The Economy

Inequality and poverty in South Africa

What is inequality?
Whenever some people have something, other people do not have, there is
inequality.
• Inequality of income: This means that some people have a large income
(money), while other people have a small income or no income.
• Inequality of opportunity: This means that some people have opportunities
that other people do not have. These opportunities (chances) include the
opportunity to have a good education, the opportunity to have goods and
services available to meet their needs and the opportunity to have
possibilities of employment.

What is poverty?
We measure poverty by comparing people’s incomes. People who have an
income that is too low to meet their basic needs (such as food, shelter,
health and education) are said to be poor or living in poverty. There are two
important ideas when we talk about poverty: the poverty line and the
poverty cycle.
• The poverty line is the minimum income needed to meet a person’s basic
needs. If you live below the poverty line, it means you do not have enough
money to meet your basic needs.
• The poverty cycle is the circle of events that keeps people poor. Poor
people do not have enough money or resources to buy food or to pay for
education and healthcare. If you are uneducated or ill, it is difficult to find a
job. Even if you can find a job, it will probably be a badly paid job. This
means you will not have enough money to meet your basic needs and so
the cycle continues. Once people are trapped in the poverty cycle, it is very
difficult for them to get out..
Inequality and poverty in South Africa
South Africa is one of the most unequal countries in the world. There is a huge
gap between the ‘haves’ and the ‘have-nots.’ Only a small number of people are
very wealthy, while about half of the population in South Africa lives below the
poverty line.

Production, inputs and outputs

What is production?
Production is making, creating and producing goods or products that
satisfy people’s needs and wants.
All of these steps to produce the product are called the production process.
A process is a series of things that have to happen in a certain order

What are inputs and outputs in the production process?

When you look at the production process for bread, you can see there are a
number of things that are needed to make the process possible. These
things are called the inputs. There are three main groups of inputs:
1. Natural inputs come from nature, such as the soil, the water and the
sunshine that are needed to grow the wheat.
2. Human inputs are the people who do the work needed in the process. For
example, the farmer cared for the soil, planted and watered the crop and
harvested it. The miller ground the wheat into flour. The baker used the
flour to bake bread.
 3. Human-made or capital inputs are the tools, equipment and money made
by people that are needed in the production process. For example, a
person made the tools the farmer used to grow and harvest the wheat.
People made the money the miller used to buy the grinding mill she needed
to grind the wheat into flour. People produced the oven and cooking
equipment that the baker used to bake the bread.

All the inputs are needed in the production process to produce a product or
output. In the example, the output is the loaf of bread. Steps 1 to 4 involve the
inputs and Step 5 is the output. In this example, the output is a product that you
can buy but an output can also be a service for which you pay. For example, a
hospital will use its facilities, medical equipment and human resources as the
inputs to create the output of health care services.

Keywords
• production: the making, creating or producing of goods (products) to satisfy
needs and wants
• inputs: all the things necessary for a production process to happen
• output: the result of an economic process that has used inputs to produce a
product or service that is available for sale

The sustainable use of resources

What are resources?
resources are things we use to help us to do something, such as make
products to satisfy our needs and wants. there are three main types of
resources: natural, human and human-made resources. As you can see,
these three types of resources are exactly the same as the three types of
inputs needed in the production process.
What is the sustainable use of resources?
The sustainable use of resources is using resources in a way that makes sure the
resources will be available to use in the long term. It means we use resources
efficiently with as little waste and as little damage as possible.

The sustainable use of natural resources

The sustainable use of natural resources means we do not simply use up those
resources until they are finished. We make sure there will be natural resources to
use in the future. It also refers to making sure the production process does not
harm natural resources in any way, such as by creating water or air pollution.

The sustainable use of human resources

Sustainable use of human resources means that people are employed in long-
term positions and trained to do their jobs properly. People are educated so that
their skills can be developed in the future as the need arises, such as when there
are changes in the production process. For example, people are trained to
operate a wood milling machine correctly, safely and efficiently and they will
receive further skills training if a new machine comes into use.

The sustainable use of human-made resources

The sustainable use of human-made resources means that we do not misuse,
damage or use tools and equipment inefficiently. It also means that we make sure
we have the human resources to maintain and repair tools and equipment. It is
also about making sure that the use of human-made resources does not damage
natural resources.

Economic growth
What is economic growth?
Economic growth is when a country’s economy gets bigger and stronger. As a
country’s economy grows, the businesses in the country produce more products,
make more money and provide more jobs. Economic growth is measured by the
amount of output the country’s economy can produce in a year. The output is not
measured in quantity (how many products) but on value (how much are all the
products worth).
 • The tree is economic growth with all the products that have been produced in a
year.
• The products make money which goes to the people who do the work in the
economy. There is more money and more production, so there are more
products and more jobs for people to produce the products.
• If there is economic growth, every year the economic growth “tree” grows bigger
and stronger. The economic cycle of products, human resources and money
increases every year.
•

Economic growth in South Africa

Economic growth is such a top priority in South Africa because the expansion of
the economy produces more goods, jobs and wealth.
Increasing the production of goods and services helps to solve problems of
unemployment, poverty and inequality. When the South African economy grows
well, more jobs are created. With more people employed, more people are
paying tax. This means the government has more money to spend on services
such as education, health care, electricity, water, housing, policing, sanitation and
public transport.

Economic growth happens when there is an increase in the production ability of a

country. The ability to increase production requires that all the resources (or
inputs) are in good supply. The inputs of natural resources, human resources and
human-made resources have to be easily available to increase the output (the
products).

Productivity
What is productivity?
Productivity is a measure of how efficiently the inputs have been used to
create the outputs. Productivity is about the relationship between three
areas:
4. inputs: the number and quality of resources used;
5. time: how long it takes to produce a product; and
6. output: the number and quality of products produced.
Productivity and inputs
Productivity is about using as few resources as possible and improving how those
resources are used to make their use efficient with the least waste of effort and
time.

Productivity of natural resources

One of the natural resources that can be used more productively is land. For
example, less land could be used to grow more trees. This can be achieved by
planting trees that grow quickly and by using water efficiently.

Productivity of human resources

Some of the ways that people can be more productive in their jobs is when their
work is planned better, when they have appropriate machines and technology to
help them, when they are trained to use those machines and technology
properly, and when they are motivated to be more productive. People can be
more productive when all their basic needs are met and they are properly
educated and trained with the appropriate skills for their jobs.

Productivity of human-made resources

Materials can be used more productively when less material is needed to make a
product and there is less waste. Some of the ways to achieve this are by using
more skilled workers, improving designs to be more efficient, and making sure
there is no unnecessary and costly damage to materials.
Machines can be used more productively when they are improved and can
produce greater output in less time. Some of the ways to achieve this are by
using the correct machine for the job, maintaining machines so that they work
properly, and making sure machine operators are skilled and well-trained.
Productivity, outputs and time
For productivity to increase, the most outputs need to be produced in the
shortest time. For example, when the table-making process is productive, more
high-quality wooden tables will be made in the least amount of time.

The effect of productivity on economic growth

What is the effect of productivity on economic growth?
• economic growth is an increase in the value of products produced in a
country’s economy in a year; and
• productivity is the measure of how efficiently inputs have been used to
create outputs in a time period.
When businesses increase their productivity, they produce more quality goods
within a short space of time. This results in economic growth because more
products are being produced in a year. In other words, economic growth is
possible because of productivity, and productivity is necessary for economic
growth.

When inputs are used more efficiently to create increased output, this leads to
both increased productivity and economic growth. The two main inputs we need
to consider in productivity and economic growth are human resources and
human-made resources. Human-made resources refer to the use of machines,
materials and tools to do work more efficiently.
Education and skills development are very important in the fight against poverty
and inequality and in the creation of sustainable job opportunities. The education
of people and the development of their skills are also very important in making
them more productive.
Technology in production, productivity and economic growth
What is technology?
Technology is the inventions (tools, machines and equipment) that make doing
things simpler and easier. It is the application of scientific knowledge for practical
purposes. Using more complex technology is using equipment such as a plough
and using even more complex technology is using a machine such as a combine
harvester.
Information and communication technology is a form of complex technology
used to find, use, share, communicate and store information. This kind of
technology is used in equipment such as cell phones, satellite dishes and laptop
computers.

What is technology in production?

In production, technology is the methods, tools and machines used to help
produce goods

The contribution of technology to increase productivity and economic

growth
Technology can be used to increase productivity and promote economic growth.
Technology provides the most efficient and effective methods, tools and
machines to produce a particular product at a particular time in a particular place.
Technology can make production processes quicker, simpler and more efficient.
This increases productivity, which in turn pushes up economic growth.
Telecommunications technology such as telephones, cell phones, faxes, satellites,
the Internet and email, and ATMs enable us to instantly send information over
great distances. Agricultural technology such as new farming methods, tools and
machines can increase food production The effective use of technology allows
more products to be made more efficiently in a shorter time. That is a recipe for
increased productivity and economic growth.
The effective use of technology allows more products to be made more
efficiently in a shorter time. That is a recipe for increased productivity and
economic growth.

Financial Literacy – Savings

Personal savings

Budgeting is a way to monitor your income and expenses. The next step in
securing your finances is to learn how to save or invest.

Savings
When people put aside some money every month, they are saving that money.
Savings are created when you abstain from consuming all of your income. Saving
can be done

• individually, usually in a bank or building society where the money is safe and
earns interest,
• communally through community saving schemes such as stokvels and loan
societies.

Saving is a safe, low-risk way to earn interest.

The purpose of savings

People save their money for different reasons.

• Emergency Fund
• Financial Security
• Financial Goals
• Investment
• Retirement
• Education
• Debt Reduction
• Opportunities
• Financial Independence

The more people save, the less money needs to be borrowed from foreign
investors. Banks will then have more money available to lend to businesses,
thereby creating more employment and growth of output.

HISTORY OF BANKS | Educational Videos for Kids

(link : to the history of banks)

Keywords
• Merchant: somebody who buys and sells goods
• Renaissance: the period in European history from about the fourteenth to
sixteenth centuries regarded as marking the end of the Middle Ages and
featuring major cultural and artistic change
• Competitive: as good as or slightly better than others because of good
value or having more worth
 • Imperial: involving or relating to the authority of a country over colonies or
other countries
• Assets: the items that make up the total value of an organisation

The history of banks

Hunter-gatherers quickly realised they could get a return on their investments if
they planted the seeds from their gatherings. Farmers experienced the problem
of not knowing where to store their extra stock. Through trial and error, they
developed a system of bartering to exchange goods for other goods and services
they needed.

Later, currency in the form of money replaced bartering as an easier way of

exchanging goods. The concept of money developed and became the accepted
form of exchange.

The history of banks begins with the first banks that were merchants who made
grain loans to farmers and traders carrying goods between cities. They also
accepted deposits and they changed money for travellers and traders.

Modern banking as we know it can be traced back to medieval and early

Renaissance Italy. Banking functions included safeguarding funds, lending,
guaranteeing loans and exchanging money.

The traditional role of banks is to keep the money of individuals and businesses
safe. This role has changed over time and banks now also offer other financial
services, for example insurance, home loans, stock trading, credit card facilities
and so on. Previously, banks were subdivided into commercial, merchant and
general banks. Banks are run as businesses and generate income through service
charges and interest received on investments. The government regulates banks
through certain laws passed in parliament which guarantee the clients’ deposits.

Banking in South Africa

In 1793, formal banking was introduced into South Africa to serve the needs of
the farming community. In 1949, the government established the National
Finance Corporation of South Africa because until then, South African funds were
still being traded in the London money market. In 1961, the first negotiable
certificate of deposit (NCD) appeared in South Africa.

Towards the end of the twentieth century, ABSA, Standard Bank, First National
Bank and Nedbank held 95 per cent of banking assets in South Africa. The South
African Reserve Bank (SARB) controls the banking sector. The banks are regulated
by an Act of Parliament that is based on British, Canadian and Australian
legislation.

Modern banking
During the twentieth century, technological developments resulted in major
changes to the way banks operated, and banks were able to increase in size and
geographic spread. The first decade of the twenty-first century saw the technical
innovation in banking over the previous 30 years cause a major shift away from
traditional banking to Internet banking.

Banking services

All banks offer a wide range of services for individuals and businesses to choose
from so that they can receive the best possible return on their investments or
money. It is a very competitive field and banks are continually upgrading their
services or coming up with new ideas to attract and keep more clients. Banks
offer high levels of professionalism and apart from providing for present needs,
they also attempt to predict and foresee trends in the future.

Banks have client care centres that handle specific client-related services. Banking
can be done in person at a branch, over the telephone or on the Internet. The
focus is on convenience and efficiency as people seek more and more ways of
saving time and receiving maximum output from minimum input.

Savings accounts
These accounts are probably the most frequently used by clients as they have low
bank charges, offer competitive interest rates and funds that are readily available
and easy to access.

Current accounts
These accounts are not used for saving, but to manage the regular flow of
money. Clients use these accounts to organise their day-to-day expenses and
they can be linked to a cheque book, cheque card and garage card. The banking
charges are higher than savings accounts charges and are calculated according to
the transactions done.

Overdraft facilities, whereby a client can go over the limit of his or her available
funds up to a maximum amount set by the bank, can be made available and paid
back with interest. Debit orders can also be linked to these accounts.

Credit cards
These accounts offer clients access to a certain amount of money they then pay
back to the bank with interest. The interest and service fees on these cards are
very high and they need to be carefully managed. The advantage of a credit card
is that it is accepted at over 20 million outlets worldwide and is often better than
using cash.

Home loans
These accounts can be used to purchase residential properties including freehold
or sectional title or vacant land, or even to construct a new residential property. A
home loan is granted according to the client’s income and must be repaid over a
period ranging from 15 to 25 years. Interest rates are linked to the repo rate set
by the central bank.

Vehicle finance
This service offered by a banking institution not only provides the money for a
new vehicle, but can also go as far as sourcing or finding the vehicle; assisting
with trade-ins; and registering, licensing and insuring the vehicle. As with a
homeloan, the vehicle finance is granted according to the client’s income and it
must be paid over a maximum of 60 months.
Investment accounts
Banks offer a variety of investment accounts with various returns according to the
type of account, amount of money invested and the exchange rate.

Money market accounts can be invested locally or abroad. Interest rates increase
with higher balances.
Fixed deposits are investments that are done for a fixed period of time and can
receive a fixed amount of interest on the money.

Unit trusts are invested locally and abroad. They can be cashed in at any time.
The interest is linked to the exchange rate.

Other services offered by the bank include insurance policies and financial
planning that includes life and disability insurance, investment planning, personal
retirement planning, estate planning and offshore financial planning.

Opening a savings account

Keyword
• Money laundering: the process of concealing the source of legally, illegally
and ‘grey area’ obtained money

One of the best ways to save is with a savings account. It is safe and convenient
and also a way to earn interest on your money. Regular deposits and withdrawals
can be made with few transaction restrictions.

Opening a savings account

The first step in opening a savings account is to choose the bank which is most
suited to your needs. As most banks offer the same services, keep the following
aspects in mind when choosing your bank:

• Accessibility: As you will use the bank often, it is convenient to choose a bank
with a branch close to where you live or go to school.
• Services offered: As mentioned, most banks offer the same services but there
may be variations or special offers that appeal to you. As the customer, you
should choose a bank that best serves your needs.
• Customer service: As with all service industries, customer service is an integral
part of a bank’s contact with their clients.
• Interest rates: Compare interest rates for different types of savings accounts
between banks and choose the bank that offers you the best interest rate.

Look for a bank that offers you the best of all these aspects.

FICA
When you have decided on a bank, go to the bank with your parent or legal
guardian. They must take their identity document and proof of address. South
Africa has implemented a law designed to combat money laundering, which is
the abuse of financial systems to hide and/or disguise the proceeds of crime. This
law is known as the Financial Intelligence Centre Act 28 of 2001 (also referred to
as FICA). In terms of FICA, all banks have a duty to help prevent money
laundering.

To open a savings account, you must be at least 18 years old and be a South
African citizen or permanent resident. Most banks do have student accounts, but
then the student or scholar must be accompanied by their legal guardian or
parent when they open the account.

Considerations
For some savings accounts you need to keep a minimum balance in your account
at all times and you will be penalised if your balance falls below that amount.
Banks also sometimes charge a monthly fee on a savings account unless you
keep a minimum balance. Transaction fees on withdrawals and transfers also
need to be considered. It is important to know how you will be able to access
your money and whether it will be with a debit or an ATM card.
Some banks offer the facility of opening a savings account over the Internet. You
then need to have an existing account with the bank. The entire process is
handled through the Internet. You will fill out your personal information. Your
email account is important and you will have to create a personal identification
number (PIN).

Interest
For the privilege of using your money from your savings account to lend to
others, banks will pay you a percentage of interest on the money you choose to
keep with them. This is called interest. If the interest rate at your bank is one per
cent and your account never has less than R1 000 in it, you will earn R10 each
year that you have your money in the account.
Being able to successfully save money is one of the keys to establishing your
financial stability. A savings account is therefore an important step towards taking
control of your finances.

Community saving schemes

Community saving schemes are often called stokvels in South Africa and are one
of the oldest forms of financial services. Stokvels involve the community and offer
members collective saving and buying services. Another form of community
saving scheme is a burial society which assists members by providing funeral
services.
Stokvels come in different forms:

• There are schemes where 12 members put an amount of money into the stokvel
monthly and each month one member gets all the money. This is a revolving
saving scheme.
• Groups of people invest in shared buying schemes where all the members pool
their money to buy in bulk and then divide up what they have bought. This is
because bulk rates for goods are often cheaper.
• There are also loan schemes where the stokvels invest in a business opportunity
for an individual in the group.
• Groups can also have homeloan schemes which assist members to save up
money to buy a house.

Stokvels are well organised, with a chairperson and a treasurer who are
responsible for administering the investments. All decisions are made as a group.

Advantages of Disadvantages of community saving schemes:

community
saving schemes:
• These schemes have a minimum of 12 members and can be
• collective as big as 150 members. If the scheme gets too big, control
banking can be lost and corruption and mismanagement can occur.
services
• If the scheme is too small, the amount of money is less.
• insurance
policies;

• marketing
of new
products
and
services;

• collective
buying of
expensive
products
 • direct
sales
channels.

It is essential that members realise that it is a commitment to belong to a stokvel

and this is why stokvels are often formed by neighbours, members of the same
community or members of a church congregation.

To qualify legally as a community saving scheme, a common bond has to exist

between the members of the scheme. It must be a formal or informal rotating
credit scheme with entertainment, social and economic functions. Members must
support each other towards the attainment of specific objectives.

Financial organisations and institutions promoting entrepreneurship

The advantage of starting a small business lies in the rewards, because they are
often more than those of salaried people. A small business also provides jobs for
other people in the community and so contributes to the economy.

Funding
One of the most challenging aspects of starting a small business is finding the
finance to do so. There are many agencies that are willing to fund bigger
businesses because the risks are lower than with small businesses where there is
a higher risk factor. Commercial banks offer venture capital and equity funding,
while national institutions for small businesses and provincial institutions for
small businesses both make funding available for small and medium enterprises
(SMEs). To qualify for a loan, the SME must present a business plan, have strict
assessment criteria and a good credit rating.

Institutions that promote entreprenuership

The following is a list of institutions that offer funding to entrepreneurs.

7. Business Partners Limited is an investment company for SMEs.

8. Commercial banks have specialist SME divisions that provide finance to qualifying
entrepreneurs. All major South African banks work towards putting something
back into the communities they service. They do this through various graduate
development programmes whereby they provide jobs for candidates and assist in
their training. They have bank accounts linked to various sectors of the economy
where they give percentages of service fees to the development of areas such as
sport, conservation and education.
9. Khula Enterprise Finance is an agency of the Department of Trade and Industry
(DTI) that was established in 1996 to facilitate access to finance for SMEs.
10. Non-bank retail financial intermediaries are independent organisations or
companies which are lent money by Khula and have to repay Khula. They must
contribute towards the achievement of Khula’s developmental impact objectives,
such as providing funding to SMEs which are black owned, women owned and
from rural areas.
11. The Communities Fund and Small Business Hub Programme and Small Business
Hub Network support SMEs, facilitating entrepreneurial opportunities and the
subsequent creation of jobs in communities located in the vicinity of Anglo
American Mines.
12. The Industrial Development Corporation (IDC) promotes economic growth and
industrial development in South Africa.
13. The South African Investment Network connects entrepreneurs seeking business
funding with investors looking for investment.
14. Sasfin Private Equity provides private equity funding for entrepreneurs.
15. The International Tourism Marketing Assistance Scheme (ITMAS) provides partial
compensation to businesses for promoting tourism to South Africa.
16. The African Contractors Finance Corporation (Pty) Ltd provides funds to
contractors.
17. The Business Finance Promotion Agency (BFPA) has several products that assist
entrepreneurs.
18. The National Youth Development Agency works on youth development by
reducing youth unemployment and promoting social cohesion.
19. The Land and Agricultural Development Bank of South Africa (Land Bank)
supports the government’s efforts to increase access to land, provide support for
emerging farmers and raise rural incomes.