Economic growth in SA: what has gone wrong?
How the country’s growth rate is steering it away from economic success
After South Africa recorded a tepid economic growth rate of 0.3% in 2016, a very moderate – but still negligible – gross domestic product (GDP) expansion of 0.5%–1% is on the cards this year, with a slight acceleration in the next two years.
Obviously, anything is better than nothing. However, in the light of the country’s unfortunate bouquet of adverse macro- and socioeconomic realities, anything less than 4% is inadequate.
The harsh reality is that a growth path of 6% per year for a period of at least 20 years is a necessary (if not sufficient) condition to make meaningful inroads into unemployment, poverty and income inequality. Moreover, this target must be achieved in a global economic environment that is less friendly and more volatile than 10 years ago.
The global recession, the ongoing tepid growth in Western Europe, the growth slowdown in China, the significant decline in resource prices, and a debilitating drought have inhibited South Africa’s growth performance over the past eight years. These external factors are beyond our control. What is more worrying, however, is the fact that these external constraints have highlighted several domestic – largely structural – obstacles to growth, development and job creation.
For instance, the country and its stakeholders are living beyond their means in the following ways:
- domestic expenditure exceeds domestic production;
- government spending exceeds government revenue;
- exports exceed imports;
- household expenditure exceeds household income; and
- investment demand exceeds savings supply.
As a deficit nation (with a disturbingly low level of gross savings for its size), South Africa is capital hungry. It is therefore vital for the country that foreign capital should be forthcoming and that the cost of that funding should be kept as low as possible. To this end, it is crucial that policy-makers show an intent and commitment to get the basics right. In the short term, that is about fiscal (and monetary) discipline and about investor-friendly, predictable and surprise-free policies.
Virtually all variations in living standards can be explained by differences in countries’ productivity. In essence, productivity is a prerequisite for international competitiveness and economic growth and development. Labour productivity is the most common measure of productivity, largely because labour costs constitute the largest share in the value of most products (in South Africa, wages and salaries represent more than 50% of the cost of producing GDP).
The productivity of labour in South Africa has, at best, stagnated over the past 10 years, while remuneration growth has increased by more than 6% per year. As a result, the unit costs of labour have escalated to be almost three times higher today than at the beginning of the 21st century. All of this has occurred during a period of near-recessionary conditions and chronically high unemployment.
Total factor productivity (TFP) measures the efficiency of all inputs to a production process; that is, it’s not only labour or capital. Its level is therefore determined by how efficiently and intensely inputs are used in production. It plays a critical role in explaining economic fluctuations, economic growth and cross-country differences in per capita income.
Factors contributing to TFP growth include innovation, the availability of skilled labour, the cost of conducting research and development, the availability of technology (and the efficiency with which technology is used), and the availability and ability of management to harmoniously and efficiently blend the available inputs.
In the short term, economic growth in South Africa is expected to be lethargic
South Africa’s TFP performance over the past three decades has been disappointing when considered according to its own historical development, as well as when compared with other countries of a similar nature. There were 15 annual declines in the country’s TFP between 1990 and 2014. Consequently, the level of TFP in 2014 was 22.6% lower than in 1989 (computed from The Conference Board Total Economy Database; Adjasi, 2015).
The reasons for South Africa’s sluggish TFP performance can be attributed to, inter alia, low efficiencies in the use of labour and capital; a variety of challenges (including regulatory and financial barriers) that prevent businesses from maximising their potential; and a low competitive base.
In the short term, economic growth in South Africa is expected to be lethargic, as exports remain sluggish (due, among other reasons, to the uncompetitive nature of its manufacturing sector) and domestic consumers continue to restore the “health” of their balance sheets. On the positive side, recoveries in key markets, such as the US, should mitigate to some extent the slowdown in China. Nonetheless, the current account deficit is expected to remain high, partly as a reflection of the structurally low level of savings.
Moreover, the risks to the outlook remain high. These include:
- continued uncertainty about the future direction of policies (including the leadership struggle within the ANC and its influence on the pervasiveness of “state capture”);
- labour-market inadequacies;
- the impact of “junk bond” status;
- rising interest rates in the US;
- the slowdown in growth in China (with the corresponding implications for commodity prices); and
- negative investor sentiment (due to, inter alia, political tension).
In the longer term, in the absence of a substantial increase in the pool of domestic and foreign savings, accompanied by a discernible improvement in the quality of the labour force, the economy is destined to muddle along the path of growth mediocrity, stuck in a middle-income trap, with limited redistribution of wealth and income. Poverty and unemployment become entrenched and spending power is confined to a relatively small group of middle-class consumers (more of whom will be black Africans).
One of the greatest challenges facing policy-makers is to avoid the temptation of creating the illusion of wealth creation
Alternatively, a well-managed economy able to inspire foreign and domestic investment by virtue of an attractive, relatively crime-free and stable business environment inhabited by productive, motivated and appropriately educated and skilled workers could generate economic growth rates of 5% per year or more. In this case, a meaningful redistribution of wealth and a burgeoning middle-class group can be expected.
One of the greatest challenges facing policy-makers over the next few years, especially while economic growth is sluggish, is to avoid the temptation of creating the illusion of wealth creation by resorting to macroeconomic populism – for example, extravagant government expenditure and artificially low interest rates. The success of attempts to “spend your way into growth” will be curtailed by the accompanying hyper-inflationary tendency and the total distortion and disruption of the allocation of scarce production factors. Sooner rather than later, austerity measures will be needed to prevent economic decay and disaster.
Meanwhile, it is worthwhile reminding ourselves that the biggest obstacle to economic success could be fatalism – a sense of hopelessness. South Africa is not without its latent strengths and assets. These include:
- being among the 30 largest economies in the world;
- having a widely respected and progressive legal framework;
- boasting a sophisticated financial infrastructure;
- having a diversified economy; and
- the ability to display resilience.
We need to visualise the long-term picture and not fixate only on the current economic woes and turbulence.
But since South Africa emerged from its 2009 recession, growth has fallen short of the government’s target of 5%, the level economists say is needed to curb unemployment.
Prof André Roux is an associate professor at the University of Stellenbosch Business School and head of the Futures Studies programmes. His areas of expertise are business economics and labour economics.
This article was paid for by the University of Stellenbosch Business School.