What is in this guide?
This guide is meant to provide a basic understanding of economics. It has the following sections:
- How do we measure the size of an economy?
- Economic Growth
- The structure of the economy
- Globalisation and the South African Economy
- The impact of globalisation on South Africa
- Labour Market
The economy is about how wealth is created, distributed and consumed. It concerns the ways in which a country produces, distributes and consumes the tangible, material commodities of life. It is also about how the proceeds or income from these activities are distributed between those that contribute toward them: capitalist businesses, workers, the state and the whole of society. Every person affects the economy in some way and we are all affected by it.
Economics attempts to answer questions such as:
- What is produced and how?
- Why does a particular country produce particular goods and services?
- How are the natural resources used?
- How does a country earn and spend its money?
- How are its people employed, and what technology do they use in their work?
- What is the relationship between these things and the wealth and poverty of different communities?
How do we measure the size of an economy?
The way we usually measure the size of an economy is by its Gross Domestic Product (GDP). GDP is the value of all the goods and services produced within our borders in one year. This value is equal to the economic wealth of the country, all the things of economic value, which can be bought or sold, that have been produced in South Africa in one year. This includes all the goods like: loaves of bread, mielies, cars and gold, as well as all the services like, taxi rides, telephone units, haircuts, hotel rooms or tickets to football matches. We add the prices of al these things together to get GDP.
The estimated value of all goods and services produced in South Africa in 2001 amounts to about one hundred and fifteen thousand million (or billion) US dollars: US$115 billion. We use dollars because this makes it easy to compare our GDP with other countries.
One of the drawbacks of the GDP number is that it excludes unrecorded economic activity. Any exchange of money that is not reported to the government in some way goes unmentioned in the GDP figure, although Stats SA does attempt to estimate the size of the ‘informal economy’. Unrecorded transactions would include the informal sector, subsistence production (i.e. growing meilies to eat them yourself), the criminal economy and white-collar crime or other means in which the wealthy evade the notice of governments. Also unrecorded in total GDP is the work done by members of society that contributes to production but which is not sold for money. The classic example is housework mainly performed by women. Cooking, raising children, making the bed are all economic activities essential for producing wealth, but none find their way into GDP, unless they are done for money and registered with government, such as formal domestic work.
Figure one, below, shows how South Africa compares with some other countries in 2001.
Figure 1: GDP of Selected Countries in 2001
Data: World Bank: www.worldbank.org
As you can see South Africa is in the middle of this selection of countries. Many of our neighbours have very small economies compared to us. The nearest country to South Africa on our continent is Nigeria. On the other hand South Africa has an economy that is much smaller than many in the world. If you add together the GDP of all the countries listed in the graph it amounts to more than US$3 thousand billion (which is called a trillion). Japan alone in 2001 produced goods and services valued at more that $4 trillion. And the value of goods and services produced in 2001 in the USA, the wealth it creates every year, is worth more than US$10 trillion.
The GDP figure gives you a snapshot of how large an economy is in any particular year. But the GDP of all countries is changing all the time. If there are more goods and service produced this year than last year we say there has been growth in South Africa’s GDP. We measure GDP growth using percentage change. For example if GDP is $100billion this year and next year it is $110billion, we say that GDP has grown by ten percent (because $10billion is 10% of $100billion).
The graph below shows growth of our GDP from 1948 until 2002
Figure 2: South African Real GDP Growth (1948 - 2002)
Data: South African Reserve Bank [% Change in KBP6006Y: Gross domestic product at market prices Yearly/RMILL/Constant 1995 prices, [1946 -2002]
There are a huge variety of factors that influence GDP growth over the long run. These include economic factors, but also all kinds of social, political and even cultural conditions. This can be seen by observing the graph of South Africa’s GDP. Even without analysing the economic conditions in the country of the period, we can see how various political conditions affected growth.The Sharpeville massacre led to the first state of emergency and the banning of the ANC and the PAC. After the Rivonia Trial all resistance to the state was incarcerated, exiled or forced underground. The regime successfully restored the racist order and to a large extent pacified the masses. Once they had completed these tasks, there was an investment boom, with foreign investors pouring millions into the country.
This Post-Sharpeville boom can be seen in the fact that in 1962 GDP grew by almost 4%. The next year growth was up to 6% and two years later GDP grew by a massive 8%, the highest level of growth seen in the post-war era. Even after this high point there is not a single year in which growth was below 4% of GDP from 1962 until 1972 – a decade long boom in the South African economy.
In the period following the Soweto uprising, when the future of the system of apartheid was in constant doubt, GDP growth became very volatile (jumping up and down). In 1977 GDP did not grow at all (i.e. 0% growth). In 1980, it reached almost seven percent, boosted by the high international gold price. Two years later it grew smaller, or contracted, by 2%.
You can see that more recently, in the first decade of freedom, growth has been far less volatile, but has not reached levels we are satisfied with. If you consider the dotted line in the graph, which is called the trend line, perhaps you’ll agree that this is not surprising. The trend-line gives the average of all the movements up and down over the whole period. As you can see it has moved consistently down.
Perhaps our policies are turning it around, taking our nation out of the crisis of declining growth and moving us into a new era sustained growth and development. But that is a matter for speculating the future: something which economists are notoriously bad at!
One of the reasons why it is important for us to generate growth every year is that every year our population also grows.
Figure 3: South African GDP per Capita (1946 – 2002)
If our GDP was to remain the same while our population grew - this would mean there would be fewer goods and services produced per person on average.
This can be easily shown using GDP per capita, which is simply GDP divided by the number of people in the country. This gives us average production, or average wealth produced, per person. As you can see in the graph above, while our GDP has grown consistently over the last fifty years, since the 1970s this growth has become more volatile and declined from its peak in 1983.
GDP per capita is a useful measure of how the economy is doing. However, it is important to remember the following problems with this figure:
- First, GDP per capita is an average: it tells us how much each South African would have if all the wealth in the country were divided equally amongst the whole population. From the graph we can see this is around R14, 000. As we know, wealth is highly uneven. In South Africa the vast majority earn much less than the R14, 000, while a tiny minority earn a great deal more than this average.
- The second thing to remember is that GDP per capita, by definition, depends on two estimates: (a) GDP and (b) population. If either of these is wrong for any reason then the GDP per capita figure will itself be wrong. In South Africa, as in most developing countries, population figures must be viewed with some circumspection. If we look at the graph above, for example, we may want to ask questions such as: Are the TBVC states included in the calculation of population and/ or the GDP figures? If they are added at a certain stage, when does this happen? Before we can answer these questions the figures can be viewed with the healthy suspicion that is due to all statistics.
The structure of the economy
The economy can be broken down, or classified, in various ways. The classifications in the chart below are taken from Stats SA methodology.
Figure 4: Percentage of GDP by Economic Sector in 1986 and 2002
Data: Stats SA: GDP reports 1990 and 2002
The chart compares the percentage of total South African GDP produced in various sectors of the economy in 1986 and in 2002. Which sectors produce relatively more GDP than in 1986? Remember that all sectors have grown larger in GDP since 1986. But some have grown faster than others and therefore account for a larger proportion of GDP. Can you discern any relationship between those sectors that have grown and those that have got relatively smaller?
Let’s look closer at how Stats SA defines these sectors:
- Mining:Includes both mining and quarrying: the extraction of our natural mineral wealth such as gold, coal, iron and diamonds. Mining was the first industrial sector in the economy and the whole structure of our economy has grown up around mining.
- Agriculture: Farming to produce foods like maize, wheat, meat, fruit and vegetables.
- Manufacturing: the production of goods in factories. This includes a wide range of products such as food, beverages, tobacco, textiles and clothing, wood and paper and their products, petroleum products, metals like steel as well as machinery and metal equipment, electrical goods, transport equipment and furniture.
- Utilities:This category includes electricity, gas and water supplies to the community and to industry. This infrastructure and services are usually provided by the state.
- Construction: the building of houses, roads, bridges, factories, office blocs, shopping malls and other buildings.
- Finance: The institutions that hold the savings, or surplus wealth, such as banks, pension fund, the insurance industry. The products these institutions sell to the public (such as life insurance, bank accounts etc) account for a significant proportion of the goods and services produced in the country. Indeed, South Africa is distinguished from most other developing countries by the size, sophistication and global integration of its financial sector.
- Government: All government taxation and spending is part and parcel of the economic interactions in society. Government contribution to GDP can be divided into the following types of economic interaction (a) transfers: where the government takes money from one sector the economy and give it to another, e.g. child support grant (b) consumption the paying of salaries and other recurring costs that keeps the system of government moving (c) investment, where the government builds new infrastructure.
- Retail: The official name for this category is wholesale, retail, and motor trade; catering and accommodation. It includes the shops, the restaurants, the hotels and other services that consumers use every day. (Do you think spaza shops are included in this figure? How much would you guess they accounted for in the economy as a whole? )
- Transport: This is actually both transport and communications. The moving of goods and people throughout the country by rail, road and air. The communications sector includes Telkom and the new cellular operators.
Each sector is interlinked with other sectors in various ways. A factory could not operate without electricity, which may be generated from coal, while from its profits the government takes taxes and may, for example, transfer these through a child support grant.
Another way of looking at the economy is to define it according to primary, secondary and tertiary sectors. These are terms you should be familiar with from the education system. Look at these classifications as given in table one below and try to explain the logic that underpins them.
Table 1: Classifying Economic Sectors
Mining and Quarrying
Agriculture, Forestry and Fishing
Electricity, Gas and Water (utilities)
Finance, insurance, real estate and business services
Wholesale, retail, and motor trade; catering and accommodation
Transport and communications
The primary sector is the closest to natural resources. Both mining and agriculture work directly on the products of nature found on, or under, our soil. The secondary sector is a step away from this: it consists of activities that process raw materials into manufactured products or material goods that are used by consumers. While growing mielies part of the primary sector, the production of mielie meal is a manufacturing process.The tertiary sector is even farther removed from natural resources. This is where the mielie meal is sold to the consumer and marketed under a particular brand identity. Most of its activities can be said to belong to the service sector:Having defined our sectors better and grouped them into broader economic categories lets go back to the questions we posed at the beginning of this section:What is the general trend with respect to the economy the growth of various economic sectors?Looking at the data you can see that those falling into the tertiary sector account for a greater proportion of our total GDP than they did in 1986. Conversely, those that falling into the primary sector accounts for a much lower proportion of our total GDP. In fact, using the same data we did in figure 4 we can say that the in 1986 the primary sector accounted for 16% of production, while in 2002 it was worth only 10%. In 1986 the secondary sector made up 34%, while in 2002 it had gone down to 28%. And the tertiary sector which means essentially services had grown from 50% of GDP in 1986 to 61% in 2002. This relative growth of services and relative decline of primary and secondary sectors is not confined to South Africa. In fact, it is a worldwide trend that is observable in all of the advanced capitalist economies throughout the twentieth century. These developments pose important challenges to all varieties of economic theory.
Globalisation and the South African EconomySince the 1990’s globalisation has become a buzzword. It dominates our debates. For some, globalisation signifies everything they believe is good about the world: progress, freedom, democracy and prosperity. For others, those in the anti-globalisation camp, it means everything bad: exploitation, unemployment, capitalism and imperialism.But what does it actually mean? How do we define it? Nobody really agrees on the definition of globalisation, and this is one of the reasons why debate on this issue is so fruitless. But before attempting to answer this difficult question, let’s first ask another, easier, question:What have been the main economic developments in the world over the last twenty years? Since 1985 the world economy has been influence by many changes. We can’t mention them all but some of the more important developments have been:
- The collapse of the Soviet Union in 1991: In previous decades, many countries were part of the Soviet camp (in our own region for example Mozambique and Angola). The USSR had attempted to create an alternative world economic system. Communist economic doctrines were applied both to trade between countries and also to markets and production within countries. This meant that many economies aligned to the Soviet world system could not be fully penetrated by the ‘capitalist’ blocs, who were the other side in the cold war. When the Soviet Union disappeared vast new markets opened up especially for the huge multi-national corporations with the capacity to supply them.
- The liberalisation of finance: Until the 1970’s, most countries imposed controls on the money coming in and out of their borders. Today there is one global market for money and capital and trillions of dollars of money flow between accounts, from hand to hand and across borders every day, instantaneously. From the 1970’s onwards the banks and other financial institutions found all kinds of ways of avoiding the controls placed on them by governments. As flows of vast sums of money occurred increasingly outside government control, a global free market in capital (i.e. money in various forms) has developed. In the 1990’s more and more countries were participating in these free markets for capital. These included the former socialist bloc, as well as the East Asian countries, such as Korea, which liberalised their money markets and allowed in more and more foreign investment. Also, the new information and communications technologies made it possible for money to flow across borders faster than ever before, through electronic finance.
- The emergence of new centres of manufacturing production:Since the 1970’s another major change that has taken place is the emergence of new centres for the production of manufactured products. Since the days of Europe’s colonial expansion, the general pattern has been for colonial powers to manufacture processed goods, while the colonized countries provided raw materials for this production. However, since the 1980’s, many Asian countries have emerged as significant manufacturers of products such as steel, cars, electronics, computer equipment and a host of other manufactured products. In our own country the predominance of ‘hong kong’ products is just one well-known example of the importance of the ‘emerging markets’ to the globalising world. Among the former colonial possessions that have emerged as important producers of manufactured products are South Korea, Malaysia and Indonesia. Also, since the 1980’s China and India, (two countries who between them account for almost a quarter of the world’s people) have opened their markets to greater capitalist investment and have sustained very high rates of growth over a number of decades. The relationship between these two factors (openness and growth) is a matter of much debate. The fact of greater openness, however, cannot be disputed. Most recently, China has joined the WTO further integrating its economy into the global capitalist market place.
- The information revolution: In 1990 it was rare and unusual for people to have or use a computer in an office. Today computers surround us everywhere, and most of them linked to national and international communication networks: the internet, ATMs and banking networks. Another visible change is cellular telephone: in 1990 there were none, today it can be seen for Cape Town to Musina. The rapid advances in computing, combined with advances in technology for communications, have created new ways of making things and of doing almost anything. These new technologies have been incorporated into the production of economic goods and services and have changed the world in infinite ways.
- The technological boom: During the 1990’s some analysts saw this technological revolution as of similar significance to the industrial revolution of the nineteenth century. As in the past rapid advances in new technology created much excitement that was, at times, rather misguided (Alan Greenspan, the governor of the US’s Reserve Bank once called it: ‘irrational exuberance”). “Experts’ began to argue that, as a result of the new technology and the defeat of the Soviet Union, the world had entered a new era of continuous growth and prosperity. Partly as a result of these overly optimistic expectations of continuous unstoppable growth, people invested billions of dollars in IT and other firms linked to new technology. However, this boom has now gone bust. The new firms, instead of offering prosperity to those investing in them, lost millions and failed to make the profits expected of them by irrational investors.
- The World Trade Organisation: In April 1994, as we celebrated the democratic victory, another important event took place. All the nations of the world come together in Marakech, Morocco, to sign the agreement that would establish a World Trade Organisation. The WTO is a multi-lateral body where the nations of the world discuss their trade relations. Its objective is to reduce tariffs and other barriers to trade. The WTO has led to large reductions in the barriers to trade between nations and, partly as a result, trade between nations has grown and grown.
- Transnational production networks:Today, a single product can be produced in many different countries at the same time. Trans-national corporations reduce costs by producing the various components of a single product in different locations throughout the world. In South Africa, for example, we assemble cars from components produced in many different countries. Another way of describing this is that, whereas production used to be inter-national (inter means between), it is now trans-national (trans-means across, like in Transvaal). A large proportion of global trade today is within the transnational firms, but across national borders. This means that firms import and export components of products between locations around the world, before exporting the finished product.
Taken together these developments have been described as “globalisation”. Now we can see why globalisation is difficult to define. After all, it is only one word, and it must describe so many different things, no wonder it gets confused!
This complexity of defining globalisation was recently alluded to in a recent World Bank report:
“Globalization . . . is a complex process that affects many aspects of our lives. The terrorist attacks on the United States on September 11 were one aspect of globalization. Rapid growth and poverty reduction in China, India and other countries that were poor 20 years ago is another. The development of the internet and easier communication and transportation around the world is a third. The spread of AIDS is part of globalization as is the accelerated development of life-expecting technologies…” [Globalization, Growth and Poverty: Building an Inclusive World Economy, 2002, IBRD/The World Bank, Washington DC.]
In short we can define globalisation as the process of the growing integration of economies and societies around the world.
By this definition, ‘globalisation’ has been going on for much longer than the last decade. The first time a ship set sail and crossed the water was the day that ‘globalisation’ started. And, of course, we are still a long way from full global integration.
It is not a single act or event. It is process that is changing all the time. It can intensify over one particular decade and slow down, or even reverse, over another decade. The manner in which it proceeds is not pre-determined and as the process develops various institutions, countries and people attempt to influence the direction and outcome of this process.
The impact of globalisation on South Africa
South Africa is not an island. Since the discovery of gold and diamonds in the nineteenth century our country has been integrated into global economy. It is no accident that South Africa’s largest corporation is called “Anglo-American”.
During the 1980’s, Apartheid South Africa was a pariah. The people of the world, who united in the anti-apartheid struggles, forced many governments and corporations to impose sanctions, boycotts and generally to isolate the racist regime from the world economy. In South Africa, as the people’s struggle for democracy succeeded, the country was at the same time readmitted to the global economy, as well as to political bodies such as the UN.
Our isolation and subsequent democratisation has therefore meant that our country has felt the effects of globalisation more rapidly than many others. Let’s look at some practical examples of how the opening of South Africa’s economy to world has affected us.
(a) The Price of Maize
Figure below shows the price of corn (i.e. meilies/maize) on the international market. The black line in the graph gives the global price of maize, which is determined in a single world market. Its scale is measured in US$ along the left hand vertical axis. Looking at the graph we can see that in January 1994 the price of a ton of maize was about $120. In July 2002 this price was around $100. The international price was very high in 1996, but generally it has gone down since 1994.
Figure 5: The International Price of Maize (expressed in $ and R)
Data: International Grain Council (US No.2, Yellow, fob U.S. Gulf ports, Friday) and South African Reserve Bank (R-$ exchange rate)
But, as we all know, over this period the price of maize in South Africa has risen by a lot. Why is this the case? Surprisingly, the answer has little to do with the farmers in South Africa.There is an international market for mielies. South Africa is only one (very small) part of all the maize produced in the world. Therefore, whatever is produced in South Africa has no influence on the global price of maize. And this global price generally determines the price of maize in South Africa. What do you think would happen if we forced our farmers to sell maize to South Africans at a price less than the global price? Before answering lets look at the other line in the graph.The white line is the same international price of maize, but denominated in Rands. It is measured on the right-hand vertical axis. (The two scales are independent of each other; we simply superimpose the one line on top of the other in order to give a sense of how two different variables have changed over the same time)We all know that the value of the Rand has fallen since 1994. In 1994 one American dollar would buy about R3-50. Today in exchange for one dollar you would get between R7 and R10 (although it changes every day). This means that in January 1994, $126 was worth R431. But in July 2002 one hundred dollars was worth more than R1000.This is summarized in table 2 below:
International maize price ($) Exchange Rate (R/$) International maize price (R) January 1994 126.49 3.41 431.24 July 2002 100.32 10.11 1,014.61
So while the international price of maize has declined in dollar terms over the last decade, the same price expressed in Rands has increased. Obviously, this leads us into debates about policy: how should government intervene? Can’t prices be controlled? We cannot answer them in full because it would require much more information than we have considered so far.But consider the question we posed earlier. All this economics is fine but people are hungry! Why shouldn’t government just fix the price at which South African farmers sell their maize?This is not impossible. But implementation would be very complicated. To see why, imagine you were a farmer: how would you respond to a situation in which, in South Africa a ton of maize will fetch, let’s say R500. But in a neighbouring country, over which the South African government has no control, there are customers who are willing to pay US$100 for the same ton. And don’t forget that a hundred dollars is worth more than a R700. Would you sell to the person offering you R500 or the person offering R700? In such situations even the strongest of patriots have been known to waver.
But let’s assume that all the farmers comply and sell their maize to the government at the fixed price. At the border between Mozambique and South Africa there is a shop on either side of the border. On the South African side a bag of maize costs R10. In Mozambique it costs R20. What do you do if you were a Mozambican?
The following graph (Figure 6) shows some changes in the labour market from 1995 to 1999. As you can see, the number of employed people increased over this period. But so has the number of unemployed. This is because, while more jobs have been created, they have not been enough to absorb the new people entering the labour market (i.e. the growth in the economically active population).
But behind these overall figures are many changes in the labour market that have taken place over the last ten years. These include:
- As we saw above, many of the formal industrial sectors of the economy have declined. These have included certain mining sectors as well as formerly protected manufacturing sectors such as textiles and clothing. The main economic growth over the last ten years has come from the new service sectors such as transport, finance, communications and many others. This change in the labour market is reflected in the sectoral shares of GDP that we saw previously.
- The other significant change in our economy over the last ten years has been that whereas jobs have been lost where the workforce is the most unskilled and the least educated, new jobs have been created for the educated and skilled sections of the labour force. This up-skilling of the labour market is a global trend.
- The third key development in the economy has been the privatisation, informalisation and casualisation of various elements of production. In general, capital has shifted investment towards ways of producing things that would lessen cost, and make it easier for labour to be controlled and disciplined.
Figure 6: Developments in the Labour Market (1995 and 1999)
All these factors combined mean that the changes in the labour market over the last few years can be characterised as:
- a decline in formal sector jobs, and a growth of informal sector jobs;
- a decline in primary and secondary sector jobs and a growth in service (or tertiary) sector jobs;
- a decline in demand for unskilled work and growth in demand for skilled work.
None of these things are unique to South Africa; they are all global phenomena. The ways in which global change affects our own labour markets are numerous and complex. In part, however, they are influenced by our policy choices.
The Clothing and Textile sector is an example. During the apartheid years it was amongst the most protected sectors in the economy. This meant that, anyone wishing to import clothing had to pay a tariff to the government of up to 75% of that article. This meant that local companies were protected from competition from producers in other countries (principally in Asia). While the Asians could produce cheaper shirts than South African companies, the addition of a 75% tariff would make their products more expensive on the South African market.
Since acceding to the WTO, South Africa has drastically reduced its protective barriers throughout the economy. This has meant that our clothing and textile sector has had to compete directly with overseas companies. It is estimated that more than 30,000 jobs were lost in the clothing and textile sector between 1997 and 2000.
At the same time, consider the following theoretical benefits to South Africans of the opening up of trade in the clothing and textile sector.
- It means that South Africans can buy clothes at cheaper prices: if East Asian producers can provide articles of clothing to our people at lower prices, then why should we pay higher prices in order to maintain local production?
- If we cannot compete with Asian companies in domestic production it will probably mean we also cannot compete with them in other markets. Behind the walls of tariff protection our firms may have become complacent and not geared themselves for international competition. The liberalisation of clothing and textile production may have increased our ability to compete in the export markets, particularly for those clothing products that we are particularly good at making?
These arguments are by no means conclusive. Certainly it does appear that a more competitive clothing and textile sector is emerging in South Africa. In particular, this sector has been able to take advantage of new opportunities opened by the African Growth and Opportunities Act (AGOA) recently passed by the Americans, and the agreement with the European Union. But, obviously if you are a retrenched clothing worker, these arguments may not be very convincing. At the end of the day the balance of evidence would have to determine whether we have benefited or suffered as a result of tariff reductions. The debates are likely to rage for years and nobody has a monopoly on the truth.
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