success. A key feature of this inequality resides in markets. In South Africa, the Competition Commission has over the last few years investigated collusion on prices in many sectors. Whilst the details of each sector are unique, a pattern is beginning to emerge. Usually there are a few larger companies that set prices amongst themselves, with high mark-ups. This suggests that despite economic reforms South Africans find it hard to gain access to markets as they experience significant barriers to entry. Consequently, even in start-up activity South Africa ranks poorly, as the structure of the economy remains unchanged.
However, there have been some gains. After significant cuts in government’s social spending in the period 1996 –1999, there has been an increase in social spending. This has been partly due to increased tax revenues, supported by economic growth and high commodity prices. South Africa’s vulnerability to changes internationally is not unique but it does suggest that the broader structural transformation of the economy away from primarily mining exports has not yet been completed. In that sense as well, South Africa’s economic ‘success story’ can be questioned.

LF Have recent changes in the national political landscape added to economic instability?

EKH The changes in the political landscape in South Africa have been significant, but have not added significantly to economic instability. The government under the leadership of President Jacob Zuma has not shown signs of making major changes to economic policy. However, there has been a more consultative style from the new government, and a much stronger focus on employment creation.
Instability is mostly coming from ‘below’ in communities. Important examples of this are the ‘service delivery’ protests. These are community based protests against poor service delivery, access to services, and a range of other problems. Often the protests turn violent with clashes with police a regular occurrence, and sporadic outbreaks of xenophobic violence though when social movements guide the protests it could be seen as adding to political engagement and moving towards some constructive change.
The challenge however remains how to develop strategies that are labour absorbing. This remains a huge challenge with current focus on industrial policy, arguably still lacking strategies to support inclusion.

LF What are the causes of what in your article you term ‘poverty traps’? How can they be overcome?

EKH The causes of poverty traps in South Africa are related to a history of colonialism and apartheid in South Africa. This means that many South Africans – the majority being black – were stripped of ownership of their property, were provided with poor quality or no education and were kept in low wage employment. This historical background has been – in my view – reinforced with new mechanisms that have deepened the poverty trap. These mechanisms are associated with ‘managed liberalisation’, through policy instruments such as reducing deficits, privatisation and more open markets. South Africa has been a cautious liberaliser, but the impacts have been huge. For instance, when Telkom was privatised, there were promises of cheaper and universal access. Yet, today South Africa continues to have high and uncompetitive telecommunications costs, and universal access is unlikely to be achieved.
The policy response in South Africa should be a recognition that there is a need to find ways for households to exit poverty through asset building. Building asset portfolios for poor households could provide both a flow of income, and resilience against future shocks. Moreover, it could potentially provide the basis for poor households to craft longer run accumulation strategies. In some instances, assets could be held in communal ownership, with some success stories beginning to emerge in rural areas. Moreover, it requires tackling power relations in the economy, and especially economic concentration along value chains. It is unusual to consider markets to be mechanisms for inclusion. The impacts on households would be important, especially as it has the potential to provide mechanisms to include poorer women into the economy. What I would argue is that we need an alliance between government and smaller players in the economy, aimed at opening access and providing employment opportunities for men and women in poor households. Trade unions and community based social movements are central to this alliance not only to provide political support for economic inclusion in the market, but also to develop alternatives focused on more collective forms of ownership.