Report on Social and Economic Developments in South Africa 1998

  Introduction

The work of Nedlac and all its constituencies takes place in a rapidly changing environment. Policy debates must, therefore, be informed by ongoing analysis of trends in the economy and society. This report on social and economic development matters to assist that process. It provides constituencies and decision-makers with information on and an analysis of social and economic developments in South Africa, and is intended to be of use to them in their policy debates. This section of the report fulfils the mandate of Nedlac to provide a report on the state of social and economic matters in South Africa, as set out in clause 7(2) of the Nedlac Act (Act 35, 1994).

The report is divided into three sections. The analysis in the first two sections is conducted along the themes of growth, employment and equity. These themes are of critical importance to the Nedlac constituencies, and were highlighted at the launch of Nedlac.

The first section of the report provides an easily accessible review of progress in South Africa during 1997 on a range of economic indicators on employment, poverty and the delivery of social infrastructure. It is intended to assist those Nedlac constituencies that do not have easy and regular access to data on these issues.

The second section provides a comparative analysis of South Africa in relation to:

• Countries with similar economic and social characteristics.
• Countries in the southern African region.
• Higher-income countries.

Indicators have been identified for each theme, namely, growth, employment and equity. The comparison is conducted in respect of each of these indicators.

Section three is different from the preceding ones. It provides a review of other "social dialogue" institutions or bodies in South Africa. This section is motivated by two requirements of the Nedlac Act. Clause 5(2)(f) states that Nedlac "shall work in close cooperation with departments of State, statutory bodies, programmes and other forums and non-governmental agencies engaged in the formulation and the implementation of social and economic policy". Clause 5(1)(a) states that Nedlac shall "strive to promote the goal of...participation on economic decision-making..." It seems appropriate, therefore, for the Nedlac social and economic report to provide information on other structures in our society which also engage in social dialogue. Section three, therefore, provides information on what structures exist, their mandates and the nature of the work they are undertaking.

A NOTE ON THE USE OF RACIAL TERMS

In this report we refer to different races: Africans, Indians, Coloureds and Whites. Although the Nedlac constituencies reject racism and racial classification, we acknowledge that a proper discussion of equality in South Africa cannot ignore the impact of apartheid policies. For this reason we use racial terms to describe differences in living standards.

A NOTE ON THE CONTRIBUTORS

This report was conceived and edited by a team comprising Mahandra Naidoo (Nedlac secretariat), Stephen Gelb (Development Bank of Southern Africa) and James Heintz (Naledi). It comprises inputs from various researchers. Section one was compiled by Simon Roberts, Joyce Lestrade-Jefferis, Ilian Iliev, Robert Mwangi and Josephine Tsele. Section two was compiled by Penny Hawkins. The working document for section three was prepared by Professor Loet Douwes Dekker, Eulalie Metton and Carol Butcher. The working document was edited by Liv Torres.

Substantial post-summit work is envisaged. This will include implementation and the further development of issues identified in the first and second phases.

A date for the jobs summit will be determined by the President but will be informed by progress made during the preparations. No date has been set for the summit yet.

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SOCIAL AND ECONOMIC DEVELOPMENTS

OVERVIEW OF ECONOMIC DEVELOPMENT

This section reviews recent developments in the South African economy and explains the relationships between key economic variables. It discusses the different factors which contribute to the growth in production, and links with expenditure, savings and investment. Trends in employment and labour productivity are then explored, followed by a discussion of developments in South Africa's international trade and balance of payments position. These economic developments are linked to changes in inflation, interest rates and the money supply. The section concludes with an outline of major changes in the government budget.

Growth

The gross domestic product (GDP) measures the total value of goods and services produced in the country each year. In 1997, South Africa's GDP grew by 1,7% in real terms, that is, after taking inflation into account. This was a significantly lower rate of growth than in 1996 (see Figure 1) and was largely due to stagnation in the primary sector, which consists of mining and agriculture. The other sectors which make up the GDP are the secondary sector, consisting of manufacturing, construction and electricity, gas and water, and the tertiary sector, which includes wholesale and retail trade, transport, communications, financial services, community, personal and social services, and the economic activity of the different levels of government.

Figure 1: Real GDP growth

After strong growth in 1996, due to good rains, agricultural production was marginally lower in 1997. Variations in agricultural production influence the overall rate of growth. Omitting agriculture yields a GDP growth of 1,9% for both 1996 and 1997. Value added in mining has been almost static since 1990. The share of mining in GDP has fallen from 20% in the 1970s to around 9% in the 1990s.

The secondary sector was the fastest-growing sector in 1997, with increases in manufacturing value added of 3%, and in electricity, gas and water of almost 5%. Although it is the largest contributor to GDP (Figure 2), the tertiary sector only grew by 1% overall, with increases of 2,5% and 2,4% in the financial services and transport, storage and communications components respectively.

Figure 2: GDP by major sectors, 1997

(Figure 2 omitted)

Source: South African Reserve Bank

A large proportion of manufacturing is very closely related to minerals, such as metal processing, chemicals and plastics, and many of these subsectors have registered growth in recent years. But there have not been significant increases in net employment.

The informal sector can also be included in the measurement of the total value of production. It is estimated to amount to 5,6% of total production in 1993, the main activities being in the wholesale and retail trades, and catering and accommodation services, followed by community, personal and social services.

Figure 3 illustrates the various sources of spending on the goods and services produced in South Africa in 1997. While consumer spending accounts for the largest proportion (61%) of total expenditure, this source of demand only increased by 2%, in real terms. Spending by general government (which includes national, provincial and local government) provided the largest stimulus to production in 1997, with an increase of 7%. Of concern is the decline in gross investment by firms. Figure 3 also illustrates that international trade had a positive net impact on South African production, as sales of exports slightly exceeded spending on imports.1

In 1997, private consumers continued to spend the bulk of their funds on nondurable goods (44%) and on services (28%). Spending on durable goods, such as household appliances, only increased marginally. This reflects the low rate of increase in personal disposable (after tax) income of 0,7% in 1997 in real terms.

Figure 3: Expenditure on gross domestic product, 1997

(Figure 3 omitted)

Source: South African Reserve Bank

Note: Investment includes change in inventories.

Overall gross domestic fixed investment rose slightly in 1997 to 17,4% of GDP. Over 70% of total investment is by private firms, on items such as machinery and equipment, although it has remained static as a share of GDP over the last three years.

Figure 4: Gross domestic fixed investment by type of organisation

(Figure 4 omitted)

Source: South African Reserve Bank

The largest increase-6%-occurred in the manufacturing sector. Investment expenditures also increased significantly in transport and communications, wholesale and retail trade, social services and mining. Increases in investment by public organisations have been mainly in economic infrastructure, such as roads.

Investment in any year has to be financed by savings from different sources, including foreign capital inflows. Although corporate savings (from profits) declined to 14,6% of GDP in 1997, it continues to account for by far the largest share of savings from domestic sources (Figure 5). Personal savings have declined significantly over the last five years, and stood at just 0,5% of GDP in 1997. This level of personal savings represents 0,9% of personal disposable income, the lowest level recorded. The decline in savings in recent years has occurred despite high interest rates, and is consistent with declining per capita income in 1997 and the burden of high levels of accumulated household debt.

Figure 5: Gross savings and financing of investment, as per cent of GDP

(Figure 5 omitted)

Source: South African Reserve Bank

Note: Savings include depreciation and inventory adjustment.

A major development in the early 1990s under the previous government was the fall in gross government saving from 4,5% of GDP in 1990 to -1,6% in 1993. Government savings became positive again in 1995, but were negligible in 1997.

To some extent, relatively large capital inflows from abroad in 1997 compensated for the decline in domestic savings. However, at the same time South Africa was able to build up an additional R19,5 billion of foreign exchange reserves in 1997. This represents funds "set aside", and, therefore, savings that were not available to finance investment in the domestic economy during 1997. The foreign capital flows also financed the deficit on the current account of the balance of payments, which is the extent to which South Africa is spending on imports in excess of revenue earned from the sale of exports, which includes gold (see Section 3).

In any given year, the ability of government to finance a budget deficit depends on savings by individuals and companies, along with foreign capital flows. The extent to which these funds are absorbed by government and are not available to finance investment by private firms, means that government borrowing could be regarded as "crowding out" private sector investment. In evaluating this, the government borrowing must be set against the uses of the funds by different levels of government for investment in infrastructure, and spending on education and health, which are investments in the most important assets of South Africa-its people. In these ways it can also be argued that government spending "crowds in" private sector investment by laying the foundations for profitable business in future years.

Incomes

The returns from gross domestic product are ultimately paid to those employed, in the form of salaries, and to owners of economic operations, in the form of profits. In 1997, the share of salaries of GDP was 59%, with gross operating surplus (profits) amounting to 41%. Since 1992, when salaries accounted for 61,5%, the return to owners has been rising faster than remuneration, reflecting increases in labour productivity which have outstripped the growth of wages.

Employment

Government-which includes local, provincial and national government as well as most parastatals-continues to account for the largest share of formal non-agricultural employment (Figure 6). This is followed by the manufacturing sector, which accounts for the largest proportion of private employment, followed by trade, which includes retail and wholesale trade, and catering.

Figure 6: Formal non-agricultural employment, share of major sectors, September 1997

(Figure 6 omitted)

From 1990 to 1997, a reduction in total formal employment of 8,7% has reflected net job losses in all sectors except for government and private services (Table 1). Mining, construction and manufacturing have all been severely affected, with these sectors continuing to shed significant numbers of jobs through 1997.

Table 1: Changes in formal non-agricultural employment, by sector (per cent)

Total Government Mining Manufacturing Construction Trade Private services

1990-97 
-8,7 3,9 -30,4 -13,4 -25,7 -2,9 5,6

Sept. 1996 to Sept. 1997
-2,2 -1,8 -4,3 -3,8 -4,1 1,2 0,6

Source: South African Reserve Bank

Note: The change in employment from 1990 to 1997 is based on average employment in 1990, and September 1997 employment.

The latest data for manufacturing employment, as of November 1997, reveal that the overall employment trends in this sector are a combination of job creation in some areas and job losses in others. During 1997, the largest reductions in employment have been in food products, clothing, chemicals and motor vehicles, which have each shed more than 5 000 jobs. Employment has only increased in plastics, nonferrous metals and, very slightly, in machinery. These patterns reflect the response by firms to the need to improve their international competitiveness in the face of tariff liberalisation, and in order to win export markets. Attempts to cut costs and increase productivity have meant that in many subsectors of manufacturing-such as electrical equipment, textiles, iron and steel, and metal products-exports and production have increased while employment has fallen.

Since 1990, overall government employment has risen by 3,9%, reflecting increases in public service employment. However, this masks the cutback in employment in the main parastatals. For example, Transnet, Sapos and Telkom have collectively reduced employment by 24% since 1990 as part of their ongoing restructuring. In addition, as the rationalisation of the public service under the new government began to take effect, government employment declined by 1,8% during 1997, and this pattern is expected to continue. This suggests that future job creation will largely depend on the private sector.

As a result of the developments in employment and production in both the public and private sectors, productivity has increased significantly (Figure 7). It has also outstripped increases in wages (remuneration per worker), such that real unit labour costs have declined by 5,7% over the last five years.

Figure 7: Productivity and remuneration

(Figure 7 omitted)

Trade and the balance of payments

Table 2 illustrates South Africa's balance of payments for 1997, which takes into account all the transactions between individuals and institutions in South Africa and those in the rest of the world. The outcome, therefore, affects the foreign exchange reserves of South Africa, although these reserves also change if the government or the Reserve Bank borrows money from foreign institutions.

The current account records the payments made for imports and the receipts from the sale of exports of goods, such as gold, and services, which include insurance, transport and tourism. In addition, international flows of money recorded under services include interest payments on foreign loans, profits and dividends due to foreign investors and those payments which South Africans receive from their investments overseas. The negative balance under net service receipts is the result of payments to foreign investors and institutions being significantly greater than the receipts. The current account also includes transfers such as migrant worker remittances and grants in aid.

The capital account records the net outcome of purchases of South African assets and loans to South African institutions by foreigners (which represent inflows of capital), and foreign assets purchased and loans made by South Africans (which are capital outflows). These capital flows are identified as short-term or long-term in nature, but this is not necessarily an indication of their stability. Long-term flows are defined to include purchases and sales of shares listed on the stock exchange and of government and Reserve Bank bonds, and so cover highly mobile portfolio capital. The net foreign capital inflows recorded for 1997 also represent an increase in the funds available in South Africa for financing of investments, and so are in effect an addition to savings of South Africa, as was represented in Figure 5 above.

Table 2: Balance of payments, 1997

R million % of GDP

Merchandise exports 114 142 19,2

Merchandise imports 130 844 22,0

Merchandise exports - imports -16 702 -2,8

Net gold exports 25 818 4,3

Net service receipts -17 428 -2,9

Transfers -501 -0,1

Current account balance -8 813 -1,5

Long-term capital flows 30 036 5,0

Short-term capital flows -9 790 -1,6

Capital account balance 20 246 3,4

Change in reserves due to balance of payments transactions 11 433 1,9

Source: South African Reserve Bank

There is, therefore, a close relationship between the capital account and the service balance on the current account in future years. If a foreign investor buys shares in a company located in South Africa, the inflow of foreign currency for the purchase is recorded under the capital account in that year. The future payment of dividends to the investor may then be repatriated and will be recorded as outflows under the current account. From this it can be seen that the large capital account surpluses over the last three years will have a negative impact on the current account in future years.

In 1997 there were large capital inflows from abroad that more than outweighed the current account deficit, to such an extent that the current account deficit was easily financed (Figure 8). This helped to stabilise the rand and allow foreign exchange reserves to increase significantly during a period of international financial instability in the context of the Asian crisis. The foreign exchange reserves held by the Reserve Bank rose to a value equivalent to more than 11 weeks of imports at the end of 1997, from just over four weeks in 1996.

Gold exports dropped. Aside from this sector, export performance remained relatively good despite the strength of the rand. Exports of goods aside from gold increased by 12,5% (in nominal terms) to R114,1 billion, although this was lower than the 23,5% growth recorded in 1996. The highest rates of growth in exports in 1997 were in mineral products, vehicles and transport equipment, machinery and electrical equipment.2 The main markets for expanded trade in these products have been in the sub-Saharan region, with which South Africa has a substantial trade surplus, exporting more than is imported.

Figure 8: Balance of payments

(Figure 8 omitted)

Source: South African Reserve Bank

Merchandise imports increased by just 5%. There were marked increases in imports in the categories of vehicles and transport equipment, and machinery and electrical equipment, both categories with significant growth in exports.

Inflation and interest rates

Inflation, which measures the annual rate of change in consumer prices, had fallen to 6,1% by the end of 1997, compared with 9,4% at the end of 1996 (Figure 9). In response to these developments, the Reserve Bank reduced the bank rate-the rate at which it lends to commercial banks-by one percentage point in October 1997 (from 17% to 16%), and again in February 1998.

Figure 9: Inflation, and real and nominal interest rates

(Figure 9 omitted)

Source: South African Reserve Bank

Note: The interest rate illustrated is the predominant prime overdraft rate of clearing banks.

The real interest rate is the nominal rate quoted by banks minus the rate of inflation. It therefore represents a better assessment of the incentive to save and the cost of borrowing. This rate increased to 12,4% at the end of 1997.

The rise in inflation to over 9% in the first half of 1997 was due largely to price increases in the food and housing components of the consumer price index (CPI). There are also signs that the depreciation of the rand in 1996 fed through to domestic prices. The imported goods component of the producer price index increased at annual rates close to 10% in the first quarter of 1997, before falling sharply to a rate of increase of only 1% in December 1997. The rate of increase of domestic producer prices also fell in the latter part of 1997, to 4% in December.

Money supply and credit extension

The monetary policy of the Reserve Bank involves setting targets within which to restrain the growth of the money supply (measured as cash and total bank deposits) and private sector credit. The underlying principle is that lower rates of money supply growth are linked with lower growth of expenditure, and a lessening of inflationary pressures in the economy. During 1997, the Reserve Bank set these targets at between 6% and 10%. Nevertheless, both the money supply and private sector credit grew by 17% during the year, and private sector credit increased by a similar amount (Figure 10).

Figure 10: Money supply (M3) and private sector credit

(Figure 10 omitted)

Source: South African Reserve Bank

High money supply growth did not appear to fuel private consumption expenditures which, as noted above, increased slowly in 1997. This breakdown in the relationship between the money supply and consumer spending is similar to experiences in other countries, and has resulted in a shift away from money supply targeting as a central element of monetary policy.

Exchange rates and competitiveness

The effective exchange rate provides a useful measure of the "average" variation in the value of the rand against a "basket" of currencies. In addition, by adjusting the effective exchange rate for differences in inflation between South Africa and its major trading partners-to get the real effective exchange rate-it is possible to get a picture of the changing international competitiveness of South African producers.

A decline (depreciation) in the effective exchange rate index means that the goods produced by South African firms become more internationally competitive. However, if prices in South Africa are increasing at a higher rate than those of its major trading partners, the positive impact of a depreciation of the rand is diminished and could be cancelled out altogether.

Figure 11: Real and nominal effective exchange rates of the rand

(Figure 11 omitted)

Source: Department of Finance, Budget Review, 1998

Note: The South African Reserve Bank weights are: US (51,7), UK (20,2), Germany (17,2), Japan (10,9)

The alternative weights used by the Department of Finance, based on an extended basket of South Africa's trading partners are: Germany (20,8), US (14,81), Japan (14,49), UK (11,55), Italy (8,58), France (6,57), Belgium (4,09), Netherlands (3,40), Switzerland (3,26), Canada (2,31), Hong Kong (2,25), Spain (1,81), Brazil (1,59), Australia (1,47), Others (3,04).

In the early months of 1997 there was a substantial strengthening of the rand and loss of competitiveness (Figure 11). The extent of this loss of competitiveness depends on which currencies are included in the "basket". The Reserve Bank and the Department of Finance have produced alternative calculations of the effective exchange rate. The Reserve Bank uses a narrower basket, excluding several countries with which South Africa has substantial levels of trade. The Department of Finance index shows a greater loss of competitiveness by South African producers, particularly in early 1997.

The overall strength of the rand in 1997 implies (all else being unchanged) a decline in the competitiveness of South African products, with exports becoming more expensive in foreign currency, while imports become cheaper in rand terms. While, as in 1995, this serves to dampen South African inflation, it also forces South African producers to cut costs or to find other ways of becoming competitive, especially in the context of ongoing tariff reductions. To an extent this has stimulated the improvements in productivity and reductions in unit labour costs (discussed above), which must also be included in any assessment of changes in competitiveness.

Government revenue and expenditure

Fiscal policy and budget reprioritisation

Figure 12: Government expenditure, per cent of GDP

(Figure 12 omitted)

Source: Department of Finance, Budget Review, Table 5b

The ongoing process of budget reform has involved restraint in government spending and a reduction in the amount which government has to borrow. This is reflected in the decline in spending by national government as a proportion of GDP, from 30,7% in the year to March 1998 to a projected 29,9% of GDP for the present fiscal year to March 1999 (Figure 12). These developments represent a significant fall in spending levels as a proportion of national output from 1992-93 and 1993-94, and have led to large increases in government borrowing. Restrictions on government spending have meant that the total stock of debt fell as a proportion of GDP in 1996-97, for the first time since 1990-91.

The breakdown of expenditure and revenue (Table 3) illustrates the size of the debt costs, which amounted to 20,8% of total expenditure in 1997-98. These costs are due to the debt burden built up over previous years and the interest rates at which government repays the holders of the debt (the majority of whom are South African).

Although capital expenditure by the national government rose slightly in the fiscal year to March 1998, its share of total expenditure has remained constant at 4,0%. Capital expenditure by all levels of government was 9,2% of total expenditure for 1997-98. This explains the increases in government investment which were reported in "Growth" above.

Table 3: Economic classification of national government expenditure and revenue

R billion 1996-97 1997-98

Current expenditure 134,8 142,2

Debt service cost 34,1 39,4

Capital expenditure 7,1 7,6

Total 175,9 189,2

Tax revenue 142,6 158,6

Non-tax revenue 4,4 4,0

Total revenue 146,9 162,6

Deficit 29,0 26,6

Current deficit 22,6 20,0

Primary surplus -5,1 -12,7

Source: Department of Finance, Budget Review, Table 5a

The increase in tax revenue for 1997-98 more than outweighed the growth in expenditure, enabling the national budget deficit to be reduced to R26,6 billion, or 4,3% of GDP. This deficit is slightly higher than had been projected, mainly because lower economic growth had a dampening effect on government revenues.

The different measures of the government's balance given in Table 3 give a more complete picture of the fiscal position. The current balance indicates by how much current expenditure-which reflects ongoing commitments such as salaries-exceeds current revenue. This was in deficit by R20 billion in 1997-98. This measure also recognises that borrowing for capital expenditure should (just as for a household or business making an investment) be assessed against the extent to which future earnings will be increased, creating the resources for repayment of the debt.

The primary balance is the difference between government revenue and spending on goods and services, that is, the interest costs are excluded. This measure shows a surplus of R12,7 billion in 1997-98. The overall fiscal deficit combines this primary surplus with interest and debt service costs of R39,4 billion to give a deficit of R26,6 billion.

The medium-term expenditure framework

In the budget presented to Parliament in March 1998, the Minister of Finance set out a framework where government priorities would be set within a three-year financial planning framework. This budgeting process enables greater direction of the transformation of government in pursuit of reconstruction and development goals. In the planning stage, sectoral teams operate at national and provincial level to examine various options and policy implications with a focus on what policy outcomes may be achieved in the future in terms of the available resources. This marks a fundamental break with the past practice of comparing the proposed expenditures each year to the resources allocated in the year before. By focusing on core policy objectives, this new approach also provides a stronger basis on which to evaluate spending and improve the efficiency with which government provides services.

Revenue and expenditure

Table 4 illustrates the reprioritisation of resources to Social Services and Protection Services in recent budgets, which by 1998-99, accounted for 65,8% of total budgeted expenditure. Within these overall categories there have also been major shifts. In Protection Services, resources have been channelled away from Defence to the other three areas, with Prisons receiving especially large proportional increases in the 1998-99 budget year, followed by Justice. Within Social Services, Health has received the largest increases in 1998-99, followed by Education, while the housing budget has been reduced after a very large increase the previous year. These increases have been partly funded by large reductions in the budgets of Economic Services and General Government Administration. This reflects a change in emphasis by the government in reducing direct funding for economic activity such as in mining, manufacturing and regional industrial development, and the slimming down of the bureaucracy.

Table 4: Functional classification of consolidated national and provincial expenditure

Spending (R billion) Estimated annual % change

(corrected for inflation)1

1996-97 1997-98 1998-99 1996-97 1997-98 1998-99

Protection Services 28,1 29,6 33,0 2,2 -0,2 6,2

Defence 11,8 10,7 11,0 -7,2 -14,1 -2,1

Justice 1,7 2,0 2,5 -3,0 11,4 19,0

Police 11,4 13,1 14,1 11,9 8,8 2,5

Prisons 3,1 3,9 5,4 4,8 19,1 31,9

Social Services 81,4 88,6 102,1 0,5 3,1 9,7

Education 39,2 40,3 46,8 3,4 -2,6 10,6

Health 18,5 20,2 25,1 4,9 3,4 18,3

Social security and welfare 16,4 18,4 19,8 -1,5 6,2 2,5

Housing 1,6 4,2 3,9 -51,3 148,6 -11,6

Other 5,7 5,5 6,5 2,0 -8,6 12,6

Economic Services2 19,5 18,9 17,1 1,7 -8,2 -13,8

General Administration, other 13,5 13,2 9,0 14,1 -7,4 -35,1

Interest 34,6 38,6 43,0 7,1 5,6 6,1

Source: Department of Finance, Budget Review 1998, Table 5.2

Notes: 1 Correction for inflation based on an increase in the CPI over the budget year, of 9,6% for 1996-97, and an estimate of 5,6% for 1997-98 and 5% for 1998-99.

2 Economic Services include a range of different categories with the largest being transport, agriculture and water.

Income tax paid by individuals (the largest proportion of tax revenue) has been rising in the three years to 1998 as a proportion of GDP (Figure 13). In addition, as higher-income earners often receive their payment in the form of a package with benefits in addition to a salary, the rules on taxation of benefits such as travel allowances have been tightened.

Taxes on company profits have also been rising throughout the period, as a share of GDP. This reflects both increasing profitability (despite poor performance by the mining sector), and the tax introduced on the retirement fund industry in the 1996 budget.

Indirect taxes, which are paid as part of the purchase price of goods, include value-added taxes (Vat), sales taxes and excise taxes. Altogether they account for the second-largest proportion of total revenue but have remained relatively stable over recent years. They are estimated to increase slightly as a proportion of GDP during 1998 and 1999, reflecting higher tax rates on fuel and on tobacco and alcohol, as well as improved collection methods.

Figure 13: Major groups of taxation, as % of GDP

(Figure 13 omitted)

Source: Department of Finance, Budget Review 1998, Table 1

An important area of taxation policy has focused on improving the efficiency of collection and widening the tax base by increasing the registration of individuals and companies. After offering tax amnesties, government is now moving to identify tax offenders and improve compliance rates to ensure that taxes are collected from all. Evaluations from 1 October 1997 to 31 January 1998 found 33% default rates for income tax, 32% for Vat and 30% for pay-as-you-earn. This suggests that there is great scope for increasing revenues through improved compliance, thus enabling more to be spent on the provision of services.

Poverty, inequality and the provision of services and infrastructure

This section assesses the extent and profile of poverty in South Africa, using the most recent available data. It draws on the Project for Statistics on Living Standards and Development of 1993-94 and the Central Statistical Service (CSS) October Household Survey and Income and Expenditure Survey of 1995.

Poverty, inequality and human development

Poverty exists where people do not have at their disposal the means of achieving a minimum acceptable living standard. The income needed for this is referred to as the poverty line. In practice, measuring poverty is fraught with difficulty and it is not easy to determine the acceptable minimum. To some this refers solely to a narrow range, in particular a diet that is adequate in terms of basic nutritional content. To others, the range includes "capabilities" such as access to health, education and shelter.

The South African Participatory Poverty Assessment reports provides a very clear image of what factors poor people themselves regard as important. Generally, these reports highlight that continuing poor health, food insecurity, crowded homes, poor access to safe and efficient sources of energy, lack of adequately paid, secure jobs, no power to influence change, and high levels of anxiety and stress are major contributing factors to people's perception of their own poverty.

At present, there is no national consensus on an absolute poverty line. A World Bank study in 1996 uses a relative definition of poverty: the bottom 20% of all households are regarded as ultra-poor and the bottom 40% as poor. We follow this approach here.

The poor are very unevenly distributed by province and most of them live in rural areas, where the percentage of individuals classified as poor was around 70% compared with 30% in urban areas.

Figure 14: Provincial distribution of the poor, % of population in poverty, 1993

(Figure 14 omitted)

Source: Klasen, 1996

Not surprisingly, poverty in South Africa is closely related to race. Sixty-one percent of Africans and 38% of Coloureds are poor, compared with only 5% of Indians and a negligible 1% of Whites.

In the country as a whole, three out of every five South African children live in poor households and, moreover, the provincial distribution is very skewed. Notably, child poverty is worse in poorer and less urbanised provinces such as Eastern Cape, where as many as 78% of children live in poor households compared to only 20% in Gauteng and 35% in Western Cape (Klasen,1996).

Gender bias among the poor is also stark. The proportion of female-headed households that are poor (60%) is nearly double that of male-headed households. One important contributing factor is that average wage income in female-headed households is around one-third of average wage income in male-headed households. In addition, female-headed households tend to have fewer adults of working age, and are more likely to be in rural areas, where poverty is concentrated. Female unemployment rates are also considerably higher than that of males.

Figure 15 illustrates the strong link between education and poverty: of households where the household head has no education, 70% are below the poverty line.

Figure 15: Poverty by level of education of head of household

(Figure 15 omitted)

Source: Project for Statistics on Living Standards and Development

Poverty and employment status are closely linked. Labour force participation rates3 of the poor are lower than that of the non-poor, with half of all poor people of working age being outside the labour market altogether. Not surprisingly, the unemployment rate (Table 5) among those in poor households is 55%-nearly four times higher than among the non-poor (14%). As a result of this, only 22% of people aged 16-64 living in poor households have jobs, compared with 60% from non-poor households.

Table 5: Unemployment rates above and below the poverty line,1 1993

Poor Non-poor All

Female 56,9 19,5 35,6

Male 53,9 10,4 25,9

Rural 55,5 16,3 40,2

Urban 55,2 13,6 23,4

All 55,4 14,3 30,3

1 The unemployment rate is calculated by dividing the number of people aged 16-64 who are not working but would like to work (and are either actively seeking work or are too discouraged to continue looking) by the number of people in the labour force.

Source: Klasen, 1996

Figure 16 illustrates the dependence of the poor on state transfers and remittances by household members working elsewhere. In rural areas, jobs represent a poor and rather unstable source of income.

Figure 16: Sources of income among poor and non-poor households, 1993

POOR HOUSEHOLDS                                                                  NON-POOR HOUSEHOLDS

(Figure 16 omitted)

Source: Project for Statistics on Living Standards and Development

The lack of access to basic services and adequate transport facilities are closely related to poverty (Table 6). This lack of services places a heavy workload on the poor, particularly women, who tend to spend a substantial amount of time fetching water and firewood. Moreover, the absence of adequate sanitation facilities and clean water makes poor households more susceptible to communicable diseases.

Table 6: Access to basic services by poor people, 1993

Percentage of households with access

Poor households Non-poor households

Electricity 22,7 74,8

Flush or VIP toilet 19,5 76,2

Piped water 28,4 80,0

Source: Project for Statistics on Living Standards and Development

Income is also very unevenly distributed by race and across the rural-urban divide. In 1995, the median household income in rural areas was only R10 300 per year, equivalent to only one-third of that in urban areas. Racial inequities were also very pronounced. Incomes of both African and Coloured households in rural areas are around 50% lower than those in urban areas.

Figure 17: Mean annual household incomes by race, 1995

(Figure 17 omitted)

Source: Income and Expenditure Survey, CSS, 1995

Social infrastructure and the extension of service provision

Education

The backlogs in education infrastructure are large and vary substantially by province (Table 7). In addition, more than half of all schools did not have electricity in 1996, and 24% did not have access to water, even within walking distance.

Table 7: Classroom shortages and learner:classroom ratios, 1996

Province Classroom shortages Learner:Classroom

Eastern Cape 15 538 50,9

Northern Cape 207 26,0

Western Cape 926 24,6

Free State 2 492 33,1

KwaZulu-Natal 14 534 39,7

Gauteng 2 332 28,4

Mpumalanga 4 455 41,2

Northern Province 13 670 44,3

North West 3 345 36,4

Total 57 499

Source: Department of Education, School Register of Needs Survey, 1996

Under the culture of learning programme in 1995, R300 million was allocated to renovating and repairing schools. After difficulties during 1996, the programme has got more fully underway during 1997. Under the national schools building programme, R1,2 billion was allocated in the years 1995-96 and 1996-97 for the construction of new classrooms and schools, although there have also been delays in this programme.

Health

The increase in spending on health in real terms each year (as discussed in "Government revenue and expenditure" above) has to be set against the large backlogs that exist in this area. It has been estimated that to rehabilitate South African hospitals would require a sustained average annual increase in the health-care budget of 3,3% for 10 years, or 6,9% for five years, over and above the increase necessary to service the needs of a growing population.

Government has instituted a clinic-building programme. By March 1997, 295 new clinics had been started and 92 completed, mostly in KwaZulu-Natal and Northern Province, which have the largest backlogs. The World Health Organisation recommends 10 000 people per clinic, compared with an average for South Africa of 12 955 people per clinic.

Municipal infrastructure

Government is committed to providing greater access to infrastructure services, such as water supply and sanitation, roads and electricity, and refuse management for households. It is providing subsidies of R15 000 for housing and R3 000 per household for rehabilitation and bulk and connector services. Grants for specific services are also being made. In addition, a separate sanitation grant is being made available, along with investment by other departments and parastatals in their specific areas of responsibility, such as water and electrification. Subsidies are also in place to cover the ongoing costs of service provision.

Table 8: Municipal infrastructure spending by category, as at end 1997

Sector R million Number of beneficiaries (millions)

Water 669,2 7 313 899

Sanitation 415,0 5 145 875

Roads 167,1 2 176 723

Refuse 14,0 503 852

Electricity 10,0 300 047

Community and health-care facilities 23,6 671 650

Total 1 298,9 16 112 046

Source: Department of Constitutional Development

By the end of 1997, R1,3 billion had been spent on 1 031 projects completed under the municipal infrastructure programme and the extended municipal infrastructure programme , which were targeted at extending infrastructure to benefit over 16 million people. Of the total, 13,7 million beneficiaries reside in urban areas, and 2,4 million in rural areas. An important dimension of these programmes is also employment creation and training. In this regard, 174 440 temporary jobs have been created, of which 24 118 were for adult women, 147 892 for adult men and 2 430 for youths. There was accredited training provided for 228 967 and non-accredited training for 388 587.

In addition, a coherent framework has also now been established for the appraisal of municipal public-private partnerships. The criteria identified to measure success include factors such as coverage of low-income households, labour involvement and consumer participation. As at the end of March 1998, a total of R17,1 billion had been approved for projects, mainly in the areas of water, sanitation, cleaning and waste disposal, and transport. Of this, R6,4 billion has already been transferred to the provinces, with most projects progressing through the design phase, which includes negotiations with stakeholders.

Housing

Data provided by the Department of Housing indicate that 987 housing projects have been approved nationally, and 690 projects actually started. The total number of subsidies approved are 735 000, and 469 000 houses have been completed or are under construction. The original housing backlog estimated in the reconstruction and development programme (RDP) was three million.

Water

As of 1 March 1998, the Department of Water Affairs and Forestry estimated that 12 million people lacked water services, and 21 million lacked sanitation facilities. Moreover, provincial inequities are stark, with KwaZulu-Natal, Eastern Cape and Northern Province worst affected.

To address these backlogs, the department initiated four programmes for the provision of water services. The latest programme, initiated in 1997, will not be completed until after 2000. Table 9 summarises delivery to date.

Table 9: All RDP projects for period to 1 March 1998

Current water Budget Expenditure Population to be Population served projects served to date

1 020 R2 861,3m R1 073,1m 4 764 000 1 593 339

Source: Department of Water Affairs and Forestry

Electricity

At the end of 1995, 4,5 million houses in South Africa, almost half of the total, were without electricity. In Eastern Cape and Northern Province over 70% of all houses had no electricity supply. The RDP set an electrification target of 450 000 houses each year, with 300 000 to be electrified by Eskom and 150 000 by the rest of the electricity distribution industry, which includes local authorities. This overall target was exceeded in 1995 and 1996, although the backlogs have not been addressed evenly across all provinces.

Preliminary data for actual connections during 1997 is provided below:

Local Other Eskom Eskom Eskom Total Total Total

government distributors urban rural total urban rural industry

154 663 11 920 43 655 241 888 285 543 198 318 253 808 452 126

Source: National Electricity Regulator

Telecommunications

Access to telecommunications facilities is highly skewed in favour of urban areas, the white population and the wealthy. Penetration rates in 1997 were just 4% in rural areas, with an overall ratio of white to black ownership of 10:1 and the ratio of wealthy to poor areas at 7:1. For the country as a whole, there are currently 11 telephones per 100 people.

Telkom's new agreement with government requires that Telkom install three million new lines, provide more than 120 000 public telephones-increasing access in rural areas to five telephones per 1000 people-and upgrade telephone exchanges.

Source: South African Reserve Bank

Electricity, gas, water 4%

Public authorities

General government 21,2%

Private consumption expenditure 61,2%

Public corporations Private frims

Source: South African Reserve Bank

Source: South African Reserve Bank

Current account balance

Capital account balance

Private sector credit

1 This differs from the balance given in the balance of payments (discussed in "Trade and the balance of payments" below) as it does not include payments made to factors of production. These payments consist of interest, profits and dividends due to people and institutions in other countries, as well as payments made to foreign labour which are remitted.

2 This is sourced from the Industrial Development Corporation, and is for the Southern African Customs Union as a whole.

3 The labour force participation rate is calculated as the sum of those who are employed and those defined as unemployed, as a percentage of the population of working age.