This is the last economic commentary I will be writing for Sanlam and it therefore seems appropriate to look back on the past 20-odd years of writing about the weal and woe of the South African economy.
The topic that featured most in my writings was economic growth: its critical importance for achieving the goals of the New South Africa and what to do to enhance the growth potential of the economy. As the graph below, illustrating South Africa’s growth performance for the past 30 years shows, we have come full circle – all the hard work that was put in to modernise the economy and put it onto a sustainable higher growth path has come to naught.
It has recently become common for political analysts to say that South Africa is back where it was in 1994. The same can be said when it comes to the economy: we are starting all over again.
Each of the five-year periods shown in the graph was characterised by events and policy responses peculiar to the time. The period from 1987 to 1991 (when an average growth rate of 1.5% per annum was achieved) represents the dying days of the old regime when the growth potential of the economy was hamstrung by a severe balance of payments constraint. South Africa did not have any meaningful access to international capital, forcing it to dampen growth in order to keep the current account of the balance of payments in surplus.
It was also a stage when the functioning of the economy was handicapped by the structural constraints of apartheid. That the economy managed to average a positive growth rate during this period is quite remarkable (1990 and 1991 produced negative growth that continued into 1992, partly caused by a severe drought).
During the period from 1992 to 1996 (average growth of 1.9% per annum) the performance of the economy started to improve as it set out to free itself from the shackles of the old regime. Very importantly the reintegration of the South African economy and financial system with the global economy started during this period.
Access to foreign capital improved gradually and the balance of payments constraint became less severe. The economy still had to deal with the last effects of the drought, but more importantly it had to face up to the challenges of international competition as protection and isolation gave way to greater openness.
The period from 1997 to 2001 (average growth of 2.5% per annum) brought home the lesson that with greater access to international capital comes increased vulnerability to the vicissitudes of international capital flows.
South Africa had just adopted the Growth, Employment and Redistribution strategy (GEAR) – its own version of the prevailing Washington Consensus, the success of which depended inter alia on annual capital inflows of at least 4% of GDP. The emerging-market financial crisis that started in Asia in 1996 and spilled over to Russia in 1998, followed by Brazil in 1999, added a new concept to the vocabulary of economic analysts, viz. contagion, as South Africa was caught up in the international flight from the asset class.
GEAR was accompanied by rather optimistic econometric projections to make it more attractive. Unfortunately, the underlying assumptions to the projections, including that the package of reforms it suggested had to be implemented as a whole, were not highlighted sufficiently, creating unrealistic expectations regarding its merits. The result was that when (predictably) things did not turn out as projected, GEAR quickly fell into disgrace and its implementation was stalled.
From 2002 to 2006 (average growth of 4.4% per annum) South Africa was swept along by a buoyant global economy, especially the so-called “super cycle” in commodities caused by a booming Chinese economy. Capital was easy to come by and the rand exchange rate strengthened beyond most expectations after being subjected to the full force of international speculation late in 2001.
It was during this period that GEAR faded into the distance (although never implemented in full) and was replaced with talk of South Africa as a developmental state, encouraged by the success achieved by Asian developmental states. But as I pointed out at the time, if South Africa indeed was a developmental state it was closer to the social democratic variety à la France.
At the same time the Accelerated and Shared Growth Initiative for South Africa (ASGISA) was formulated with the help of international experts, focusing on six constraints that were holding the economy back, and a sustained growth rate of 6% per annum was envisaged. However, ASGISA was unceremoniously confined to the dustbin with the advent of the Zuma administration.
The 2007/08 international financial crisis and its aftermath coincided with the change in administration in South Africa. The result was that South African economic policy formulation was left rudderless at a time when it required both sharp thinking and sharp implementation. A new National Development Plan was put together but very quickly went the same way as GEAR and ASGISA.
The simplistic New Growth Path strategy that emanated from the equally new Economic Development Department and the Department of Trade and Industry’s ideologically invigorated enthusiasm for industrial policy, embodied in successive Industrial Policy Action Plans, also could not pull the economy out of its slump.
The period from 2007 to 2011 (average growth of 2.7% per annum) therefore saw an unwelcome negative turn to South growth performance that gained further momentum in the following five years from 2012 to 2016 (average growth of 1.6% per annum), bringing us back to the type of growth experienced in the dying days of apartheid. Although it is popular (and partly true) to blame the woes of the South African economy during this period on international conditions, the crux of the matter is that economic policy first veered off course and then entered a vacuum, with policymakers taking their collective eye off the ball.
The fact is that access to international capital is once again becoming the Achilles heel of the economy for the same reason as before 1994, although in a different disguise – a lack of confidence in South Africa’s future.
What can we learn from the experience of the past 30 years?
Firstly, the South African economy only performs well when it can cling to the flying coattails of the international economy. It has no internal growth dynamic to speak of, which is a serious indictment on the quality of its human capital.
Secondly, successive South African governments have displayed an admirable ability to analyse the roots of the problems and to come up with comprehensive plans to correct them. Unfortunately, they have also displayed a severe lack of capacity for implementing such plans and to patiently wait for them to bear fruit.
Thirdly, it has time and again been acknowledged that the South African economy is being held back by a plethora of severe structural constraints. However, the political will to drive through a game-changing structural change agenda has consistently been lacking. Structural change is furthermore not a one-off event, we live in a dynamic world that requires continual adjustment. I fear that South Africa is falling further behind as the world passes it by.
And so South Africa finds itself in 2017 with sub-1% growth, with little hope of things improving significantly for the foreseeable future. Does it need a new plan/strategy to escape from this strait-jacket?
I don’t believe so. For a start, it will be enough to dust off the NDP, and even GEAR and ASGISA, and update them to take cognisance of the world in which we find ourselves today, combining their best insights and IMPLEMENTING them. But that will only be the beginning and South Africa will have to prove to the world that it can stay the course.
Jac Laubscher is an economic advisor at Sanlam.