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1 Land Reforms in South Africa: Opportunities and Challenges June 19, 2015 Introduction The last twenty years of South Africa s development have been characterized by neo-liberal social, political and economic reforms that brought the country out of 46 years of apartheid rule and international isolation. Following the democratic election of Nelson Mandela, leader of the African National Congress (ANC) in 1994, key policy changes including equal housing access for blacks, firm privatization, increased political participation in African Union affairs, and education curriculum reform were enacted throughout the country. Among the many reforms the government took to empower historically oppressed peoples, land reform has been crucial. The dispossession of indigenous populations in South Africa by Dutch and British settlers in the late 1800s was greater than any other African country (The Economist, 2014). In 1913, the Native Lands Act prohibited the establishment of new farming operations, sharecropping or cash rentals by blacks outside of the reserves (Bantustans) where they were forced to live. In total, these reserves only made up 13% of the total land in South Africa, which was widely disproportionate to the ratio of blacks to whites at the time (Statistics South Africa, 2014). After 1994, policy focused on restitution, land tenure reform and land redistribution, which sought to return more land to disadvantaged black farmers (The Economist, 2014). However, the process of land reforms faced many challenges since implementation, which called for newly streamlined plans to be rolled out by President Jacob Zuma. This report seeks to clarify and Queen s Global Markets A PREMIER UNDERGRADUATE THINK-TANK

2 interpret some of the key implications of proposed policy changes and their implications for future quality of life for all South African citizens. Background Figure 1: South African Demographics, 2014 Historically, land reforms have been made either to bring a country out of poverty traps caused by widespread subsistence agriculture, or lack of tenure rights for farmers as a result of sharecropping, landlord abuse of power or political reasons. A country cannot bring itself out of a stage of underdevelopment when farmers do not make capital investments to yield higher outputs per unit of labour, or find other ways to lower the cost per unit of output. Furthermore, the lack of supporting policies for improved communication networks between rural areas and urban centers, or more flexible social institutions puts farmers in a risk-adverse position with only labour variance at the individual s disposal for planning. A lack of tenure rights also reduces the farmer s labour efficiency, as there is less incentive to work the land. African Coloured White Indian/Asian Source: Statistics South Africa, 2014 End of Apartheid Rule: Impacts and Outcomes Structural reforms needed to be implemented in order to realize some of the inefficiencies in subsistence agriculture and land dispossession. Key policies pursued by Zuma s government include a ban on foreign ownership of farmland, decentralized development plans in 47 districts, legal restriction on farm size to 12,000 hectares, and a 2

3 Figure 2: Land Ownership, /50 policy that allows for workers who lived under a whiteowned farm to acquire up to a 50% share of that farm (BBC, 2015). This is done largely to promote a more natural land repossession process, where black farmers do not have to worry about relocation. However, the implementation of this policy could create a further divide between unhappy white farmers who feel a loss of control over historical rights. To make matters more complicated, there is already a large divide between the white commercial farms, and black subsistence farms in the country. Land ownership statistics show that social acceptance and political reforms have yielded little impact. 87% of farmland was owned under whites in After 2012, this figure dropped to only 67%, after 7.95 million hectares of land were transferred to black farmers. (Statistics South Africa, 2014). All in all, the slow pace of redistribution has failed to turn political promises of populist ANC policies to economic realities of a stronger South Africa. 'White' commercial agricultural land 'Black' communal areas (most stateowned) Other state land Remainder, including urban areas Source: Institute for Poverty, Land, and Agrarian Studies The state needs to find better ways to achieve efficiency in land reforms. Thus far, failure of restitution, lack of capital access for black farmers, and the willing buyer willing seller system have impeded the development process of South Africa s farmlands. Giving repayments to farmers has hardly been followed through on by the government, leading to some skepticism among farmers regarding the government s commitment to their policies (Lahiff, 2010). A lack of capital investment for new farmers has led to failures on 50% of newly acquired farms due to the lack of modern farming technology practices including irrigation, machinery and crop specialization 3

4 (Financial Times, 2015). Many new farmers are not experienced to continue farm operations at an equal level of sophistication as previous owners. Others have different motivations for their use of land due to a lack of government support for new technologies. These motivations are at times, based on a desire to use the land for subsistence, or mid-level mixed farming uses, rather than full-scale commercialization and crop specialization; 45% of this group, for example, want less than one hectare for food production (BBC, 2015). Even though the redistribution process is not yet complete, there are already worries that future food production will be negatively impacted with these policies in place. Non-coordination of the market was another concern for the government, as the willing buyer willing seller system had problems including the inability of buyers to meet sellers asking price, and lack of forcible government intervention in the process. This is a more complex issue to solve as it pertains to the degree of government intervention that should exist in a market process that unfolds on the background of racial divide, and xenophobia. Whether or not the government expropriates land will likely have a great impact on future land investments. The pace of reform will be key to land reform success. The economy requires coordination of its participants, as well as resources to streamline itself for future growth, to lead to per capita income improvement. Social and economic challenges that are not handled appropriately could deter foreign direct investment at a disastrous rate, or fail to achieve the ANC s goal of redistributing one third of previously owned white commercial land. An Economic Analysis of Policy Issues The Market for Land Reform To this day, agriculture remains an important part of the South African economy. South Africa has a dual agricultural economy, including advanced commercial farming as well as subsistence-based production in the more rural areas of the country. Approximately 1.3 million hectares of land are under irrigation, employing around 650 thousand people directly. Over 8.5 million people are dependent on agriculture for their employment and income (Statistics South Africa, 2014). 4

5 Figure 3: Balance of Trade The commercial agricultural sector has grown by an almost 14% CAGR since 1970, while the total economy has grown by over 14.5%. This is resulting in a decline of the agricultural share of GDP. Currently, agriculture stands at fewer than 2.5% of total GDP, however there are strong backwards and forward linkages into the economy so the sector is estimated to actually contribute around 14% of GDP (Statistics South Africa, 2014). Corn is most widely grown crop, followed by wheat, sugar cane and sunflowers. Corn is a very versatile crop as it is a dietary staple for the people of South Africa, it is a food source for the livestock and it is also exported. Citrus and fruits are exported, as are locally produced wines and flowers. Source: South Africa Revenue Service, Trading Economics Information asymmetry and lack of capital Many African farmers practice peasant farming and are constrained by different factors such as lack of basic farm inputs like machineries and fertilizers. They also have limited knowledge of the standard methods of production required to cultivate the new and more advanced seeds. This lack of knowledge and inputs results in a low yield in comparison to the advanced commercial farming. Growth of Subsistence farming, decrease in commercial production 5

6 There has already been a shift from commercial production to a more subsistence based farming. This will continue to increase with the proposed land reforms. Insufficient government support in rural infrastructure, finance and agricultural expertise leads to a lower crop yield in subsistence-based production. It is also difficult for small farmers to be certified or to make deals with big retailers because they are unable to satisfy standards for consistency or quality. Lack of Scaled Production With a decrease in the amount of commercial production, South Africa experienced a lower than expected yield per hectare of land. Commercial production creates economies of scale, giving farmers cost advantages with a low cost per unit of output. The shift away from commercial production the agricultural sector loses this cost advantage. South Africa s key trade partners The United States, Germany, Japan, China and Zimbabwe are South Africa s main trading partners. Although South Africa s total exports are falling there exports to the rest of Africa remain encouraging, growing by 13.5%. This will make the rest of Africa South Africa s fastest growing export destination and the second largest export destination after Asia (Trading Economics, 2015) Zimbabwe s Experience South Africa s move to expropriate land from white and foreign owners is not unprecedented. It follows in the path of neighbouring Zimbabwe; its leader, Robert Mugabe, has instituted land reforms of various sorts ever since he took power upon the country s independence in Mr. Mugabe, like Mr. Zuma today, has been viewed as a crony. He remains in power due to repression of the opposition and a tendency to institute and maintain populist policies regardless of their effectiveness. Mr. Mugabe s government had sought to redress land inequities in Zimbabwe that were the result of colonial rule and racism. Initially, the government mandated that white-land owners would be required to give the central government the opportunity to purchase land at about market value before seeking a purchaser on the open market. The government would then transfer ownership of the land to black 6

7 Zimbabweans. It is estimated that the government purchased 3.2 million hectares of land under this system during the 1980s and 1990s (Cross, 2009). In 2000, however, amidst mounting political opposition, Mr. Mugabe chose to hasten the pace of land reforms. He opted to forcibly confiscate land from white owners without compensation and later enforced a minimum 51% equity ownership requirement in most commercial ventures. A majority of land was quickly transferred from commercial farmers to those with only subsistence farming experience. Resultantly, between 2000 and 2009, Zimbabwe s agricultural output decreased in volume and value by 69% and 70% respectively (Cross, 2009). Jobs were displaced and violence erupted. The country produced consistent food supply deficits and became a large recipient of food aid. Evidently, the rapid confiscation and transfer of land from commercial farmers to those with little mass-farming know-how cannot succeed. As discussed above, the state of South Africa s farms is similar to that of Zimbabwe 15 years ago. President Zuma s proposals, based on Zimbabwe s past policies, will likely do more to undermine the country s agri-infrastructure than they will to redress historical inequalities. Implications Going Forward South Africa is a country on a rocky rise. Despite prevailing racial tensions, widespread poverty, and governmental corruption, the country stands out as a model on the African continent and is the ire of poorer neighbours. The country s unemployment rate stands at 25%, yet, since the end of Apartheid, the country s gross domestic product has nearly tripled from $130 billion to approximately $350 billion last year, making it the second largest economy in Africa. Moreover, the country has a robust education system with close to full enrollment of student-age children according to the World Bank. South Africa is right to attempt to redress inequities in its society, many of which have led to its endemic crime problem. It uses quota systems in everything from school admissions to rugby (England, 2014). Its shantytowns are being replaced with permanent housing in old townships like Soweto. Attempting to fix inequities in land ownership is the next logical step in its transition from apartheid; it is 7

8 not inconceivable that the current state of land ownership (as illustrated above) reminds many locals of the pre-1994 climate. However, as the experience of Zimbabwe demonstrates, confiscation of land and the transfer of ownership has devastating consequences. Instead of implementing forced ownership sharing programs, the government should invest in training for current subsistence farmers and continue to promote aforementioned cooperatives that lead to efficiencies for subsistence farmers (the expense of one tractor shared amongst 10 subsistence farms does not seem so daunting). Instead of implementing policies that may dissuade foreign direct investment, South Africa should welcome FDI, but enforce equal working conditions across its population. Moreover, given the interest in FDI in South Africa (the Oxford Business Institute pegs it as the 13 th most popular target for FDI globally), the country can stipulate that ventures train local employees rather than only exploit cheap labour. Most important, if the government wants South Africa to continue to be a hotspot for FDI, it must ensure credibility in its institutions and rule of law. Confiscating land and interfering with sales processes does the opposite. Instead, it should seek to expand access to credit for all of its citizens so that black workers with experience on farms can compete in legitimate bidding processes. South Africa has the opportunity to continue to lead its continent. Demonstrating a keen will to enforce rule of law by upholding land titles rather than confiscating them will encourage more FDI. Rather than transferring land to create equality, it should invest in education and expand access to credit to promote competitive diverse bidding on farm land for sale. While they may be popular, land reform via confiscation and transfers do more to harm a country than help. 8

9 Bibliography Cross, E. (2009, May 18). The Cost of Zimbabwe s Continuing Farm Invasions. Retrieved from The Cato Institute. England, A. (2014, December 26). Quotas cause ruck in South African rugby. Retrieved from Financial Times. England, A. (2015, February 23). South Africa: Staking a Claim. Retrieved from Financial Times. I had a farm in Africa. (2015, February 28). Retrieved from The Economist. Lahiff, E. (2010, July 6). Q&A: Land Reform in South Africa. Retrieved from PBS. South Africa's Zuma outlines land reform plans. (2015, February 14). Retrieved from BBC. 9

10 Contributors Josh Wine Senior Director, Middle East Africa Tracy Li Junior Director, Middle East Africa Ethan Vera Analyst, Middle East Africa Queen s Global Markets Queen s University 143 Union St. Kingston, ON, Canada K7L 3N6 10