Unemployment and Privatization by keara

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									SOUTH AFRICA 2000

April 24, 2000 Professor Zonis

Alwyn Andrew-Mziray Molly Haney Hilda Rodriguez John Wiese Janice WIlliams
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INTRODUCTION Slow economic growth and low foreign investment resulting from a relatively small market size have accompanied South Africa‟s political transition from apartheid to democracy. The lack of rapid economic progress has limited the monetary as well as fiscal ability of the government to cope with the pressing social ills affecting the nation such as shortage of skilled labor force, high unemployment rates, violent crime, and lack of educational attainment. The ANC political mandate serves to secure political stability but new macro and microeconomic policies such as privatization and affirmative action have created tensions in the coalition. In addition, other forces such as regional instability, specifically Zimbabwe‟s land redistribution crisis, may be expected to have impacts on South Africa‟s ability to portray itself as fertile land for investment and springboard for the rest of the Southern Africa. Thus, a cycle of social uncertainty and lack of economic confidence has defined South Africa to potential new foreign investors and has served as a barrier to increased investment. EXECUTIVE SUMMARY Our assessment of the feasibility of investment in South Africa for the next three to five years is based on a model composed of 5 essential, interacting variables. These are macroeconomics, education, unemployment, privatization and crime. In addition, other forces also affect the economic outlook of South Africa such as regional stability, health and corruption. Together, these variables present a stagnate economy, where new foreign investment is not expected. However, companies that already have investments in South Africa and show profitability will remain there, so the situation is not completely detrimental to growth, but rather to new foreign investment.

MACROECONOMICS South Africa‟s political and economic environment has in the past year been through some changes as a new president took office and a new governor assumed control of the reserve bank. This second democratic political transition saw the presidency transferred to Thabo Mbeki and with it the challenge of achieving economic growth sufficiently high to tackle unemployment. Accompanying this political transition was an economic one where Reserve Bank Governor, Tito Mboweni took control of monetary policy, which remains constrained by the same factors that plagued his predecessor, Chris Stals. The bank‟s objective has always been to protect the value of the currency in the interest of a balanced and sustainable economic growth. Governor Mboweni‟s focus of monetary policy is on the inflation rate and not the currency. President Mbeki and Governor Mboweni have the challenge of promoting sustainable growth sufficiently high to absorb new entrants to the labor market, but they also need to decrease unemployment. To achieve this growth they will require a more accommodating monetary policy, continued fiscal consolidation, more aggressive privatization, and labor market reform and trade liberalization. The government has thus implemented the GEAR (Government‟s Growth, Employment and Redistribution Strategy. policies. In dealing with the structural side, the Government decided to emphasize on trade liberalization. They also began to reduce exchange controls and allowed individuals to invest offshore as well as domestic institutions to enter swap transactions. The privatizing of and restructuring of state assets was also brought forth. However, thus far, partial privatizations have taken place only in Telkom, Transet (Spoornet), Debel (which is made up of 20 different companies in the armament business), and South African Airways. Eskom, an electricity provider, was also sold and achieved excellent electrification targets. The other lackluster area, was the government‟s effort to develop policy to better manage the labor market. Four pieces of legislation were produced that have increased labor market rigidities and costs. These restricting policies have been the one area where Governor Mboweni has been constantly criticized. Fiscally, the government emphasized on decreasing the budget deficit and restructuring public services. They were rather successful in decreasing the deficit, however the monetary policy was limited by their overall external position, which remained weak. Once growth picked up, the current account widened. A dependence on portfolio inflows and short-term debt as well as low reserves, forced the South Africa Reserve Bank to maintain a relative high real interest rate. From time to time, the Bank responded to speculators on the currency by hiking interest rates and intervening in the foreign exchange market. GEAR proposes structural reforms and conservative fiscal monetary

If an aggressive implementation of GEAR is carried through, then growth rates in the region of 5.0-6.0% could be achieved in three to four years time.i This growth rate would be necessary to absorb all new entrants into the labor market. The policies set out in GEAR were to have produced growth of 6.1% by 2000, and annual growth of 4.2% from 1996-2000. Growth in the non-agricultural employment sector was to have reached 4.3% per year by 2000, averaging 2.9% over the period. However, real GDP growth in the period 1996-1998 averaged just 2.4% compared to the target of 3.4%, while employment contracted on average by 2.2% per year versus a target of 2.3%.ii While a range of domestic and international economic fundamentals point to improving conditions in South Africa, growth rates sufficiently high to begin reducing unemployment will not be forthcoming in the next two years. Goldman Sachs forecasted a GDP growth of 1% in 1999 and 2.6% in 2000, which based on past experience would have little effect on job creation. Real GDP growth is expected to be at 1% in 1999, 2.6% in 2000 and 3.4% in 2001iii. This growth will come mainly from an improvement in private consumption expenditure, the wealth effects of the „demutualization‟ of Old Mutual and lower interest rates. Other factors that will also help with growth: are better export growth, especially with Asia‟s improving conditions, higher growth in Europe and better commodity prices. Sustainable GDP growth in the region of 5-6% will need to be achieved if unemployment levels are to fall. This level of growth will only be attainable if monetary policy is freed from the reactions

placed on it by the forward book and only if investor confidence is raised by the transparency that inflation targeting can bring. Furthermore, the public sector will have to be made smaller and more efficient and privatization will have to be more aggressive. The government will also have to improve the absorption capacity of the labor market, for one thing, making labor legislation less onerous. With aggressive structural reforms, South Africa could achieve sustainable real growth GDP growth of about 5.5%, which would generate upwards of 500, 000 jobs per year iv. This level of growth would begin to show in about 3-4 years time. Significant changes in monetary policy are taking place now and are significant in two places. First, the move to explicit inflation targeting has been confirmed. This happened in the 1 st quarter of 2000. A core inflation rate of 6-7% has been targeted for the end of 2000 and 2001v. This could be realistically met without a too restrictive monetary policy. Governor Mboweni has suggested the formulation of a policy target agreement between the government and the central bank. This agreement would define the efforts required to contain inflation in pursuit of sustainable higher economic growth and employment creation. Inflation targeting requires the participation of labor and business if it is to work. Mboweni has a lot of experience and strong contacts with labor and business sectors. Bringing them into the inflation debate would allow for a pact on appropriate inflation targets. Mboweni has an

apparent desire to introduce a culture of greater transparency in the formulation of monetary policy in South Africa. Inflation targeting should support this desire. It is expected that inflationary pressures will be subdued. Structural changes in the economy, especially agricultural market reforms and reforms in the trade regime, should keep prices lower. Moreover the government‟s recent stance on the wage increases for the public sector (6.3%) will help keep inflation in check. Lower mortgage costs and cuts in the prime overdraft rate have benefited headline consumer inflation as well as lowering month-on-month inflation growth. Second, all indications are that there will be far less focus on the exchange rate. It appears unlikely that the bank will intervene to protect the currency as it did in the past. Tito Mboweni‟s comment the day before he became governor were that “…it was a waste of time trying to take on speculators. When you intervene they take you to the cleaners.” The point here is that under his leadership, there should be far less intervention in the currency market. However, Governor Mboweni‟s comments on exchange rate management in his address to the Reserve Banks Management were rather subdued. He stated that the intervention was required for smoothing fluctuations and that its purpose was not to oppose market trends. This was certainly the standard explanation of his predecessor, Chris Stahl. South African Reserve Bank had a gross international reserves including gold of $6.2 billion in 1999 with projection of$ 6.5billion at the end of the year 2000.vi The reserve bank‟s policy is to protect the value of the currency in the interest of balanced and sustainable growth. It is expected that monetary easing will continue well in to 2000 but that it‟s pace will slow from that experienced in the first seven months of 1999 and the accelerated easing that followed after. Goldman Sachs expects that the return of the current account to deficit will bring the Rand under some renewed pressure but that the growth of commodity exports will be the supportive currency. According to Carlos A. Texeira at Goldman Sachs, The Repo rate should reach 12% by the year-end implying a prime overdraft of 15%. It is anticipated a further 100bps decline in the prime rate next year. Goldman Sachs remains bullish on local debt and expects yields on the benchmark R150 to tighten to 12.5% by mid-2000. They also expect the Rand to be R6.50 to the dollar by end of 2000 and that it is undervalued by 5%. In this economic picture both local debt and equities look very attractive. As interest rates fall and domestic demand picks up, the corporate earnings scenario looks much more enticing. Resource stocks look set to rally further as commodities relevant to S. Africa begin to perform better. The prognosis of the mining industry has not been so good due to: weak prices; restructuring that has led to significant job losses; increased activities due to wage negotiations; and the volatile state of South African industrial relations. However tourism is expected to catapult and become the mainstay of the South African economy. According to local investment banker, Guy Hayward, tourism will soon surpass both

mining and agriculture as the biggest employer in the economy. He also feels that this is the best market for investment. In looking at tourism, one must take into consideration the high levels of crime in South Africa, particularly violent crime. Both internally and abroad, the investment community‟s perception of South Africa is conditioned by reports of violent crime. To attract foreign direct investment and stop the flight of professionals from South Africa, crime has to be combated aggresively. In conclusion, the main risks to the economic outlook are predominantly external developments. Higher than anticipated inflation; a major stock market correction in the US; renewed emerging market turmoil; or a liquidity crunch could lead to widening spreads in local debt, an equity market correction and weaker Rand. Domestically, factors leading to favorable economic outcome are accelerated implementation of the Growth, Employment and Redistribution strategy without which the sustainability of the upturn in the economic cycle would be put in jeopardy.

EDUCATION Consistently ranked among the top two challenges to doing business in South Africa, the lack of educational preparation among otherwise employable individuals is far-reaching and detrimental to the country‟s economic health. From the 1950s to 1994, the educational system served as the main tool for Apartheid rule, which prepared black Africans for low-wage jobs while simultaneously protected the white minority from competition.vii As a result, the current educational system lacks a strong infrastructure that can be easily transformed to serve all South Africans. Hence, the perpetuation of low educational attainment and lack of confidence in the educational system, further limits South Africa‟s possibilities of marketing itself as a sure investment with a readily available supply of skilled labor. Since the 1994 government shift from apartheid to democracy, the educational structure in South Africa has been under major renovation. The big picture is a multi-cultural country of young and old, on all different academic levels, integrating and maneuvering through an often non-funded and racially resistant maze of Bantu, public, and private learning options in pre-primary, primary, secondary, tertiary schools, and Technikons (skill training schools). The new government faces the overwhelming task of designing a system that operates to ensure each citizen‟s constitutional:
“right to a basic education, including adult basic education; to further education, which the state, through reasonable measures, must make progressively available and accessible…in the official language or languages of their choice…taking into account—(a) equity, (b) practicability; and (c) the need to redress the results of past racially discriminatory laws and practices…” The Consitution

The South African government is aided in this endeavor by two other main entities: Nongovermental Organizations (NGOs) and humanitarians/ grassroots activists. Collectively, the efforts of these three sectors will produce significant results in the educational arena in South Africa, but the results will not be evident in the next three to five years, but rather in a generation‟s time. Government The current national education motto is Tirisano: Working Together to Build A South African Education and Training System for the 21 st Century. This concept of working together is one that receives a lot of rhetoric because of the challenge of managing such a major overhaul through national direction, provincial budgetary accountability, and local government management. In July 1999, the national Minister of Education, Kader Asmal, established nine national educational priorities. The priorities have been categorized by committee into the following five program areas: HIV/AIDS; school effectiveness and teacher professionalism; literacy; training and higher education; and organizational effectiveness of the national and provincial departments of education. The implementation plan, which has a year 2004 target, “identifies the outcomes and performance indicators against which the Department of Education‟s success in meeting the objectives can be measured, thus contributing to increased transparency and accountability.” The establishment of an effective nationwide educational system with its bureaucracy, policies, aims and ambitions, is cumbersome in the face of dire unemployment and unmet national growth projections. Parliament imposes expensive and arduous tasks on its ministers such as generating responses to difficult, and impossible to answer questions. By forcing the ministers to spend time on often theoretical, structural, or overly detail-oriented questions, Parliament has prevented the ministers from focusing on basic, tangible, short-term goals in the overhaul of the system. On the other hand, school administrators are overwhelmed by pressing issues evident in the daily conducting of business at schools such as:      Adult literacy rates as low as 51% in some provinces, with up to one million people in a province having received no education at all; 51% of standard 10 examination candidates actually taking the Math portion and 21% passing; Disparities of 48% (black), 59% (coloured), 80% (Indian), and 98% (white) corresponding to adults with higher education educational data not matching census data HIV/AIDS and violence as daily classroom distractions

The crisis of South African education cannot be understated, nor surmised with whimsical provincial surveys. (Source: Edusource Data News, March 1999.) The following are some of the concerns noted by provincial educational ministers:


Phillip Kganare, the Free State: 93.7% of the provincial budget goes to salaries and only 6.3% goes to infrastructure and other programs aimed at normalizing the state of education; disciplinary action taken against 1,326 teachers.


E Mushwana, Northern Province: R6 billion was needed for infrastructure while the current budget could only manage R45 million. “What this means is that one needs more than 150 years to achieve the standards of other areas.”


Zille, Western Cape: vast discrepancies such as 17% of the country‟s top schools located in the Western Cape with some schools so dysfunctional that no amount of money would solve the problem; priority to achieve at least 195 days of dedicated teaching and learning time in every school year.

NGOs NGOs are active players working to shorten the mass learning curve. Some, such as The Education Foundation, collect and publish educational data. Some, such as JET (Joint Educational Trust), source funding for grants to improve facilities and provide professional development of teachers. One recent initiative of JET is CHESP (Community/Higher Education/Service Partnerships) where they promote the idea of students of higher education supplying civil society reconstruction and community development through their course work at cooperating universities. Still other NGOs such as SAIDE (South African Institute for Distance Education) research and recommend alternative approaches to instruction and learning. Grassroots Organizations/Individuals Finally, there are the individuals, churches and organizations who through volunteers, many foreign, use their connections to collect and distribute monetary and material donations. Esther Ramusi, an urban planner and widow of the chief attorney to architect the new constitution, volunteers her time expanding one-room-schoolhouses servicing 300-800 elementary school students and securing scholarships for poor students interested in law school or medical school; Gil Winters, COO of New African Advisors, participates in a formal mentoring program, guiding one young man at a time through his educational experience; Ngalaah Chuphi, Ethos Equity, carries out the self-determined responsibility of financing the education of family and friends; Marcia Calderoni contracts with American universities to recruit South African talent. Each navigates through unresolved racial obstructions and cultural norms to assist in the elevation of the collective academic status. Prognosis Unfortunately, considering the concurrent social and health needs of South Africa and in light of slow economic growth, education‟s additional funding needs are unlikely to be met in the near future. In addition, the structural changes necessary to transform the educational system from a segregated one to high skill-driven one will take time and the results will only be seen in the long run.

Some argue that better management rather than additional funds are the key. Either way, the fact that 22.8% of total government spending is allocated for education proves its high level of priority to the government. Even through the dense bureaucratic malaise, there seems to be a general sentiment that government is making reasonable progress in its urgent task to develop South Africa by upholding the constitutional mandate of education for all.

UNEMPLOYMENT Despite an average annual growth rate of 2.3% since the African National Congress (ANC) took power in 1994, unemployment levels remain shockingly high at an estimated 40%.viii Realizing the seriousness of the threat posed by such high levels of unemployment and eager to initiate the redistribution of wealth within the society, the ANC launched an aggressive macroeconomic reform package in mid 1996 called GEAR (Growth, Employment and Redistribution). Universally praised by economists, GEAR is a set of policies designed to promote greater investment, trade liberalization, restructuring of state assets, increased spending on training and health issues, and labor market flexibility all in a low inflationary environment. While significant progress has been achieved on all of the designated policy fronts, labor market flexibility remains a woeful laggard and a key factor behind the stubborn unemployment figures.ix Following its election in 1994, the ANC implemented a series of anti-discriminatory, pro-labor policies in an effort to heal some of the injustices which occurred under Apartheid. These regulations have placed enormous strains and costs on the private sector such that firms are extremely reluctant to hire new workers. Further compounding the complex regulations are the high level of real wages within South Africa, currently the highest of any emerging market.x Still more alarming, the high real wages are not offset by high productivity as the Centre for Development and Enterprise in Johannesburg reported, ”South Africa‟s ratio of wages to productivity was 35% higher than that of the US…All developing countries in the sample had lower wage/productivity ratios than South Africa.”xi An explanation for the lack of labor market flexibility lies in the political affiliations of the ANC. Originally founded as a revolutionary organization aimed at destroying Apartheid, the ANC was forced to form an alliance with the South African Communist Party and the trade unions in order to build the sort of popular support necessary to break the grip of white establishment. Since 1996 as the ANC has gained confidence in its ability to govern, it has shunned its traditional communist ideology in favor of more free market policies.xii Cracks have begun to form in the alliance as the individual parties have started to pursue their own interests. In the case of COSATU (Congress of South African Trade Unions) this has

meant widespread strikes in opposition to the market liberalization reforms and to what it perceives as a diminished role within the alliance.xiii For their part, the communists have registered only weak protest and awkward rationalizations of the new policies as intermediate steps toward the achievement of a greater good for the people. To his credit, Thabo Mbeki, himself a former communist, has stood resolute in support of what are generally regarded as sound economic reforms. In February, he announced the establishment of the International Investment Council whose members include Jurgen Schrempp of Daimler Chrysler, George Soros and William Rhodes of Citigroup. The goal of the council is to assist in the development of policies which will assist South Africa in becoming more competitive in the international market. In direct attacks to the trade unions, Mbeki has condemned the most recent strikes as impediments to progress. Still, he remains eager to maintain the alliance given the legitimacy that such a broad power base lends to ANC leadership.xiv PRIVATIZATION The issue of labor market flexibility will remain a key factor in determining how effectively the ANC will be able to reduce unemployment. However, no less important in dealing with unemployment is the speed with which the ANC pursues privatization. Though the reforms enacted under GEAR are predicted to produce long-term growth, many economists believe that a catalyst is necessary to trigger an expansion. The state has such a large presence within the economy that it has created a classic “crowding-out” situation in which private sector firms find it difficult to obtain money for investment. xv The Apartheid leadership nationalized South African industry on an almost “Soviet scale” to promote self-sufficiency. Although the ANC has privatized 11 billion Rand of state assets over the past 6 years, this number pales in comparison to the 270 billion Rand in assets still under government control. While the ANC has pledged to increase the rate of privatization under the new minister of public enterprises, Jeff Radebe, this promise runs counter to its plans to extend utility services to poor blacks given that private companies have no incentive to provide services to those who cannot pay. xvi The complexity of the privatization issue suggests that the ANC will not reach its goal of completing the privatization process by 2004. Mr. Radebe has responded to criticism regarding the already slow pace of reform by stating that concentration on the “big four” parastatals, Eskom (the electricity utility), Transnet (transport), Telkom (telecommunications) and Denel (defense) will hasten the process. He has further emphasized that the size and complex structure of the state companies creates difficulties for the government and that the strong opposition from the trade unions has created a drag on the government‟s reforms. xvii

Forecast Given the ANC‟s open acknowledgement that privatization will increase only moderately within the next 2 years, it is unlikely that the economy will receive the sort of immediate boost that economists are recommending to initiate rapid growth. Hence unemployment will remain a long-term problem. In an ironic and tragic twist, the AIDS epidemic raging in South Africa may serve to ease the problem somewhat. Conservative estimates hold that 10% of the population may die within the next decade from AIDS and within the mining industry estimates run as high as 40%. Still, South Africa must make fundamental progress in education, labor market reform, and privatization for unemployment to fall to a tolerable level. In the 3-5 year time frame, this looks unlikely.

CRIME Crime in South Africa is a result of underlying social ills, and poses a serious threat to domestic stability. As the country transforms itself from the Apartheid Era to a democracy, the types of and opportunities for crime have exploded while the methods of prevention continue to be inefficient and ineffectual. South Africa has become synonymous with crime that cuts across racial, social, and economic barriers. Today crime needs to be especially brutal to get any attention at all. The country has: the world‟s second highest murder rate (a murder or attempted murder occurs every 12 minutes), a reputation as the rape capital of the world (a rape is committed every 26 seconds), and increases in robbery of more than 225% since 1970.xviii South Africa is enveloped in an environment of lawlessness that has left the transitional democracy understaffed, under-resourced, under-trained, and overwhelmed. While not the only pivotal factor affecting South Africa‟s economic growth, crime certainly derails South Africa‟s trajectory toward a successful economic future and endangers the potential for investment. Causes South Africa‟s violent history, combined with present day social afflictions, form the root causes of crime in the nation. Lisa Vetten of the Center for the Study of Violence and Reconciliation states: “Apartheid normalized violence as a means of controlling other people. It certainly made violence a typical response for many people.”xix Violence was evident on all sides: Apartheid police brutally repressed the non-white masses to uphold racial segregation, the anti-apartheid liberation militants used violence to gain power, men of all South African cultures have traditionally found it acceptable to assault women. Combined with the wide proliferation of firearms, South Africa‟s heritage of violence is clear as crimes get more and more violent and the public becomes increasingly desensitized to crime. With Apartheid ending just six years ago, the wounds are still fresh. High unemployment rates, a decrepit educational system, extreme poverty, and vast income

inequality make a life of crime seem the obvious choice: it pays. Ted Leggett, a US lawyer studying South African crime, states: “in townships with high unemployment, young men use Western consumerist aspirations as their yardstick for coming of age. That could mean stealing a BMW, because you know you will never be able to buy it, and raping girls to demonstrate your masculine sexual prowess.” xx Lisa Vetten further says “young black men who no longer have the anti-apartheid liberation struggle to galvanize them are experiencing a sense of frustration and anger. When men experience what they perceive to be an erosion of power, they often react violently.”xxi An overall sense of disenfranchisement, the marginalization of young black males, and the lack of economic opportunity will continue to incite young people to a life of crime unless the government can remedy these basic social and economic ills. Compounding these social ills is the growth of the youth population into the stage ripe for crime, 15 to 24 years old, and the rapid expansion of the HIV/AIDS pandemic.
“In a decade‟s time, every fourth South African will be between 15 and 24, [the] age group where people‟s propensity to commit crime is at its highest. About the same time there will be a boom in South Africa‟s orphan population as the AIDS epidemic takes its toll. Growing up without parents, and badly supervised by relatives and welfare organizations, this growing pool of orphans will be at greater than average risk to engage in criminal activity.” xxii

What makes the growth of the youth population and the increase in AIDS orphans so precarious is that there is no real remedy to the situation, the government cannot combat natural population growth and the effects of an incurable disease. South Africa will have to deal with the fallout whether it likes it or not. Since the fall of the apartheid regime in 1994, organized crime has flourished with opened international borders, a weakened transitional democracy, first world financial efficiencies and physical infrastructure, and the use of technology. Audits from the SAPS (South African Police Service) have identified more than 500 crime groups with national and international origin operating in South Africa. From drug trafficking to car high jacking to money laundering to gold theft to illicit trading in environmentally protected goods, Russians, Nigerians, Chinese, and Italians are expanding their operations and the types of crimes committed in South Africa, while national gangs are consolidating for profits and increasing their scope and capabilities.xxiii The government has declared organized crime as a priority, and has even created the Scorpions, South Africa‟s premier specialized police force, although most criminals have eluded capture and proliferated by capitalizing on the governments‟ inefficiencies. “Organized criminal groups continue to be one step ahead of law enforcement agencies in South Africa. The threat of them undermining state structures and the fragile new democracy through corruption, bribery and increasingly violent crime should not be underestimated.”xxiv Responses Crime is expanding so rapidly that South Africa‟s criminal justice system (police, justice, prisons) cannot effectively provide the resources necessary to protect the public. “There is a link between the process of political transition and a rising crime rate. Transition requires a reworking of both the

formal and informal instruments of social control.”xxv The police force is undertrained, underresourced, understaffed, and overwhelmed with workload. Two thirds of the force remains from the Apartheid era, over 30,000 police officers are functionally illiterate, statistics and administrative infrastructure are poor, and police brutality is pervasive.xxvi “Their pay is low, so corruption is widespread. And now the police are no longer supposed to shoot fleeing suspects, and detectives are no longer allowed to kick confessions out of suspects, the official clear-up rate for serious crimes has slumped.” xxvii Confidence in the criminal justice system‟s services has plummeted which causes the underreporting of crimes, vigilantism, and an overall sentiment of lawlessness without recourse. Police detectives lack the training necessary to investigate crime, fewer cases are being prosecuted, prisons are overcrowded with people awaiting trial, conviction rates are around 1 in 40, and “some serious violent crimes are solved so rarely that the perpetrators have less than a one in fifty chance of being caught and punished.”xxviii Rampant crime, police incompetence, and decreased confidence levels in the government‟s crime services have increased the incidence of vigilantism, where individuals, gangs, and organized groups of all colors take the law into their own hands. Two of the country‟s largest and most notorious groups, Mapogo a Mathamaga and PAGAD (People Against Gangsterism and Drugs), and local taxi lords, recruit victims and non-victims alike to mete out brutal, organized group violence that includes kidnapping, bombing, various forms of torture, and often murder, on alleged crime suspects. “Despite denunciations from the government, the public seems to approve of vigilantes. South Africans historically have favored frontier justice, light on due process and heavy on punishment. White settlers inflicted rough beatings to subdue blacks, and Africans largely governed themselves using traditional methods now considered barbaric.”xxix Members of the vigilante groups claim that this type of justice is their only recourse against “ineffectual, corrupt, or outgunned cops” and claim that crime in affected areas has been effectively reduced. xxx The private security industry has experienced a business boom in response to escalating crime rates. It is normal to see houses and businesses surround by 10ft, barbed wire walls, gated entrances, and barred windows; to witness armed security guards in virtually every building; to find a proliferation of security products including alarms with “panic buttons”, rape insurance, and even a car anti-hijacker device that shoots flames at perpetrators. With an average annual growth rate of thirty percent, the private security industry exceeded R11 billion by the end of 1999. Security guards clearly outnumber SAPS: “there are approximately two private security guards for every employee of the SAPS. It is estimated that there are more than four private security guards for every uniformed member of the SAPS engaged in visible policing work.” xxxi Higher crime rates will actually benefit the industry.

Prognosis Crime and corruption will continue to plague South Africa and hinder its ability for domestic stability and growth in the near term. The apartheid scars of oppression are recent, the historical culture of violence is widespread and perpetuated, public confidence in the government‟s ability to fight crime has been broken repeatedly. Time, distance, and cultural education are needed to heal these wounds, which is no easy task and may take more than a generation to calm. Poverty, unemployment, lack of education, and income inequality, the roots of crime, require major infrastructure changes before any improvement can be witnessed. Although rudimentary programs are in place to address these changes, we cannot expect to see widespread, tangible results until beyond the 5 year range. A growing youth population, coupled with a high orphan rate due to HIV/AIDS will create an even greater number of disenfranchised young adults growing up in sub-optimal living conditions, conditions that encourage and often foster crime. As a result, crime rates will continue to increase and/or stabilize at their current high rate and the public will become increasingly desensitized to violence until these major issues are addressed, despite government attempts at intervention. Within the next three to five years, we can expect the government to attack crime with increased budgets, spending, and rhetoric to combat negative perceptions. An infusion of money will allow the police, justice, and correctional systems to address basic policing concerns, provide essential force training, acquire more help in prosecution and convictions, enhance the prisons, and gradually gain back public confidence. However, these solutions are superficial and based on crime response, rather than crime prevention. As politicians decry the “zero tolerance method” approach to crime, the police will most likely use increasing force, which can, and has led to increased police brutality, to legitimize their control. Vigilantism will continue to be a common response, specifically in black areas with a history of police brutality, gaps in policing itself, and lack of confidence in the justice system. If the police can capture public sentiment and align themselves with vigilante groups to form “legal” community policing, many populations could be serviced and crime may decrease. Until the public feels safe, we will also see additional growth in the private security industry, with new products and services constantly being introduced. Martin Schönteich predicts that “SAPS resources will increasingly be channeled into combating priority crimes, such as drug trafficking, violent crimes committed with illegal firearms, and the activities of criminal organizations. This will decrease the SAPS‟s resources for visible policing and crime prevention functions in residential areas.” xxxii Schönteich recommends a privatization of the entire criminal justice system. While privatizing the criminal justice system would decrease the government‟s overall control, it would bring together the burgeoning private security industry, foreign training expertise, and private sector efficiency to stimulate quick, effective, believable change that is desperately needed. This could in turn stimulate the job market, renew public

and investor confidence, and change the overall nature of global policing. Until South Africa can rebuild and coordinate the three systems, and eliminate overall inefficiencies, with or without private help, it will not see a cohesive unit that works together to prevent crime from happening in the first place, and stabilizes the nation. The psychological impact of crime in South Africa should not be forgotten. South African citizens live feeling insecure, often “caged”, and private security becomes a necessity that only exacerbates fear. Crime does not discriminate and as important dignitaries, as well as many foreign nationals become victims, South Africa‟s notoriety as the “world‟s most dangerous country outside of a war zone” will increase. Foreign companies will have difficulty recruiting people to live in South Africa, tourists will opt for less hazardous locations, and emigration of South African nationals, the “brain drain”, will come to an all time high. These more psychological issues will turn tangible as money, in its various forms, will leave South Africa if the country remains as it is today.

POLITICAL AND REGIONAL STABILITY In the June 1999 parliamentary elections, the ANC dominated, seizing 66% of the popular vote. The Democratic Party, the closest thing South Africa has to an opposition, gained just 9%. Critics, pointing to the example of Zimbabwe, claim that such one party dominance threatens the long-term viability of democracy in South Africa. Without question, the emergence of an effective opposition will be important to the development of the political system. However, in the short term, the ANC power may not be such a negative scenario. Such a strong majority has given the ANC a clear mandate to

aggressively pursue its program of reform. Given the severity, complexity and tension associated with the challenges of unemployment, education, poverty, income inequality, and crime in South Africa, it is critical for the government to take clear and decisive action. The ANC‟s popularity among the electorate will ultimately allow Mbeki to push through painful reforms and implement policy more quickly thereby achieving recovery sooner.xxxiii Unfortunately, the greatest threat to South African political stability may not be from within its own borders. Recent developments in Zimbabwe where landless blacks have seized the property of white farmers with the official sanction of President Robert Mugabe, have alarmed ANC officials who fear such violence could spread to South Africa. South Africa faces the same sort of land redistribution challenges as Zimbabwe and despite the ANC‟s clear desire to launch a large scale redistribution, progress has been slow. Of the 63,455 land claims that have been filed since May 1995, only 3,916 have been handled with approximately 300 rejected. As Johann Kirsten, head of the Department of Agricultural Economics at

Pretoria University notes, “Implementation is the main concern. If the process is not speeded up, in 20 years‟ time we could be in a situation similar to Zimbabwe.” xxxiv Thoko Didiza has acknowledged the problems with implementation and reforms designed to make the redistribution process less legalistic are on the way. Complications do exist however since few blacks are able to produce documents to prove they had ownership of a particular piece of land. Under a new plan, the government is buying up land then giving it to poor blacks who can show they have a good use for it.xxxv Ultimately these reforms to the land redistribution process may be enough to forestall a full scale black seizure of white farms in South Africa, but the situation in Zimbabwe could still pose a threat. If the situation in Zimbabwe continues to deteriorate, South Africa could be flooded with emigrants seeking to escape the violence.xxxvi Given the high level of crime, poverty and disease which already exist in South Africa, such an influx could destabilize an already tense situation. Importantly, Mbeki has taken a proactive approach by attempting to resolve the situation in Zimbabwe with calls for international assistance in funding a land redistribution program for South Africa.xxxvii At this point, it unclear whether the situation will escalate beyond the borders of Zimbabwe. What is clear, however, is that South Africa will suffer economic repercussions as it watches its largest trading partner attempt to sort out the land issue

Selected Economic Indicators 1993 1994 1995 1996 1997 1998 1999 2000F I. Activity (% change) Real GDP growth Real Domestic Demand Real Private Consumption Real Gross Investment GDP (US$ billion) Population (millions) Manufacturing Volumes (Seas. Adj) II. Inflation (% change) Core consumer Price Index (period average) Core consumer Price Index (end of period) Headline Consumer Price Index (period average) Headline Consumer Price Index (end of period) III. Monetary sector (12 - month % change) Monetary Base (MO) Broad Money (M3) Credit to the Private Sector (% of GDP) Private Credit Extension IV. Interest Rates e.o.p. Repo Rate Real Repo* Prime overdraft rate Real Prime* 3 month BA/NCD rate Benchmark Bond Yield (R150) Real R150* Long Bond Yield (R153) V. External Sector (US $ billion) Current account Trade Balance Export, f.o.b o.w. Gold Imports f.o.b Gross international reserves incl. Gold (stock) Import coverage coefficient (months of MGS) Nominal exchange rate (Rand/US$, e.o.p) VI. Public sector Cash Flows (in % of GDP) Primary National budget balance Nominal National budget balance Interest Payments (% of Revenues) VII. Debt Indicators Total external debt (US $ billion) Total external debt (% of GDP) 1.2 1.2 1.6 -0.5 130.4 39.6 1 3.2 3.8 3.7 8.2 135.8 40.4 2.6 3.1 3.8 5.4 10.7 151.1 41.2 6.4 4.2 5.6 5 7.5 143 42.4 0.7 2.5 3.3 2.7 5.2 147.6 43.3 3.5 0.5 1.8 1.3 4.8 133.5 44.2 -2.7 1 0.8 1.1 0.9 128.9 45.1 -1 2.6 3.2 2.8 5.9 135.3 46 4.9

12.6 10.7 9.7 9.7

8.9 8.5 9 10

7.9 6.9 8.6 7

7.2 9.3 7.4 9.5

8.8 7.7 8.5 5.6

7.4 7.8 6.9 9

8 8 5.6 3.5

7.5 6.9 4.5 5

-2.5 7 56 11.3

23.2 15.7 55.8 12.8

30.9 15.2 57.7 17.6

12.3 13.6 59.7 16.1

11.4 17.1 61.8 14.4

8 14.6 66.4 16.7

10.7 9.7 67.8 10

12.6 15.7 72.3 16.7

12 1.8 15.3 4.8 10.2 12.1 1.9 12.7

13 5.6 16.3 8.6 12.5 16.6 8.9 16.7

15 5.1 18.5 8.3 14.5 14.5 4.6 14.4

17 10.8 20.3 13.9 16.7 16 9.8 16

16 6.4 19.3 9.4 15.1 13.9 4.5 14.2

19.3 15.3 23 18.9 17.8 16.3 12.4 16.1

12 6.7 15 9.5 10.5 13 7.6 14

11 4.6 14 7.4 9.5 12.5 6 13.8

1.5 6.2 24.8 6.9 18.5 2.7 1.2 3.4

0.1 4.5 26.3 6.7 21.9 3.1 1 5.54

-2.2 2.7 30.1 6.2 27.4 4.3 1.2 3.65

-1.9 2.7 30.3 6.1 27.6 2.2 1 4.68

-2.3 2.3 31.2 5.6 28.9 5.9 1.5 4.87

-2.1 1.8 29.1 4.7 27.3 5.4 2.1 5.88

-0.9 3.1 29.6 4.6 26.5 6.2 2.2 6.35

-1.6 2.4 31.5 4.5 29.1 6.5 2.4 6.5

-4.6 -9.4 21.5

-0.1 -5.2 21.6

0.1 -5.2 23.3

0.7 1.8 -4.7 -4 23.3 24.1

2.8 -2.9 23.7

2.9 -2.9 24.7

3 -2.9 25.2

27 23.1

29.7 21.8

35.3 23.4

34.5 39.2 24.1 26.6

38.8 29.1

39.3 30.4

39.8 29.4

Total external debt (% of exports) Total public debt (% GDP) External debt service ratio (% of XGFS) VIII. Investment and Savings (% of GDP) External current account balance Gross domestic savings Gross domestic investment *Deflated using ex-ante headline CPI

94.3 59.6 13.8

98.6 61.5 13.8

101.8 97.8 107.3 112.9 114.2 109 61.2 60.2 60.4 58.7 57.9 53.6 10 14.8 17.7 16.6 17.1 13.7

1.1 18.6 17.5

0.1 19.3 19.2

-1.5 19.4 20.8

-1.3 -1.5 18.5 17.4 19.9 18.9

-1.6 16.8 18.4

-0.7 17.7 18.4

-1.2 17.8 19

Source: International Financial Statistics, South African Reserve Bank. Goldman Sachs Estimates

Revised GDP numbers
1993 382 426 44 11.5 270.7 514.9 1.3 1.2 1994 431 482 51 11.8 278.1 531.5 2.7 3.2 1995 485 548 63 13.5 287.5 548.1 3.4 3.1 1996 543 615 72 13.1 296.8 570.9 3.2 4.2 1997 595 680 85 14.3 301.8 585.1 1.7 2.5 1998 649 738 89 13.7 302 588.3 0.1 0.5

Previous GDP (R bill - current prices) Revised GPP (R bill - current prices) Difference (R bill ) Difference % Previous GDP (R bill - 1990 prices) Revised GDP (R bill - 1995 prices) Previous annual % growth (1990 prices) Revised annual % growth (1995 prices)

Previous % growth (1990 prices) Revised % growth (1995 prices)

Q1 1998 Q21998 Q3 1998 Q4 1998 Q1 1999 Q1 1999 0.4 0.3 -2.5 -0.3 0.9 0.7 -2.3 0.2 0.6 1.7

Source: Statistics South Africa, June 1999 & August 1999, Statistical release No P0441

CONTACTS Professor Fred Ahwireng-Obeng PhD Professor of Business Administration (Economics) and Director of the Centre for Entrepreneurship Graduate School of Business Administration University of the Witwtersrand, Johannesburg 2 St David‟s Place, Parktown 2193 South Africa PO Box 98, WITS, 2050 South Africa 27-11-488-5605 27-11-643-2336 fax D Michael Cheers, Managing Editor Ebony South Africa 1st Flr, 35 Wierda Rd West Wierda Valley Sandton 2196 27-11-784-9885 27-11-784-9929 fax Ngalaah Chuphi Associate Ethos Private Equity 34 Fricker Road Illovo Johannesburg 2196 PO Box 9773 Johannesburg 2000 South Africa 27-11-328-7433 27-11-328-7410 fax The Education Foundation/Edusource PO Box 41892 Craighall 2024 Hydewest, 2 Albury Rd Dunkeld West, Johannesburg 011-447-6515 011-447-5559 fax Clara Gibbs Marketing Director McDonald‟s South Africa 25 The Woodlands Woodlands Drive Woodmead PO Box 1522, Gallo Manor, 2052 Gauteng, South Africa 27-11-236-2424 27-11-802-2849 fax Brian Goodall, Dip Marketing Research & Advertising, Filpa, CFP Adv. Tax Cert. (UNISA) Investment Management Services CC PO Box 571 Bedfordview 2008 011-455-5810 011-455-4198 fax

Monique D. Griffith Executive Director Southern Africa Business & Cultural Company 6-4th Ave. Westward Suite 1 Melville, 2109 Suite 20, Postnet x9, Melville 2109 27-11-803-8888 27-11-803-0079 fax Rashieda Ismail Tour Guide (good source for visiting the townships) Tel 27 21 426 2327 Robert H. Kelley III Vice President South African Enterprise Development Fund PO Box 2241, Saxonwold, 2132, First Floor, 32 Fricker Road Illovo, Gauteng, 2196. RSA 27-11-283-1630 27-11-442-9824 fax Zetu Khoza ADC Ministry of Health Private Bag X 399 Pretoria, 0001 Tel 27 12 325 5526 27 12 328 4773 Jenny Low SAIDE (South African Institute of Distance Education) Noswal Hall, Siemens St. Tel 011 403 2813 JET (Joint Education Trust) 3rd Floor Braumfontein Centre 011-403-6401/9 www.jet.org.za Victor Mallet Southern Africa Correspondent for the Financial Times PO Box 2762 Saxonwald 2132 Johannesburg, South Africa Tel: (2711)280 3270 Mobile: 083 3781 948 Fax: (2711)280 3280 Email: ftimes@global.co.za Lulama Mshumpela Member of the Gauteng Provincila Legislature

PO Box 3127, Benoni 1500, Republic of South Africa Tel: (011) 498-5625 Fax: (011) 498-5675 Mobile: 082 376 8182 Email: Imshumpela@gauteng.gov.za Welcome Msomi, CEO Naledi Ya Afrika Group Building 22 CSIR P.O. Box 395 Pretoria 0001 South Africa 27-12-841-2921 27-12-841-3365 fax Kristina Quattek Chief Economist ING Baring 2 Merchant Place 27-83-600-4863 Carl le Roux Consul South African Consulate General 200 S. Michigan Avenue Suite 600 Chicago, Illinois 60604 Tel: (312) 939-7929 ext 207 Fax: (312) 939-0344 Email: sacongenchicago@worldnet.att.net Anthony C. Rutherford Managing Director and International Oil Consultant International Advisory Services 30 Avenue Saint Bartholomew Fresnaye Cape Town 8005, South Africa 27-21-434-8769 Mokhetsi Sedotsa Associate Goldman Sachs London Tel 44 171 774 1000 Monica Faith Stewart Managing Director State of Illinois Illinois Department of Commerce and Community Affairs Africa Trade and Investment Office Ronald H. Brown Commercial Center

15 Chaplin Road Illovo 2196 South Africa Private Bag X11 PostNet 80 Birnam Park 2015 Thabo Tembo Associate Cadiz Investments Capetown Tel 27 21 683 3790 Minister Monto Tshabalala-Msimang The Minister of Health Private Bag X 399 Pretoria, 0001 Tel 27 21 237 1895 27 21 465 1575 Direledi Tsotetsi Gauteng Legislature PO Box 3127, Benoni 1500, Republic of South Africa 011-498-5625 011-498-5675 fax Lisa M. Walker Director of Marketing and Business Development Ronald H. Brown Commercial Center 15 Chaplin Road Illovo 2196 South Africa PO Box 1762 Houghton 2041 27-11-778-4800 27-11-442-8818 fax Gil Winters, COO New African Advisors Tel 27 11 836 2027 Peter Worthington JP Morgan Chief Economist, South Africa Physical: The Forum, 2 Maude Street Sandton Square, Sandown 2196 Postal: Private Bag X9936 Sandton 2146, South Africa Tel: 27 (0)11 302-1755 Fax: 27 (0)11 302-1711 Email: worthington_p@jpmorgan.com


Carlos A. Texeira. Goldman Sachs. Global Economics Researcher. South Africa: From Transition to Growth. GS Global Economics Paper # 29. 20th September 1999. iii South Africa: From Transition to Growth. GS Global Economics Paper #29. 20/9/99 iv South Africa – A medium- Term Growth Strategy, Frederico Kaune, July 27, 1998. v Goldman Sachs estimates. Carlos Teixeria. Global Ecoonomist. vi International Financial Statistics, South African Reserve Bank. vii Federal Research Divison, “South Africa: A Country Study”, May 1996: 146-147. viii Leonard Thompson, “Mbeki‟s Uphill Challenge” Foreign Affairs 78 (1999): 83-94. ix Peter Worthington, “JP Morgan Economic Research Note: South Africa‟s Next Five Years” 14 May 1999. x “Paper Lions,” The Economist 17 April 1999. xi Martin Wolfe, “Spreading South Africa‟s Wealth,” The Financial Times 15 March 2000, final ed.,sec 1:14. xii Victor Mallet, “South African Communists Carry on Intellectual Struggle,” The Financial Times 18 March 2000, final ed. sec 1:8. xiii Nicol Degli Innocenti, “South Africa: Unions in Unemployment Protest,” The Financial Times 12 February 2000, final ed. sec 1:10. xiv Victor Mallet, “Tough Reality Inspires Sense of Urgency,” The Financial Times 20 September 2000, final ed. sec Survey. xv Adrienne Roberts, “‟Better Life for All‟ Proves Hard to Deliver,” The Financial Times 20 September 1999, final ed. sec Survey. xvi xvi Peter Worthington, “JP Morgan Economic Research Note: South Africa‟s Next Five Years” 14 May 1999. xvii Nicol Degli Innocenti,”South Africa Rules Out Immediate Eskom Sale But Pledges Overhaul,” The Financial Times 5 April 2000, final ed. sec 1:10. xviii Tina Sussman, “United in Anger Over Crime: South Africa‟s Suspects Get Zero Tolerance,” Newsday 23 May 1999: A19. xix Vera Haller, “South Africans Cry for Justice in Rape Crisis,” USA Today 29 Nov. 1999: 18A. xx Alex Duval Smith, “South Africa Faces Ugly Truth on Rape,” The Independent 10 Oct. 1999: 25. xxi Andrew Maykuth, “Rampant Assaults Spur South African Firm to Offer Rape Insurance,” The San Diego UnionTribune 30 Oct. 1999: A21. xxii Martin Schönteich, “Age and AIDS: South Africa‟s Crime Time Bomb?” Institute for Security Studies Publications, 1999: 1. xxiii Peter Gastrow, “Main Trends in the Development of South Africa‟s Organized Crime,” Institute for Security Studies African Security Review, Vol. 8, No. 6, p 2. xxiv Gastrow 10. xxv Ryan Carrier, “Dissolving Boundaries: Private Security and Policing in South Africa,” Institute for Security Studies Institute for Security Studies African Security Review, Vol. 8, No. 6, p. 5. xxvi Dr. Bill Dixon, Institute of Criminology, University of Cape Town. Personal interview, March 17, 2000 xxvii The Economist, “Behind the Razor Wire,” 16 Jan. 1999. xxviii Martin Schönteich, “Assessing the Crime Fighters,” Institute for Security Studies Occasional Paper No. 40, Sept. 1999: 1. xxix Andrew Maykuth, “Vigilantes Impose Mob Justice in South Africa,” San Diego Union-Tribune 7 Nov. 1999: A30. xxx Daniel Wakin, “Vigilantism Spreading as Crime Soars in South Africa,” Fort Worth Star-Telegram 18 Jul. 1999: 29. xxxi Jenny Irish, “The South African Private Security Industry,” Institute for Security Studies Monograph #39, Aug. 1999: 3. xxxii Martin Schönteich, “Fighting Crime with Private Muscle: The Private Sector and Crime Prevention,” Institute for Security Studies 1999: 5. xxxiii Peter Worthington, Chief Economist for South Africa, JP Morgan. interview 24 March 2000. xxxiv Nicol Degli Innocenti,”Land-hungery South African Blacks Look to Neighbour for Cue” The Financial Times 22 April 2000, final ed. sec 1:4. xxxv “South Africa‟s Anxious Eyes on Zimbabwe,” The Economist 15 April 2000: 39.

xxxvi xxxvii

Kathy Chenault, “Zimbabwe‟s Political Storm Could Batter Southern Africa,” Business Week 1 May 2000: 68. Tony Hawkins, “Presidents Back Mugabe Stance on Land,” The Financial Times 22 April 2000 final ed. sec


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