By the end of the decade the South African economy might have dropped so far into a vortex of decline that we will become a lower-middle income country.

That would mean that the income of the average resident would have fallen to such an extent that the World Bank would shift us downward from the upper-middle income country category into the lower-middle income one.  

On its own, dropping out of the upper-middle income group is the crossing of a threshold, and a reflection of pressures that have been building for some time. But such a re-rating of South Africa would have enormous symbolic importance as an indictment of ANC rule and its inability to change course.

Last week consulting firm Eunomix released the results of its model, which forecasts that with slowing growth and investment, South Africa could become a lower-middle income country by 2028. The World Bank places economies into four income groups – low, lower-middle, upper-middle, and high income countries. Where a country is placed is based on its Gross National Income per capita in current US dollars.

In an account by Bloomberg of the for-sale-only Eunomix report, the main reason that puts SA at risk of dropping into a lower country category is the failure of the ANC to accelerate growth and reform.

This forecast should act as an alarm about our direction of travel, but that’s unlikely with a government that has sat on its limited reform agenda for ages. As an alarm, the prospect of this downgrade gives us a picture of the much harsher world into which we could be heading. It is also a reminder that economies can experience precipitous falls, irrespective of how sophisticated they are.

Sharply slumped

Even without a forecasting model, a chart showing South Africa’s per capita income in recent years is sufficient to show our direction of travel.

South Africa Real Per Capita Income (1994-2020) US Dollars

Source: World Bank: https://data.worldbank.org/indicator/NY.GNP.PCAP.PP.KD?end=2020&locations=ZA&start=1994
Gross National Income Per Capita PPP (constant 2017 US Dollar)

South Africa’s real per capita income rose constantly from 1994 to 2008, the inflexion point in the country’s economic performance. It then slumped for a year and then grew far more slowly until 2014. For the past seven years per capita income has declined and in 2020 sharply slumped with the Covid-19 lockdown. Per capita Gross Domestic Income in real terms is almost at the same level it was in 2005.

The recent upward revisions to national accounts mean that GNI per capita means the country has been granted some breathing space. But nevertheless the direction of travel still poses the risk of South Africa being pushed into a lower-income category.

For per capita income to grow, the economic growth rate must be above that of the population rate of increase. In each of the past five years, economic growth has been below population growth.

For the past two years, the repeated Covid lockdowns have pushed economic growth well below population growth. According to the latest National Treasury forecast, the economy will grow at 5.1 percent this year as it springs back from the tight lockdowns.  But after that the forecast is for subdued growth at 1.8 percent next year, and 1.6 percent in the year after. That will allow barely any per capita income growth. With proper policies and reform, South Africa as an emerging market should be grow at well over 5 percent a year.

Slower population growth could also help raise per capita income. But South Africa’s population growth is where it should be for a country with our per capita income, and birth control is easily available for those who want it. Without a rise in incomes, we are not about to see further sustained drops in fertility. 

Substantial risk

Slow growth is a substantial risk to economic and political stability. Lower growth means lower tax revenue and that could result in debt-service difficulties. With much higher budget deficits there are mounting pressures on the government budget. That will at some point translate into cuts, or at least no increases, in spending on key delivery areas like social grants, education, and healthcare. Combined with rising unemployment, that raises the risk of rising frustration and violence.

Life in a lower-middle income economy is on average a lot harder than in an upper-middle income country. The correlations between country conditions and placement in a category are for the most part pretty close. In a lower-middle income country the poverty rate is higher, population growth is faster, carbon emissions are higher, and life expectancy at birth is lower. Unemployment is higher and there is often no social safety net. Skilled emigration in these countries tends to be higher than in rich ones. With greater poverty, and a deterioration in health services, and a rise in infant mortality, the fertility rate and population growth might increase, thereby bringing about further drops in per capita income.

Every year a number of countries move between one World Bank country-income category and another. South Africa would not be unique in falling into a lower category. The Bank keeps income classification thresholds fixed in real terms by adjusting them annually for inflation. The category into which a country is placed reflects its economic growth, inflation, exchange rates, and population growth.

Lower-middle income bracket

In 2020, South Africa’s GNI per capita was $5,410, which comfortably placed it in the upper-middle income bracket of between $4 096 and $12 695. With a GNI per capita at $5 410, South Africa’s current position is nearly 24 percent above the upper-middle income lower threshold. But with slowing growth, inflation, and adverse exchange rate movements, South Africa could find itself in the lower-middle income bracket, which covers countries with GNI per capita of $1 046 to $4 095.

Apart from South Africa, the upper middle-income economies currently include Botswana, Brazil, China, Cuba, Gabon, Libya, Mauritius, Namibia, Russia and Thailand.  Indonesia and Iran were upper-middle income countries but slipped down one rung in 2020, mainly due to lower oil prices. Mauritius was an upper-middle income country and also slipped down in 2020. Venezuela, once classified as an upper-middle income country, is now unclassified due to problems with data. Two years ago a good growth year took Zimbabwe from a low-income country to a lower-middle income country, although it is without electricity most of the time and has at times been unable to pay its health workers.

If South Africa is downgraded, this would do enormous damage to our economic standing in the world. India is a lower-middle income economy, but is a gigantic country with strong growth prospects. By contrast we would sit in the lower-middle income category with poor growth prospects.

[Image: https://pixabay.com/photos/wallet-money-finance-to-pay-costs-3548021/]

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