The South African economy has been stuck in a low-growth, high-unemployment trap for years. Eskom’s power cuts and low confidence are throttling any prospects of a recovery.
There are technical solutions to all these problems, but these would be politically tough to implement as there would be job and income losses for supporters, although economic gains for the wider economy.
Eskom is a big indicator of the government’s intentions on reform. The signs are that it will try to reduce power cuts while undertaking minimal efforts at reform in allowing the private sector to generate as much power as it can. And because of the political constraints under which it operates, power cuts will continue for some time.
Eskom monopoly
President Cyril Ramaphosa has allowed independents such as private companies and municipalities to produce only up to 100MW in power. And last week Eskom was allowed to make plans to buy around 1000MW from private companies. That is progress in breaking the Eskom monopoly, but hardly sufficient to resolve the crisis. Yet even approvals for independent power producer projects have been caught up in massive red tape. Over the weekend the Sunday papers reported that a shake-up of the top management at Eskom is imminent. That is unlikely to make a positive difference, but the government is desperate to show they have a plan.
What is clear is that the big South African turnaround is not about to happen any time soon.
The direction of travel on reform and pro-growth policies is regressive. To protect jobs the Minister of Trade, Industry, and Competition, Ebrahim Patel, is intent on greater protection against imports. That will drive prices higher and possibly result in shortages.
So, what are the prospects for reform?
Ramaphosa can hardly make any big reform moves just months ahead of the ANC conference. All the factions are trying to appeal to the ANC base with populist policies which favour expropriation without compensation and a Basic Income Grant.
Any ANC leader will have to defer to special interests that are blocking reform. Big reforms would require smaller government, the possible privatisation of state-owned enterprises, and a change in the labour laws, as well as a move away from empowerment procurement. That would hurt core ANC constituencies. The World Bank suggests that Eskom should shed around two-thirds of its workforce. Much of the state sector would also face deep cuts in jobs. There would be many losers from reform, who could actively disrupt the reform process.
What sort of deal could be done to reduce their opposition?
Apart from generous payouts for job losses there is no deal that could be done to ease the losses of special interests. The best guarantee of support for reform is if strong economic and jobs growth is forthcoming within months of tough measures being taken.
A crisis could trigger reform, but even then there is no guarantee. If people take to the streets to protest against high food and electricity prices, the likely reaction might be to crackdown but also to raise various subsidies rather than make sure there is an economic recovery.
Surprise reform
Could reform be a big surprise as it was in the Soviet Union and apartheid South Africa?
It was the desperate economic state of the Soviet Union that triggered Mikhail Gorbachev, then leader of the country, to embark on perestroika, conceived of as reforms to save the existing system of state economic control. It is highly unlikely that he thought that these would lead to a largely free market system, as well as the break-up of the Soviet Union.
The ideologues in the ANC might draw the lesson that allowing independent power producers could act as the gateway for further reforms, and therefore prevent surprise change.
If the South African economic crisis were to seriously deepen, the opportunity could be used by an adept leader to push ahead with reform. Their argument might be that this is the best bet to control the process and survive. But that’s unlikely given the intense rivalries within the party.
An economic crisis could drive the government into the hands of the IMF. With the rise in global interest rates, risk aversion toward developing countries, and global recession, IMF bailouts are at an all-time high. An IMF programme would almost certainly involve cuts in government spending, and severe job losses in the state sector, as well as labour market and other reforms.
While we are going to take severe economic strain in a global recession, we might not have to go to the IMF. South Africa is an exception in that it has very large foreign exchange reserves. Governments go to the Fund when they are short of foreign exchange due to persistent balance of payments deficits and might be on the verge of not being able to buy crucial imports.
Substantial reserves
South Africa’s foreign exchange reserves are substantial – about 13 percent of GDP. This gives assurances to overseas investors in our bond market that they will always be able to obtain foreign exchange when they want to sell their Rand-denominated bonds.
It is not impossible that we will ultimately go to the Fund, but unlikely. If there is a crisis such as the government being unable to service and repay a bond because it cannot borrow more, then we would face problems. But the Reserve Bank could intervene with our foreign exchange reserves to maintain liquidity and calm the markets. Our problem is the size of our rand denominated deficit, rather than a foreign exchange problem and therefore the prospect of the IMF coming in and demanding changes is low.
The chances of a full-blown crisis are low. The Reserve Bank pursues a conservative monetary policy that prevents hyperinflation and a currency run, while the Treasury has, so far, held the line against the blow-it-all spending the ANC might like to pursue. That could change if the Reserve Bank’s independence is compromised or the Treasury is taken over by an ideologue.
Therefore, crisis-driven reform is unlikely. Change will have to be domestically driven, either through a change of heart in the leadership of the ANC or a coalition. Currently the maths does not indicate that a non-ANC and non-EFF coalition will come to power in 2024. More likely would be an ANC-EFF coalition, which could command the Treasury to spend unaffordable amounts and bring the Reserve Bank under its control.
I hope I am wrong. There were few who saw perestroika and glasnost leading to deep reform, and many thought that a leader of the old Transvaal National Party – FW de Klerk – would ever do what he did.
Countries like Zimbabwe and Venezuela have managed to carry on for decades without reform, albeit at a serious cost to their economies. The real problem is that the political stars have to be aligned by having a leadership that responds positively to pressures exerted beyond their narrow constituencies.
The views of the writer are not necessarily the views of the Daily Friend or the IRR
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