• Key concepts
• Economic growth and economic development
• Demand-side approach
• The supply-side approach
• Evaluation of the South African approaches used in South Africa
• The North/South divide

Overview

9.1 Key concepts

These definitions will help you understand the meaning of key Economics concepts that are used in this study guide. Understand these concepts well.

Use mobile notes to help you learn these key concepts. See page xiv in the introduction for more.
Learn the difference between growth and development initiatives.

9.2 Economic growth and economic development

The difference between economic growth and economic development

9.3 Demand-side approach

9.3.1 Growth and Development
A demand-side approach includes discretionary changes in monetary and fiscal policies with the aim of changing the level of aggregate demand.
Monetary policy is driven by the South African Reserve Bank (SARB). It aims to stabilise prices by managing inflation.
Fiscal policy is driven by the Department of Finance. It aims to facilitate government, political and economic objectives.
A demand-side approach to economic growth and development does not only depend on fiscal and monetary policy. It is dependent on all components of aggregate demand, that is, C, I, X and G.

When you prepare for the exam, memorise CONCEPTS FIRST!
9.3.2 South African approach
The South African approach uses both monetary and fiscal measures to influence aggregate demand in the economy.
Monetary policy
The South African Reserve Bank (SARB) as the central bank in South Africa formulates the monetary policy. They use the following instruments:

• Interest rate changes
  It is used to influence credit creation by making credit more expensive or cheaper. The exchange rate is stabilised by encouraging inflow or outflows.
• Open market transactions
  To restrict credit the SARB sells securities. When banks buy these securities money flows from banks to the SARB. The banks have less money to lend and cannot extend as much credit as before. To encourage credit creation the SARB buys securities. Money flows into the banking system.
• Moral suasion
  The SARB consults with banks to act in a responsible manner based on the prevailing economic conditions.
• Cash Reserve Requirements
  Banks are required to hold a certain minimum cash reserve in the central bank. Banks have a limited amount to give out as credit.

Fiscal policy
South Africa’s fiscal policy is put into practice through the budgetary process. The main purpose of fiscal policy is to stimulate macroeconomic growth and employment, and ensure redistribution of wealth.
The following instruments are used:

• Progressive personal income tax
  Higher income earners are taxed at higher tax rates. These taxes are used to finance social development. The poor benefit more than those with higher incomes.
• Wealth taxes
  Properties are levied (taxed) according to their market values. Transfer duties are paid when properties are bought. Securities (shares and bonds) are taxed when traded. Capital gains tax is levied on gains on the sale of capital goods (e.g. properties, shares). Estate duties are paid on the estates of the deceased. These taxes are used to finance development expenditures which benefit the poor more often.
• Cash benefits
  Old age pensions, disability grants, child support and unemployment insurance are cash grants. These are also known as social security payments.
• Benefits in kind (natura benefits)
  These include the provision of healthcare, education, school meals, protection etc. When user fees are charged, poor or low income earners pay less or nothing. Limited quantities of free electricity and water are provided.
• Other redistribution
  Public works programmes, e.g. the Strategic Integrated Projects (SIP) provides employment subsidies and other cash and financial benefits such as training, financing and export incentives.
• Land restitution and land redistribution
  Land restitution is the return of land to those that have lost it due to discriminatory laws in the past. Land redistribution focuses on land for residential (town) and production (farm) for previously disadvantaged groups. The money for these programmes is provided in the main budget.
• Subsidies on properties
  It helps people to acquire ownership of fixed residential properties. E.g. government’s housing subsidy scheme provides funding to all people earning less than R3 500 per month.

9.4 The supply-side approach

9.4.1 Creation of growth
A supply-side approach includes anything that can influence the aggregate supply of goods and services, with the focus on microeconomic components, e.g. competition and potential output.
Government intervention aims to facilitate the smooth operation of markets in order to stimulate growth and development.
9.4.2 South African approach
The South African approach aims at improving the effectiveness and efficiency of markets. This requires:

• Markets to operate more equitably and inclusively: More blacks must be accommodated in the mainstream economy if it is to work efficiently.
• Business efficiency: Taxes must be collected efficiently, capital formation must increase, human resources must be supported to improve, and free advisory services must be made available so that business efficiency improves.
• The cost of doing business must be lowered: transport, communication and energy costs must decrease.

9.5 Evaluation of the South African approaches used in South Africa

9.5.1 Growth and development policies

At certain periods, the South African government has focused its initiatives on economic growth, while at other points, policy emphasis has shifted to economic development (see Figure 1 below).
The main growth and development policies are:

1. Reconstruction and Development Programme (RDP)
   The main strategy was to alleviate poverty and address the inequalities and shortfalls in social services by focusing on job creation, welfare, housing, transport, land reform, healthcare, education, training, water and sanitation.
   Evaluation thus far:
   
   • Meeting basic needs: government creates an increased demand for goods and services. The expanded public works programmes were mostly labour intensive. This helped alleviate unemployment and poverty slightly.
   • Some social achievements: building houses, providing clean water, electrification, land reform, and healthcare.
   • Real GDP growth erratic since 1994, unemployment in formal sector increased.
   • Key objectives of poverty reduction and improved service delivery hardly successful.
2. Growth, Employment and Redistribution (GEAR)
   The main strategy was to strengthen economic development, redistribute income and create socio-economic opportunities for the poor.
   Evaluation thus far:
   
   • Mixed outcomes.
   • Brought greater financial discipline and macroeconomic stability.
   • Real reduction in fiscal deficit (less than 3% in terms of international benchmarks).
   • Inflation has dropped mostly to within inflation targets.
   • Foreign exchange reserves increased in most regards.
   • Failure to create sustainable job opportunities.
   • Failure to redistribute wealth more evenly.
3. Accelerated and Shared Growth Initiative for South Africa (ASGISA)
   Its objective is to co-ordinate government initiative to create economic development:
   The key elements are:
   
   • Halve unemployment and poverty by 2014.
   • Accelerate economic growth to an average of 6% between 2010 and 2014.
     
     Evaluation thus far:
   • Growth in infrastructure investment, especially in the public sector.
   • Employment growth has lagged behind economic growth – reason real wage increases are higher than productivity.
   • The second economic strategy helped slightly to reduce unemployment through the Expanded public Works Programme.
   • Poor economic growth and high unemployment for the youth.
4. Joint Initiative on Priority Skills Acquisitions (JIPSA)
   It is the skills development arm of ASGISA. Focus is on skills development, especially through the SETAS.
5. Expanded Public Works Programme (EPWP)
   It is a nationwide government intervention to create employment using labour-intensive methods, and to give people skills they can use to find jobs when their work in the EPWP is done.
6. The New Growth Path (NGP)
   Its aim is to enhance growth, create employment and create greater equity. The strategy is to identify key sectors as “job drivers” and promote and support industries and sectors that can drive job creation.
   Focus is to:
   
   • Create 5 million jobs by 2020, reducing unemployment from 25% to 15%.
7. National Development Plan (NDP)
   It sets out to expand economic opportunities through investment in infrastructure, more innovation, private investment and entrepreneurship.
8. Small Business Development Promotion Programme (SBDPP)
   It was designed to deliver support and services to small, medium and micro enterprises.
   
   • Department of Trade and Industry (DTI), Industrial Development
     Corporation (IDC) and the National Small Business Act offer these services.
   • Laws are revised to help change power imbalances.
9. Black Economic Empowerment Programmes (BEE) The Black Empowerment Act and Employment Equity Act were designed to assist in the transformation and redress of previously disadvantaged groups. Measures are implemented to ensure redress and affirmative action in the workplace and business environment.

9.6 The North/South divide

The table below shows different ways to distinguish between developed countries (in the North) and developing countries (in the South).

Activity 1

Study the cartoon below and answer the questions that follow:

1. What is the message behind the cartoon? (2)
2. List any TWO countries involved in this phenomenon. (2)
3. List any TWO products displayed in the cartoon. (4)
   [8]

Activity 2
Study the cartoon below and answer the questions that follow:

1. What is the message behind the cartoon? (2)
2. What is the main objective of Broad-Based Black Economic Empowerment? (2)
   [4]

Activity 3
Distinguish between economic growth and economic development. [8]

Answer to activity 3

Activity 4
Explain unequal standards of living as a characteristic of the North/South divide. [6]