It wasn’t too many posts ago that I last discussed the “Why Nations Fail” blog but via Cheap Talk I see it has become relevant to the news-cycle. They respond to Mitt Romney’s claim that Israel is wealthier than Palestine (wealthier than Mitt Romney even claimed) because of culture by instead blaming institutions, tying that in with the Israeli occupation. David Bernstein, on the other hand, would point out that the standard of living in the West Bank and Gaza actually improved after the occupation, and that (at least as of 1993) the per capita GDP was higher in those territories than Egypt or Jordan (from which they originally came). Eli Dourado is unsatisfied with either explanation and wants to know the upstream variables for both institutions and culture.

Their response either interrupted or marked the end of a series of posts on post-apartheid South Africa. Daron Acemoglu & James Robinson seemed to be chiefly concerned with inequality, while when I typically read someone worried about South Africa the fear is generally focused on power plants shutting down, HIV epidemics, or a supposed genocide of Boer farmers. They reference the fear of Zuma (and his machine gun song) going the way of Zimbabwe, but they think that the cautious avoidance of frightening the white elite led to insufficient land reform and the co-opting of black politicians. Oddly enough they praise the creation of a “vibrant” democracy even though it effectively seems a one-party state. Singapore is a very well functioning one-party state, and I would have said the same thing of Japan before their Lost Decade, but I don’t put that much weight on vibrant democracy. I’m also confused by their use of acronyms in the last post, I assume “NIC” means “newly industrializing country” but “newly latinamericanized country” makes little since there is a continuation of long pre-existing inequality, and Brazil of the BRIC group is quite “latin american” already in that respect. The comparison with Germany in that post is also off since it was already a fairly wealthy country before the world wars broke out. The original posts can be found here, here, here, here and here, but I figure they should be compiled into one so they can be read in one place and in order.

South Africa: Struggling Beyond Apartheid

In Why Nations Fail we discuss how the Apartheid regime in South Africa in many ways epitomizes extractive institutions. It emerged gradually during European colonization of South Africa, finding its first wave of institutionalization after the Union of South Africa was formed in 1910. It then intensified after the election of the National Party in 1948 which ruled the country until democratic transition occurred in 1994.

The economic institutions of Apartheid were designed to redistribute income and assets from blacks to whites which they did very effectively. As they were gradually constructed, the real living standards of Africans probably fell by 50-60% as shown by Pim de Zwart’s research. Frances Wilson’s book Labour in the South African gold mines, 1911-1969 shows that, though South African economy as a whole was growing, the real wages of gold miners was the same in the late 1960s as it had been in 1910.

So it was only the whites who benefitted from South African growth as the world’s most unequal country was being created.

These extractive economic institutions were backed up by extractive political institutions. The Union in 1910 brought together the Boer Republics of the Transvaal and the Orange Free State with the British colonies of Natal and the Cape. At the time, the Transvaal and the Orange Free State had racially-based franchises, while Natal and the Cape Colony had franchises based on property ownership and tax-paying status as in Britain itself in 1910, so they actually enfranchised rich blacks and coloreds. But after the Union, the blacks were disenfranchised in 1936 and the coloreds were disenfranchised 1956. Only whites had political power and with such extractive institutions, they were able to set up extractive economic institutions.

It should then be not a surprise that the transition to inclusive political institutions which occurred in 1994 was driven by conflict. It emerged from a long struggle and was only made possible by the increasing ability of the black population to organize and oppose white rule chiefly through the African National Congress (ANC). The ANC’s victory seemed to sound the death knell for the extractive economic institutions of Apartheid.

But as we discuss in the next three posts, moving to a new set of economic institutions has turned out to be much more difficult than most assumed in 1994.

South Africa: The Fear of Collapse

It might appear that changing economic institutions shouldn’t be that difficult. If you have power, you should be able to change things in a direction you favor. Simple. But not so simple in South Africa. The majority had power after 1994 in the shape of the government of the African National Congress (ANC), but they were very afraid that if they moved too soon and too fast, then they would alienate the white segment of the population, who owned the land and the capital stock, and this would precipitate an economic collapse.

White rule was not just a matter of keeping black wages low as we saw in our previous post. Blacks had been herded into townships placed at some distance from jobs where the whites could control and monitor people. Many, including nearly all the women, had been pushed far into marginal rural areas, notably the so-called homelands. And of course, the educational system had systematically discriminated against blacks who were not in a position to just take over the assets owned by whites and use them as productively.

The ANC rightly feared that the mass expropriation of white assets would lead to economic collapse which could create falls in living standards and who knows what types of populist challenges and political instability.

When faced with these challenges, what could the ANC do?

They had power, but it was difficult to use it. So they opted for a gradual approach, driven party by their idea that it would be possible to create an inclusive society which included not just the blacks, but also their former oppressors.

In consequence the institutional reforms implemented after 1994 were modest. There was to be no land reform; instead there would be market friendly “willing buyer, willing seller” transactions facilitated by the government. Most towns had their nice white areas and outside were the townships where the blacks lived in shacks, without toilets, without running water, without electricity. The white property was to be left alone; instead the conditions in the townships would be ameliorated. Proper houses could replace the shacks, electricity could be put in, water be provided. In other places policy was just as modest.

Whites were worried about the macroeconomy. So the ANC agreed to an independent central bank, something that the whites had not deemed necessary when they were running the country.

The position of the whites in this was a little strange. It was as if they had said: OK yes it’s true that for several hundred years we have been exploiting you, forcing down your wages, stealing your land, but now we have democracy and we have to respect private property and free markets (something rather inconspicuous during white rule when markets were continually rigged in favor of whites and against blacks). The ANC in response just ate humble pie.

Nevertheless, the ANC made progress. They created a vibrant participatory democracy, something that white rule had never dreamed of. They created a new system of social transfers which radically reduced poverty. They built three million new houses for poor people in the townships.

But inequality, rather than going down, went up. Of course some of that increase in inequality has been due to the emergence of black businesses and a black professional class. All the same, the typical business in South Africa is still remarkably similar to what it was before 1994: the whites own and the blacks do the work. Look around and you’ll see that blacks still walk while the whites drive.

South Africa: The Fear of Oligarchy

In our last post we pointed out that the fear of economic collapse has generated some quite surprising outcomes in South Africa since 1994. The African National Congress (ANC) were so concerned that alienating the white elite would be very costly, they ended up with a society even more unequal than the one they inherited.

How did that happen?

We argued that this was in some sense an unintended consequence of the cautious policy that the ANC adopted in 1994. In effect the ANC completely abandoned the policies which it had adhered to since the formulation of the Freedom Charter in 1955 which stated:

The national wealth of our country, the heritage of South Africans, shall be restored to the people; The mineral wealth beneath the soil, the Banks and monopoly industry shall be transferred to the ownership of the people as a whole; All other industry and trade shall be controlled to assist the wellbeing of the people.

This policy had been confirmed by Nelson Mandela as recently as May 1990, after his release from prison and during his first public address to South African big business, when he said:

it is quite obvious that the economic power relations represented by the excessive concentration of power in a few white hands have to change … one of South Africa’s imperatives is to end white domination in all its forms, to deracialize the exercise of economic power”.

Sounds radical, but in practice it wasn’t. Why not?

In our last post we argued that the fear of collapse put the ANC between a rock and a hard place.

But there is more to it.

In 1993 the financial services company Sanlam sold 10% of its stake in Metropolitan Life to a black owned consortium led by Nthato Motlana, a former secretary of the ANC’s Youth League and one-time doctor to Nelson Mandela and Desmond Tutu. After 1994 the number of these deals began to grow rapidly, reaching 231 by 1998 and by this time some estimates suggest that as much as 10% of the Johannesburg Stock Exchange (JSE) was owned by black businesses. This was a spontaneous start to what has become known in South Africa as Black Economic Empowerment.

Put crudely, these first deals were attempts by white capital to give the ANC political elite a stake in the private enterprise economy they dominated. Perhaps the major driver of the lack of effective reform in the extractive economic institutions of Apartheid is not just that the ANC elite were fearful of collapse but also because they started seeing their personal interests in the continuation of the same economic institutions.

And of course, this is nothing but a version of Robert Michels’s Iron Law of Oligarchy. Some evidence that there is at least some truth to this comes from the following figure which plots the relationships between leading South African firms and prominent ANC politicians.

Each link represents a non-executive directorship that a particular politician holds. This figure contains some of the most powerful people in the ANC including Cyril Ramaphosa (middle), the man who negotiated the transitional agreement with the National Party; Tokyo Sexwale (middle right), long time prisoner in Robben Island with Nelson Mandela; Max Sisulu (top left), son of Walter Sisulu, one of the founders of the ANC youth league with Nelson Mandela and one of the towering figures in the struggle against Apartheid.

So could it be that although initially the transition in 1994 started creating inclusive political institutions, this process has been reversed by the capture of the new black political elite by the white business elite? Could it be that this has then ensured the continued domination of the economy by the white business elite even as the white political elite has been cast aside after 1994?

South Africa: The Fear of Populism

The slow progress in changing economic institutions since 1994, which we have discussed in the last two posts (here and here), whatever its cause, creates another problem, or maybe two.

One is the obvious one that the lack of progress will create a huge populist backlash against the ANC. In 2009 after Thabo Mbeki had been forced out of power by his own party, the ANC opted for Jacob Zuma as the president. Many saw this at the time as a lurch towards radical chance in the platform of the party. Indeed Zuma’s theme song of “Bring me my machine gun” seems to be a radical departure from the pipe smoking cerebral Mbeki. You can see Zuma singing it here at the ANC national conference:

The translation of the words reveal that this is a song with a simple message.

My machine my machine gun
Please bring my machine gun
My machine gun my machine gun
Please bring my machine gun
My machine gun my machine gun
Please bring my machine gun
Please bring my machine gun
You’re pulling me back
My machine gun, Please bring my machine gun

Many others in the ANC would like to reach for their machine guns as well. A notorious one is Julius Malema, former head of the ANC Youth League, who reveled in singing another song of the struggle against Apartheid called “Shoot the Boer” (Boer referring to white South Africans of Dutch descent) whose (Zulu/English) lyrics are:

Ayasab’ amagwala (the cowards are scared)
dubula dubula (shoot shoot)
dubula dubula (shoot shoot )
ayasab ‘a magwala (the cowards are scared)
dubula dubula (shoot shoot)
awu yoh
dubula dubula (shoot shoot)
aw dubul’ibhunu (shoot the Boer)
dubula dubula (shoot shoot)
aw dubul’ibhunu (shoot the Boer)
dubula dubula (shoot shoot)
aw dubul’ibhunu (shoot the Boer)
dubula dubula (shoot shoot)
aw dubul’ibhunu (shoot the Boer)
dubula dubula (shoot shoot)

Malema has demanded the expropriation of land and assets from whites without compensation and has praised the Zimbabwean model. Yet Malema, though there is clear evidence of his popularity amongst some of the population, was convicted of “hate speech” and expelled from the ANC. Zuma rushed to distance himself and the party from such class and has yet to reach for his machine gun since becoming president. Despite many anxieties and increasing inequality so far populism seems only a distant threat in South Africa.

South Africa: The Fear of Becoming Columbia

South Africa didn’t collapse economically after the end of Apartheid. In fact, following the tails of a long decline from the mid 1970s, its rate of economic growth picked up after the transition in 1994 and has been positive, though moderate, ever since. Despite how modest progress towards a different society has been, South Africa has not veered to populism, though as we saw in our last post there have been some threats.

But perhaps populism is not the main threat to South African democracy in any case. Perhaps the real danger lies elsewhere.

In Why Nations Fail we tell the story of how Latin American societies became highly unequal and extractive during the colonial period. Though they gained independence 200 years ago, most of Latin America, for example Colombia, continued along this path, with the traditional or new elites firmly remaining in control despite electoral democracy taking root. Though electoral democracy and other reforms removed the de jure control of these elites, their de facto command remained largely unchallenged.

Could it be that the endpoint for the transition in South Africa is a transition from Apartheid to a Colombian model?

Here is why this scenario is not so far-fetched: in Latin America, the elite managed to keep de facto power in attendance because it still controlled the main economic assets and wealth, and could capture and co-opt the new political elites. The situation is similar in South Africa. Economic assets and influence are still hugely concentrated. In the face of the economic power of the economic elite, the ANC leaders found themselves with both serious constraints on their behavior and new lucrative economic opportunities. Legitimately they feared the economic collapse that might have followed from the implementation of too radical a program. So they went slowly. But slow progress left economic power, opportunities and decision-making where they had been before. The once radical ANC began to empathize with the problems of business; they worried about the bottom line of businesses — after all, wasn’t business confidence crucial for the new South Africa? Private sector banks were involved with the attempt to build houses for the millions of black people living in shanty towns, but banks worry about collateral and profits, not about the positive externalities and the social transformation that would follow from an integrated society. The ANC started sympathizing with the banks, perhaps even forgetting about that social transformation.

In the meantime the reality of Apartheid fell into the past. People, especially new generations, started to get used to inequality. Perhaps with Apartheid gone, inequality appears less unjust, less rigged today.

The bottom line of this is that a clear trajectory for South Africa is not as a NIC or a BRIC but as a NLC, a Newly Latinamericanized Country, one with high inequality and persistently poor economic performance as a result of the fact that the vast majority of its population will still be poor and excluded from economic opportunities. Some people, of course, will be doing extremely well.

It is interesting that the German state after World War II, though devastated by the war and de-Nazification, was still able by the 1960s to largely re-build the infrastructure which the Allies had pulverized in the closing stages of the war. In contrast, the South African state has been unable in the same amount of time to get the poor people, who fought for the end of Apartheid and voted for it, out of shacks and shanty towns.