South Africa: The Fear of Collapse

It might appear that changing economic institutions shouldn’t be that difficult. If you have power, you should be able to change things in a direction you favor. Simple. But not so simple in South Africa. The majority had power after 1994 in the shape of the government of the African National Congress (ANC), but they were very afraid that if they moved too soon and too fast, then they would alienate the white segment of the population, who owned the land and the capital stock, and this would precipitate an economic collapse.

White rule was not just a matter of keeping black wages low as we saw in our previous post. Blacks had been herded into townships placed at some distance from jobs where the whites could control and monitor people. Many, including nearly all the women, had been pushed far into marginal rural areas, notably the so-called homelands. And of course, the educational system had systematically discriminated against blacks who were not in a position to just take over the assets owned by whites and use them as productively.

The ANC rightly feared that the mass expropriation of white assets would lead to economic collapse which could create falls in living standards and who knows what types of populist challenges and political instability.

When faced with these challenges, what could the ANC do?

They had power, but it was difficult to use it. So they opted for a gradual approach, driven party by their idea that it would be possible to create an inclusive society which included not just the blacks, but also their former oppressors.

In consequence the institutional reforms implemented after 1994 were modest. There was to be no land reform; instead there would be market friendly “willing buyer, willing seller” transactions facilitated by the government. Most towns had their nice white areas and outside were the townships where the blacks lived in shacks, without toilets, without running water, without electricity. The white property was to be left alone; instead the conditions in the townships would be ameliorated. Proper houses could replace the shacks, electricity could be put in, water be provided. In other places policy was just as modest.

Whites were worried about the macroeconomy. So the ANC agreed to an independent central bank, something that the whites had not deemed necessary when they were running the country.

The position of the whites in this was a little strange. It was as if they had said: OK yes it’s true that for several hundred years we have been exploiting you, forcing down your wages, stealing your land, but now we have democracy and we have to respect private property and free markets (something rather inconspicuous during white rule when markets were continually rigged in favor of whites and against blacks). The ANC in response just ate humble pie.

Nevertheless, the ANC made progress. They created a vibrant participatory democracy, something that white rule had never dreamed of. They created a new system of social transfers which radically reduced poverty. They built three million new houses for poor people in the townships.

But inequality, rather than going down, went up. Of course some of that increase in inequality has been due to the emergence of black businesses and a black professional class. All the same, the typical business in South Africa is still remarkably similar to what it was before 1994: the whites own and the blacks do the work. Look around and you’ll see that blacks still walk while the whites drive.

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