Why Apartheid will continue to haunt the economy 1

This week we celebrate Human Rights Day and ERSA’s Economic History working group is hosting a workshop in Cape Town on the Economics of Apartheid. Johan Fourie has assigned us some interesting reading for the workshop and has already made a blog post on why Apartheid ended. Reading through the different articles I was struck by the different ways in which Apartheid policies shaped the economy. When people talk about the legacy of Apartheid they often mention only the obvious consequences, like inequality, but there is much to say about how Apartheid shaped the very nature of production today.

SA map

Do you remember the Bantustans?

Grand Apartheid was about “seperateness” and moved blacks to the urban periphery, or tried to keep black people in traditional homeland areas. The key point in the literature is that the social and spatial distance between the races was aimed at protecting white workers. Lowenberg (1997) writes: “Precisely because employers possessed a compelling interest in replacing expensive white workers with cheaper black workers, the only way the white workers could protect their privileged position was by capturing the power of the state to enforce racial discrimination”. Hazlett (1988) outlines the different labour market interventions undertaken by the Apartheid government. Job reservation policies were used to protect unskilled and semi-skilled white workers from black competition. Maroitti (2012) details the workings of the Industrial Conciliation Act of 1924. Both authors argue that “the revisionist Marxist view that job reservation benefitted White capital is incompatible with the evidence”. Apartheid policies aimed to protect white labour from black labour and as such the economic roots of Apartheid did not make business sense. It hindered the allocation of resources. This had far reaching consequences.

Firstly, it made white labour relatively expensive. Secondly, reducing the supply of black labour encouraged capital-intensive production. Thirdly, it created skill bottlenecks. Mariotti (2012) shows that increases in white educational attainment did help them to move into skilled jobs and the black workers into semi-skilled jobs, but it did not end racial segregation across occupations because of the failures of the black education system.

The influx control designed to protect white workers also necessitated the Apartheid state’s costly decentralisation policies. These never achieved the benefits of agglomeration economies and firms had difficulty in attracting white and black urban workers to underdeveloped areas. The incentives offered to decentralising industries were cheap capital, while the constraints to hiring black labour in urban firms further aggravated capital intensity in production.

Discriminating in favour of expensive white labour raised the cost structure of South African industries and required protection from international competition. Import substitution industrialisation policies lead to an increased demand for imported capital goods and capital-intensive intermediate inputs. After a first round of ISI in domestic consumer goods a second stage took place, backwards in the production chain. Tariffs were imposed on intermediate- and capital goods imports to stimulate their domestic production, often in contradiction of comparative advantage. This caused the capital-labour ratio to increase as well as higher domestic prices for inputs. This in turn, reduced overall factor productivity in manufacturing and slowed growth.

Later, the tenuous position of the balance of payments and capital flight necessitated capital controls. This prevented large industrial firms from investing abroad and they ended up buying into each other’s holdings, contributing to conglomerate ownership and limited competition.

The result is that we today have a small open economy that is capital-intensive, anti-competitive and uncompetitive. The border industries have disappeared but a significant spatial mismatch in urban labour markets remain. As ever, the economy is vulnerable to exchange rate fluctuations and the capital flows needed to finance the deficit on the current account. Unemployment and inequality have been exacerbated by the failures in education post-1994.

What does the history say about the ways that we can address these challenges? Maybe that is the stuff of another post after the workshop.

One comment

  1. Pingback: The best of 2013 « Skool vir Ekonomie

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