Today, April 27, is South Africa’s Freedom Day. This was the day in 1994 when the first egalitarian election was held in South Africa, an election that allowed all adults to vote irrespective of their race, and the day in 1997 when the new constitution took effect thereby ending the system of apartheid first adopted in 1948.

South African history has been dominated by the interaction and conflict of several diverse ethnic groups. According to the 2001 Census the population today is made up of black African (79%), white (9.6%), colored (8.9%), and Indian/Asian (2.5%). The aboriginal Khoisan people have lived in South Africa for millennia as well as other African immigrants from the north. White South Africans are descendants of later European settlers, first the Dutch in 1652 who founded Cape Colony. Cape Colony was eventually ceded to Britain in 1806. The Boers (Dutch descendants) left Cape Colony after 1835 to found the Orange Free State and the Transvaal. The British and the Boers later defeated the Zulus in 1879. The British and the Boers subsequently fought two wars first in 1880-81 and a second in 1889-1902. In 1910 the Union of South Africa was formed by combining the British colonies and the Boer “republics”. The coloreds are descended at least in part from all of these groups, as well as from slaves from the East Indies, and there are many South Africans of Indian and Chinese origin, who are descendants of laborers that arrived in the nineteenth and twentieth centuries.

Racism Did Not Cause Apartheid

Apartheid meaning “separateness” was a system of legal racial segregation enforced by the National Party government of South Africa between 1948 and 1994, under which the rights of the majority non-white inhabitants of South Africa were curtailed and minority rule by white people was maintained. The apartheid system was the invention of Afrikaner intellectuals (descendants of the Boers).

In theory the system was designed to allow for the separate development of the various population groups in South Africa. This was to be done by setting aside certain geographic areas for the nine tribal groups of black people within which they would in time realize their “national” aspirations. The remaining non-white groups, the Coloreds (people of mixed races) and the Indians, until they were loosely incorporated into a type of federal parliamentary structure, were left out in the cold. Their position remained to be defined. The whites (composed primarily of the two major language groups English and Afrikaans) constituted the remaining “tribe”. They would provide the necessary leadership for the peaceful advancement of all South Africa’s peoples.

The system was presumably motivated by a heartfelt desire to preserve the Afrikaner identity and a response to the very real problems that a culturally heterogeneous population as South Africa presented. The Afrikaners are a deeply religious, disciplined people who have overcome centuries of adversity, including the formidable suffering inflicted by a grasping British establishment. The suffering culminated in the brutal second Boer War in which Afrikaner civilians languished in appalling concentration camps. The Afrikaners remember how the British attempted to destroy their language, their culture, and their independence. The memory is responsible for the continuing tension between English and Afrikaans-speaking whites in South Africa. The English, who have traditionally dominated the commercial life of South Africa, have been identified as “liberal” while the Afrikaners, the inventors of apartheid, have been seen as right-wing. Political divisions have reflected cultural divisions.

Most people see racism as a prime explanation of apartheid. In this they are incorrect. The persistence, if not the existence, of racial discrimination and of discriminatory attitudes is the result, not the cause, of apartheid.

Professor William Hutt (1899-1988) provided a more logical and simpler explanation. In The Economics of the Color Bar: A Study of the Economic Origins and Consequences of Racial Segregation in South Africa (1964), he argued the economy has been seriously hampered by apartheid. Members of all population groups have paid the price. It was a book that took courage to write, a book that exhibits passion as well as scholarship, a conscience-raising work, but one also that raised hackles on both sides of the political spectrum in South Africa. It is a book still worth reading today.

Barriers Against Black Labor

The practical implementation of apartheid implied the regulation of black labor. Black worker mobility was seriously curtailed in two ways. First, black workers were not allowed to move from one geographic region to another without official permission. In particular, movement from the rural “black” areas to the urban “white” areas was restrained. Workers had to be petitioned for and, once attached to a particular employer, were prevented from leaving to work for another. Separation from the original employer theoretically implied a return to the “homeland” from which the worker originally came. Secondly, upward mobility for black workers was restricted in the job hierarchy by the official reservation of certain jobs for whites.

The effect was to reduce the supply of labor, especially skilled labor in the urban industrial areas, and to raise the price of labor in these areas and depress wages in the rural regions. In addition, Hutt maintained not only that white labor union power was the source and driving force of early discrimination, but also that the denial to non-whites of the right to unionize actually benefited them as a group economically. The true rationale was to protect white labor. This is a prevalent theme in South African economic history. Since the unification of South Africa in 1910, no government has been able to stand against the interest of white workers. Restrictions on black labor protected white workers by keeping up the price of labor and by providing them with preferential access to the acquisition of skills. This was clearly against the pure economic interest of white employers, who would have benefitted from an abundance of cheap labor.

The conflict of economic interest was reflected in the basic English/Afrikaans cultural and language division. The Afrikaners were overwhelmingly rural, uneducated and poor. The English were predominantly urban, skilled and middle class. The employers and the skilled workers in the mines, the main opportunities of employment, were mostly English. The unskilled white workers were predominantly Afrikaners. The origins of institutionalized race prejudice in South Africa, according to Hutt, lie in the so-called “poor-white” problem. It was in order to protect and maintain the economic superiority of poor white workers that racial discrimination was institutionalized.

White workers in effect used the machinery of government to establish a non-competitive group, a monopoly. By forcibly preventing other groups from competing with it, white workers also achieved an economic distance from the groups excluded. Starting with labor actions in 1907, and first enacted into law in 1911, white workers attempted, with unfortunate success, to exclude non-whites from the most lucrative jobs, first in the mines and then in the rest of the economy. They used a number of different strategies, varying in subtlety and hypocrisy, from punitive union strikes to the establishment of ‘fair pay’ legislation, a strategy that excluded non-whites by preventing them from competing much in the same way as minimum wage legislation works today—and supported by the argument that to pay less was unconscionable. In addition, whites were able to pursue a sort of ‘divide and rule’ policy by exploiting the existing antagonisms between the non-white subgroups.

These observations imply that apartheid was not imposed suddenly by a group of extremists. It was in fact the continuation of a long tradition of protecting the white working class and maintaining its economic superiority. Apartheid was simply a more comprehensive, extensive and damaging system adopted as national policy in 1948.

Consequences of Apartheid

A number of important consequences of this system emerged. First, the system of migrant labor was of necessity incompletely enforced. In enforcing it the influx control mechanism was brutal and open to abuse. Blacks were obliged at all times carry their “pass” in white areas. They were subject to arbitrary police inspection. The absence of a “pass” for any reason meant arrest and “deportation” back to the homelands, or detention until a “pass” was produced. Nevertheless both the white employers and the black workers had an incentive to evade the system. Workers wanted jobs, employers wanted cheap labor. This is, in crucial respects, similar to any situation involving “illegal immigrant labor”, for example, in the southwestern US. In South Africa the result was a large illegal black population in the urban areas.

A second consequence of labor restriction was a chronic shortage of skilled labor. This was a result both of the restrictions on geographical mobility and the reservation of skill acquisition facilities for non-blacks, but mainly the latter. There was an internal dynamic. With economic growth the demand for skilled jobs rises, causing a rise in their price. In a free system non-white groups would enter schools and training programs to upgrade their skills. However, these options were closed to them. Eventually whites moved further up the skill hierarchy to a point where they were no longer in a potentially competitive position with non-whites. Ironically this was where apartheid succeeded as originally intended.

The third consequence was the increase in social tensions caused by denying South African blacks the opportunity to acquire and use human capital. The apartheid system widened the social and economic gap between the races. This had two effects. It struck a blow at the self-esteem of the non-whites. Whites saw blacks as uneducated, ignorant and incompetent. A lack of training and a lack of encouragement for non-whites reinforced this stereotype when performance indeed fell short. The expectations were self-fulfilling on both sides. The long-term result was an enduring bitterness and resentment toward whites by non-whites. The removal of opportunities for personal betterment implies much more than the loss of economic benefits; it implies the deprivation of ones pride.

Perhaps the most important consequence of labor restrictions involved the destruction of the black family. Nothing is more conducive to the long term accumulation of human capital than a stable nurturing family life. The migrant labor system, since it prohibits families from accompanying migrant workers to the urban areas breaks up families. Fathers spend most of their lives away from their wives and children. This is not only devastating for the families left behind; it encourages promiscuity, alcoholism and general recklessness. The rural areas remain populated by the young and the old as many young women also leave in search of work.

These are some of the effects of a system driven basically by economic interest. Any system that tries to engineer social outcomes against the natural interests of the individuals involved must have unfortunate consequences. The South African government recognized the problems and sought to mitigate and reverse these effects through an ambitious and costly program of economic decentralization. This was seen as an alternative to influx control. Take the jobs to the workers so that the workers do not have to come to the jobs. This is a classic case of one form of intervention leading to another form of intervention that is familiar from the history of economic regulation all over the world.

Numerous tax-subsidy schemes were introduced to attract white business people to establish enterprises in the so-called border areas. Many went but the economic decentralization failed as the subsidies were never enough, or affordable given the scope of the intervention required. The plan, by implication, called for the economic partition of the entire country in a manner that corresponded to the political partition conceived under apartheid.

It was only when, finally, in the early seventies that the white business establishment, now including a large emergent Afrikaner business class, finally prevailed upon the government to recognize the prohibitive social cost of apartheid that it began to be dismantled. It took two decades just to overcome the resistance of all the vested interests. Ultimately it was the triumph of market forces that made people realize the huge cost of apartheid.

In delivering this message in 1964 Hutt inevitably offended a number of separate and opposed political constituencies. From the left-liberal perspective it was heresy to suggest that the white workers were responsible for apartheid. The left-wing movement in South Africa, with strong ties to socialist and communist support abroad, was committed to the idea that apartheid was the instrument of white capitalist exploitation. It was, in their eyes, a method of subjugating and cheapening non-white labor and thereby inflating profits. White workers were seen as the natural ally of non-whites. Blacks were seen as the victims of both apartheid and capitalism. The solution for them was to dismantle apartheid and the capitalist system that apartheid represented.

Color Bar exposes both the logical fallacies and the historical inaccuracies of this position. Hutt shows how it was against the interests of the white employers to cheapen black labor, for to do so implied an unacceptable sacrifice in productivity. There was in fact a severe shortage of skilled workers and white employers had an interest in, and are in the historical record as, opposing the exclusion of non-whites from working in and training for skilled jobs. Hutt shows that, on the contrary, the employers were willing to pay for the accumulation of such human capital.

Why did white employers never come to exert any effective political pressure behind their desire for a democratic workplace? The truth, according to Hutt, is that from those early days onwards, no white employer would dare risk the wrath of the white worker alliance of Afrikaner workers, the newly-imported British artisans, and the Afrikaner political establishment that supported them. The threat of strikes and violent work disruptions was rendered credible by the long and bitter strike and violent work disruptions that occurred in 1911. From that time onwards no white employer wanted to risk the provocation of similar events. But the conventional wisdom of the left-wing movements, both in South Africa and abroad, would not abide such suggestions. Thus, a cogent and committed opponent of apartheid had alienated himself from many of those who might have been expected to join him.

As to those who were the target of Hutt’s criticism, the Afrikaner political establishment, their hostility was redoubled by the fact that Hutt eschewed the usual left wing criticism and had the temerity to suggest that apartheid was the child of an unholy alliance between the anti-communist Afrikaner political movement and socialist workers. Hutt was thus twice damned—a heretic in the eyes of both sides of the political spectrum.

Hutt became known as a leading but lone voice in the academic community condemning South African apartheid. For him the apartheid era is the culmination of the progressively encroaching power of the central government on all aspects of economic and social life. It is finally just another form of central planning. In the final analysis, “We are concerned not with the human failings which have led to race injustices but with the types of social organization which permit and buttress these injustices”.

Women Being Raped – One in Three Chance

Thanks to apartheid South Africa still faces daunting economic problems, of which poverty is the most prominent. Unemployment, at 25%, is high, and a life expectancy of 49.3 years at birth is low. Half the population lives in poverty. The country has one of the highest rates of HIV/AIDS in the world. It has one of the worst reported rape statistics in a country not at war, where one-third of the women can expect to be raped during their lifetime. Such is the tenacious human cost of apartheid.

William Harold Hutt (1899–88) was an English economist born into a working-class family. He graduated from the London School of Economics (LSE) in 1924 with a Bachelor’s degree in Commerce and worked for a publisher until 1927, attending LSE classes informally until March 1928, when he accepted a position at the University of Cape Town in South Africa. There he remained until his retirement. In 1930, he was promoted to Chair of Commerce. Later, he would be named Dean of the Faculty of Commerce. His writings on Keynesian economics and labour markets are original and profound, but because he labored in the backwater of South Africa, few economists are aware of his contributions. In Economists and the Public (1936) he coined the now famous concept of “consumer sovereignty”.

William Hutt was in Hong Kong in 1978 and I had the opportunity to hear him lecture and to explain to him how Hong Kong worked then. He was particularly interested to learn that our labor markets were largely unfettered by labor legislation and we actually maintained a “reach-base” policy for migrants from the Mainland who entered the territory. If he were to learn of our decision to limit cross border family reunion, our resistance to let in Mainland mothers to give birth in Hong Kong, our policy to enact minimum wage legislation, and the enormous pressure to push for a standard work week, he would certainly be saddened. Allow me to salute a great economist, who made South Africa his home, and had to witness its descent in his lifetime.

Minimum Wage Amplifies Unemployment

The minimum wage legislation soon to be enacted will in effect discriminate against the least skilled in society – the new immigrant. All those who have had a meal at the very popular hot-pot restaurants will notice the unmistakable non-local accents of many of the waitresses. Given their job tasks they are little more than glorified “bus-boys”, possessing skills that are only suitable for the most unskilled jobs available. It is a tribute to these hot-pot restaurants that they have discovered such an innovative business model, employing the almost unemployable, and making it such an enjoyable experience for all. The market is the unskilled laborers’ best friend; thanks to the innovations of so many different enterprises they create jobs for the least employable. Minimum wage legislation will affect these, and other similar experiences, that consumers can enjoy and will jeopardize job opportunities for the least employable. The unskilled new immigrant will have to become self-employed. How sad! Even worse, the introduction of a standard work week will further swell the ranks of the unemployed. And when we are hit by the next recession we will be pushing with full force for unemployment insurance. This represents death by a thousand cuts; and of regulations begetting more regulations. When will we heed the lessons of history?

South Africa today is a middle-income, emerging economy, and is widely regarded as the engine of growth for sub-Saharan Africa. On the occasion of its seventeenth anniversary under a young constitution there is great hope for its people and their future. In a recent study Maxim Pinkovsky and Xavier Sala-i-Martin (2010) showed that the steady fall in poverty in sub-Saharan Africa since 1995 has been striking, thanks to the expansion of the markets following institutional reforms and it is expected to continue. I wish I could be as optimistic about the future of my own city.


Maxim Pinkovsky and Xavier Sala-i-Martin, “African Poverty is Falling Much Faster than You Think,” NBER Working Paper 15775, 2010.

William H. Hutt, The Economic of the Color Bar: A Study of the Economic Origins and Consequences of Racial Segregation in South Africa, London: Institute of Economic Affairs, 1964.


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