From the early 19th century, South Africa’s economy resembled that of a typical colony. Raw materials were extracted and exported, with the rents going to the colonisers. By the early part of the 20th century, while large colonial corporations continued to dominate the economic landscape, the local settler community began to keep a larger share of the rents. They continued to use cheap labour to extract natural resources, largely for export. They used the rents to build up a services sector to support their lifestyles.

The evolution of the apartheid state and the development of the economic system in South Africa were intertwined. Racial discrimination and apartheid kept labour cheap through various means, most notably the creation of labour reserves, the destruction of African subsistence farming, influx control and job reservation. In the aftermath of the Second World War, apartheid became more formalised and entrenched. The apartheid state gradually developed the capabilities to substitute a share of imports through industrial policy and state-owned enterprises. These policies also enabled the state to increase incomes and living standards for the white community (especially Afrikaners) and a generous welfare state was established to reduce poverty among whites. Similarly, land ownership policies enabled a large commercial agricultural sector to develop.

The manufacturing sector grew, supported by cheap energy, abundant mineral resources, import substitution and the defence industry. From the mid-1960s to the early 1980s, the state directed nearly half of national savings to large projects in petrochemicals, iron and steel, and electricity generation. This further distorted the economy, making it highly capital and energy intensive. Poor-quality education for black people, influx control and job reservation prevented black workers from getting a share of the productivity gains.

Typical of mining economies, wealth was concentrated, with a small number of white families owning a significant share of the national wealth. Sanctions further strengthened import-substituting industries and led to ever greater levels of concentration and inefficiency. Cartels and oligopolies developed in almost every major sector.

The rise of the industrial sector in the 1950s through to the 1970s facilitated some black urbanisation. The development of trade unions gave black workers a bigger voice in the mining and industrial sectors than ever before.

From the late 1970s, the apartheid economy entered a prolonged crisis. Falling global commodity prices, the rising cost of welfare, rising union resistance, sanctions, and the costs of policing the country and waging war in Namibia and other parts of the subcontinent, all combined to slow the economy down. The pitfalls of import substitution – rising inefficiency and high costs – came to the fore. With the exception of brief periods when the gold price spiked, the economy contracted throughout the period 1970 to 1993. Fiscal and monetary expansion were insufficient to hold off the inevitable – a full-blown economic crisis. The 1992 recession was the deepest ever experienced by South Africa since the Second World War.

The factors that shaped the apartheid economy developed over a long period of time, giving rise to patterns of growth and development that excluded the vast majority of people from sharing in its fruits, and which were environmentally unsustainable.

After 1994

Managing the post-apartheid economy was complex, partly because the excesses and policy errors of the latter years of apartheid left the country close to bankruptcy. South Africa had no foreign exchange reserves, public debt had rocketed, inflation was in the upper teens and investment levels had plummeted. The first task was to stop the decline.

In the period 1994 to 2001, South Africa was successful in stabilising the economy, improving the confidence of domestic and foreign investors, rebuilding its reputation among lenders, bringing down inflation and restoring the health of the public finances.

Improving foreign investor confidence was important because by 1994, South Africa had a very low savings rate. To meet the objectives of the Reconstruction and Development Programme, the country would have to invest at a higher rate than it could afford to save. Raising savings quickly would plunge the economy into a recession and so the country needed to attract foreign savings.

Tariff liberalisation exposed domestic industry to international competition. Some industries survived and thrived, but others were unable to compete internationally and shed significant numbers of jobs. Liberalisation in the agricultural sector had a similar effect. In general, this openness enabled prices to fall and investment to rise, though it did make the economy more vulnerable to external shocks and placed onerous burdens on a number of labour-intensive sectors.

By the early 2000s, South Africa was able to raise investment levels with some ease by attracting foreign capital. The most binding constraint of the apartheid economy – access to capital – had been broken.

The period 2003 to 2008 saw the longest economic boom in South Africa’s history. Employment increased faster, unemployment fell, investment rose and inflation and real interest rates declined rapidly. The global economic downturn brought a halt to that progress, with the consequent domestic recession reversing many of the country’s gains in employment creation and investment levels.

During the years of high growth (2003 to 2008), it became clear that economic path dependency was a major hindrance to achieving the higher growth levels associated with many other developing countries. Even before the global economic crisis, factors such as low savings, poor infrastructure, skills shortages in the face of high unemployment, a high import bill versus relatively low growth in exports, near-saturation in private sector capacity utilisation and inefficiency of government economic services had started to strain the economy. As a result, inflation, the current account deficit and pressures on energy supply had begun to increase. The economy had performed well for five years, but beyond its trend growth, and elements of overheating were starting to manifest.

South Africa lost about 1 million jobs during the global financial crisis or 9 per cent of workers. The main reasons have to do with a fall in demand for goods and services, especially in the construction, retail and services sector. Despite a significant increase in infrastructure spending in the run up to the World Cup and a counter-cyclical fiscal response, large real wage increases contributed to the fall in employment and some moderation is required to ensure that employment recovers as the economy recovers.

In summary, while the country successfully navigated the transition period, rescued the economy from virtual bankruptcy and broke one of the critical binding constraints on growth, it still faces the task of transforming the economy to one that employs more people and enables the potential of its entire population to flourish. Given deeper historical and structural factors, and challenges in the conduct of policy thus far, the transformation required is not likely to be smooth or rapid. The path dependency syndrome is deeply established. South Africa has to transform the economy, opening up new industries and firms, while at the same time growing the existing economy. Both tasks are equally important and they are interdependent.