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South Africa: The Fear of Oligarchy

In our last post we pointed out that the fear of economic collapse has generated some quite surprising outcomes in South Africa since 1994. The African National Congress (ANC) were so concerned that alienating the white elite would be very costly, they ended up with a society even more unequal than the one they inherited.

How did that happen?

We argued that this was in some sense an unintended consequence of the cautious policy that the ANC adopted in 1994. In effect the ANC completely abandoned the policies which it had adhered to since the formulation of the Freedom Charter in 1955 which stated:

The national wealth of our country, the heritage of South Africans, shall be restored to the people; The mineral wealth beneath the soil, the Banks and monopoly industry shall be transferred to the ownership of the people as a whole; All other industry and trade shall be controlled to assist the wellbeing of the people.

This policy had been confirmed by Nelson Mandela as recently as May 1990, after his release from prison and during his first public address to South African big business, when he said:

it is quite obvious that the economic power relations represented by the excessive concentration of power in a few white hands have to change … one of South Africa’s imperatives is to end white domination in all its forms, to deracialize the exercise of economic power”.

Sounds radical, but in practice it wasn’t. Why not?

In our last post we argued that the fear of collapse put the ANC between a rock and a hard place.

But there is more to it.

In 1993 the financial services company Sanlam sold 10% of its stake in Metropolitan Life to a black owned consortium led by Nthato Motlana, a former secretary of the ANC’s Youth League and one-time doctor to Nelson Mandela and Desmond Tutu. After 1994 the number of these deals began to grow rapidly, reaching 231 by 1998 and by this time some estimates suggest that as much as 10% of the Johannesburg Stock Exchange (JSE) was owned by black businesses. This was a spontaneous start to what has become known in South Africa as Black Economic Empowerment.

Put crudely, these first deals were attempts by white capital to give the ANC political elite a stake in the private enterprise economy they dominated. Perhaps the major driver of the lack of effective reform in the extractive economic institutions of Apartheid is not just that the ANC elite were fearful of collapse but also because they started seeing their personal interests in the continuation of the same economic institutions.

And of course, this is nothing but a version of Robert Michels’s Iron Law of Oligarchy. Some evidence that there is at least some truth to this comes from the following figure which plots the relationships between leading South African firms and prominent ANC politicians.

Each link represents a non-executive directorship that a particular politician holds. This figure contains some of the most powerful people in the ANC including Cyril Ramaphosa (middle), the man who negotiated the transitional agreement with the National Party; Tokyo Sexwale (middle right), long time prisoner in Robben Island with Nelson Mandela; Max Sisulu (top left), son of Walter Sisulu, one of the founders of the ANC youth league with Nelson Mandela and one of the towering figures in the struggle against Apartheid.

So could it be that although initially the transition in 1994 started creating inclusive political institutions, this process has been reversed by the capture of the new black political elite by the white business elite? Could it be that this has then ensured the continued domination of the economy by the white business elite even as the white political elite has been cast aside after 1994?


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.


South Africa: Struggling Beyond Apartheid

In Why Nations Fail we discuss how the Apartheid regime in South Africa in many ways epitomizes extractive institutions. It emerged gradually during European colonization of South Africa, finding its first wave of institutionalization after the Union of South Africa was formed in 1910. It then intensified after the election of the National Party in 1948 which ruled the country until democratic transition occurred in 1994.

The economic institutions of Apartheid were designed to redistribute income and assets from blacks to whites which they did very effectively. As they were gradually constructed, the real living standards of Africans probably fell by 50-60% as shown by Pim de Zwart’s research. Frances Wilson’s book Labour in the South African gold mines, 1911-1969 shows that, though South African economy as a whole was growing, the real wages of gold miners was the same in the late 1960s as it had been in 1910.

So it was only the whites who benefitted from South African growth as the world’s most unequal country was being created.

These extractive economic institutions were backed up by extractive political institutions. The Union in 1910 brought together the Boer Republics of the Transvaal and the Orange Free State with the British colonies of Natal and the Cape. At the time, the Transvaal and the Orange Free State had racially-based franchises, while Natal and the Cape Colony had franchises based on property ownership and tax-paying status as in Britain itself in 1910, so they actually enfranchised rich blacks and coloreds. But after the Union, the blacks were disenfranchised in 1936 and the coloreds were disenfranchised 1956. Only whites had political power and with such extractive institutions, they were able to set up extractive economic institutions.

It should then be not a surprise that the transition to inclusive political institutions which occurred in 1994 was driven by conflict. It emerged from a long struggle and was only made possible by the increasing ability of the black population to organize and oppose white rule chiefly through the African National Congress (ANC). The ANC’s victory seemed to sound the death knell for the extractive economic institutions of Apartheid.

But as we discuss in the next three posts, moving to a new set of economic institutions has turned out to be much more difficult than most assumed in 1994.  


Why do Paramilitaries have Nicknames?

We have previously discussed Colombian paramilitaries McGuiver and El Gurre (see here and here). Other commanders of fronts in the same organization were called Terror and Pájaro (Bird). Even their boss Ramón Isaza was referred to by a nickname, El Viejo (the old one). Nicknaming was not restricted to the commanders. The junior ranks had nicknames as well. For example when McGuiver set himself up in La Danta he came with a group of 12 men called Tominejo (Small Bird), Chuki, Mafia, Abejorro (Bee), Boby, Pinganilla (Unimportant), Wilson, Automan, Tarzan, Monogringo (Blonde Gringo), Ruso (Russian), and Mandarino (Mandarine).

Nicknames are of course common in all walks of life but as political scientist Diego Gambetta pointed out in his book Codes of the Underworld, they are much more common amongst criminal or illegal organizations, particularly the Mafia. He argues that this is for two main reasons (page 240):

In Sicily the frequency of individuals bearing the same first name is high because of the practice of christening people with the names of a handful of patron saints.

So nicknames are a useful way of living each mafioso a unique identifier. The same naming pattern is very prevalent in Colombia.

Nicknames are also useful to conceal people’s identities, making it more difficult to catch them and blame them for crimes. Gambetta explained this as follows (pages 240-241):

While mafiosi have an interest in identifying each other accurately, they also have an even keener interest in preventing being identified by the authorities or rival mafiosi.

Gambetta produces some interesting evidence to bolster his argument. Using trial records for Italian Mafiosi which identified their role in the organization and whether or not they had a nickname, he shows that while only 26% of Mafia bosses had nicknames, 64% of hit-men had them. He argues that this is because hit-men were much more at risk from being in confrontation with the authorities of rivals and therefore needed greater secrecy.

In comparison with these facts the Colombian situation is starkly different. The head of every single paramilitary block had a nickname, and almost certainly so did every member under them. Paramilitaries were given nicknames during their military training. Part of the motivation seems very related to Gambetta´s hypotheses.

But unlike the Mafia, paramilitaries were involved in a real war against the guerilla groups the FARC and the ELN, so perhaps the desire for secrecy was even more intense. Another hypothesis about nicknaming is that the Colombian civil war is much more brutal and all-enveloping than the activities of the Mafia. It involves massacres, displacements and a lot of violence.

In addition to Gambetta’s hypotheses it could be that nicknaming is a way of dehumanizing a person, detaching the paramilitary with the nickname from the real person, thus severing them from their social conditioning and values. This might then make it easier for them to engage in activities like massacres. It may just not be a coincidence that nicknaming seems to take place during military training.


Did the Europeans Bring Human Capital?

One of the most salient set of ideas about the remarkable economic development of the United States is that it was able to benefit from some unique type of endowment brought by the British. In Why Nations Fail we argue that, on the contrary, the British in North America tried to copy the colonization strategy of the Spanish. They failed because the circumstances were so different. In our last post we showed that the experience of the Puritans in Providence Island suggests that it was not cultural or religious inheritances which were distinct in the United States. Just as we argued in the book, when the Puritans got the chance to behave like the Spanish, they took it.

But leaving culture or values aside maybe, the British brought other things to North America which distinguished them from the Spanish. Perhaps they brought human capital to the colonies.

Certainly by the 19th century, the United States had much higher literacy and educational attainment than Latin America (and by the 20th century much higher than anywhere else in the world as Claudia Goldin and Lawrence Katz document in The Race between Education and Technology). Maybe, in line with some sort of modernization hypothesis, this was the main cause of their better institutions?

It seems plausible that the Europeans who moved to North America had higher human capital than the Spanish who settled Latin America. But it turns out that’s not the case at all.

There are many good historical sources of information on this. Historian James Lockhart The Men of Cajamarca provides a detailed analysis of those who accompanied Pizzaro in his conquest of Perú. 76.6% could sign their name (this is the basic test for literacy in the pre-modern world). Other information, such as surviving letters or diaries, suggests that 53% of them could definitely read and write. Colombian historian José Ignacio Avellaneda in a series of books, starting with Los Compañeros de Federman, examined the conquistadors in five different expeditions to New Grenada (Colombia). The average level of literacy was 78%. Other evidence is consistent with this. Literacy in Spain was lower, around 50%. But conquistadors mostly came from urban areas, Castille and Andalucia which had higher literacy, and more importantly, many were hidalgos, second and third sons of nobles who could not inherit land under Spanish law.

In contrast much of the United States was colonized by illiterates; comparatively, colonists in the United States had no greater literacy, and most probably lower literacy, than those in Latin America. Using the same signing test David Galenson in White Servitude in Colonial America found that during the period 1683-84 (quite a bit later than the Spanish conquests) only 41.2 % indentured laborers who came to the US were literate. 80% of European population in 17th century Virginia came as indentured laborers. Jury lists suggest a figure of 54% for the literacy rate of Virginia in the 1600s. Other sources put this at 60%. What about New England? 1650-1700 various sources suggest literacy was around 55% for rural areas, 77% for Boston (see also this paper).

The situation in Australia, settled early on by British convicts typically from the lower end of the education distribution at home, was more extreme. As late as 1790, more than 50% of settlers were illiterate (see, for example, this paper).

Overall, settler colonies did not start out with favorable human capital endowments. In fact these were most probably higher in Latin America.

By the middle of the 19th century, North America and Australia were far ahead of Latin America in terms of educational attainment and human capital. But this was a consequence of political decisions to allocate resources to education and the incentives their institutions created to acquire human capital.