Chapter-Opening Case: Economic Development in South Africa

The Republic of South Africa was the product of British and Dutch colonial ambitions in Southern Africa. These date back to 1652 when Dutch traders established Cape Town as an important waypoint on the spice route between the Netherlands and the Far East. The British seized Cape Town and the surrounding area in 1802. They subsequently defeated both the indigenous Zulus and states established by Dutch settlers (known as Afrikaners) in 1879 and 1902, respectively, and incorporated the captured territory into the Union of South Africa. In 1961, the Republic of South Africa was established.

For decades, South Africa was ruled by the National Party. In 1948, the National Party imposed a policy of apartheid, reserving political power for the minority white population that comprised less than 10 percent of the total population. After significant international sanctions that limited trade and inward investment by foreign multinationals, causing significant economic hardship, the apartheid policy was abandoned in 1992. In 1994, the country held its first democratic elections. The African National Congress (ANC) won a majority in those elections, as it has in every election since then, and Nelson Mandela became the country's first black President.

Nominally, the ANC was committed to a mixed economy. In practice, the state privatized several of the state-owned enterprises that it had inherited from the prior regime, although significant state-owned businesses still remain (they include electric utilities and the national airline). Mandela's successor, Thabo Mbeki, pursued orthodox macroeconomic policies aimed at reducing the government's budget deficit and taming inflation. At the same time, the end of sanctions meant more inward foreign direct investment and greater opportunities for international trade. As a result of these policies and developments, by the early 2000s, the South African economy was growing at around 5 percent per year.

In 2009, Mbeki was succeeded as president by Jacob Zuma. Under his leadership, corruption thrived and public spending ballooned. Zuma himself was embroiled in several corruption scandals, along with a rape allegation. In early 2018, facing a motion of no confidence in Parliament, Zuma resigned. He was succeeded by Cyril Ramaphosa, but significant damage had already been done. Economic growth had slowed to a crawl, real GDP per person had shrunk every year since 2014, and the ratio of public debt to GDP rose from 26 percent in 2008 to 56 percent in 2018.

To compound matters, South Africa has one of the worst AIDS epidemics in the world. Some 7.7 million people, or 20 percent of the general population, are HIV positive. One-third of all deaths in South Africa are AIDS related. It hasn't helped that South Africa's leaders often failed to recognize the nature of the crisis. Mbeki publicly questioned the link between HIV and AIDS. Zuma told reporters that he knowingly had unprotected sex with an HIV-positive woman, but it wasn't risky because he took a shower afterward to stop himself from getting AIDS. Regardless of where the blame lies for the epidemic, there is no question that it has had a negative impact upon the South Africa economy.

Almost three decades of ANC rule have also failed to solve a number of other endemic problems that bedevil South Africa. These include a degree of income inequality that is among the highest in the world; persistently high unemployment (particularly among black youth); high violent crime (again, among the highest in the world); and high poverty. Many of these problems can be traced back to decades of apartheid, but it is striking that after 25 years of ANC rule, they still persist.

To compound matters further, South Africa now faces one of the worst COVID-19 epidemics in the world. Although official figures suggest that South Africa's caseload is below that of countries like the United States and the United Kingdom, data on excess deaths suggest that the true impact of the epidemic is two to three times higher than suggested by official figures. Due to the epidemic, in 2020, the unemployment rate surged to 30 percent, the government budget deficit more than doubled, and the economy shrunk by an estimated 8 percent. Clearly, President Cyril Ramaphosa has his work cut out for him.anctions limiting trade and investment as well as creating economic hardship. While apartheid was finally abandoned in 1992 and market-based reforms stimulated the economy, corruption and health crises including rampant AIDS infections and the COVID-19 pandemic continue to plague the country, limiting its economic growth and development and creating hardship for many South Africans. The goal of this activity is to demonstrate your understanding of economic development and the influence of a countrys political system on a countrys economic growth and potential. This activity is important because as an international manager, you need to understand how government policy influences levels of economic development and what it means for business. Read the case and answer the questions that follow. The Republic of South Africa was the product of British and Dutch colonial ambitions in Southern Africa. These date back to 1652 when Dutch traders established Cape Town as an important waypoint on the spice route between the Netherlands and the Far East. The British seized Cape Town and the surrounding area in 1802. They subsequently defeated both the indigenous Zulus and states established by Dutch settlers (known as Afrikaners) in 1879 and 1902, respectively, and incorporated the captured territory into the Union of South Africa. In 1961, the Republic of South Africa was established. For decades, South Africa was ruled by the National Party. In 1948, the National Party imposed a policy of apartheid, reserving political power for the minority white population that comprised less than 10 percent of the total population. After significant international sanctions that limited trade and inward investment by foreign multinationals, causing significant economic hardship, the apartheid policy was abandoned in 1992. In 1994, the country held its first democratic elections. The African National Congress (ANC) won a majority in those elections, as it has in every election since then, and Nelson Mandela became the country's first black President. Nominally, the ANC was committed to a mixed economy. In practice, the state privatized several of the state-owned enterprises that it had inherited from the prior regime, although significant state-owned businesses still remain (they include electric utilities and the national airline). Mandela's successor, Thabo Mbeki, pursued orthodox macroeconomic policies aimed at reducing the government's budget deficit and taming inflation. At the same time, the end of sanctions meant more inward foreign direct investment and greater opportunities for international trade. As a result of these policies and developments, by the early 2000s, the South African economy was growing at around 5 percent per year. In 2009, Mbeki was succeeded as president by Jacob Zuma. Under his leadership, corruption thrived and public spending ballooned. Zuma himself was embroiled in several corruption scandals, along with a rape allegation. In early 2018, facing a motion of no confidence in Parliament, Zuma resigned. He was succeeded by Cyril Ramaphosa, but significant damage had already been done. Economic growth had slowed to a crawl, real GDP per person had shrunk every year since 2014, and the ratio of public debt to GDP rose from 26 percent in 2008 to 56 percent in 2018. To compound matters, South Africa has one of the worst AIDS epidemics in the world. Some 7.7 million people, or 20 percent of the general population, are HIV positive. One-third of all deaths in South Africa are AIDS related. It hasn't helped that South Africa's leaders often failed to recognize the nature of the crisis. Mbeki publicly questioned the link between HIV and AIDS. Zuma told reporters that he knowingly had unprotected sex with an HIV-positive woman, but it wasn't risky because he took a shower afterward to stop himself from getting AIDS. Regardless of where the blame lies for the epidemic, there is no question that it has had a negative impact upon the South Africa economy. Almost three decades of ANC rule have also failed to solve a number of other endemic problems that bedevil South Africa. These include a degree of income inequality that is among the highest in the world; persistently high unemployment (particularly among black youth); high violent crime (again, among the highest in the world); and high poverty. Many of these problems can be traced back to decades of apartheid, but it is striking that after 25 years of ANC rule, they still persist. To compound matters further, South Africa now faces one of the worst COVID-19 epidemics in the world. Although official figures suggest that South Africa's caseload is below that of countries like the United States and the United Kingdom, data on excess deaths suggest that the true impact of the epidemic is two to three times higher than suggested by official figures. Due to the epidemic, in 2020, the unemployment rate surged to 30 percent, the government budget deficit more than doubled, and the economy shrunk by an estimated 8 percent. Clearly, President Cyril Ramaphosa has his work cut out for him.

The effect of international sanctions imposed against South Africa in protest of the countrys apartheid policy

Multiple Choice

A.) encouraged international trade in protected sectors.

B.) reduced high levels of unemployment.

C.) limited economic growth and development in the country.

D.) reduced inequalities in wage rates among the countrys indigenous people.

E.) opened the economy for new investment.