South Africa has a
two-tiered economy; one rivaling other developed countries and the other
with only the most basic infrastructure. It therefore is a productive and industrialised economy that exhibits many characteristics
associated with developing countries, including a division of labour between formal and informal sectors--and uneven
distribution of wealth and income. The primary sector, based on
manufacturing, services, mining, and agriculture, is well developed.
South Africa's transportation infrastructure is among the best in
Africa, supporting both domestic and regional needs. The OR Tambo
International Airport serves as a hub for flights to other Southern African
and International countries. South Africa also has several major ports that
make it a central point for most trade in the southern African region.
A brief history of the South African economy
The formal economy of South Africa has its beginnings in the arrival
of Dutch settlers in 1652, originally sent by the Dutch East India Company
to establish a provisioning station for passing ships. As the colony
increased in size, with the arrival of French Huguenots and German
citizens, some of the colonists were set free to pursue commercial farming,
leading to the dominance of agriculture in the economy.
At the end of the 18th century, the British gained control of the
colony, imposing the English language on the colonists, who were now
developing a culture of their own. This in turn lead
to the Great Trek, spreading farming deeper into the mainland, as well as
the establishment of the independent Boer Republics of Transvaal and the
Orange Free State.
In 1870 diamonds were discovered in Kimberley, while in 1886 some of
the worlds largest gold
deposits were discovered in the Witwatersrand region of Transvaal, quickly
transforming the economy into a resource dominated one. The British,
seeking the riches of the gold fields, invaded the Boer republics, and
re-gained control over them in 1902 after the Second Boer War. The country
also entered a period of industrialisation during
this time, including the organization of the first South African trade
unions.
The government soon started putting laws distinguishing between
different races in place. In 1948 the National Party won the national
elections, and immediately started implementing an even stricter race-based
policy named Apartheid, effectively dividing the economy into a privileged
white one, and an impoverished black one. The policy was widely criticized
and lead to crippling sanctions being placed against the country in the
1980s. The legacy of Apartheid will still have a major impact on the
economy for generations to come.
South Africa held its first multi-racial elections in 1994, leaving
the newly elected African National Congress (ANC) government with the
daunting task of trying to restore order to an economy harmed by sanctions,
while also integrating the previously disadvantaged segment of the
population into it. As of 2005 agriculture, that once dominated the
economy, contributes only 3.4% to the country's GDP, while services now
account for 65.1%.
The GEAR economic policy
The Government of South Africa demonstrated its commitment to open
markets, privatisation and a favourable
investment climate with its introduction of the crucial Growth, Employment
and Redistribution (GEAR) strategy - the neoliberal economic strategy to
cover 1996-2000. Introduced by Finance Minister Trevor Manuel in June 1996,
the policy set government the ambitious goals of achieving sustained annual
real GDP growth of 6% or more by the year 2000 while creating 400,000 new
jobs each year. The policy was meant to increase investment, especially
Foreign Direct Investment, in the country to help achieve these ambitious goals.
South Africa uses a mixed economy.
The outcomes of the GEAR strategy have been mixed. It brought
greater financial discipline and macroeconomic stability but largely failed
to deliver in key areas. Formal employment continued to decline, and
despite the ongoing efforts of black empowerment and signs of a fledgling
black middle class and social mobility, the country's wealth remained
unevenly distributed along racial lines. The desperately needed FDI also
remained elusive, and consequently the ambitious economic growth targets
were never realised. The policy came under
stringent fire from many critics, especially when growth slumped to only
0.8% (later revised even lower to 0.5% by Statistics South Africa) in 1998.
South Africa's budgetary reforms such as the Medium-Term Expenditure
Framework and the Public Finance Management Act - which aims at better
reporting, auditing, and increased accountability - and the structural
changes to its monetary policy framework (including inflation targeting)
have, however, created transparency and predictability and are widely
acclaimed. Trade liberalisation also progressed
substantially since the early 1990s. Average import tariffs in South
Africa, for example, declined to 14.3% in 1999 from more than 30% in 1990.
These efforts, together with South Africa's implementation of its World
Trade Organisation (WTO) obligations and its constructive role in launching
the Doha Development Round, show South Africa's acceptance of free market
principles.
One of the key pillars of the GEAR macroeconomic strategy was to
reduce the fiscal deficit, which had reached over 9% of GDP during the
1993/4 fiscal year. The deficit has remained below 3% since the
implementation of the reforms, greatly improving South Africa's fiscal
health. The Government's 2002 budget called for a moderate increase in
spending to promote faster growth and poverty alleviation.
Inflation Targeting and GDP growth
In the February 2000 Budget Speech, the Minister of Finance,
announced a policy of inflation targeting, helping to bring consumer
inflation, which had been running in the double digits for over 20 years,
under control. Inflation declined from 6.9% in 1998 to less than 6.0% in
2000. The target was set to keep the consumer price index (CPIX) — a key indicator
of inflation — between 3% and 6% average per annum. Although initially
successful, the rand's rapid depreciation in late 2001 led to greater
inflationary pressure and the South African Reserve Bank missed the target
during the course of 2002, with inflation coming in at an average of 9.3%
for the year.
Since September 2003, however, the CPIX inflation rate has remained
consistently within the target range. The average annual rates of CPIX
since 2001 were: 2001 - 6.6%, 2002 - 9.3%, 2003 - 6.8%, 2004 - 4.3%, 2005 -
4.3%.
Success in keeping inflation down allowed the Reserve Bank to reduce
the prime lending rate — that determines the interest rate. During 2003
alone interest rates were cut by 550 basis points (5.5%), while between
2002 and 2006 interest rates were cut by a total 650 basis points (6.5%).
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