Economic Watch

South Africa’s growth tragedy

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By the time 2017came round South Africa’s economic growth performance, which peaked at 4.4% ten years earlier, has dropped back to the type of growth experienced in the dying days of apartheid.

This coincided with the advent of the Zuma administration, the development plan known as the Accelerated and Shared Growth Initiative for South Africa (ASGISA) being unceremoniously confined to the dustbin, and with the 2007/08 international financial crisis and its aftermath.

The result was that South African economic policy formulation was left rudderless at a time when it required both sharp thinking and sharp implementation. A new National Development Plan was put together, but very quickly went the same way as the previous two development plans.

However, although it is popular (and partly true) to blame the woes of the South African economy during this period on international conditions, the crux of the matter is that economic policy first veered off course and then entered a vacuum, with policy makers taking their collective eye off the ball.

This is the conclusion of Jac Laubscher, chief economic adviser for Sanlam Limited, and lecturer in economics at the University of Stellenbosch in his just published final economic commentary for Sanlam – something he has been doing for the past 20 odd years.

The figures show that South Africa's growth performance for the past 30 years has come full circle - all the hard work that was put in to modernise the economy and put it onto a sustainable higher growth path has come to naught.

His final commentary gives a glimpse at the political and economic challenge awaiting the next administration once Mr Jacob Zuma leaves office.

“It has recently become common for political analysts to say that South Africa is back where it was in 1994. The same can be said when it comes to the economy: we are starting all over again,” writes Laubscher.

Five-year periods 1987 to 2017

Each 5-year period between 1987and 2017 was characterised by events and policy responses peculiar to the time:

The period 1987 to 1991 (when an average growth rate of 1.5% per annum was achieved) represents the dying days of the old regime when a severe balance of payments constraint hamstrung the growth potential of the economy. South Africa did not have any meaningful access to international capital and the structural constraints of apartheid handicapped the functioning of the economy.

During the period from 1992 to 1996 (average growth 1.9% per annum) the performance of the economy started to improve as it set out to free itself from the shackles of the old regime. Access to foreign capital improved gradually and the balance of payments constraint became less severe.

The period from 1997 to 2001 (average growth 2.5% per annum) brought home the lesson that with greater access to international capital comes increased vulnerability to the vicissitudes of international capital flows. South Africa implemented the Growth, Employment and Redistribution strategy (GEAR), the success of which depended inter alia on annual capital inflows of at least 4% of GDP, but the emerging-market financial crisis that started in Asia in 1996 hit and South Africa was caught up in the international flight from the asset class.

Rather optimistic econometric projections accompanied GEAR ,but unfortunately, the underlying assumptions to the projections, including that the package of reforms it suggested had to be implemented as a whole, were not highlighted sufficiently, creating unrealistic expectations. The result was that when (predictably) things did not turn out as projected, GEAR quickly fell into disgrace and its implementation was stalled.

In the period 2002 to 2006 (average growth 4.4% per annum) South Africa was swept along by a buoyant global economy, especially the so-called “super cycle” in commodities caused by a booming Chinese economy. GEAR was replaced with talk of SA as a developmental state, encouraged by the success achieved in Asia, but if the country indeed was a developmental state it was closer to the social democratic variety à la France.

At the same time the Accelerated and Shared Growth Initiative for South Africa (ASGISA) was formulated with the help of international experts, and a sustained growth rate of 6% per annum was envisaged. However, ASGISA was unceremoniously confined to the dustbin with the advent of the Zuma administration.

In 2007/08 the international financial crisis and its aftermath coincided with the change in administration in South Africa. The result was that South African economic policy formulation was left rudderless when it required both sharp thinking and sharp implementation. A new National Development Plan was put together, but very quickly went the same way as GEAR and ASGISA.

The period from 2007 to 2011 (average growth 2.7% per annum) therefore saw an unwelcome negative turn to South Africa's growth performance that gained further momentum in the following 5 years from 2012 to 2016 (average growth 1.6% per annum), bringing us back to the type of growth experienced in the dying days of apartheid.

“The fact is that access to international capital is once again becoming the Achilles heel of the economy for the same reason as before 1994, although in a different disguise – a lack of confidence in South Africa's future,” Laubscher writes.

Lessons to learn?

Firstly, the SA economy only performs well when it can cling to the flying coattails of the international economy. It has no internal growth dynamic to speak of, which is a serious indictment of the quality of its human capital.

Secondly, successive SA governments have displayed an admirable ability to analyse the roots of the economy's problems and come up with comprehensive corrective plans. Unfortunately, they have also displayed a severe lack of capacity for implementation.

Thirdly, it has repeatedly been acknowledged that a plethora of severe structural constraints is holding back the SA economy. However, the political will to drive through a game-changing structural change agenda has consistently been lacking. Structural change is furthermore not a one-off event.  We live in a dynamic world that requires continual adjustment. SA is falling further behind as the world passes it by.

And so, South Africa finds itself in 2017 with sub-1% growth, with little hope of significant improvement for the foreseeable future. Does it need a new plan/strategy to escape from this strait-jacket?

“I don't believe so. For a start, it will be enough to dust off the NDP, and even GEAR and ASGISA, and update them to take cognisance of the world in which we find ourselves today, combining their best insights and IMPLEMENTING them. But that will only be the beginning and South Africa will have to prove to the world that it can stay the course,” Laubscher concludes.

(This is a shortened extract from Laubscher’s commentary. To read the full text on the Sanlam website, click here.)

by Intelligence Bulletin Team

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