The economics of apartheid and racial inequality by H.E.

Prof. Dr. Amb. Tal Edgars

Abstract
Twenty years after apartheid was formally abolished it continues to shape South African society.
Its legacy persists over and above interest in it as a perverse phenomenon.

INTRODUCTION

It should surprise no one that the weight of our history hampers our attempts to create a
prosperous society. This has been a constant theme in presidential State of the Nation
addresses. Of the 25 such addresses since 1994 (two in election years), 20 have mentioned the
word ‘apartheid’ at least once. In 2004 Thabo Mbeki, celebrating 10 years of democracy, said
that ‘we have always known that our country's blemishes produced by more than three
centuries of colonialism and apartheid could not be removed in one decade’. In 2011 Jacob
Zuma said that ‘the legacy of decades of apartheid underdevelopment and colonial oppression
cannot be undone in only 17 years’. In more recent addresses, President Zuma has observed
that ‘apartheid spatial patterns still persist in our towns and cities’ (2013), and that ‘the culture of
violence originated from the apartheid past’ (South Africa Government Online 2014) South
Africa Government Online, 2014. State of the Nation Address, 1994–2014. Available online:
http://www.gov.za/speeches/son/index.html (accessed 7 September 2019).

Researchers confirm these views. Poverty levels remain high for black South Africans, their
educational attainment and health outcomes continue to lag behind those of white South
Africans, and unemployment, which was already increasing during the 1970s and 1980s, shows
no signs of declining. The distrust and non-cooperation induced by apartheid persist to this day.

While economists and policymakers are rightly interested in addressing these consequences of
apartheid that affect South Africa today, the task seems to have fallen to economic historians to

The economics of apartheid and racial inequality by H.E. Prof. Dr. Amb. Tal Edgars
discover precisely how policy decisions taken during the apartheid era determine the country's
economic growth in the twenty-first century. The stagnation in employment opportunities is a
case in point. The shortage of semi-skilled workers caused by the apartheid regime's statutory
job reservation policy obliged manufacturers to overinvest in capital technology, with the result
that South African manufacturing became capital intensive rather than labour intensive. The
consequence for employment has been low levels of job creation at the unskilled level, precisely
the level of skills that the Bantu Education Act of 1953 and subsequent policies had envisaged
as being required.

Economic historians are interested in the economics of apartheid not just because apartheid
continues to affect South Africans, but because we see analogous situations elsewhere today.
Ethnic divisions remain a feature of our times worldwide, perhaps nowhere more overtly than in
the continuing conflict between the Palestinian Independent Authority and Israel. Former
American president Jimmy Carter (2006) famously called for ‘peace not apartheid’ in this region.
In the US, discussions of poverty and inequality often reference apartheid (Massey &
Denton 1993).

In South Africa, we continue to extract lessons that hold the promise of not repeating past
mistakes. We look for clues to understanding ideologues and their ideologies.

QUESTION: Can we find similarities between Afrikaner nationalism in the early twentieth
century and black nationalism in the twenty-first? We investigate apartheid policy
counterfactuals because they provide a sobering perspective on current trade-offs: should
government focus on high quality education for a select few, or education for all, but of lower
quality? And at the macroeconomic level we consider the global response to apartheid policies:
Do economic sanctions force a regime change, or do they instead strengthen the oppressor's
hand?

The economics of apartheid and racial inequality by H.E. Prof. Dr. Amb. Tal Edgars
The good news is that we are getting better at understanding how the past affects us and
recognizing analogies between past and present. With the tools of econometrics, South African
economic history studies are adding a valuable quantitative analysis to the rich qualitative
analysis that is growing larger each year.

The digitization of data previously buried in archives and libraries is beginning to make the
apartheid era more accessible. Studies of apartheid can contribute to important themes in the
economic history literature, such as the longevity of institutions and path dependence.

The era provides natural experiments with which we can analyse human behaviour in response
to distorted incentives. The benefit of such experiments is that the inferences drawn are causal.
And because South Africa's twentieth-century experience is a microcosm of global
development, with the incomes of rich and poor diverging, the apartheid and post-apartheid
periods serve as an analogy for the process of globalization and the potential effects of greater
integration

THE LITERATURE

The difficulties associated with paying for and enforcing apartheid in the 1980s and ending it in
1994 prompted analysis of the system's origins, nature, consequences and costs. By the 1980s,
over 30 years of apartheid had provided sufficient evidence for the likes of historians from 1980-
2015. Others addressed more specific issues, such as Afrikaner living standards, Afrikaner
entrepreneurship and cross-cultural business dialogue. A thorough discussion of the last two
decades of the apartheid period may be found in two issues of the South African Journal of
Economic History, the precursor to the present journal, edited by Stuart Jones and Jon Inggs.

Lipton's 1986 book on capitalism and apartheid was a seminal contribution to the Marxist-liberal
debate. As Nattrass (this issue) notes, by the 1970s it was being asked who the beneficiaries of
apartheid were. Marxists argued that since capital benefited from low wages, it was capital that

The economics of apartheid and racial inequality by H.E. Prof. Dr. Amb. Tal Edgars
benefited at the expense of the working classes of all races, whereas liberals argued that
although capital did benefit from low wages, low wages were simply the outcome of a policy
designed to protect white workers from competition with black workers. Lipton, a leading
proponent of the liberal view, notes the fluidity of economic policy over the 30-year period in
response to economic opportunities and challenges.

She argues in her 1986 book that although economic policy may have seemed at times to
favour capital in the form of the mining and manufacturing sectors, systems such as statutory
job reservation for whites began to hinder growth in the manufacturing sector. When capital
productivity began to decline, capitalists lobbied the government for economic reform in the face
of opposition from white farmers and white labour and in that sense capital helped bring about
the end of apartheid. Some disagree with that view, and it is important to note that the mining
industry in particular benefited for a long time from the pass laws and migrant labour.

I would argue that Nattrass (1991) put an end to the ideological ‘Marxists versus liberals’ debate
when she observed that a more scientific approach would have a better chance of answering
the question of who benefited from apartheid. With the demise of apartheid and a clearer
understanding of its costs and benefits, that debate has tapered off and been replaced with a
more traditional economic analysis.

Among the first to take this approach were Kaempfer and Lowenber (1988) and Moll (1991). In
the tradition of economic investigation, Kaempfer and Lowenberg offer an explanation for both
the origins and the demise of apartheid. Using a public choice model, they conclude that while
international sanctions may have hurt the economy, it was the costs of running apartheid at
home, particularly as resistance was increasing in the 1980s, that ultimately made the system
untenable. Moll shows that the rapid growth of the South African economy during the early
years of apartheid was more likely to have been due to the worldwide rebound after World War
II than to cheap labour, and that, compared with other economies at similar stages of
development, the overall growth was in fact slow, and beginning to run into difficulties as early

The economics of apartheid and racial inequality by H.E. Prof. Dr. Amb. Tal Edgars
as the 1970s. This finding has been confirmed by Feinstein (2005) and again by Nattrass and
Seekings (2011)

With the emphasis shifting away from ideological disagreement the scientific approach has
gained ground. However, the absorption of former departments of economic history into either
economics or history departments, and the pressure from students and the job market, has
meant that the topic of apartheid economics has been of interest mainly to history scholars. The
major publications following the apartheid period reflect this. The first authoritative economic
history of South Africa, Feinstein's (2005) An Economic History of South Africa, was published a
full decade after the end of apartheid. Like those before him, Feinstein is adamant that the
apartheid system collapsed under its own weight, dragged down by ‘a colossal bureaucratic
apparatus of influx controls and labour bureaux’; that the apartheid rulers had ‘ambitious aims’
but in practice achieved very little; and that three things caused the system's downfall: the gold
mines’ loss of profitability, industry's low efficiency and high production costs, and adverse
external economic and political changes – all three of which led the new State President FW de
Klerk to make the dramatic policy changes he announced in 1990.

Nicoli Nattrass and Jeremy Seekings (2011) provide an overview of the economics of apartheid
in the most recent Cambridge History of South Africa. They use the little statistical evidence
available from official publications to investigate broad changes in production, labour, poverty
and inequality. They find evidence of rapid mechanization which, they argue, ‘meant not so
much replacing skilled with semiskilled work as replacing large quantities of unskilled labour
with smaller quantities of semiskilled labour’, thus exacerbating inequality. The apartheid
government attempted to address this through fiscal redistribution, but the post-1970 economic
changes had a surprising effect on income inequality: while South Africa's Gini coefficient
remained roughly the same between 1970 and 1993, within-group inequality increased
significantly. They note, for example, that the Gini coefficient for the black population rose above
0.6, only marginally below the overall figure for South Africa.

The economics of apartheid and racial inequality by H.E. Prof. Dr. Amb. Tal Edgars
Unlike historians, economists have largely shied away from investigating South Africa's
apartheid past, one reason being that as apartheid became history, policymakers wanted to
solve problems that the new democratic economy had inherited. The focus therefore shifted to
the macroeconomy and to using new individual level data sets that for the first time provided
information on the entire population. The aim was to improve living standards for the previously
disadvantaged.

Economists understandably looked forward to meeting the challenges to the South African
economy, increasing our economic understanding and contributing to the policy discussion.
South African economists were some of the first to study labour migration, the effects of cash
payments, intergenerational education mobility, social networks, education production functions
and the role of women in the rural labour force.

Another reason for the economists’ delayed response to the study of apartheid has been the
notorious lack of apartheid era data. The creation of the ‘homelands’ as reserves for the black
population meant that the decadal censuses of 1970 and 1980 excluded a large proportion of
blacks, and even where they were enumerated, more limited information was obtained than for
coloureds, Indians and whites. The first inclusive household survey was conducted in 1993 and
the first inclusive census in 1996. Furthermore, since the apartheid regime (using the excuse
that the homelands would be independent countries) provided very little macroeconomic data,
we have limited information on apartheid era black wages, particularly in the homelands.

Yet, as this special paper attests, economists are showing renewed enthusiasm for investigating
the apartheid period. One reason for this resurgence of interest is the persistence of the
apartheid legacy, with the South African economy still plagued by the inequality of opportunity
and outcomes we saw in the early 1990s. Economic growth and the much-vaunted economic
reforms have not given the boost to employment and living standards that many expected.
Indeed, some authors argue that inequality has increased since the demise of apartheid. I am
obliged to recognize that the South African economy today is still tied to the apartheid era

The economics of apartheid and racial inequality by H.E. Prof. Dr. Amb. Tal Edgars
economy, that there is indeed path dependence and that we have to understand the economy of
the twentieth century in order to improve outcomes in the twenty-first.

Another reason is the broad shift in the methodology of economic history research in North
America and Europe that started in the second half of the twentieth century and has spread to
South Africa. Our archives and government publication libraries house massive collections of
official data. Now that we have more local and international financial support and better
technology, the task of transcribing and digitizing South Africa's recent economic past is getting
under way.

This new data, and the increasing popularity of economic history, has begun to attract younger
researchers looking for ways to demonstrate their analytical skills. The topic of the Bantustans,
apartheid-era independent ethnic homelands, has been a magnet for scholars searching for a
natural experiment to measure causal effects. Taryn Dinkelman, for example, has estimated the
long-run health effects of early childhood exposure to drought. She finds an increase of 3.7 to
5.8% in disability rates later in life, and an effect twice as large for the homelands. This finding
has implications for understanding the role of natural disasters in African countries, especially
those that, like the homelands, have inadequate access to public and private safety nets.

A PhD student at the London School of Economics and Political Science, Edward Kerby, has
investigated the origin and evolution of regional development and the policies that gave rise to
the largest industrial planning project on the African continent. Because the peripheral but
labour-abundant homelands lacked agglomeration economies, incentives for industrial zones
were systematically introduced over 40 years in these homelands and the industrial periphery of
apartheid South Africa. Using apartheid-era primary archival sources, Kerby traces the
development and eventual failure of these special zones and notes the lessons for similar
industrial planning today. (Kerby, 2014)

The economics of apartheid and racial inequality by H.E. Prof. Dr. Amb. Tal Edgars
University of Illinois PhD student Nicolas Bottan, together with Paulo Bastos, uses the homeland
boundaries to test the standard bargaining theory in which the dismantling of coercive
institutions improves the negotiating position of unionized mineworkers (Bastos and Bottan
2014). From the 1996 census these authors document large income gaps between communities
inside and outside the homelands. They find that spatial income convergence between 1996
and 2011 was considerably stronger among marginalized communities with higher initial
exposure to resource rents, confirming the standard bargaining theory.

Harvard University PhD student Martin Abel (2014) uses the forced relocation of blacks to the
Bantustans to investigate how it affected inter-ethnic trust and social capital. He finds that
people living in the former homeland areas are less trustful of other South Africans, less proud
to be South African, and less keen on the idea of a united country than those living close to
former settlement camps.

The Bantustan borders have had lasting effects on political outcomes too. PhD student Daniel
de Kadt from the Massachusetts Institute of Technology, together with Horacio Larreguy, uses
voting patterns at ward level over five election years (2000–2011) to show how the
empowerment of traditional authorities can prop up the ruling party, a system these authors call
‘clientelistic quid pro quo’. Using a difference-in-difference approach, they find that traditional
leaders in South Africa provide electoral benefits of roughly 6.5 percentage points to the ruling
African National Congress party.

Surprisingly little attention has been paid to identifying and measuring how apartheid affected
neighbouring countries, such as Mozambique and Malawi, which were sources of labour for the
South African mines. Dinkelman and Martine Mariotti (2014) have begun to fill this gap by
investigating two historical events: the removal of migration quotas in 1967 and the Malawian
ban on mine labour in 1974. Using Malawian census data, they show that labour migration had
large, positive and lasting effects on the educational attainment of those left behind, with those

The economics of apartheid and racial inequality by H.E. Prof. Dr. Amb. Tal Edgars
most exposed to the migration shocks having 0.08 to 0.135 more years of schooling in
adulthood and being 2 to 3 percentage points more likely to have ever attended school.

The sudden withdrawal of labour from South Africa had political and socioeconomic
consequences for the country. Columbia University PhD student Laurence Wilse-Samson
(2013) shows that the reduced supply of foreign mine labour increased local demand for black
workers but the slow local response also increased mine and farm mechanization. He shows
that these induced structural changes increased the support for political reform in open districts
more than in closed districts, while mining districts became more supportive of the non-
democratic regime. Using the same shock to employment, Mariotti shows that the increase in
employment of black males based in the homelands following the withdrawal of foreign labour
led to an increase in living standards within those homelands.

A promising new research topic is apartheid as an economic phenomenon in itself. Mariotti

explores the consequences of white upward mobility on the reservation of semi-skilled jobs for
whites. She finds that as white workers shifted into increasingly skilled jobs, the pressure to
reserve semi-skilled jobs decreased and blacks began to move into those jobs, even before the
formal end of statutory job reservation. This shift in employment patterns occurred despite the
fact that, as Mariotti finds, employers in the manufacturing sector considered blacks and whites
substitutable for each other throughout the apartheid period, despite the official reservation of
these jobs for whites.

THE PAPERS IN THIS SPECIAL REPORT

This special issue brings together thoughts about apartheid during the period itself and areas
where the topic has come up more recently. The questions raised show that there are still fruitful
areas of research open to economic historians interested in how apartheid affected the South
African economy.

The economics of apartheid and racial inequality by H.E. Prof. Dr. Amb. Tal Edgars
Mats Lundahl discusses the winners and losers in statutory job reservation. His paper tracks the
development of macroeconomic modelling of apartheid labour market policy from Porter’s(1978)
discussion of a multi-sector economy with only one type of labour to his own
(Lundahl1982,1989) expansion of that model to include both skilled and unskilled labour. He
criticizes the Wintrobe (1998) model for failing to recognize the importance of factor rewards in
the South African economy. He shows that, contrary to the Marxist claim that job reservation
ensured the growth of capital, it was white unskilled labour that benefited most from job
reservation, while capitalists were constrained by the obligation to hire expensive white workers.
He notes how various theoretical models evolved over time to deal with the industrialization of
the South African economy.

A confounding feature of apartheid for those who have tried to pigeonhole it over the years is
the fluidity of the economic ideology in response to need and opportunity. The papers by Anton
Lowenberg, Lindie Koorts, Martine Mariotti and Danelle van Zyl-Hermann, and Servaas van der
Berg all address this theme. Lowenberg has focused for some time on the public choice and
political economy aspects of apartheid. His work tempers the liberal argument that apartheid
staunchly supported the white working classes. In this issue he builds on previous work
(Lowenberg,1997) to show that rather than being rigid the apartheid ideology was pragmatic,
adjusting where necessary in the face of economic constraints and responding to economic
incentives by varying the strength with which it enforced its racist ideology.

Koorts supports Lowenberg’s argument by analysing the economic rhetoric of DF Malan, one of
the National Party’s chief ideologues. She shows that Malan and the National Party shifted their
views from anti-capitalist to anti-communist during their tenure, in response to the political
issues of the day. This fluid approach to economic policy is one of the reasons we have
struggled to pinpoint the economic goals of apartheid.

An example of this fluidity is described by Mariotti and Van Zyl-Hermann in their analysis of the
decline of statutory job reservation and the recommendation by the Wiehahn Commission that it

The economics of apartheid and racial inequality by H.E. Prof. Dr. Amb. Tal Edgars
be abolished. They show that state implementation of statutory job reservation was flexible, with
increasing support for the manufacturing sector’s need for semi-skilled workers. Following
decreasing implementation of this statute in both the manufacturing and mining sectors, the
Wiehahn Commission was charged to determine the viability of the policy. In a complete
turnaround, the government accepted the recommendation to scrap job reservation despite the
disapproval of white and coloured trade unions.

By the 1970s the apartheid government was aware of the high poverty levels among blacks.
Servaas Van der Berg discusses the fiscal result of a shift in social spending from whites to
blacks in the mid-1970s. This is perhaps not quite a case of ideological fluidity, but it shows that
the apartheid government was aware of the importance of blacks to the South African economy
and that it had accepted that its vision of separate development had failed. Van der Berg shows
that the initial spending shifts were so well channelled that post-apartheid social spending is
now extremely well targeted.

Nicoli Nattrass contributes to the conversation about the costs and profitability of apartheid with
a discussion of the declining rate of capital productivity. She revisits the Marxist-liberal debate
prevalent in the literature of the 1970s and 1980s and shows that the data simply do not support
the notion that cheap unskilled labour was the cause of rapid economic growth during apartheid.

Roy Havemann also contributes to the topic of the costs of apartheid. He looks at the multiple
exchange rate system that was devised to provide macroeconomic stability in the 1970s and
1980s when South Africa was becoming increasingly isolated politically and economically.
Despite the implementation of an at times complicated exchange rate system, the regime was
unable either to halt politically inspired capital flight during the 1980s or to encourage foreign
invest- ment. Indeed, the system led to, among other things, an increase in concentration in
industry, lower growth in manufacturing exports, and increased exchange rate volatility.

The economics of apartheid and racial inequality by H.E. Prof. Dr. Amb. Tal Edgars
Roger Southall and Katherine Eriksson investigate the effect of apartheid on black wealth and
education outcomes. Southall discusses the development of the black middle class during the
twentieth century, and particularly that group’s difficulties in finding an equivalent political
position in the apartheid system. Eriksson contributes to the debate about the importance and
longevity of institutions. Investigating the effects of the change in the language of instruction
from English or Afrikaans to the mother tongue under the Bantu Education Act of 1953, she
finds that in the long run this policy change increased both educational attainment and wages
for people it had affected by 1980.

Finally, Waldo Krugell looks at how apartheid’s influx control policies affected the spatial
distribution of people and wealth from 1911 to 2011. He finds that despite many attempts by
successive white governments from 1911 until the end of apartheid to limit the inflow of blacks
into urban areas by setting up legal and physical constraints and encouraging industrial
development in peripheral areas, South Africa today has an over-concentration of settlement in
areas of initial white settlement.

The economics of apartheid and racial inequality by H.E. Prof. Dr. Amb. Tal Edgars