THREE main weaknesses confront our economy: its major sectors are increasingly foreign owned; its production structure is based on mineral exports, besides being dominated by unproductive sectors such as finance, real estate and wholesale and retail trade; and its growth is on the basis of worsening income inequalities.
These weaknesses tend to drive the economy towards stagnation and make it vulnerable to credit downgrades.
The Budget Review 2016 provides a detailed plan on how government seeks to manage this situation. But the current account is in a structural deficit, and the Review does not critically examine why this is the case. More than 60% of this deficit is accounted for by legal outflows in the form of dividends and other transfers related to foreign ownership.
The Review expects the deficit to remain unchanged. And it admits that reducing it would require higher domestic savings. But this is unlikely to be forthcoming. Big industry’s SA-generated profits are largely repatriated because of high levels of foreign ownership. Workers already save through their pension funds, and most of them earn wages too low to save anything more. To generate sufficient domestic savings to narrow the deficit, government will have to spend less.
But there is a catch. A freeze on spending and the persistent current account deficit put downward pressure on the growth rate of the economy and increase unemployment.
Lower growth and a higher rate of joblessness pull domestic consumption down. Domestic investment will also fall. Further, the increases in interest rates (to tame the rand) serve only to reduce domestic investment and consumption. SA will almost certainly enter a recession.
For all this, the Budget Review appeals only to a vague variable called “confidence”. It says: “Rising confidence and investment by the private sector [are] needed to turn around the country’s economic fortunes.” And: “Government is taking steps to restore confidence in the economy and address structural constraints to growth.”
It continues: “If current collaborative efforts by government and business successfully boost confidence, a stronger investment recovery can be expected.”
Confidence among businesses is based on an expected future increase in profits, which to a large extent depends on economic growth. Similarly, confidence among households is based on the expected growth rate of disposable incomes.
Interest rates are set to keep rising, the world economy is still weak, a freeze on the increase of government spending is expectedand growth of 0.7% is forecast. It is difficult to see how “confidence” can be boosted under these circumstances.
The Review hopes to win over the ratings agencies by stating that it will accelerate the pace of “fiscal consolidation”, but this will simply quicken the pace of SA’s descent into a recession. It will reduce the tax base and widen, rather than narrow, the budget deficit.
The impending downgrade should present an opportunity for us to reconsider the economy’s growth path fundamentally, instead of clutching at straws and vague notions such as “confidence”.
The progressive trade union movement has consistently said this growth path is not sustainable and is fragile and vulnerable to small shocks.
We have to be serious about radical transformation, which should entail a robust strategy of industrialisation in which beneficiation and infrastructure development are key to addressing the trade deficit and increasing labour absorption. This will address structural unemployment and income inequality.
We should seriously consider measures to limit foreign ownership and the ease with which profits leave this economy, to address the constraint imposed by the current account deficit and to boost SA savings.
• Malikane is associate professor of economics at the University of the Witwatersrand