Why South Africa's Apartheid Economy Failed¶
Anton D. Lowenberg (1997). Why South Africa's Apartheid Economy Failed. Contemporary Economic Policy, Vol. XV (July). Western Economic Association International.
| Type | journal article |
| Scope | Economics and economic history of apartheid |
| Method | synthesis review |
| Period studied | 1924–1994 |
| Regions | South Africa |
| Themes | manufacturing industrial policy, labour markets wages, sanctions divestment, macro fiscal finance debt, education human capital, politics ideology elections, business and state, transition post apartheid, bantustans removals influx |
| Citation key | lowenberg1997 |
Argument¶
Apartheid collapsed because its internal inefficiencies escalated as the economy shifted from primary production to manufacturing. Influx control and job reservation, inferior black education, industrial decentralization and import-substitution mercantilism raised costs. Chronic current account deficits, dependence on foreign capital, and rising administrative and defence burdens added to them. These weaknesses left the economy exposed to capital flight, commodity price shifts and political shocks. Whites, now mostly skilled and in manufacturing, found the costs of apartheid exceeded its benefits, so reform would probably have come even without sanctions. The argument is a synthesis of secondary literature, supplemented by a cost-benefit political economy framing.
Evidence and method¶
Entirely secondary literature (Lipton 1985 and 1989, Lundahl 1992, Jones and Muller 1992, G. Davis 1994, Mohr 1994, Rosendorff 1996, Kaempfer et al. 1995) and aggregate statistics drawn from it: GDP growth, manufacturing share, current account balances, debt, saving and investment ratios, tax incidence. No archives or original data.
Place in the debates¶
- Liberal vs revisionist on apartheid and growth (see Liberal vs revisionist: was apartheid functional or dysfunctional for capitalist growth?). Largely liberal/neoclassical: apartheid was an inefficient set of regulations that became increasingly dysfunctional for capitalist growth as manufacturing came to dominate. Whites came to bear the costs, so the system was abandoned.
- Sanctions effectiveness (see Sanctions, disinvestment and the anti-apartheid movement). Sceptical: sanctions were partly an effect of South African turmoil. Financial withdrawal was the most damaging channel, and it was a market response to risk. Sanctions' main effect was to push the state into inefficient self-sufficiency projects such as SASOL. Apartheid would have collapsed without them.
- Why the white regime conceded power (see Why apartheid ended: reform, transition and elite bargaining). Cost-benefit account: rising costs of repression, shrinking white incomes relative to black, and a lower cost of redistribution made handover preferable. The end of the Cold War and the Namibia settlement hastened it.
- Apartheid, import substitution and economic performance (see Did the apartheid economy fail? Growth, productivity, investment and the post-1970s crisis). Apartheid and import-substitution protection produced Latin American-style mediocre growth rather than East Asian-style growth.
Findings¶
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Reform of the labour market (Wiehahn, Riekert) came before significant sanctions and was driven by the needs of manufacturing. (p. 2)
the recommendations of the government-appointed Wiehahn and Riekert commissions in the late 1970s led to abolishing labor market apartheid well before the imposition of significant foreign economic sanctions
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Influx control raised the capital intensity of manufacturing despite black unemployment. (p. 2)
by reducing the supply of black labor to the industrial sector, influx control encouraged the substitution of capital for labor in manufacturing, despite rising levels of black unemployment
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Decentralization incentives of cheap capital undermined their own purpose of generating unskilled black jobs. (p. 3)
one of the incentives offered to decentralizing industries was cheap capital, which encouraged capital-intensive technologies and reduced the demand for the unskilled black labor that was plentiful in the homelands
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Manufacturing growth slowed sharply after the early 1970s as import substitution ran its course. (p. 4)
The average annual growth rate of real manufacturing output declined from 7.4% in the period 1947-1974 to 1.3% in 19751992
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The 1985 credit withdrawal forced large current account surpluses to service debt. (p. 5)
South Africa had to run current account surpluses of $2.66 billion in 1985, $3.15 billion in 1986, $3.02 billion in 1987, and $1.29 billion in 1988
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Net investment collapsed in the 1980s. (p. 6)
net investment as a share of GDP fell from 17%- 18% in the first half of the 1970s to a mere 3%-4% in 1985-1988
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The state's share of fixed investment and its defence burden were heavy. (p. 6)
By 1983, the defense bill had reached 14% of the national government's budget or about 4% of GNP
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The tax burden fell overwhelmingly on whites, who scrutinized state spending. (p. 6)
Overall, 75% of national tax revenue was paid by whites
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Causality between sanctions and economic distress may run from South African events to sanctions. (p. 8)
Kaempfer et al. (1995) find empirical evidence that sanctions were in some measure responses by foreign interest groups to events in South Africa
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Financial sanctions via the 1985 credit withdrawal were the most damaging, but rested on domestic vulnerabilities. (p. 8)
Of all the foreign measures initiated against South Africa, the sanctions imposed by the international private financial sector were probably the most damaging.
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The conclusion is that apartheid became a liability and collapse was internally driven. (p. 9)
even more significant was the fact that the economy had undergone changes which had turned the apartheid system, once an economic 'asset' for important groups of the white population, into a liability
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Growth slowed markedly after 1974. (p. 9)
Growth of real GDP averaged 4.9% annually from 1946 to 1974. From 1974 to 1987, however, it averaged only 1.8%
Evidence ledger¶
Sources used¶
| Source | Kind | Period | How used |
|---|---|---|---|
| Lipton, Capitalism and Apartheid: South Africa, 1910-84 (1985) – used as a compilation of data on manufacturing share, state investment share, defense spending | secondary literature compilation | 1910-1984 | Supplies figures on manufacturing's share of GDP, defense spending share, and the state's share of gross fixed investment, plus the account of job dilution and employer lobbying. |
| Jones and Muller, The South African Economy, 1910-90 (1992) – used as a compilation of macro data | secondary literature compilation | 1910-1990 | Supplies GDP growth, saving ratios, capital-account and import-composition figures, and the narrative of reform and unrest. |
| Lundahl, Apartheid in Theory and Practice: An Economic Analysis (1992) – time series on manufacturing share, capital-labour ratio, investment, current account | secondary literature compilation | 1946-1988 | Supplies the manufacturing GDP share, industrial growth rates, capital-labour ratio, current account surpluses after 1985, disposable income growth, and net investment share. |
| Davis, South African Managed Trade Policy: The Wasting of a Mineral Endowment (1994) | secondary literature compilation | 1920s-1990 | Supports the account of protection, the 1936 government report on white employment in protected industries, current account deficits, and GEIS. |
| Mohr (1994) series on manufacturing growth, capital-flow composition and terms of trade | secondary literature compilation | 1947-1992 | Provides the decline in real manufacturing growth from 7.4% to 1.3%, the shift to short-term capital inflows, and the 66% fall in terms of trade. |
| Lipton (1989), 'The Challenge of Sanctions', South African Journal of Economics – data on current account, foreign debt, sanctions | secondary literature compilation | 1946-1989 | Supplies current account deficit averages, the share of short-term foreign debt in 1985, and the argument that sanctions were caused by financial difficulties. |
| Kaempfer, Lowenberg, Mocan and Topyan (1995) empirical study of sanctions and anti-apartheid politics | secondary literature compilation | not stated | Cited as empirical evidence that sanctions responded to events in South Africa rather than independently causing them. |
| T. Moll (1991), cross-country growth comparison with 20 middle income developing countries | secondary literature compilation | post-World War II | Used to show South African GDP growth was mediocre relative to comparable countries. |
| Grundy (1991) survey figures on unemployment and U.S. letters of credit | secondary literature compilation | 1980-1987 | Provides unemployment rising from 30.6% to 37% and the fall in U.S. commercial letters of credit. |
| Kendall and Louw (1987), After Apartheid – tax incidence | secondary literature compilation | 1987 | Supports the claim that whites paid 75% of national tax revenue. |
| Rosendorff (1996) working paper on white-black income ratios and Gini coefficient | secondary literature compilation | 1970-1990 | Supports the claim that the democratic transition coincided with historically low white-to-black income ratios and Gini. |
| Wiehahn and Riekert commission reports (late 1970s), via McGrath (1990) | commission or official report | late 1970s | Establishes that the commissions recommended abolishing job reservation, recognising black unions and easing urban mobility before sanctions. |
| The Economist, May 20, 1995 Survey and September 9, 1995 | newspapers periodicals | 1995 | Cited for the conglomerate ownership structure and the 19 separate education departments under apartheid. |
Inference¶
Quantification: Illustrative figures.
Argumentative synthesis built on secondary literature and published macro statistics quoted from it. The argument runs through a sector-by-sector narrative of policy costs (labour, education, decentralization, trade, capital flows, administration) and a counterfactual judgment about sanctions. There is no original data analysis, and the political-economy cost-benefit framework is asserted rather than tested.
Key claims¶
| Claim | Basis | Strength |
|---|---|---|
| Influx control and job reservation became increasingly costly as manufacturing grew, prompting reform from the 1970s well before sanctions. (p. 2) | Lipton (1985), Jones and Muller (1992), Lundahl (1992) narrative, plus the Wiehahn and Riekert commission recommendations via McGrath (1990). | Partial data |
| Protection and import substitution generated chronic current account deficits, dependence on foreign capital, and falling manufacturing growth. (p. 4) | Davis (1994) and Lundahl (1992) series on current accounts and growth, Mohr (1994) growth rates, and Jones and Muller (1992) import composition. | Partial data |
| The 1985 withdrawal of foreign credit was the most damaging sanction but reflected domestically generated vulnerability and perceived country risk. (p. 8) | Lundahl (1992), Lipton (1989), Jones and Muller (1992) and J. Davis (1995) figures on capital outflows and debt. | Partial data |
| Sanctions were in part caused by, rather than the cause of, South Africa's economic and political difficulties. (p. 8) | Kaempfer et al. (1995) empirical results and Lipton (1989) argument, with T. Moll (1991) on the timing of the export decline. | Partial data |
| Administrative, policing and defense costs of apartheid were large and rising, absorbing investment and requiring heavily white-borne taxation. (p. 6) | Lipton (1985) figures on defense budget and state share of investment, Kendall and Louw (1987) on tax incidence, Economist on duplicated departments. | Illustrative or anecdotal |
| Growth was mediocre and declined sharply after 1974, with net investment collapsing in the 1980s. (p. 9) | Jones and Muller (1992), J. Davis (1995), Lundahl (1992) and T. Moll (1991) growth and investment figures. | Partial data |
| Apartheid was abandoned mainly because its internal economic costs exceeded its benefits to whites, and would likely have collapsed even without sanctions. (p. 10) | Synthesis of the above secondary sources plus Rosendorff's income-ratio argument; the counterfactual is not tested. | Asserted |
The author's caveats¶
Notes that some security expenses may have included non-defense policing functions, and that rising indebtedness and short-term borrowing were worldwide trends not specific to South Africa. Otherwise no systematic data caveats.
Gaps in the evidence¶
The argument that internal costs, not sanctions, caused reform is not tested with counterfactual or time-series evidence on white political preferences. Needed data include election returns and white opinion surveys, official national accounts and balance of payments series, budget data on administrative and security costs, and sectoral wage and employment data. These exist in published official sources and archives but are cited only second-hand through a few secondary syntheses.
Replicability: Data poorly documented.