What direction SA’s economy?

JP Landman

South Africa’s new cabinet is a careful balance between different interest groups – and between different views on the economy. On the one hand we have people like the new minister of economic development, who comes from a fairly socialist and government-centred view of the world. On the other are people such as Trevor Manuel, who have learned about the limitations of the state.

There will be serious debates about economic policy, including:

  • macroeconomic policy (interest rates and budget balances)
  • industrial policy (which industries the state should support and protect)
  • microeconomics (the economics of individual sectors such as textiles, health and vehicle manufacturing, where tariffs, relevant infrastructure and specific supply side measures are important decisions)

This is a new phase in South Africa’s democracy, and will be a new experience for the country’s political economy.

When the Growth, Employment and Redistribution Programme (Gear) was introduced in 1996 after that year’s currency crisis, it was very much a top-down affair. The left has not forgiven Mbeki for that, and took their revenge. This top-down approach is the way macroeconomic stability was introduced in a score of countries in Latin America and even India, the world’s largest democracy, in 1991 – five years before Gear.

Politics and economic policy-making do not always mix, as we saw in the old South Africa and what we currently see in Latin America.

High road and low road scenarios

The high-road scenario is that the macro framework remains: a floating currency, budget discipline that will enhance national savings, tight focus on inflation (preferably through inflation targeting), and an open and outward-looking economy.

The debate can then move on to questions such as:

  • How can South Africa get onto a growth path that is more labour intensive?
  • How can capital best be mobilised to finance infrastructure development?
  • What are the next reforms to be undertaken to lift the growth capacity of the economy? Industrial policy and micro-economics can play a huge role in this.

The low-road scenario is that the macro framework gets jettisoned. This is unlikely due to the cash-flow squeeze caused by the global crisis and South Africa’s infrastructure programme.

A more realistic risk is that we develop a huge dependence in the state to deliver growth and development. This takes us into a developmental state framework. Not a developmental state as it was practiced in the East or Latin America, but with a unique South Africa identity to it. Will it be a market-friendly developmental state or a statist one? The choice will determine South Africa’s growth.

How much is enough?

By how much should the country grow to sustain its progress? As always, I like to convert it to per capita income growth, as that takes care of population growth.

Over the first 15 years of democracy per capita incomes were lifted by 30%. All else flowed from that. Just to repeat some of the results of that 30% rise:

  • More than 4-million jobs were created taking the percentage of the working age population that is employed from 39% to 44%. (Unemployment is not falling as much as 4-million new jobs would suggest because more young people enter the labour market looking for jobs. It is an issue of demography, not failure to create jobs).
  • Huge progress has been made in providing housing, water, sanitation and electricity to millions of people.
  • A social security net has been established that helps close to 14-million people every month at a cost of 4.8% of GDP.
  • This year the public sector will invest 8% of GDP in infrastructure.

(It is no surprise that the African National Congress was returned to power with a huge majority in the recent elections – millions of lives have changed, even if other millions have not.)

To repeat the above and more would again require a 30% rise in per capita incomes over the next 15 years. That in turn will only require economic growth of 2.4% a year. That is not a demanding growth rate, and one South Africa should be able to achieve. If the figure looks low it is because the country’s population growth rate is low.

But do we want to up our game? A difference of just 1% growth a year – annual growth of 3.4% – can bring that 30% rise about in 10 years, not 15. In a six-year period of 3.4% growth, 2-million more jobs can be added to the economy.

All the benefits achieved above will again be reaped, but in a shorter time. It will make a huge contribution in wiping out the country’s developmental deficit.

Will we plod along, or strive for the 6% growth that the Accelerated and Shared Growth Initiative targeted? That is for me will be the test of Jacob Zuma’s new government, and we will see over the term of this parliament how things develop.

JP Landman is a self-employed political and trend analyst. He consults to SA largest private wealth business, BoE Private Clients, and works with several SA corporates on future scenario trends. His focus areas are trends in politics, economics and social capital.

Among some of the unique research projects his consultancy has undertaken was the role of public institutions in battling corruption (quoted by the UN in a report on corruption), the interplay of demographics and economic growth, and an overview of trends around poverty alleviation in SA. Whilst working as an analyst on the JSE in the 1990s he was voted the top analyst in political trends.

He is also a popular speaker who has addressed diverse audiences locally and internationally and enjoys consistently good ratings.

He has a BA and LLB degrees from Stellenbosch (1978), studied Economics and Development Economics at Unisa (1979 and 1980) and later at Harvard (1998 and 2005), and obtained an MPhil in Future Studies (cum laude) from Stellenbosch (2003).