subscribe Support our award-winning journalism. The Premium package (digital only) is R30 for the first month and thereafter you pay R129 p/m now ad-free for all subscribers.
Subscribe now
Picture: 123RF/seanh
Picture: 123RF/seanh

Emerging from the election, the incoming government faces an uphill struggle to sustainably move the economy to meet the electorate’s aspirations and global investors’ imperatives. Critical macroeconomic policy decisions could enable the new leadership to make real inroads on structural problems that have kept the economy from growing. 

The critical economic policy debate in SA has focused on the balance between the state and the market. The crux of this debate is whether SA should follow a state-led or market-led growth model. This issue is really about the size and role of the state. However, the genuine debate should transcend these parameters. The incoming government must not let the debate be stuck on “big government” versus “small government”. The vital debate should not be over the size of government but how well it is run.

The global commodity price cycle has been the traditional driver of the economy given its large mining sector. Additionally, through the minerals energy complex (MEC), the mining and energy sectors are integrated into the secondary and tertiary activities of the economy. Thus, SA’s MEC is a vital stimulus for economic growth. However, it has become an unintended hindrance to industrialisation.

Significant and sustained commodity price increases characterised the period from the 1997 Asian financial crisis to 2010. Over this period the real annual GDP growth rate in SA increased to more than 5% a year, employment increased and the unemployment rate dropped. Yet after the global economic slump of 2008-09 the international commodity cycle took a nose-dive in 2011, which corralled the country’s growth rate. Growth decelerated, leading to a recession before the Covid-19 pandemic. The pandemic and the subsequent lockdowns deepened the contraction in the economy. 

Profound shift

Remarkably, despite an upswing in global commodity prices in 2016, SA’s growth rate was not positively affected. Domestic supply-side constraints, especially electricity shortages, offset the expected stimulus. The economic downturn and power shortages, transmitted across a range of MEC linkages, have only accelerated deindustrialisation.   

The task facing the incoming government is to bring about a profound shift in the economy’s competitive position. The economy must pivot away from the MEC-based growth model that has historically linked its successes to the global commodities cycle towards new models of fostering competitiveness.

New engines of economic growth focused on a novel complex of green energy must be established. SA must have a strategy that actively pursues opportunities for green growth to enable new comparative advantages. This entails making global decarbonisation enablers and green versions of grey products for the global market.

Between 1994 and 2008 GDP increased at an average 3.6% annually, translating in per capita terms to just 2%, falling beneath the average of upper-middle-income countries and those in Sub-Saharan Africa. After the 2008 financial crisis growth was curtailed and it dropped to an average 0.7% in the half-decade leading up to Covid-19. In 2020 the contraction was more profound than in most countries. Over the 14 years encompassing 2009 to 2023, annual growth averaged just 1.2%. 

This subpar growth pattern reflects the consistent fall in the economy’s productivity and the downturn in investment directly resulting from microeconomic policies. Productivity decline is most evident in network industries but extends to the overall economy. Significant deceleration in the total factor productivity accounts for the bulk of the poor performance.

Municipal services

The diminishing productivity in network industries has seeped into the larger economy through interconnected conduits of supply and demand. The poor productivity in network industries, with lacklustre investment performance and confidence, has also been characterised by policy uncertainty triggered by a decline in the quality of governance. 

Other explanations exist for micro factors affecting growth beyond policy uncertainty and the utilities’ waning productivity. One of these is the low quality and access to municipal services such as electricity, water, sanitation and municipal roads, which directly impede business activities. The economy’s underperformance is thus mainly due to severe supply-side restrictions resulting from severe state capacity failures. 

The incoming government must work effectively for the economy to work efficiently and harness all the assets and talents SA possesses. It must establish improved mechanisms for bringing black South Africans more fully into the economy. Ultimately, this means connecting the majority with opportunities for participating in the economy. At the heart of this challenge is ensuring spatial integration, meaning citizens must live in the areas best suited for work, entrepreneurial success and access to markets, technologies and financial instruments. 

Fiscal policy will require strict attention as well. SA’s debt is likely to rise as long as growth remains stagnant. The combination of rising debt and economic stagnation translates into high and rising interest rates on debt, thus crowding out social and other growth-orientated spending.

SA is locked into a high-interest rate, low-growth trap. High real interest rates in relation to economic growth — and by a large margin — render the country’s fiscal position unsustainable. The new government should place at the top of its agenda the task of mending public finances while simultaneously addressing the weakness and unproductiveness in spending. 

Long-term prosperity for SA will require sustainable development and a shift to a low-carbon economy. Investments in renewable energies and cultivating a green, climate-resilient industrial sector should be at the top of the planned economy’s agenda.

• Ngozo is a research manager at the Financial & Fiscal Commission SA. He writes in his personal capacity.   

subscribe Support our award-winning journalism. The Premium package (digital only) is R30 for the first month and thereafter you pay R129 p/m now ad-free for all subscribers.
Subscribe now

Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.

Speech Bubbles

Please read our Comment Policy before commenting.