GDP and its Discontents – A South African example

The average South African Gross Domestic Product (GDP) between 1994 and 2016 was US$496.295 billion in Purchasing Power Parity (PPP) US$, having steadily increased from 1994 until peaking at US$ 761.9bn in 2017. The implication of this is that South Africa is ranked as an upper-middle income country. Considering the fact that GDP has become a global measure of the general well-being of a country, it would seem South Africa has been progressing well. However, many South Africans will disagree with this assessment because the improvements in GDP have not been met with similar improvements in their life.

A lot of this is as a result of what lies behind South Africa’s growth and more fundamentally how this growth is shared across the population. So the question is what does underpin SA’s development path?

South Africa’s development is currently dependent on debt financed domestic consumption, foreign direct investment and revenue received from exporting commodities. Extracting commodities, including diamonds, gold, platinum and coal, has been the backbone of South Africa’s economy for more than a hundred years. In line with what is happened around the world, the profits and wealth accumulated from extracting these resources has been concentrated in the hands of a few.

The discovery of diamonds and gold in the late 19th century resulted in masses of people moving to the Highveld in order to get a share of this new found wealth. The newly discovered diamonds and gold meant that machinery needed to be brought from the coast to the interior in order to develop mining in the region. Once the gold was mined it needed to be transported to the coast. All of this required massive amounts of energy. This energy was sourced from electricity produced from refining coal. The extraction of coal was therefore critical in supporting the extraction of gold, but in order to ensure the maximum profitability of gold and thereby to boost the economy, coal was sold at low prices to Eskom, to guarantee that the mines were provided with cheap electricity costs.

Following the massive hike in oil prices around the world in the 1970s, the demand for coal skyrocketed and the price soared. This qualitatively changed the political economy of coal mining. Coal was now not only mined to produce electricity anymore, but due to the increase in price meant that it became a lucrative export. Besides exporting coal, South Africa also remains dependent on coal to provide its citizens with electricity. In 2015, close to 80% of South Africa’s electricity was produced from burning coal. Historically, one of the ways big business was able to dig up and transport large quantities of coal was through state subsidies which provided cheap steel, electricity as well as cheap railway services, and the apartheid system produced an oversupply of cheap black labour.

 

Over time technology improved, and thus it has become more profitable for industry to become increasingly capital intensive. This was the beginning of huge job losses in the mining sector, exacerbating South Africa’s unemployment crisis.

 

Unemployment is a global problem, but South Africa is one of the more exceptional cases for a middle income country. Generally other middle income countries have an unemployment rate between 5% and 10%. Yet in South Africa, the rate is closer to 40% using the expanded definition of unemployment. Even following more than 10 years of good economic growth South Africa has not been able to reduce huge levels of unemployment. In 2008 the global financial crisis further compounded the country’s job crisis. The unemployment rate increased by a further 5,2% between the fourth quarter 2008 and the fourth quarter of 2017.

 

What is not counted here is the number of people who have stopped actively seeking work. This number has grown exponentially. Today, more than half of South Africans under the age of 35 years old have never been employed. The only jobs that the South African economy was able to create on a large scale has been security jobs, increasing from 115 000 jobs in 1997, to 288 000 jobs in 2005. The problem is that these jobs are largely insecure, low-wage jobs.

 

So on the one hand, digging up commodities and burning fossil fuels has benefited some enormously; on the other hand it was built on the backs of many who will never attain even some of those benefits. In fact whilst the benefits are privatised and concentrated amongst a few individuals the costs are socialised. Today, the still very high profits from mining are diminishing, at the same time the cost of mining to society grows.

 

A dependence on extractivism (mining is one example) has deep environmental costs. Mining destroys air, water and the land that we live on. Where coal mining exists, it is often in regions with fertile soil. But as a result of the degradation and pollution from coal mining, cultivating crops has become near impossible; fires ignite on active and on abandoned coal mines; the air is concentrated with dust particles and the water is toxic due to acid mine drainage turning water catchment areas, aquifers, wetlands and rivers into wastelands.

 

The ramifications of this is catastrophic including heavy health costs to the people living in the areas where coal is mined and refined in order to produce electricity. Many of the people living in these areas suffer from different health diseases including silicosis, heart disease, cancer and asthma. The fact that between 2200 and 2700 premature deaths are linked to the burning of coal, gives sense of the severity of the health risks.The health costs affect people unevenly, with the greatest share of the cost to society being paid by poor and disadvantaged people of the community. One of the major problems with GDP is that it does not measure the environmental and health costs incurred from these extractive based industries.

mining

But, how is South Africa’s growth shared?

Together wages and profits makes up the total value added in an economy or GDP at market prices. The motive in determining the balance between wages and profits is about class control over the different parts of the total value added to the economy. In Post-Apartheid South Africa, the evidence suggests that the profit rate has gone up, whilst workers’ wages have fallen. This brings to the fore another major problem with GDP as a measure of well-being and that is that fails to take into consideration inequality within an economy.

 

The relatively good GDP in South Africa is able to mask extreme levels of inequality within the country. Reliable data indicates that the rich in South Africa have become considerably richer over the past twenty years. The top ten percent of South Africans controls more than fifty percent of the economy whilst the poorest ten percent earns less than a half a percent of GDP. This makes South Africa one of the most unequal countries in the world. The gap between the haves and many have-nots continues to grow as the unemployment rate rises and the real wage of most workers decrease.

 

The extreme inequality and very high unemployment rate means that a majority of South Africans struggle to survive. These socioeconomic circumstances lead to the decay of the social fabric in poor and working class South African communities.

 

All of this ultimately highlights two things: firstly that GDP is an inadequate measure of development and well-being, secondly it illustrates that the way the economy is currently structured is destructive to the environment and people. This requires us to establish new economic models of development as well as the institutionalization of new measures of development that looks beyond GDP. Both of these must be founded on principles of equality and sustainability.

By Dominic Brown