Economic resurgence still faces great obstacles – Glacier Quarterly

Apr 04, 2018
4 April 2018 - South Africa’s newfound optimism at the ascendancy of Cyril Ramaphosa must be judged in the only arena that really matters – the economy.


Frans Cronje

American politician Stephen Bloom is credited with the keenly insightful observation that ‘economics is to politics what gravity is to jumping’.

In South Africa today, Bloom’s maxim is dauntingly relevant.

Determining whether South Africa is now on a reformist trajectory must be measured against two sets of markers: one relates to the rule of law, corruption and accountable government, which is getting the bulk of analyst attention. But the second set is even more important and relates to policy reform in areas of empowerment, the labour market, property rights and education.

Our thesis is that the initial post-1994 economic recovery, born in equal measures of good fortune and some sensible policy, made possible a far greater improvement

in living standards than is commonly understood.

That trajectory was broken in the aftermath of the 2007 Polokwane conference and later the global financial crisis. Public frustration (measured in polling and voting data) born of now unmet expectations frightened ruling party politicians, who tried to counter the trend with equal measures of ideological dogma and populist policy.

The response was wholly counterproductive and that stalled South Africa’s post-crisis recovery, even as other emerging markets grew out of the crisis. The ensuing weak economic performance triggered a significant loss of confidence in the ruling party, which in turn triggered deepening populism – and hence the slow turning of a dangerous negative spiral was set in motion.

This is essentially where South Africa came to stand in November last year.

Whether what has happened over the past six weeks indicates that the ruling party might reform to survive, and set the country on the path to growth and stability, hinges on how the new administration addresses two fundamental questions: • Restoring the rule of law: The signs are promising but the test will be if these early actions translate into a raft of successful prosecutions, an important catharsis and a sign that the paradigm has indeed shifted.

  • Economic policy reform: Here, the obstacles are indeed great. Three in particular must be overcome, and failure in any one of them will see the reformation stall, even if Ramaphosa manages to deal effectively with corruption and malfeasance, and reestablish the rule of law.ECONOMY

The first is the budget deficit. Both government revenue and expenditure as a share of GDP have continued to rise sharply – financed in part through the borrowing that doubled the debt-to-GDP ratio and through placing a now nearintolerable burden on individual incometax payers.

As a result, Ramaphosa’s new administration may not immediately have the money to develop the infrastructure to support an economic recovery while meeting the welfare and service delivery demands of several million households.

The antidote is growth, but our forecasts are that this year growth rates will underperform emerging market averages by around 70%. An economic growth rate of up to 2%, as policymakers are predicting, is nowhere near the watershed level for breaking the structural unemployment crisis – the second major obstacle that government faces.

The third hurdle is education. To take just one indicator, over half of the Grade 10 class of 2014 progressed to matric in 2016, and, of these, less than 3% passed matric maths with a grade of 60% or higher – a qualification that offers a young person the reasonable prospect of ascending to the middle classes within a decade.

Without doubling the number of matric maths passes every five years it will be very difficult for government to deliver on demands for middle-class access. For the past several years, the country has matched the third of our most recent scenarios – the break-up of South Africa.

In this scenario an out-of-touch and corrupt government would grow ever more distant from South Africa’s people. Counterproductive policy would undermine investment and entrepreneurship. The fiscal deficit would deepen and service delivery, public education and healthcare would suffer as state coffers run dry. Repelled by their politicians, South Africans would withdraw into enclaves – some prosperous and others urban slums and rural backwaters. South Africa would continue to underperform compared to emerging markets on almost every measure.

But now South Africa has an opportunity to realise the fourth scenario – the Rise of the Rainbow – in which a reformed ruling party will introduce changes to restore the rule of law and position South Africa as a competitive investment destination.

Economic growth would exceed 5% by 2029 and the unemployment rate would be halved. South Africa would turn from the brink of disaster to become one of the world’s most exciting emerging markets.

There is not enough evidence to make the call yet, but within six months to a year we ought to have enough to say whether we are likely to continue in the Breakup or whether South Africa will change paradigms and enter the era of the Rise of the Rainbow.

However, to be clear, to upgrade the scenario will require the right markers going up on two broad fronts:

  • The first front is populated by those markers that deal with accountable governance, parastatal reform, state capture, the rule of law and business and popular confidence – and they look a lot better than they did a year ago.
  • But the second front is populated by those that deal with policy reform in areas of the labour market, empowerment policy, property rights and education – the odds of which hinge almost entirely on the balance of forces in the battle of ideas.

If we make the upgrade, it means we’ll be confident that economic growth rates will rise to about 4% by 2024 and to over 5% by 2029. The unemployment rate will fall to below 15% over the same period. South Africa will quadruple the number of young people passing maths in matric.

There will be no doubt about property rights or the rule of law.

Frans Cronje is a scenario planner and CEO of the SA Institute of Race Relations (IRR)

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