How democracy has led to economic stagnation, and what to do about it

South Africa is an old country with a lot of old problems that are not amenable to many technical solutions.

South Africa belongs to a group of countries that were known as the New World. These are countries that were carved out of the Americas by the European powers after Christopher Columbus.

New World countries were created by genocide against, among others, Native American populations and replaced with free populations from Europe and enslaved populations from Africa. South Africa and Mauritius are the only New World countries in Africa. The most economically successful New World country is the US. The least successful is probably Haiti.

What has all this to do with South Africa today? The answer is plenty.

The modern South African economy is as old as the economy of the US. The efforts to develop both countries date back to the 1860s, about 150 years ago.

In 1865, the US started on its road to development from an agricultural economy by abolishing slavery. South Africa abolished slavery in 1834. In 1867, South Africa commenced its road to development by starting diamond mining, soon followed by gold mining.

Today the US is the largest industrial economy in the world while South Africa is the largest economy in Africa.

However, that is where the comparison between the two countries ends. South Africa’s level of economic development today is where the US was 115 years ago, in 1910. Today, the per capita gross domestic product (GDP) of the US is $89,000. The per capita GDP of South Africa is $6,000.

Why did the economies of the two countries diverge to the extent that an average American today is 15 times more productive than an average South African?

The answer is not as complicated as one may imagine. Leaders of the two countries chose two different roads to economic development. American leaders chose an innovation-driven industrialisation model to development. South African leaders, on the other hand, chose a minerals-export-driven development model that was combined with import-substitution industrialisation.

The American road to development prioritised investment in the skills and health of its population. The South African road to development prioritised exploitation of natural resources through the use of cheap, unskilled labour.

This is what accounts for the massive differential between the productive power of an average American compared with an average South African.

Natural resource curse

The World Bank regularly publishes a Global Human Capital Index, which measures which countries are best at mobilising their human capital – the economic and professional potential of their citizens.

It thus measures how much capital a country loses through lack of education and health.

The top 10 in a survey of 169 countries in the 2020 Human Capital Index were Singapore, Hong Kong, Japan, Korea, Canada, Finland, Macao, Sweden, Ireland and the Netherlands. South Africa was number 132.

Among African countries, Mauritius was number 58, Kenya was number 91. The bottom 10 countries were all African: the Democratic Republic of Congo, Sierra Leone, Angola, Mozambique, Nigeria, Liberia, Mali, Niger, Chad and the Central African Republic.

Why does South Africa’s economy, the most diversified on the African continent, have one of the lowest human capital indexes, both in Africa and in the world?

This is explained in part – ironically – by South Africa’s vast mineral resource endowment. Large mineral endowment is both a blessing and a curse. South Africa is a classic illustration of this duality.

The exploitation of South Africa’s large mineral endowment explains the relative development of its economy; at the same time, it explains its stagnation.

The South African economy, as we know it today, dates from 170 years ago with the discovery of copper deposits in Namaqualand in 1854. These discoveries were soon followed by the discovery of diamonds, gold, coal and platinum deposits, to mention only a few minerals in South Africa’s treasure trove.

To extract these minerals South Africa had to import everything except black labourers. It imported capital, machinery, skilled miners, railways, food and other supplies.

The exploitation of minerals thus created what came to be known as an enclave capitalist economy. This type of economy employs a relatively small number of workers, most of them unskilled, but produces minerals of very high value in the world market. Such an economy can thus sustain a small enclave population with a fabulous standard of living in a sea of poor, low-skilled population. This was what South Africa became during the past 170 years.

Compared with the US, which has a developed capitalist society, South Africa’s middle and upper class/elite is only 12% of the economically active population, whereas a similar population group in the US – proprietors, managers and professionals – are 37.6% of the economically active population.

Most striking is South Africa’s size of the category “underclass and unemployed”. They comprise nearly half of the economically active population. This category does not exist in the US.

An enclave capitalist economy in South Africa developed through imports substitution industrialisation. This is in contrast to how the economies in East and South East Asia are developing. They are developing through export promotion industrialisation. This explains why the South African economy is less sophisticated than most Asian economies.

An important attribute of a natural resource enclave capitalist economy is its dependence on imported skills and technology. Such an economy is dominated by foreign companies in most sectors, especially in manufacturing. This explains its relatively low investment in research and development. Foreign firms carry out their research and development in their home countries.

It also explains the dominance of oligopolies in many sectors of the economy. This therefore accounts for low levels of entrepreneurship in such an economy as South Africa’s. The foreign firms carve up the limited, protected domestic market in an enclave capitalist economy and so keep out new entrants into the economy.

A mineral-dependent enclave economy lives with enormous risks. Top of the list is what happens when mineral resources become depleted and/or are substituted due to technological changes. We are seeing this in South Africa today in connection with its four top primary export minerals – gold, diamonds, coal and platinum group metals:

• Gold deposits have become more uneconomical to mine due to the depth of the deposits;
• Diamonds are being replaced with cheaper synthetic diamonds;
• Coal is being phased out due to climate change considerations; and
• Platinum is being made superfluous by the phasing out of the internal combustion engine which used platinum to scrub exhaust fumes.

Mineral assets’ depletion or their substitution is one cause of South Africa’s economic stagnation. The second source of its stagnation is democracy.

Democracy, deindustrialisation and economic stagnation

One of the most important outcomes of democracy in South Africa was that it transferred political power from property owners, farmers, miners, factory owners, bank owners and shop owners to non-property owners – the African middle-class professionals and organised labour.

This is one of the major drivers of the country’s economic stagnation.

Non-property owners – African middle-class professionals – who control the state use their political power to transfer the economic surplus from potential investment in the production sector to consumption by the ruling political elite using the tax system, and awarding themselves inflated public sector salaries.

This contributes to fuelling economic stagnation.

Democracy is a last-resort form of appeasing or accommodating the demands of aggrieved social groups through the creation of a more inclusive system of governance. Democracy comes about when the use of force has failed to suppress or overcome threats from below to an existing socioeconomic order.

Democracy is a mode of preserving, as much as possible, the existing socioeconomic order through compromise and accommodation where use of force by protagonists has failed to prevail.

I once asked Pik Botha why the National Party (NP) decided to negotiate when it did, from a position of strength. Botha said the NP estimated it could hold back the threat from the blacks by force for another 10 years. He said a more immediate threat to the regime were the whites. The whites were not prepared to sacrifice their standards of living in order to preserve apartheid. The main threat to the white standard of living came from international sanctions, especially American sanctions.

The British government was also aware of the threat of the collapsing South African economy posed by the American sanctions. By their own calculations, the British concluded a collapsing South African economy would dislocate 800,000 people of British descent from South Africa and another 200,000 citizens in the UK who would lose their jobs derived from trade with South Africa.

Given the threat to South Africa’s socioeconomic order, the NP therefore had to find a formula that preserved as much of the existing socioeconomic system as possible by accommodating its adversaries who by the mid-1980s included: big business, whites, blacks, the American government, the UK government, African governments, the United Nations and the Commonwealth.

South Africa’s industries had grown behind high tariff walls. When the walls were lowered with the advent of democracy after 1994, the economy proved uncompetitive and thus started to deindustrialise rapidly.

Democracy has therefore proved to be a double-edged sword. On the one hand it brought about many social, economic and political benefits. On the other it contributed to economic stagnation. 

Conclusion: How to overcome economic stagnation

The conclusion is that political power in South Africa after the May 2024 elections is in the hands of the combined black and white middle-class. Left out of political power are the working class, the poor and the capitalists.

As the middle class in South Africa is consumption-driven, this is a risky outcome for the country economically. It means economic stagnation is going to continue indefinitely unless a coalition of the marginalised groups intervenes politically and forms a new coalition to contest for political power on a production-driven agenda.

Desirable way forward for South Africa:

1. Promote conversation between the groups politically marginalised by democracy, especially the poor and business, about a better and inclusive future for South Africa;
2. Promote industrial modernisation policies to reduce dependence on mineral resources;
3. Creation and promotion of a new entrepreneurial class linked to digital and 4IR technologies;
4. Overhaul of the education system to improve South Africa’s Human Capital Index position from 132 out of 169 globally;
5. Repeal black economic empowerment (BEE) legislation;
6. Professionalise public service and halve its cost as a percentage of GDP;
7. Draw up an urbanisation plan for South Africa and a development strategy for rural areas in former homelands; and
8. Overhaul the education system and health provision for the population. DM

This is an edited version of a paper delivered at the recent FW de Klerk Foundation Conference on “Achieving an Inclusive Economy”.

Moeletsi Mbeki is chairperson of the South African Institute of International Affairs (SAIIA), an independent think-tank based in Johannesburg.