Role of the Government in the Economy

Role of the Government in the Economy

South African economists in the 1980s described the national economy as a free-enterprise system in which the market, not the government, set most wages and prices. The reality was that the government played a major role in almost every facet of the economy, including production, consumption, and regulation. In fact, Soviet economists in the late 1980s noted that the state-owned portion of South Africa's industrial sector was greater than that in any country outside the communist bloc. The South African government owned and managed almost 40 percent of all wealth-producing assets, including iron and steel works, weapons manufacturing facilities, and energy-producing resources. Government-owned corporations and parastatals were also vital to the services sector. Marketing boards and tariff regulations intervened to influence consumer prices. Finally, a wide variety of laws governed economic activities at all levels based on race.

The government's main concern since the discovery of gold in 1886 had been balancing the growth of the mining industry against the need to diversify, in order to create sustained development and self-sufficiency. Successive governments had tried to encourage and to support local industries that could reduce imports, provide jobs, and create a multiplier effect by encouraging further industrial growth. Paul Kruger, who had led the Transvaal in the late nineteenth century, had granted monopoly concessions to industrialists; the 1920s governments of Jan C. Smuts and J.B.M. Hertzog had initiated state corporations, and the post-1948 National Party government had tried industrial decentralization (see Industrialization and Imperialism, 1870-1910; Segregation, 1910-48; and Apartheid, 1948-76, ch. 1).

Even after decades of policy shifts designed to spur development and diversification, however, South Africa's export economy in the 1980s still relied primarily on the gold-mining industry, and the government still protected import-substitution industries in order to keep them in operation. Furthermore, agriculture continued to be an uneven producer and therefore received substantial subsidies and other forms of government assistance. In the late 1980s, the government presented a blueprint for economic policy consistent with this history of economic struggle. Its central economic strategy advocated a shift toward strongly market-oriented policies, but left room for government intervention in response to social and political demands. The strategy increased the emphasis on local industrialization in order to cut imports and to create jobs. The only component of the central economic strategy that was really new was the effort to strengthen export industries, especially to increase value added through local processing of raw materials for export.

In 1994 the new Government of National Unity continued the economic policies of its predecessors, emphasizing a market orientation overall, but allowing government intervention when necessary, and maintaining import-substitution industries while trying to spur industrial development toward exports. International markets increasingly opened to South Africa, and trade flourished, especially with the new industrial giants of Asia. Senior government officials tried to downplay the ANC's longstanding commitment to nationalization of key industries in order to gain much-needed foreign investment. It was nonetheless clear that the debate over privatization would continue at least through the rest of the decade.

Legal Restrictions

Two legislative pillars of apartheid--the Natives Land Act (No. 27) of 1913 (and its amendment in 1936) and the Group Areas Act (No. 41) of 1950--limited African economic and business activities in both rural and urban areas (see The Legislative Implementation of Apartheid, ch. 1). These acts were repealed in 1991, but few blacks could yet afford to move into formerly white areas without financial assistance. Numerous other laws and regulations had restricted black economic activities and employment, especially the Mines and Works Act (No. 12) of 1911, the Native Labour Regulation Act (No. 15) of 1911, the Industrial Conciliation Act of 1924 and its amendments in 1937 and 1956, the Mines and Works Amendment Act of 1926, the Factories, Machinery, and Building Works Act (No. 22) of 1941, and the Bantu Labour Act (No. 67) of 1964. Public services and education opportunities were limited by the Bantu Education Act (No. 47) of 1953, the Reservation of Separate Amenities Act (No. 49) of 1953, and the National Policy for General Affairs Act (No. 76) of 1984.

In contrast to the government's control over domestic economic activity of South Africans, few legal restrictions were imposed on the economic activities of foreign nationals in South Africa, aside from stringent exchange controls on the repatriation of capital funds. Foreigners were welcome, even encouraged, to establish businesses in South Africa, and they could qualify for numerous government concessions and subsidies. During most of the apartheid era, those who wished to sell their South African assets, however, could do so only in financial rands (a currency control device), rather than the more commonly used commercial rands (see Currency, this ch.).

Financial rands could be sold only to a foreign buyer for capital investment inside the country, and the financial rand traded at a discount (15 percent in late 1994) compared with the commercial rand. Exchange restrictions did not apply to current earnings, however, and investors could transfer those funds, subject to taxation. In March 1995, as the financial rand strengthened, and under strong pressure from the business community, the government abolished the financial rand.

The new government in 1994 began to implement legislation intended to compensate some of the roughly 3.5 million black citizens who had been dispossessed of their land under apartheid. The Restitution of Land Act (No. 22) of 1994 provided for the creation of a Land Claims Court and a Commission on Restitution of Land Rights to arbitrate demands for restitution. Petitioners under the law were given three years to lodge their claims. White landowners who feared the loss of their land lobbied hard through the South African Agricultural Union, which represented 60,000 white farmers, and succeeded in weakening provisions in the new law that would have given land rights to many sharecroppers and labor tenants. The white landowners also won the right to appeal land-claim decisions and to receive legal aid services under the new legislation. By mid-1996, only a small number of land claims had been adjudicated.

Parastatals

The government's strong role in shaping the economy was especially evident in the large number of parastatals, or state corporations, that it established beginning in the 1920s. Its primary goal was to strengthen import-substitution industries, which had started to grow during World War I, by providing infrastructure improvements and basic materials. Among the first such enterprises were the Electricity Supply Commission (Eskom) and the South African Iron and Steel Corporation (Iscor), both founded in the 1920s, and the Industrial Development Corporation (IDC), established in 1940 to support other new industries. The IDC helped to establish many other state corporations, including the Phosphate Development Corporation (Foskor); the South African Coal, Oil, and Gas Corporation (SASOL); and the Southern Oil Exploration Corporation (Soekor). In addition, many state corporations also founded subsidiary companies in partnership with private firms, and many held controlling shares of stock in private firms.

Private individuals were allowed to purchase shares in many state-owned corporations. The government generally appointed a majority of corporate directors, but senior management made most personnel decisions independent of government control. The government's primary avenue of control over state corporations was by granting or withholding loans of state money. The electricity parastatal, Eskom, was always allowed to raise money publicly, but most other state corporations relied on government funds for capital financing.

The anticipated private-sector participation in these parastatals did not materialize, however. Investors showed little interest in purchasing parastatals' stock. Iscor suffered the embarrassment of an almost total public refusal of its stocks when they were offered for sale in 1929. In fact, most state corporation ventures were viewed as unprofitable and were funded by the government because of a lack of private interest. In 1979, however, after oil sales from Iran had been cut off, the synthetic fuel corporation, SASOL, offered shares to the public; investors eagerly bought all that were available and fully supported two more such issues.

In February 1988, President P. W. Botha announced plans to privatize several state-controlled industries, including Eskom, Foskor, and Iscor, as well as state-operated transport, postal, and telecommunications services. The reasons given for the privatization effort were that it would reduce public criticism of the government role in these enterprises and that these parastatals themselves were no longer profitable for the government. State corporations had been the major recipients of large foreign loans that were called in and cut off in 1985, leaving them with serious capital shortages. Sale of the corporations' assets could both ease the debt burden and provide the government with new revenue for much-needed social programs for the poor.

Iscor was the first major parastatal to be sold, in November 1989. Its sale raised R3 billion for the treasury. The government then scaled down its plans, and in the early 1990s the future of privatization was unclear. Officials estimated that the roughly R250 billion needed to finance the purchase of the largest state corporations probably could not be found inside the country. The argument for privatization was also weakened by the worsening investment climate as political negotiations stalled and violence increased. Government opponents, especially the ANC, vigorously opposed privatization--viewing it as a ploy to maintain white control in preparation for majority rule.

In 1995 the Government of National Unity began to develop its own privatization program. Late that year, Deputy President Thabo Mbeki announced that the government would seek equity partners in Telkom and in South African Airways and that it would sell several smaller parastatals outright. The announcement provoked strong protests from labor unions over the threat of job losses and over labor's exclusion from the policy decision-making process.

Budgets

The government enjoyed surplus budgets in most years during the 1970s and the early 1980s, until chronic high inflation and gold price fluctuations combined to diminish the business tax base in the mid-1980s. The severe decline in real gold prices reduced tax revenues to less than 2 percent of total revenues in FY 1990-91, compared with 25 percent of total revenues in the boom year a decade earlier (see table 7, Appendix).

The personal tax base had always been relatively narrow because of the limited income of the large black population (about 76 percent of the total population) and the relative affluence of most whites (about 13 percent of the population). Searching for additional revenue during the late 1980s, the government tried to avoid higher taxes on businesses and instead relied on deficit financing. For example, in FY 1987-88, the deficit was 5.8 percent of GDP as part of a deliberate fiscal stimulation of the economy. This pattern of spending continued, and the budget deficit rose to 9 percent of GDP in 1993.

The erratic price of gold during the 1980s led to other budget problems, fueling the cycle of reduced industrial revenue, currency devaluation, and high inflation. The government attempted to encourage business development through lenient tax policies, but average incomes continued to be low so this strategy failed to bring in the needed government revenues. The government tried to increase its revenues by "widening the net" of goods and services taxed in 1991, when it introduced a 10 percent value-added tax (VAT) to replace the former 13 percent general sales tax. Then, in an effort to encourage capital spending, businesses were exempted from paying the VAT on capital inputs. And to encourage investment, other forms of tax, such as corporate taxes, taxes on gold mines and gold companies, and import surcharges on capital goods, were reduced. By 1995 the VAT had been increased to 14 percent.

The FY 1994-95 budget projected revenues of R105.8 billion and expenditures of R135.1 billion, leaving a deficit of R29.3 billion, or about 6.2 percent of projected GDP (see table 8, Appendix). To raise revenues, the government planned to sell domestic stocks, increase foreign borrowing, and increase excise taxes on alcohol and tobacco products--expected to bring in an estimated R525 million. The government also levied a one-time, 5 percent "transition levy" on individuals and businesses with taxable incomes of more than R50,000, expecting to enhance its revenues by about R2.25 billion through this measure.

In March 1995, the ANC-led government's budget for FY 1995-96 estimated total revenues at roughly R123 billion and expenditures at R153.3 billion, with a budget deficit of R29.7 billion and a gross borrowing requirement (including interest on previous debt) of R38 billion. Government revenues were to be enhanced by higher taxes on alcohol, tobacco, and gasoline (and a higher, 43 percent maximum rate on individual incomes). The budget was well received overall, and the Johannesburg Stock Exchange generally held steady after it was presented.

The proposed government budget for FY 1996-97 projected revenues of roughly R145 billion and expenditures of R174 billion, with a projected deficit equivalent to 5.1 percent of GDP. Principal projected new revenues included taxes on monthly retirement income, while revenues from import tariffs would be reduced or eliminated. Proposed budget allocations included roughly R7.5 billion for salary increases and pay adjustments for government workers, intended to reduce the inequities of the apartheid era. The budget also envisioned expenditures of roughly R5.5 billion for education, R10.2 billion for military spending, and R9.8 billion for the police.

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