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Country analysis > South Africa Last update: 2008-12-17  

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The “Second Economy”: Short hand, underhand or sleight of hand?

Isobel Frye1

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South Africa is an upper middle country, and yet as a result of a deeply skewed allocation of income and resources2 , many millions of people live in chronic poverty. The eradication of poverty remains the official priority of the state and the ruling party, but we have seen levels of unemployment almost double since 19943 , and the broad consensus is that levels of poverty and inequality have correspondingly risen. All of this in spite of the fact that the country has experienced a steady rate of economic growth and development since 1995, with GDP growth in 2004 being at its highest since 19844 .

Poor people are beginning to run out of patience waiting for the promised delivery of government services, houses, jobs and a better life for all, as is evidenced by the increasing number of demonstrations in poor communities, and an increase in both sectoral and national strikes, and yet government appears to continue to flounder about for any definitive reasons for these continuing trends of poverty and unemployment. For many others however the rise in levels of unemployment and poverty and the low levels of state capacity to deliver can be directly traced to the impact of the conservative macroeconomic policies adopted by the state under the GEAR5 between 1996 and 2000.

Despite the fact that the GEAR failed to meet its targets on most of its goals, including increased levels of local and foreign investment, as well as employment creation, government for its part continues to hail the success of GEAR based solely on the attainment of two indicators, namely the reduction of the budget deficit, and the reduction in inflation.

We believe that this myopia is symptomatic of an inability or unwillingness by the state to view the economy as a unitary system. In this paper we argue that the continued use of the phrases “first” and “second” economies are informed by the same inability or unwillingness. The Presidency has said that this phrase could be seen as a metaphor, a short hand, for all of those who do not fall into the formal economy of South Africa. Policies should not be built on metaphors. Is it a conjuror’s sleight of hand, an attempt to persuade people both internally and internationally that we have contained and isolated the causes of poverty in society, or should the continued use of this phrase be seen as a deliberate and underhand attempt to deny the true roots of the crisis at hand, which is that the processes that pauperise and impoverish are the same that enrich the formal economy and encourage increased investment; that the process of marginalisation of many millions of people is an integral part of the equation that has and continues to drive formal economic growth.

The ubiquitous use by policy makers of the “two economies” divide we see as reflecting a perceived need by the state to accommodate both the demand of Business for a non-interventionalist6 state with the clear need for state led intervention to address the growing needs of the poor and unemployed. The result is the sleight of hand of the “first” and “second” parallel economies theory.

This paper begins with an outline of how the state uses the concept of the “second economy” in government policy discourse. We then trace the historical processes by which black South Africans have been marginalised from the mainstream capitalist economy since colonial times. Thereafter we consider how the President introduced the concept of an economic dualism into South Africa discourse, and see how that has developed from two nations, to a first and third world discourse, and finally to the “first” and “second” economy. Hereafter we consider where the term “second economy” originated from internationally, and we explore the characteristics of a mainstream economy with a true parallel economy co-existing alongside it, to demonstrate that this is not what we experience in South Africa.

Finally we revisit Wolpe’s critique of the development of Bantustans and the policies of segregation and Apartheid, and his underlying thesis that the rationale for the development of Reserves was informed not just by racial ideology, but by compelling needs of capitalism. The conclusion of the paper brings together these different sections, and suggests that there are similar compelling dynamics of Capital at work that result in an ongoing loss of employment, and the consequent increase in poverty and social atomization. The Conclusion suggests that we will not be able to identify successful solutions if we fail to see the interconnected causes and effects within this economy. We dismiss the use of “two economies” as an attempt to legitimize the favouring of the needs of business and to promote separate and unequal development of the rich and the poor.

  1. Senior researcher in poverty eradication and socio-economic rights, National Labour and Economic Development Institute (NALEDI). This paper is written in my personal capacity.

  2. South Africa has one the highest Gini coefficients internationally. According to the UNDP Human Development Report of 2003 (quoting work by Fedderke in 2003), the Gini coefficient for an individual (rather than household) based on income was 0.69 and based on expenditure was 0.67 in 2000. This was up from a measure of 0.66 for both in 1995.

  3. The official unemployment rate virtually doubled from 15.9% in 1995 to 30.5 % in 2002, while the expanded rate of unemployment rose from 29.4% in 1995 to 42.5% in 2002 (DBSA, 2005).

  4. Brait, Macro GDP, 29 November 2005.

  5. Growth Employment and Redistribution.

  6. While the state has limited interventions with regard to black economic empowerment endeavors, what we refer to here is intervention in the nature and structure of the economy itself.

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