As serendipity would have it, I was working on a long-term structural analysis of the SA economy when Colin Coleman’s new proposal hit my desk.

Its title drew my attention: How to put South Africa on a bold, new, successful economic trajectory. I eagerly put my laptop down, leaving aside the megabytes of economic data and economic forecasting I have been working on for weeks, and jumped onto the article with an enthusiasm pitched by the fact that Nouriel Roubini, folk hero of heterodox economists, is one of its co-authors.

I first scrolled through the article to assess its heft: the boldness of a proposal must somewhat be commensurate to its volume. Bold proposals demand evidence. While there is a law of diminishing returns on volume, the opposite is also true. Coleman’s proposal is contained within a mere 1,800 words, with no graphs or tables.

In mid-2020 Coleman had proposed that government should confront the pandemic with a fiscal stimulus of R100bn, which he then, too, called bold. That prompted me to jump onto my laptop and model his evidence-free idea. I concluded then that R100bn was too small given the expected impact of the pandemic: a mere 1.8% of 2019’s GDP, less than one week of economic activity. Assuming a pessimistic 10% drop of GDP, I estimated that a stimulus should range between R600bn and R1.2-trillion — figures whose enormity horrified informal advisers I shared it with. President Cyril Ramaphosa’s subsequent stimulus announcement, below the low-end of my numbers, thus made sense to me — abstracted number-wise.

Number-wise only because this government is not the solution but the problem. At this point, you must be scratching your head wondering whether I am a heterodox economist, an old-fashioned Keynesian, or an evil supply-sider. I am a data-obsessed pragmatist with 30 years in business, most of which fixing broken economies and the businesses they hurt. In 2020, I found an inverse correlation between the rise in government expenditure in this country and the growth of this economy. The more government spends, the less the economy grows.

Back to Coleman. Yes, government expenditure should be directed towards social stabilisation. Yes, R100bn or even R200bn more debt towards this is a small price to pay for social peace versus the alternative, considering the July insurrection. Yes, government should explore a wage subsidy to decrease labour costs. And yes, social stabilisation should be linked to structural reforms. All these things Coleman et al. propose.

Patently unsustainable

On the social welfare side, their core idea is to add the 12-million unemployed to the social safety net. And its cost? R100bn. Doing so would up social expenditure from a world-beating 73% of total government expenditure to nearly 80%. Public sector workers included, an astounding 55% of the country’s population would end up on the government bill. Once committed, government would be unable to uncommit. In time, the R100bn would escalate, raising debt without having resolved any structural economic issue.

That idea also comes with tax increases on higher-incomes. There were about 4-million (registered) taxpayers in 2019, and 18-million people on social grants. In 2000, there were about 4-million taxpayers and 3-million people on social grants. The country is one of the most taxed in the world. Less than 3% of the population pays 90% of a personal income tax that accounts for 40% of revenues. This is patently unsustainable. Adding to the burden for this slither of population would be counter-productive. Wealthy residents, South Africans and non, are already voting with their feet.

The authors also point out that R100bn corresponds to the increase in tax revenues generated by the current commodity boom. But like all commodity booms this one is unlikely to last. And investment in mining in SA is at an all-time low — not accidentally. That goose urgently needs a competent veterinarian.

On to structural reform, then. Here, the authors call for recapitalisation of businesses and initiatives that will “target higher rates of fixed investment”. This economy is facing an investment strike, growth fixed capital formation being the lowest ever recorded, and on par with that of countries at war. So, yes please.

But the reforms they propose are either incidental, impractical or misguided. Tourism needs help, but is years away from post-pandemic. Infrastructure investment is sorely needed, but government anti-competition bias ensures that such expenditure will further raise the high cost of doing business.

The parastatals are at once fiscally unaffordable, economically net negative contributors, grossly mismanaged and generally corrupt. Recapitalising Eskom would be as effective as that miserly recapitalisation of SAA, but with far more tragic consequences. Spectrum allocation and migration have been no brainers for years; yet government has sat on it for reasons that escape reason.

Haphazard sprinkling

Incentivisation and industrial policy is what the department of trade, industry and competition (DTIC) has done for two decades. Targeted protectionism, grants, funding and incentives, all meticulously administered through weird and wonderful sectoral master plans — whose secret recipes are held in a safe under the desk chair of minister Ebrahim Patel — have brought de-industrialisation, the obliteration of the working class, and the loss of entire value chains. This goes for mining. And for just about every other “legacy” sectors. In sum, not much growth is to be expected from the sprinkling and somewhat haphazard structural measures proposed.

As for the notion that the large government wage bill (50% of government expenditure, 25% of GDP) can be leveraged through improved public services and frontline delivery, I struggle to find the appropriate words to return it to sender, save to note that I assume Coleman knows that structural reform in government is to SA politics what Chernobyl was to life.

Which leaves us with the “sizeable small and medium business hybrid equity funding scheme, plus grants for SMEs [...] funded by the National Treasury, in partnership with financial institutions, to help recapitalise the economy [...] aimed at stimulating investment and job creation”. No sums, sources (yes, Treasury, but Treasury does not fabricate money, or does it?), mechanisms and growth effects are presented in support of this initiative.

Structural reforms are meant to change the cost-reward structure of an economy towards disincentivising growth-destroying behaviours and incentivising growth-generating ones. Colin’s et al. strategy falls well short of that. The measures envisaged as an all or nothing package (why all or nothing, I can’t say because) betray a profound misdiagnosis of the country’s situation and what it will take to stabilise it, then fix it. They have confused causes and effects.

Secular growth collapse

The structural analysis of the economy I am conducting for a client shows, first, that since 2011 South Africa has experienced a secular growth collapse. Second, this collapse is primarily endogenous. Third, this growth collapse became structural and self-replicating sometime around 2016-2017. Fourth, government is the primary cause of this structural, self-replicating endogenous growth collapse. Fifth, any further injection of debt-funded government expenditure, even if directed towards consumption, will be insufficient to even stabilise economic decline — let alone reverse it.

SA’s growth collapse is of the type experienced by countries like Argentina, Brazil, Greece, and unless urgently addressed will turn into the type experienced by countries like Zimbabwe. Even I, often accused of being alarmist, was shocked by the results of my analysis.

SA’s economic engine is, for the most part, exhausted and damaged. If businesses are undercapitalised, it is not because there is a deficit of capital, but because there is a deficit of investment. There is a deficit of investment not because there is a deficit of capital, but because there is a deficit of reasonable returns. There is a deficit of reasonable returns not because there is a deficit of investment, but because there is a deficit of productivity.

There is a deficit of productivity not because there is a deficit of investment, but because overall costs of production and transaction are unaffordably high. Overall costs of production and transactions are unaffordably high not because there is a deficit of productivity, but because government has introduced massive disruption, uncertainty and distortion in the economy.

Only immediate, massive and painful structural reform will in time deliver growth.

I now undoubtedly sound like an orthodox economist intent on unleashing untold misery onto the poorest and most vulnerable. I stand far away from any such economists. I, like Coleman, know that this country’s social fabric cannot take the kind of austerity advocated by the apostles of fiscal profligacy. I, like Dany Rodrik — whom he quotes extensively and haphazardly — know that an economy is a social institution whose purpose is to deliver the highest levels of wellbeing to the largest number of people at the lowest cost to society and the environment. I am a social democrat.

As a social democrat, I also know that no economy can sustainably grow and develop without continuous, painstaking investment in humans, infrastructure and ideas. If debt is the right lever, then debt must be used. But more government debt is absolutely not the right instrument to fix this growth collapse.

The root cause

Government is now the single greatest cause of the problem. And there lies the fundamental, damning flaw of Coleman’s strategy. It endorses incidental or failed policy and incites more debt-fuelled government interference, a mere rehash of the tired developmental state concept as understood and practised by this government.

The strategy is guaranteed failure. It would not generate durable growth. It would deliver a debilitating debt crisis. It would lead to collapsing real incomes (they are already falling). It would produce the very sociopolitical instability Colin is rightly concerned about.

Eunomix has calculated that there is a 75% correlation between income and state fragility at the international level. Once, under President Thabo Mbeki, SA was the least fragile country in the world for its level of income. This is no longer the case. It is as fragile as its level of income would statistically suggest. An increase in its fragility and decrease in real incomes mean that the country will rank as a failed state by 2030, if not earlier. We have calculated that by then SA will have downgraded to a lower middle-income country.

At the root of this catastrophe is the fact that since 2011 government has, as neoclassical economists would say, gotten prices terribly wrong. And not developmental state-wrong (which I am fine with). SA is an exemplar of how to drive disinvestment, and the latest case study in needless government-directed economic destruction leading to sociopolitical destruction. Government has gotten prices failing state-wrong.

Government’s scarce resources should be almost entirely directed towards social stabilisation, urgent non-commercial infrastructure and services, and long-term human capital development. This undoubtedly means a smaller, more competent and more honest public service. Cue the labour union strikes ... It also means opening up the economy to the country’s still remarkable private sector and the vast numbers of citizens excluded by policy from the economy.

Until and unless government gets this, growth will remain a no-show. The question, which Eunomix’s growth diagnostic answers, is why does government not get it? Maybe, in part at least, it is because it keeps getting the wrong advice from the same people.

• De Baissac is CEO of political and economic risk consultancy Eunomix Group.


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