Mandela's Economic Legacy Threatened by South Africa Inequality

Friday, 06 Dec 2013 01:12 PM

 

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Nelson Mandela emerged from 27 years in apartheid jails in 1990 pledging to seize South Africa’s mines and banks. Four years later, his government slashed spending and courted foreign investors, paving the way for the longest period of growth in the country’s history.

The former president and Nobel Laureate, who died yesterday at the age of 95, was instrumental in getting the African National Congress, which led the fight against apartheid and has ruled ever since, to embrace an open economy.

“Only a Mandela could have realigned the ANC’s economic policy from the mindset of the 1950s, with the development state, with socialism, with nationalization, to the world of the 1990s and beyond,” Robert Schrire, a politics professor at the University of Cape Town, said in an interview. “He recognized that for the poor to prosper, the rich had to feel they had a future in the country.”

Yet Mandela’s legacy of economic stability is beginning to come under attack as the country fails to slash unemployment and reduce inequality. The jobless rate remains 24.7 percent, while average earnings for black households are a sixth of their white counterparts. The ANC’s youth wing last year waged a campaign for the nationalization of banks and mines, the very policies ditched by Mandela in 1994, and poor communities have staged a series of protests against a lack of housing and basic services.

The rand has plunged 19 percent against the dollar this year, the worst performer of 16 major currencies tracked by Bloomberg, and was trading at 10.4751 as of 1:32 p.m. in Johannesburg today.

White Hands

“We still have racial unemployment, racial poverty and racial inequality,” said Sidumo Dlamini, president of the 2.2-million-member Congress of South African Trade Unions, the country’s largest labor grouping and a member of the ruling alliance. “Our country is still in white hands.”

Mandela’s embrace of spending rigor and foreign capital allowed the economy to expand for 15 years, until the third quarter of 2008, when the global financial crisis pushed it into recession. That growth and rising tax receipts enabled the post-apartheid government to extend welfare grants to about 16 million people and give more than 85 percent of households access to electricity, up from 45 percent in 1996.

Pariah State

Instead of nationalizing companies, Mandela coaxed foreign investors into the country. His ideological shift laid the groundwork for Lakshmi Mittal’s LNM Group to buy Africa’s biggest steelmaker in 2004 and London-based Barclays Plc to take control of South Africa’s largest consumer bank in 2005. In 2011, Fayetteville, Arkansas-based Wal-Mart Stores Inc. bought a majority stake in the nation’s biggest general-goods wholesaler.

Restoring confidence in South Africa’s economy in 1994 was a significant achievement. Apartheid had turned South Africa into a pariah state, subjected to international sanctions and boycotts. The economy was hemorrhaging foreign capital, had only enough reserves to cover 10 days of imports and was running a budget deficit of 9.1 percent of gross domestic product.

Mandela asked Chris Liebenberg, who had just retired as chief executive officer of what is now Nedbank Group Ltd., the country’s fourth-largest bank, to become finance minister. He accepted the job on condition that South Africa would have a market-related economy and exercise fiscal discipline.

‘Steady Progress’

“Those were tough times,” Liebenberg said in an interview. “We were heading for bankruptcy. Mandela was very mindful that the ANC having not been in government would not be as astute in managing the economy as it should be. He came to me because I was a banker with lots of international contacts and experience.”

In his first budget, Liebenberg raised taxes, equalized the tax system for all racial groups and slashed the defense budget. Those measures helped the government to raise $750 million in 1994 in its first post-apartheid international bond sale, 50 percent more than originally planned. By 1999, the Finance Ministry had reduced the budget deficit to 2.3 percent of GDP.

Mandela also persuaded Chris Stals, the central bank governor, to postpone his retirement by five years to help manage the country’s transition.

Life in Prison

“We made steady progress from day one on for those first five years,” Stals said in an interview. “Our main task was to bring us back into the world economy. Mr. Mandela certainly made a major contribution to that. The trust people had in him and his policies certainly enabled us to lay a very good foundation.”

That trust was hard won.

Mandela was sentenced to life imprisonment after being convicted of treason in June 1964, serving much of his sentence on Robben Island near Cape Town. His economic thinking was framed in terms of the ANC’s 1955 Freedom Charter, which called for the country’s mineral wealth and banks to be transferred to the ownership of the people.

“The question of nationalization of mines is a fundamental policy of the ANC,” Mandela said shortly after his release. “I believe the ANC is quite correct in this attitude and we should support it.”

A year later, he assured foreign companies their investments were safe following talks with then-Chinese Premier Li Peng, who told him nationalization wasn’t viable and that China was considering selling state companies.

Broad Sweep

“The world had changed while Mandela was in jail,” said Iraj Abedian, an economist who helped craft the Mandela’s administration’s 1996 hallmark economic policy, which won praise from international investors. “His engagement with the role players in the political, economic and financial world brought that reality home.”

Mandela helped set the broad parameters of economic policy, while leaving formulation and execution to his subordinates, according to Liebenberg, who now helps manage charities established by the former president.

“Until Mandela set his stamp on a policy I think it would not have been possible to drive it through the ANC,” Liebenberg said. “It certainly would not have been possible to drive it through government.”

Abedian, now CEO of Pan-African Capital Holdings, a Johannesburg-based advisory service, was struck by the attention to detail that Mandela, a trained lawyer, gave to policy making.

Phone Calls

“He would go through every document word by word, line by line,” Abedian said. “It was a question of understanding the rationale for every step, weighing it up, questioning it in detail, far more than people would believe.”

Stals recounts how after Trevor Manuel was appointed finance minister in 1996 and the rand tumbled 8.8 percent in the space of a month, Mandela would phone him two or three times a day for market updates.

“He showed a great interest in what we did and he was always quite well-informed,” said Stals. “He liked to discuss the monetary policy issues. He never really interfered, he never really gave instructions.”

Still, the stability that Mandela engineered in those early years after apartheid never made South Africa an economic dynamo. Economic growth has averaged 3.5 percent since 2004, compared with 10.5 percent in China and 7.7 percent in India.

Economic Framework

Moreover, the Gini coefficient, a measure of income inequality, has risen to 0.63 in 2009 from 0.59 in 1993, making South Africa one of the world’s most unequal societies. Poverty remains most prevalent among black South Africans, who make up 79 percent of the population of 53 million.

Mandela never tackled labor laws that companies say stifle investment, or turned around an education system that has left South Africa with labor shortages for skilled jobs.

A wave of violent labor unrest that swept the country in 2012 has continued this year, with workers in the mining, agriculture and transportation industries going on strike for higher wages. The unrest peaked on Aug. 16, when police killed 34 protesters at a Lonmin Plc platinum mine.

Labor unions and the South African Communist Party blame the 1996 economic framework, known as Growth, Employment and Redistribution, for entrenching apartheid-era inequity. The policy, which was spearheaded by Manuel and described by Mandela as “non-negotiable,” sought to trim state borrowing, contain inflation and gradually relax exchange controls.

Working Class

“Established capital benefited from stabilization and liberalization measures,” while the interests of the poor and working class were largely overlooked, said Blade Nzimande, the SACP’s general secretary.

The ANC’s Youth League revived calls for nationalization, saying drastic steps were needed to distribute the country’s wealth more equitably. The league has toned down its demands since its leader Julius Malema was expelled from the ANC last year.

Mandela did the best he could for the country under the circumstances, Abedian said.

“Very few people appreciated what unstable macroeconomic conditions apartheid had left behind,” he said. “In that type of environment what was critical was to have a credible, not necessarily an instant, solution. Mandela realized what steps had to be taken to normalize and stabilize the economy.”


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