About this site

This resource is hosted by the Nelson Mandela Foundation, but was compiled and authored by Padraig O’Malley. It is the product of almost two decades of research and includes analyses, chronologies, historical documents, and interviews from the apartheid and post-apartheid eras.

A Social Market Economy for South Africa - Prerequisites

Prof Simkins, in an address entitled "A South African Social Market Economy? (Round Two)", delivered at the conference on "Social Contracts, Conflict Resolution and South Africa's Economic Future: A German-South African dialogue", jointly organised by Wits University's Centre for Policy Studies and the Konrad-Adenauer Stiftung, addressed himself to the question of a social market economy in South Africa. Prof Simkins' address is to be published in full elsewhere. The following are extracts of relevance to the questions of restoring South Africa to an economic growth path.

A commentator has observed that "the German economy can be compared to a beautifully maintained, high-powered car which functions perfectly in reasonable weather on the motorway; its performance in winter on poor roads is as yet unknown". One might reply that adherence to social market principles ensures that the car will always be high-powered and the roads always motorways. But such a reply overstates the case. Adherence to social market principles is probably a necessary condition (in a democratic context) for good economic performance; in post-war Germany, such adherence created the conditions for sustained high investment by both small and large business. But other circumstances - Marshall Aid, buoyant international economic conditions in the 1950s and 1960s, and a tradition of efficient export trade dating from the late nineteenth century - also helped.

There are four main reasons why good economic performance helps maintain a social market system.

The first, and most obvious, is that it enables the state to finance the social part of its programme while permitting the incomes of those not in need of assistance to rise. The economic inefficiencies which arise as a result of even the best system of redistribution through the state can be relatively easily shrugged off.

Secondly, it increases the adaptability of the economy to change in international economic conditions. With high and rapidly increasing investment, the average age of both physical and human capital becomes quite short and its composition can be changed rapidly in response to new circumstances.

Thirdly, the importance of past distributions of wealth is diminished. Inheritance matters less than ability in determining an individual's or household's wealth holdings at any time. The dead hand of the past does not lie so coldly on the current generation as it would if the rate of economic growth were slow.

Finally, it makes social democratic compromises easier and makes it less likely that the economy will seize up as a result of fierce class conflicts over the appropriation and use of profit. For such compromises to exist, both capitalists and workers must expect consumption to rise in the future as a result of the appropriation of current profits. Rapid and stable economic growth renders it more likely that these expectations can be sustained.

It is well known that the South African economy does not presently have the strength that the German economy had during the first ten or twenty years of the social market economy. Our economy has been battered during the last decade by high international interest rates and weak demand for its commodity exports as well as by politically induced lack of confidence leading to capital outflows. So the more immediate question from our point of view is whether there is a lower bound to economic performance below which the construction of a social market economy is impossible. Interpretation of the evidence from other semi-developed countries (especially in Latin America) varies. On the one hand, it is argued that democratisation requires a significant growth in per capita incomes, so that a new democratic regime can sustain itself by offering economic improvements to a wide range of constituencies. On the other, a recent study suggests that democracies are no worse at handling economic crises than authoritarian regimes. Indeed, their ability to do so may rest on the restraint of citizens who are well aware of the hazards of authoritarian rule.

For the South African economic growth rate to be improved at least one of the following developments is required:

i) An improvement in the price of our commodity exports, notably gold. Prospects for this seem rather remote at present.

ii) A return of foreign direct investment, which would have the effect of encouraging higher rates of domestic investment. Signs of interest are appearing at present, but whether the policies to sustain it will emerge remains to be seen. The "post-apartheid dividend" will not materialise automatically.

iii) Structural adjustment leading towards a much higher volume of manufactured exports. This is necessary if talk of a "new growth path" is to have any value at all, but it has three tricky implications:

The first is the necessity for at least a limited liberalisation of trade in order to lower the cost structure of manufactures; the difficulty is to do it without suddenly wiping out protected parts of our present manufacturing base. Vested interests always make adjustment of this sort politically difficult. In general, import substituting industrialisation offers more scope for rent-seeking than export oriented industrialisation. One can always deliver an exiguous supply of high-cost goods and services to a domestic market. By contrast, export orientation puts sterner controls on costs if products are to be competitive on international markets.

The second is the requirement that new areas of comparative advantage be constructed so that market niches can be targeted and occupied. This requires new investment; it requires the incorporation, if not the development, of new technology. It also requires new forms of co-operation between state, business and labour. The shape of this co-operation is highly controversial in the South African context. On the one hand, there is German co-dermination as a possible model. On the other, there are proposals for state interventions in investment decisions in accordance with a dirigiste industrial policy, possibly along the lines of the South Korean practice of the 1970s. But this practice excluded workers and it led to inefficiencies which became apparent by the end of that decade. Yet other proposals call for sacrifice of returns by life offices, pension funds and industry in order to direct funds towards meeting basic needs. But one has to be deeply concerned about efficiency in the present context of rather low growth.

The third is the presence of a reasonably well educated labour force produced by an educational system which has some rational relation to labour market requirements. Universal primary education is within reach in South Africa and, in terms of quality, it will be easier to get primary education to where it should be compared with other levels. Conditions in secondary and tertiary education are very unsatisfactory; resources are being wasted at present. Crucial decisions need to be taken about the quantity, type and quality of state-provided education in such a way that the educational system as a whole remains affordable. (There is no case for restricting private education at all. Of course, the standard legal constraints on contracts such as the prevention of fraud should apply.) These decisions will be politically difficult to make for two related reasons:

First, credentialism (that is, the use of educational qualifications as a proxy for competence) exists in the South African labour market as in any other with substantial modern and public sectors. It may well be the consequence of emphasis on equality of opportunity and "affirmative action" that there is increased bureaucratisation in the labour market, with a formal hierarchy of credentials controlling access to skilled, managerial and professional positions, quite possibly without sufficient attention being paid to the quality of education and training behind these credentials.

Secondly, perceptions exist of the relationship between education and the labour market which suffer from the fallacy of composition. In a system with credentialism, it is one's relative position in the education qualification hierarchy which will determine one's formal labour market prospects. But the only way an individual can improve his relative position is by increasing his absolute level of education. Especially if there is high unemployment, circumstances can easily arise in which the scramble for relative position will lead to pressure for higher and higher general levels of certified education and training, even when these have no economic rationale in terms of their social return. One should not underestimate the determination of ordinary people under these circumstances: a director of education in one of the homelands recently discovered that there were 20 informal schools being run by teachers on his establishment about which his department had no knowledge. Communities had put up buildings next to existing schools and put pressure on head teachers to staff them from the department's budget.

This resource is hosted by the Nelson Mandela Foundation, but was compiled and authored by Padraig O’Malley. Return to theThis resource is hosted by the site.