SOUTH AFRICA: ECONOMIC TRENDS AND THEIR IMPLICATIONS FOR RACIAL TENSIONS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP83S00855R000100100005-9
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 21
• Document Creation Date: December 21, 2016
• Document Release Date: July 29, 2008
• Sequence Number: 5
• Publication Date: August 1, 1982
• Content Type: CABLE

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Directorate of Confidential
Intelligence
South Africa: Economic Trends
and Their Implications
for Racial Tensions
An Intelligence Assessment
State Dept. review completed
Confidential
ALA 82-10114
August 1982
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for Racial Tensions
An Intelligence Assessment
Directorate of
Intelligence
South Africa: Economic Trends
and Their Implications
ALA,
Council. Comments and queries are welcome and may
be directed to the Chief, Southern Africa Division,
Office of African and Latin American Analysis. It
was coordinated with the National Intelligence
This assessment was prepared by
Confidential
ALA 82-10114
August 1982
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South Africa: Economic Trends
and Their Implications
for Racial Tensions
? Key Judgments Two salient features of South Africa come to mind when casual observers
think of that country: its glittering mineral wealth and its brooding racial
problem. Even transit passengers passing through Johannesburg's bustling
Jan Smuts airport are struck immediately by the contrast between the
brisk business being done by duty-free kiosks selling gold Krugerrands and
the omnipresent and sullen black maintenance staff. 25X1
The linkages between the South African economy and relations between its
racial groups are more than superficial. South Africa's history and
apartheid policies have shaped its economy, dividing it into a modern
industrial sector and a rural subsistence sector and creating enormous
socioeconomic disparities within the population. These disparities have
added to racial tensions resulting from the white minority's refusal to share
This paper examines the linkages between economic performance and
racial tensions, projects trends in both areas through 1985, and discusses
the implications for South Africa and for the United States. Its findings
are fairly pessimistic:
? Living conditions for urban blacks have improved significantly over the
past 12 years as the result of steady economic growth and the govern-
ment's adoption of a strategy of building a nonwhite middle class as a
buffer against revolution. But the gap between white and nonwhite
standards of living remains enormous.
? Because the South African economy is so vulnerable to fluctuations in
world gold prices and because these prices cannot be counted on to rise
above $500 an ounce before the end of 1985, we estimate that real
economic growth will hover at 2 percent or less in 1983 and remain below
5 percent in 1984 and 1985.
? Pretoria acknowledges that 6-percent annual growth is necessary just to
provide jobs for black entrants to the labor force. Moreover, because
South Africa's tax base is small, resting almost exclusively on the
Information available as of 10 August 1982
has been used in the preparation of this report.
Confidential
ALA 82-10114
August 1982
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Confidential
business and personal incomes of the minority (17 percent) white
population, the government will be unable to increase spending signifi-
cantly on programs to improve the socioeconomic status of nonwhites.
? Consequently, the pace of improvement in black housing and education
and in nonwhite living standards in general is likely to slow, and the pool
of unemployed and underemployed blacks will! probably swell. Even if
economic growth is a notch higher than we predict, the black unemploy-
ment rate is unlikely to dip below 20 percent.
? We believe, therefore, that the potential for major racial disturbances
will increase over the next several years, with the country's industrial
centers becoming the most likely trouble spots.
A leveling off of South African economic growth along the lines we
anticipate will by itself have mixed consequences for the United States over
the near term. Stepped up foreign borrowing by Pretoria to offset current
account deficits, for example, will broaden lending opportunities for US
commercial banks, and this will help to offset reductions in earnings and
expansion opportunities for US firms doing business in South Africa.
Inasmuch as they heighten the potential for a major racial upheaval,
however, recent and prospective economic events undermine the US
objective of preventing racial conflict in South Africa from jeopardizing
US economic and strategic equities there.
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The Setting 1
Recent Economic Patterns and Prospects 4
Challenges for the Mid-1980s 8
1. Map: South Africa: Major Industrial Areas
3. South Africa: The Black/White Wage Gap
1. South Africa: International Role, 1981
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Development and Structure of the South African
Economy
The discovery of gold in 1886, in what is now the
Johannesburg area of Transvaal province, shaped the
early development of South Africa's modern economy.
European and American capitalists poured in money
and technology, tying South Africa into the Western
economic system in the process. Development of gold
mining paved the way for the exploitation of many
other minerals, such as chromium, manganese, and
uranium. Gold mining stimulated the formation of the
engineering and explosives industries. Demand for
electric power for mining and refining led to exploita-
tion of major coal deposits in Natal and Transvaal
provinces, and the recruitment of blacks to work the
mines helped create the nonwhite labor force that now
also serves the manufacturing, services, and commer-
cial agriculture sectors.
Gold made the Pretoria-Johannesburg area the coun-
try's major industrial center and fostered the growth
of three other areas-the Western Cape around Cape-
town; the Port Elizabeth-Uitenhag-East London area
of the Eastern Cape; and the Durban-Pinetown dis-
trict in Natal. Each possesses a major port, and plays
a key role as an entrepot for goods going to and from
Pretoria and Johannesburg. Today, the four areas
provide over 80 percent of South Africa's industrial
output and employ nearly 80 percent of its modern
work force.
The manufacturing sector of the modern economy was
first stimulated by South Africa's enforced isolation
during World War I, but was hurt by the depression in
the 1930s. It gained new vitality during World War II,
when it was temporarily shielded from foreign compe-
tition yet pressed to provide the Western powers with
supplies of all kinds. During the 1960s, increased
investment by Japanese and Western businesses eager
to get an early share of the small but growing
southern African market provided an added boost to
the manufacturing sector.
Nevertheless, the limited purchasing power of the
black population in South Africa-and in neighboring
states-as well as the countrys distance from major
Western markets have stunted development. In the
late 1970s, manufacturing output was only $18 billion
more than in 1950, compared, for example, to a
growth of $28 billion in manufacturing in Canada (a
country of about equal population) during the same
period. South African manufacturing accounted for
only 12 to 14 percent of total employment in the
modern economy by the end of the 1970s (less than 10
percent of black employment), compared to almost 20
percent in Canada.
Commercial agriculture in South Africa has followed
the pattern-on a much smaller scale-of agricultur-
al development in the United States. Beginning with
the ruggedly individualistic Afrikaner Boer farmers
and herders of the early days, agriculture has evolved
into large, family-owned agribusinesses. It is rapidly
incorporating modern technologies and is turning to
heavy machinery instead of cheap, but inefficient,
black labor. As a result, South Africa is self-sufficient
in food production and has large surpluses for export.
Agriculture, however, accounts for only 7 percent of
GDP and less than 10 percent of exports.
The mineral sector is today both the greatest strength
of South Africa's modern economy and the source of
its greatest weakness. Mineral exports account for
about 75 percent of export earnings; gold alone repre-
sents 66 percent of mineral exports. South Africa
earned over $13 billion from gold sales in 1980. The
modern economy, however, is so heavily oriented
toward mineral exports that its health has long been
hostage to fluctuations in' world mineral prices and to
the capability of the mining industry to increase
output. For example, the'decline in South Africa's
gold output by a third after 1970-as the richest ore
.veins were exhausted-was largely responsible for a
drop in the country's average annual growth in GDP
from 5.1 percent during 1951-70 to 3.7 percent during
1971-81.
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and Their Implications
for Racial Tensions
The Gains of the 1970s
South Africa's gross domestic product is only about a
third as large as Canada's, even though their popula-
tions are roughly equal.' Yet, South Africa's 4.6
million whites enjoy one of the highest living stand-
ards in the world. Most of its 25.6 million nonwhites
lead lives of grinding poverty. Roughly half of the 22
million blacks engage in traditional agricultural prac-
tices in rural "homelands," where conditions are not
much different from those in the poorest African
countries. Most of the other 11 million blacks, along
with the 3.5 million Asians and Coloreds (people of
mixed race), provide cheap labor for the modern
economy.
Living conditions for many South African blacks,
nonetheless, improved significantly during the 1970s.
These improvements reflected economic expansion
averaging almost 4 percent annually, the related
growth in the size of the black urban population, and
government encouragement of improved conditions
for blacks as part of its policy of building a nonwhite
middle class. The incidence among blacks of nine
serious diseases-infective encephalitis, small pox,
trachoma, typhus fever, meningitis, puerperal sepsis,
scarlet fever, leprosy, and diptheria-declined sharp-
ly, for example. Although health services are still poor
for most blacks, the availability of doctors and mod-
ern health care facilities for nonwhites in South
African urban areas is a notch ahead of those in the
rural homelands. Moreover, although the share of
black children enrolled in school remained constant at
47 percent through the 1970s, those staying in school
to acquire a secondary education grew from 15 per-
cent to almost 25 percent of total enrollment. Both
primary and secondary educational facilities are more
readily available to blacks in urban areas, and com-
pulsory education was introduced for urban blacks in
some locales in 1981.
' Except where otherwise indicated, the statistics in this paper were
derived from official South African Government publications.
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Gross domestic product
Population
Public and publicly
guaranteed foreign debt a
Foreign direct investment,
stock a
$82 billion
30 percent of Canada's
35 percent of Mexico's
29 million people
121 percent of Canada's
42 percent of Mexico's
$6 billion
$1 billion held by the United States
$12 billion
$2 billion US exposure
$21 billion
29 percent of Canada's
86 percent of Mexico's
$21 billion
30 percent of Canada's
84 percent of Mexico's
645 metric tons
60 percent of world total
72 percent of non-Communist
total
The expansion of the economy between 1970 and
1981 opened the way to greater nonwhite participa-
tion in the modern sector. Black employment in
mining, manufacturing, and other sectors of the mod-
ern economy grew by 25 percent to 2.8 million
workers during the period.' Real wages for blacks in
2 These data exclude the approximately 4.5 million black workers
who were unemployed or working as subsistence farmers in the
homelands, employees on white-owned farms, domestic servants,
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these jobs climbed by an impressive average annual
rate of 5.7 percent, a significantly higher pace than
that achieved by whites. Nonetheless, the spread
between the average annual current income of whites
and that of blacks grew from about $3,730 in 1970 to
$9,500 in 1981.
Other factors contributed to the progress realized by
blacks:
? The replacement of white minority regimes in
Angola, Mozambique, and Zimbabwe with black-
ruled governments hostile to South Africa induced
South African mining companies to halve their
employment of low-wage foreign migrants in favor
of more domestic black workers. The steady rise in
gold prices beginning in the early 1970s enabled
gold mining companies, which account for two-
thirds of total mining employment, to maintain
profitability despite increasing labor costs. As a
result, real mine wages for blacks grew at 11
percent annually during 1971-81, outpacing black
wage gains in all other sectors and bringing black
wages in mining roughly into parity with those in
the rest of the economy.'
? Blacks moved steadily into higher paying semi-
skilled and skilled jobs left open by shortages of
white workers. The growth of skilled job openings
outpaced the expansion of the white labor force both
because of demographic factors-white population
expansion equaled only 1.5 percent a year during
1971-81-and because of military conscription that
forced practically all young white males to delay
their entry into the labor market.
The Role of Governmental Reform
Changes that occurred in the government's overall
approach to racial issues during the latter part of the
1970s reinforced economic and demographic pres-
sures for change-and raised nonwhite expectations.
The rethinking of racial policy by Pretoria was set in
motion principally by the riots in Soweto in 1976 and
the subsequent wave of racial disorders in other
nonwhite South African communities. Adding to the
Despite these gains, earnings for black miners average just $240
pressures for a change in government racial policies
were the emergence of hostile black regimes in Ango-
la and Mozambique, an economic downturn in 1976-
77, and increased Western activism against apartheid.
Viewing itself threatened by, in its words, a "total
onslaught" of hostile internal and external forces,
Prime Minister John Vorster's administration sought
to rationalize and orchestrate foreign and domestic
policies in order to develop a more coherent strategy
for maintaining white control. Government initiatives
and statements after mid-1976 reflected a change in
approach from one of actively seeking to reduce the
black population in urban areas and to limit black
involvement in the modern economy to one of creating
a stable black work force enjoying improved living
conditions. Although Vorster refused to grant mean-
ingful political rights to nonwhites, he made plain
through statement and action that his goal was to
create a nonwhite middle class with enough of a stake
in the existing system to want to defend it, alongside
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whites, against outsiders and, if necessary, against less 25X1
privileged South African blacks.
As part of this effort and with considerable public
fanfare, the government relaxed apartheid restrictions
in such areas as sports, urban black residency, job
discrimination, and the sIegregation of public facili-
ties. Pretoria also began to increase spending on black
education, housing, and health care. It also stepped up
its effort to bring the salaries of black civil servants-
whose numbers doubled to about 500,000 between
1970 and 1981-up to the level of their white counter-
Although P. W. Botha had a reputation as a hardliner
on racial issues when he became premier upon Vor-
ster's resignation in 1978, he quickly embraced Vor-
ster's approach, pushing it further and faster in some
areas. Botha has boosted; spending on black education
and housing to unprecedented levels, further rolled
back or amended regulations prohibiting black entry
into skilled occupations, and eased travel and other
restrictions on urban black jobholders. In addition, he
has initiated programs to provide electricity, street
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South Africa: Major Industrial Areas and Black Homelands Figure 1
BOTSWANA
Hotazel
Mn
Art Transvaal retori
Mn -J afi nnesburg
My So{wetoo p
Orange
j Kimberley Free State
Bloemfontein-
Mbabane
Major industrial area
Black homeland
-.- Province boundary
MINERALS and MINES
Cr Chromium O Coal
Mn Manganese A Gold
U Uranium
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and sidewalk paving, sewerage, and shopping centers
to Soweto and some other major black townships.
Finally, Botha has encouraged private involvement in
such sectors as housing and industrial training and
has tried to inject new life into development projects
in the homelands through a number of stimulative
and this reduced South Africa's foreign indebtedness.
Meanwhile, South Africa built its foreign exchange
reserves up to the equivalent of a comfortable five
months' worth of imports.
measures including tax concessions.
Initially, Botha's efforts were facilitated, indeed made
possible, by an economic boom that began in 1979 and
lasted through 1981. Economic growth at the peak of
the boom exceeded the 6-percent rate the government
acknowledges is necessary to absorb new black job
entrants into the nonagricultural, modern sector. The
surge in government revenues from what journalists
dubbed the "golden harvest" provided the money for
the increased spending on education and housing for
blacks. The boom also shaped government calcula-
tions about the reaction of the white electorate to
racial reform; reports from the US Embassy and from
journalists make it plain that Botha and other reform-
minded officials assumed a fairly high white tolerance
for their program because the government could
increase spending on social projects and roll back
restrictions on black economic activity without affect-
ing the well-being of whites.
The Boom of 1979-81
Upside. Robust economic growth was fueled by the
jump in world gold prices that began in 1979. The
business cycle peaked in 1980 with banner growth of
7.3 percent in real GDP. The unprecedented gold
price boost improved the terms of trade sharply,
producing record current account surpluses of more
than $3.5 billion in both 1979 and 1980. Import
volume, led by an increase in finished consumer
goods, jumped 15 percent in 1980 alone. Large quan-
tities of capital equipment and machinery, raw mate-
rials for domestic processing and assembly, and crude
oil-which accounted for more than half of total
imports-also flowed in to fuel the rapid domestic
expansion.
The availability of low-interest funds on the domestic
capital market enabled the private sector and public
corporations to repay many foreign loans in 1979-80,
Soaring income tax revenues created by the broad-
based economic expansion allowed Pretoria to in-
crease selected consumer subsidies and cut tax rates
on personal income and retail sales in late 1979.
Despite increased government spending for both de-
fense and social programs, the sharply higher revenue
intake reduced the budget deficit to below 2 percent
of GDP in 1980.
The tax cuts, along with the easing of interest rates,
produced a sharp increase in private spending. Pur-
chases of consumer durables-such as furniture, ap-
pliances, and automobiles-surged by 26 percent
during 1980. Improved business expectations in-
creased domestic and foreign direct investment in
plant and equipment, and inventories bulged.
The increases in consumer and industrial demand
spurred a rise of over 11 percent in manufacturing
and in wholesale trade. Construction followed closely
with 8-percent growth. Bumper summer crops also
brought a 13-percent increase in real farm output
despite a decline in winter crop production and stag-
nating meat output.
Monetary discipline slipped in the intense boom,
however, setting the stage for accelerated inflation.
The relaxed credit controls and low interest rates led
to a $4.2 billion increase in commercial bank lending
to the private sector in 1980. These factors and rising
gold and foreign exchange holdings pushed the money
supply up by more than 27 percent in 1980. Only the
existence of excess industrial capacity at the begin-
ning of 1980, the surge in imports, and the movement
of larger numbers of blacks into higher paying skilled
positions contained inflation to about 14 percent for
the year.
Downside. Bumping into limits on their ability to take
on more credit, South African consumers began to
reduce spending by early 1981. This slowdown in
growth of private consumption marked the start of the
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Figure 2
South Africa: Selected Economic Indicators
Note change in scales
Growth of Money Supply Exchange Rate
Percent US $/Rand
25
20
15
10
0 1978 79 80 81
a P roj ecte d.
bLondon average daily fixing price.
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business-cycle decline. More restrictive monetary pol-
icies designed to cool the overheated economy contrib-
uted to the slowdown as the year progressed. Only
record harvests kept real GDP growth at 4.6 percent
last year. Unemployment among urban blacks,
which-according to South African Government sta-
tistics-dropped 1 percentage point to 8.1 percent in
1980, began to increase rapidly in 1981, and real
incomes of nonwhite groups began to decline.4 F
We believe that these domestic trends would have had
only a moderate impact if they had not been accompa-
nied by two major developments on the international
economic front: the plunge in gold prices and the
onset of the recession in the United States and in
other Western countries. Gold prices slid steadily
from an average of $560 an ounce in January to just
$400 by the end of 1981, cutting foreign exchange
earnings by $3.5 billion. Rising US interest rates,
which induced international currency traders to
switch from gold to dollars after mid-1980, and
increases in Soviet gold sales were largely responsible
for the slide.
Nongold export earnings dropped 14 percent in re-
sponse to the recession in the West. Falling diamond
prices cut proceeds from diamond exports alone by
over $400 million in 1981. Although import volume
flattened, world inflation and a fall in the value of the
rand against foreign currencies drove the value of
imports up 14 percent. As a result, South Africa was
forced to step up short-term borrowing from Europe-
an currency markets and to draw down gold and
foreign exchange reserves by $1.8 billion to cover a
record $4.5 billion current account deficit for 1981.
Increasingly worried about inflation, Pretoria sharply
tightened its freewheeling monetary policies in the
first three quarters of 1981. The South African
Reserve Bank boosted domestic interest rates and
tightened bank reserve requirements, forcing a con-
traction in domestic credit. The result was a drop in
'The employment statistics exclude blacks in the homelands, where
unemployment stayed high in the 1970s and remains so. The overall
black unemployment rate probably rose to about 20 percent in 1980
despite the modern sector's absorption of 215,000 new black
the growth of the money supply (at annual rates) from
46 percent in first quarter 1981 to 10 percent in the
third quarter. In October and December, the Reserve
Bank made two well-publicized gold "swaps" with
West European commercial banks for $1.2 billion to
help stem the foreign exchange drain without under-
mining Pretoria's anti-inflationary policies.' Despite
these measures, constraints on skilled manpower and
industrial capacity, a slip in monetary discipline in the
fourth quarter, and increases in some government
administered prices (such as rail rates) kept inflation
above 15 percent in 1981.
Near-Term Economic Outlook
Unless gold prices rise significantly above current
levels, we estimate that South Africa's rate of eco-
nomic growth will not exceed 1 percent in 1982.
Financial losses already have become so great that
some marginal gold mines subsidized by Pretoria may
soon be forced to close. Contractionary fiscal and
monetary policies aimed at further squeezing private
demand for imports, restraining the national budget
deficit, and curbing inflation will inhibit manufactur-
ing, construction, and commercial activities. More-
over, drought has considerably dimmed the likelihood
of another good harvest this year.
Meanwhile, Pretoria's international payments prob-
lems will deepen. In our' judgment, Pretoria cannot
cut imports enough this year to offset the slide in
foreign exchange earnings caused by falling gold
prices. Since the beginning of 1982, the price of gold
has fallen to a weekly average of less than $350 an
ounce. Although possible reductions in US interest
rates and inflation may ease downward pressures on
gold prices later this year, their average is unlikely to
reach $400 an ounce. Pretoria already has begun sales
of 99.9-percent pure, 400-ounce gold bars (up from
' Following a pattern establislied in the mid-1970s, Pretoria sold
gold at discount prices with a commitment to repurchase the gold in
the future at a premium. The,"swaps" covered more than one-fifth
of the government's gold stock. We assume that Pretoria hoped in
this manner to avoid the expansion of domestic banking liquidity
that would have ensued from increased foreign borrowing. Pre-
toria's repurchase commitments moderated the pressures that
outright gold sales from stocks would have had on already falling
prices.
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South Africa: Balance of Payments
Merchandise trade balance
-676
-655
-1,100
-5,866
-10,160
-9,800
Merchandise exports, f.o.b.
7,237
8,566
10,467
12,395
10,718
10,700
Merchandise imports, f.o.b.
7,913
9,221
11,567
18,261
20,878
20,500
Net gold output
3,214
4,443
7,129
13,035
9,580
8,000
Net services
-2,109
-2,370
-2,696
-3,909
-4,380
-4,700
Net transfers
45
112
194
378
425
500
Current account balance
474
1,530
3,527
3,638
-4,536
-6,000
Long-term capital movements
340
6
-1,216
-781
410
Change in liabilities related to reserves b
-240
-562
-476
1
2,102
Other short-term capital movements c
-975
-931
-1,816
-2,174
867
Gold valuation adjustments and SDR allocations
287
1,617
2,418
1,258
-624
Change in gross gold and other foreign reserves
-114
1,660
2,437
1,942
-1,781
Total reserves, yearend
906
2,566
5,085 d
7,446 d
4,877
a Projected on the basis of an average gold price of $375 an ounce,
1981 average exchange rates, and 1-percent real growth.
b Liabilities related to reserves are short-term foreign liabilities of
the South African Reserve Bank and short-term foreign obligations
of the central government and commercial banks.
c Includes supplier credits and errors and omissions.
d Total reserves are not the sum of change in reserves and the
previous year's total reserves because of year-to-year changes in
exchange rates.
99.5 percent) in an effort to boost flagging export
earnings. Even so, the current account deficit soared
to $1.4 billion in the first quarter of 1982 and will
likely balloon to a record of nearly $6 billion this year.
South Africa is borrowing heavily abroad to finance
imports and to replenish its foreign exchange reserves.
The South African Reserve Bank already plans to
borrow $3 billion from overseas lenders this year,
according to Western banking sources. In addition,
Pretoria has withdrawn $130 million from its reserve
account in the International Monetary Fund. Despite
these measures, we believe South Africa will again
draw down its foreign reserves by $1.5-2.0 billion to
help meet foreign payments needs in 1982.
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Anticipating increased budget deficits, Finance Min-
ister Owen Horwood announced in February a 10-
percent surcharge on imports and an increase in the
general sales tax from 4 percent to 5 percent. The
government originally estimated these measures
would yield $1.2 billion in additional revenue during
the fiscal year that began on 1 April. Horwood's
budget, presented in March, also included a $625
million increase in other taxes to help offset a $1.3
billion fall in tax revenues from gold mining because
of the drop in gold prices. Even with these adjust-
ments, the budget called for a slight decrease in real
spending this year to just over $18 billion and a
budget deficit up slightly from last year to $2.4
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billion. Pretoria, however, did not expect the price of
gold to drop as low as it has during this year.
Consequently, lower-than-expected revenues from
gold could still increase the deficit. In this case,
pressures would mount for Pretoria to enact new
revenue measures to contain both the deficit and
inflation-which is already running at a 16-percent
annual rate.
The Longer Term
We believe that as long as US interest rates are high
and inflation is contained, international speculative
pressures are likely to keep gold prices below the $500
to $600 range. Gold prices need to reach this plateau
to permit the level of import growth in South Africa
necessary for more rapid economic expansion. With-
out increased gold income, we estimate that South
African growth probably will continue to bump along
at 2 percent or less through 1983. The government is
likely to maintain tight constraints on imports in order
to control the international payments deficit and on
public spending to reduce inflationary pressure. De-
pressed consumer spending, inventory reduction by
businessmen, and reduced investment in plant and
equipment by both public and private firms can all be
expected to act as brakes on growth from the demand
side.
By 1984 the economic picture will improve somewhat
in South Africa, although world conditions mitigate
against South Africa's regaining export opportunities
like those of the 1979-81 boom period. OECD and
private business forecasters, judging that most of
Europe and Japan are now essentially out of the
trough and that the US economy is likely to pick up
late this year or in 1983, currently project economic
recovery in the Western industrialized countries to be
spread over the next 18 months.' This recovery should
be sufficient to lift demand for South African exports.
In addition, business analysts see a recovery in South
African domestic spending on consumer durables
based on product life and observed cycles.
Economic growth in 1984 and 1985, therefore, may
well regain the 1970s average of 3 to 4 percent
annually, even with little or no improvement in gold
6 These forecasters also project that long-term growth in the
developed countries will fall short of that achieved during the late
prices and continued tight monetary and fiscal poli-
cies. Were there to be good rainfall and bountiful
harvests, the growth rate might exceed 4 percent by-
at most-1 percentage point. On balance, we estimate
that the average annual growth rate will, for the
foreseeable future, be below the 5.1-percent rate
achieved in the 1950s and 1960s.
If gold prices rebound to levels higher than we
anticipate, South Africa will benefit accordingly. In
our judgment, gold prices of $500 to $600 an ounce
would return economic growth to 4 to 5 percent in
1983 and provide a platform for growth of 6 to 8
percent in 1984 and 1985. Each $100 rise in gold
prices would boost export receipts by about $2.1
billion, or 11 percent over earnings we project for
1982. In turn, replenished revenues from taxes on
renewed gold mining profits would enable the govern-
ment to ease the tax burden on personal incomes,
thereby stimulating consumer spending. Increased
earnings from gold sales alone would allow sufficient
increases in imports to accommodate this demand.
Rising gold income would have a cumulative effect
because it would enable'the government to forge
ahead on delayed investment projects and permit
mining companies to revitalize development of rela- 25X1
tively low-grade gold de i posits.
Implications for South Africa and the United States
Challenges for the Mid 1980s
Botha has stuck to his limited racial reform program
despite the economic slowdown and the rightwing
political backlash reflected in the results of the elec-
tion in April 1981. The',budget tabled in March 1982,
for example, increased allocations for the Department
of Cooperation and Development (which funds admin-
istration and development of Soweto and other black
townships) by one-third to $1.2 billion, while budget-
ing for black education; and training was increased by
29 percent to $476 million.' These gains came at the
expense of allocations to other areas. Defense spend-
ing was held to a nominal 8-percent rise to $2.7
Spending per black pupil, nevertheless, remained at about $175 a
year, compared to more than $1,000 for each white student.
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billion. Although the only actual cuts were in agricul-
tural programs-down $109 million-the overall
budget was austere.
A leveling of economic growth along the lines we
anticipate, however, will inevitably undermine Botha's
ability to continue raising spending on social pro-
grams. The steep drop in gold profits and stagnation
in white incomes, which together are the sources of
half of government tax revenues, will put a cap on
revenue unless tax rates are raised again. We believe
Botha is unlikely to increase tax rates or further divert
funds from other uses because such moves would give
political ammunition to his rightwing critics. The
splitting away of the right wing of the National Party
in March 1982 and the response to political stumping
over the past few months by both Prime Minister
Botha and the leader of the new Conservative Party,
Andries Treuernicht, reflect strong white opposition
to the whole Botha reform program. The negative
reaction of many whites indicates they believe they
are being asked to foot the bill for programs that, in
the end, will erode their privileged position-and they
resent it.
Consequently, we anticipate that spending constraints
and demographic trends-primarily the annual
growth of roughly 3 percent in the black population
and steady increases in black urbanization-through
1985 will undermine the government's goal to create a
nonwhite middle class that would be a buffer against
racial upheavals. No plausible economic growth sce-
nario, for example, is likely to reduce either the black
unemployment rate below 20 percent or the number
of unemployed blacks, now totaling about 1.5 million,
over the next few years:
? Assuming economic growth averages less than 2
percent during 1982 and 1983, stagnation in nonag-
ricultural, modern sector employment and the emer-
gence of new black jobseekers will push black
unemployment in the modern sector toward 2
million.
? Economic growth of 3 to 4 percent annually during
1984 and 1985 would again be likely to produce
slow growth in black employment. The ever-increas-
ing numbers of black labor force entrants, however,
would continue to swell the pool of unemployed at
only a slightly lower rate than in 1982-83.
? Only in the unlikely event that economic growth
exceeds our expectations and averages 6 to 8 percent
during 1984 and 1985 would conditions for blacks
improve in a fashion akin to that of the late 1970s.
Ironically, the initial phases of this sort of boom
could present their own problems. We believe, for
example, that another boom would substantially
increase pressures from black workers for higher
wages and better working conditions. Moreover, the
expansion of job opportunities would bring many
blacks from the homelands to the urban areas and
would lead many marginally employed blacks-
domestic servants, part-time workers doing odd jobs,
and the like-to begin hunting full-time jobs in the
modern sector. In the short term, this could serious-
ly strain limited public services and add to unem-
ployment of the unskilled.
Likely Patterns of Response
Because there are no large-scale unemployment or
welfare programs for blacks in South Africa, many of
the unemployed urban blacks will be forced to fall25X1
back on family members already living at or near
subsistence levels in the homelands if growth contin-
ues to be slow. Households in the homelands can
expect little increase in the $300 or less a year in cash
they are now able to secure to supplement farm
production. Indeed, this small amount comes princi-25X1
pally from remittances from migrant workers em-
ployed in mining and modern sectors, some of whom
will lose their jobs at the slower growth rates.[
We do not believe that rural development projects will
pick up slack or otherwise cushion the problems of the
unemployed. The economic downturn has made busi-
nessmen even more reluctant to invest in projects in
the homelands. As a result, we believe the urban-rural
gap will widen, adding to the tensions in overall black-
white relations.
In the absence of economic growth greater than we
anticipate, frustrations are likely to rise even among
employed black industrial workers and others among
the relatively well-to-do nonwhite community. These
nonwhites are already feeling the immediate impact
from the slowing in the growth in earnings for black
urban workers. Income growth will in all likelihood
slow sharply between now and 1985.
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Figure 3
South Africa: The Black/White Wage Gap
Annual Wages (US $)
Basic Industries
1.8 Million Blacks
0.5 Million Whites
Services
1.1 Million Blacks
0.9 Million Whites
This, in our view, will give impetus to the growth in
size and militancy of black labor unions. Following
legalization of collective bargaining rights for black
unions in 1979, black union membership accelerated
steeply from about 70,000 in 1979 to more than
200,000 currently. Labor retrenchments and in-
creased management resistance to wage increases this
year because of the economic slowdown have led to
strikes in many plants and to serious rioting at four
gold mines. Because inflation still exceeds 15 percent,
pressure for wage hikes is increasing.
Budgetary constraints and the business downturn will
act increasingly as a drag on programs to upgrade
education and housing, which are of particular impor-
tance to the nonwhite residents in urban areas. Be-
cause it is such an emotional issue among whites, the
government has been reluctant to take the one step in
the area of education that might yield quantum
results-abandoning the separate education systems
for the various races in favor of a unified, multiracial
school system. A government-commissioned study
published in 1981 found that because of the vast
disparities between the white and nonwhite systems,
Pretoria would need to earmark $5.5 billion annually
for an indefinite period to bring the nonwhite systems
up to par with the white system. This compares with
the $476 million budgeted for nonwhite education this
year! Faced with economic hard times, business
'South Africa today spends about 5 percent of GDP on education,
a level comparable to that in many Western countries. Bringing
nonwhite education up to current white standards-which would
entail massive programs for improving the quality and numbers of
nonwhite teachers and schools, making textbooks available to
individual nonwhite students,,and the like-would involve stagger-
ing costs that might absorb as much as 20 percent of GDP.
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leaders are unlikely to expand their involvement in
industrial and vocational training. Given the magni-
tude of the problem and the hesitant pace at which
the government and the private sector are proceeding,
we believe that no perceptible increase even in black
literacy is likely until well after the mid-1980s.F-
The prospect for any easing in housing shortages for
urban blacks is equally bleak. Although, under this
year's budget, allocations by the Department of Com-
munity Development for urban housing construction
were increased by 20 percent, the number of units
completed will be only a fraction of the 150,000 to
200,000 needed. The quality of government housing,
moreover, will probably remain far below standards
sought by blacks who are beginning to move up the
economic ladder. Public housing construction remains
locked into a pattern of row after row of box-like
units, each with four barracks-like rooms. The govern-
ment has only begun to provide electricity and indoor
plumbing and to pave sidewalks and streets.
As with education, private-sector involvement in non-
white housing is likely to be held back by the project-
ed slow pace of economic recovery. A 99-year lease-
hold scheme enacted in December 1978, which
provides urban black residents many of the rights of
property ownership, has failed to spur home construc-
tion by individual nonwhites or to attract private
mortgage financing. According to the government
itself, applications from black families under this plan
so far have totaled 2,500-of which only 1,200 have
been approved. In our view, this response reflects:
? Lack of discretionary income by blacks for home
construction and improvement.
? Perceptions among blacks that they are as well off
with the government footing the bill for housing.
? General unattractiveness of home ownership in the
dreary townships.
? Pervasive uncertainty among blacks about their
status in white urban areas after decades of govern-
ment policy to reduce permanent residence.
Nonwhite pessimism over the prospects for improve-
ments in housing, education, and wages was reflected
in recent surveys by private South African organiza-
tions and universities, which found that the majority
of urban nonwhites already believe that their living
conditions are deteriorating and their prospects for
advancement are declining.
Implications for Racial Unrest
We believe the potential for serious racial unrest in
South Africa will remain high through 1985 under
the best of economic circumstances. Socioeconomic
disparities between whites and nonwhites are such
that it would take decades for even the most reform-
minded government to close the gap significantly, and
nonwhites' expectations for change have been raised
by the progress they have made in recent years. In the
meantime, black frustrations over the white minor-
ity's reluctance to share political power will continue
to reinforce black impatience with the scope and pace
of economic and social change. The politicization of
the nonwhite communities and the activities of terror-
ist groups such as the African National Congress will
compound the problem.' 25X1
tween them and terrorist organizations.
Continued economic stagnation along the lines we
anticipate will increase the probability of racial vio-
lence. Rising black unemployment alone will broaden
the pool of idle urban youths, who are particularly 25X1
prone to give violent vent to frustrations over their
political and social status and the inability to achieve
goals in education, jobs, and living standards. Eco-
nomic hard times will also contribute to the increasing
militancy of the black trade union movement. As a
result the white authorities between now and 1985
will probably be faced simultaneously with two dis-
tinct forms of racial discontent-actions by laborers
and nonwhite consumers aimed at improving econom-
ic conditions, and more violent, less focused demon-
strations by militant nonwhite youths, including stu-
dents, seeking more fundamental reforms. There may
be increasing linkages among these groups and be-
We believe that the Eastern Cape, which is one of the 25X1
most economically depressed areas in the country and
which has a highly politicized black population, is
likely to become a major trouble spot. Black labor
unions have grown rapidly in this area since 1979 and
receive support from the growing pool of unemployed.
The proximity of the industrial centers to the impov-
erished Ciskei and Transkei homelands coupled with a
government drive to relocate many unemployed 25X1
25X1
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blacks to these homelands and increased ANC activi-
ties in the area have created a volatile mix. The
potential for racial disturbances is only slightly less
high in the Pretoria-Johannesburg area-particularly
in Johannesburg's black township of Soweto-and in
the Western Cape with its increasingly restive Col-
ored population.
Implications for the United States
In our view, South Africa's continuing recession, its
economic vulnerability to fluctuations in world gold
prices, and fundamental constraints on rapid improve-
ments in nonwhite living standards have profoundly
worrisome implications for long-term US interests vis-
a-vis South Africa. Recent socioeconomic trends cut
against theories that economic growth in South Africa
will sop up the pool of unemployed or that movement
toward a racially integrated economy will create
evolutionary pressures for the dismantling of the
segregated political system. In this sense, we are
bothered less by the fact that white tolerance for
change has not kept pace with nonwhite aspirations
than by the fact that growth in the economy except
under the best of circumstances has not kept up with
basic demographic trends. The heightened potential
for a racial upheaval that flows from slow socioeco-
nomic progress for nonwhites undermines the basic
US objective of preventing racial conflict in South
Africa from jeopardizing US economic and strategic
equities there and from creating openings for the
Soviets throughout the region.
We doubt, however, that serious threats to US overall
interests will materialize soon. Although the economic
realities of the region add to the potential for racial
violence, the white government in Pretoria is firmly in
control and will remain so for some years. Its commit-
ment to reform notwithstanding, the Botha govern-
ment has not hesitated to use whatever force is
necessary against violent opposition. Over the near
term, we believe the pattern of racial unrest will
remain one of spontaneous disturbances over specific
local grievances, both economic and political; harsh
police action will assure that antigovernment groups
continue to lack overall leadership and organization.
We believe South Africa's economic recession will, by
itself, have mixed consequences for the United States
in other areas over the near term:
? On the one hand, it will cut profits and expansion
opportunities for most of the 400 South African
subsidiaries, affiliates, and branches of US firms.
Moreover, even though their labor standards are 25X1
generally high in comparison to South African
businesses, US-based firms will remain primary
targets for strikes because of their perceived suscep-
tibility to pressure.
? On the other, increased foreign borrowing by South
Africa to offset current account deficits broadens
lending opportunities for US commercial banks at
little economic or political risk.
The near-term effects on US regional interests will
also probably be mixed. ;Because of Pretoria's eco-
nomic links with its neighbors, the recession in South
Africa will hurt some black states. Zimbabwe, for
example, which has a thriving manufacturing sector
and which normally exports one-fourth of its finished
goods to South Africa, will be hurt by the drop in
consumer demand. Likewise, Lesotho and other black
states that earn important foreign exchange from the
remittances of "guest workers" they send to South
Africa will feel the pinch as Pretoria lowers ceilings
on the numbers of foreign workers in order to provide
jobs for unemployed South African blacks. Such 25X1
developments will compound the economic problems
many of these black states are experiencing and will
lead them to look to the1 West-especially the United
States-for more economic aid. On the other side of
the coin, however, budgetary constraints have made
Pretoria acutely sensitive to the $1 billion it spends
annually to prop up the white administration in
Namibia. This is, in our judgment, a significant,
although not dominant, factor in South Africa's deci-
sion to step up the pace of independence negotiations.
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In specific policy dealings with the South Africans, we
believe the United States will continue to encounter
pleas from Pretoria for ever greater amounts of
patience and understanding of South Africa's gradu-
alist approach to racial reform. This will derive, at
least partly, from fundamental economic constraints
on rapid or significant change.
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