There will be no immediate recovery for the South African economy from the last year of lockdown. This year the South African Treasury predicts the country will grow at the very moderate rate of 3.3 percent, and only at 2.2 percent the year after. We will be coming off the low base of a disastrous 2020 and the growth rate of a dynamic economy would be far higher.
By contrast the International Monetary Fund (IMF) projects India will grow by 11.5 percent and China by 8.1 percent.
The Indian economy contracted 8 percent last year; that is slightly more than the 7.2 percent dip that we endured, yet India’s economic recovery from the lockdown is way above ours.
Our growth rate this year will be lower than that of Emerging and Developing Countries as a group, which the IMF expects to grow by 6.3 percent. It will also be lower than that of the world economy, which is projected to grow by 5.5 percent.
The signs are that South African growth and job creation will be severely hobbled in its recovery.
And even then there are severe risks to the recovery from a slow rollout of the vaccination programme and the threats of new mutations and waves of Covid-19 infection. As the Treasury said last week in its Budget Review, a faster recovery requires a set of reforms to remove barriers to growth, lower the cost of doing business, bolster confidence and boost investment. It also requires a properly functioning electricity supply system.
The pitiful state of Eskom is one of the big reasons why our economy will not be able to grow like China’s and India’s. “Unreliable electricity supply continues to throttle economic activity,” says the Treasury in the Budget Review.
Last year, despite the much slower economic activity due to the lockdowns, Eskom was unable to meet demand. According to the Budget Review, in 2020 load-shedding was the highest since 2015, with a cumulative 52 days of power cuts compared to 103 in 2015. Government is easing generation restrictions on firms and municipalities, bids have been submitted for emergency power production, but as yet there are no results. And this power might take some time to come on stream.
The bigger problem is that South Africa has not undertaken reforms to take it into the modern era.
There have been no major changes to raise productivity, competitiveness and rates of return for business to attract investment. For the past 15 years or more the problems at Eskom have been well known, yet no recovery or privatisation plan has been implemented. And the other problems to be addressed by Operation Vulindlela have also been present for years.
Operation Vulindlela focuses on a necessary but insufficient narrow range of reforms such as the switch from analogue to digital signals for TV to make space for additional data and voice spectrum, the rapid rollout of 5G, making it easier to import critical skills, the rollout of an electronic visa system, improving commuter rail, increasing the efficiency of ports and improving water quality. All of these have taken an inordinately long time to implement.
To clear the way for rapid growth it has to be made more worthwhile to employ large amounts of labour to reduce unemployment. Changes in the minimum wage regime imposed by bargaining councils and the government directly will have to be introduced. State enterprises cannot be allowed to drain the economy. State enterprises like Eskom – electricity generation and distribution, Transnet – rail, Prasa – commuter rail transport, Denel – defence and technology are all in crucial sectors and cannot afford to be badly managed. The poor management of the state enterprises and endless need for bailouts means that capital and returns for the economy and the chance for higher growth are being destroyed.
Rapid economic growth alone could allow South Africa to make headway in dealing with some of the country’s most urgent and dire problems. The overwhelming experience is that prolonged high economic growth creates jobs and brings people out of poverty. Faster growth would allow a rise in tax revenue and hence result in a smaller budget deficit; it would also reduce borrowing requirements. Growth is like a virtuous circle for the economy and the big problem is that the economy has under-performed since 2007, and the prospects for a new and faster growth track are not present.
South Africa requires wholesale reforms that will be of equal historical importance to those undertaken by China and India. Arguably, China and India had to make far greater ideological leaps and had to take on more vested interests than South Africa would have to undertake. South Africa operates in a freer market than China and India did prior to their reforms, yet there is still a stultifying economic environment in the country that severely dampens growth prospects.
In the case of China, a wave of reforms resulting in growth began with Deng Xiaoping after Mao’s death. Privately owned township and village enterprises were permitted in 1978. Soon the pace of reform accelerated with the de-collectivisation of agriculture, moves away from price controls, allowing private groups to manage enterprises, and opening the country to foreign investment. The results have been spectacular in bringing many hundreds of millions of people out of poverty and modernising the country over the past forty years.
Until the early 1930s, the Indian economy was burdened by a system of licenses and red tape known as the “License Raj”. About 80 government agencies were in charge of licenses for business, as well as production and price controls. A Planning Commission came up with Five Year Plans similar to those in the Soviet Union. In 1991 the government decided to liberalise in order to obtain an IMF bailout. Many license regulations were scrapped, tariffs were lowered, and the country made a move to open itself to the international economy. By 2014 when the Planning Commission was abolished its role had been greatly reduced.
The battle for reform still continues, but as in China, hundreds of millions of people have emerged from poverty. In the latest battle over reform, farmers and the government of Prime Minister Narendra Modi have been engaged in a long conflict over cutting agricultural subsidies. To achieve a further boost to growth, Indian markets will have to become more competitive, allow smaller firms to expand, sell off state enterprises, and the cost and ease of doing business to be reduced.
Apartheid came with a highly restrictive economy in the form of job reservation, racially restricted access to education and training, state enterprise monopolies, extensive licensing and red tape, price controls on many agricultural commodities, high tariffs and strict exchange controls. One of the first acts of the ANC was to scrap the agricultural control boards and subsidies, reduce tariffs, and ease foreign exchange controls.
Since then economic reform has stalled and as a result our recovery from the lockdown will be slow.
The views of the writer are not necessarily the views of the Daily Friend or the IRR
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