What economic modelling can tell us about SA’s future

The country is dogged by unemployment, poverty and inequality, but these can be alleviated by implementing appropriate policies.

NOMPU SIZIBA: The South African economy has been performing at sub-par levels for over a decade now. In recent years the idea of growing above 1% has been a fantasy. Unemployment levels remain very high, with Stats SA recently revealing that youth unemployment now stands around 55%. The story of unemployed graduates is a common one, and industry complains that the skills it is looking for are hard to come by. In the meantime the country has had many economic policies since the dawn of democracy that have sought to ensure economic growth with the hope of it being inclusive in nature. But this has just not happened.

A man who may have some solutions for the country’s economic paralysis is Dr Asghar Adelzadeh from the Applied Development Research Solutions, ADRS. He is an economic modeller, and has done economic models on a number of African countries. He joins me on the line to share his wisdom. Thanks very much for joining us, Doctor. Let’s unpack your fancy title a little. What does an economic modeller do, and why is your job important for economies?

ASGHAR ADELZADEH: It’s important in the sense that what we do is that we look at the economy and we want to know – we know that it is complicated and everything seems connected to each other. But at the same time the government and others want to be able to influence its direction, where it’s going. In order to do what is familiar and develop foresight about it, we do certain things where we would go; we develop a formal replicate of the economy, a formal replicate that is mathematical, based on economic theory and computer programming and these things – a replicate of the economy that tries to capture the working of this economy, based on the data of this country, the behaviour of the private sector households. Then that replicates. Because it’s smaller, less complicated than the country as a whole, it allows to do what is familiar. So, what if we do invest in that certain area, or what if we change monetary policy, or what if we do certain industrial policy … And then we can simulate forward-looking forsight in terms of where it takes us. Is that where we want to be, or do we need to do more, need to do less, need to bring other policies into it?

So that’s the main help for it – to give us foresights, forecasts, impact analysis and to be able to have a better understanding of a policy before implementing it. We have a sense of whether it’s going to be effective in what we want it to do.

NOMPU SIZIBA: Understood. So, Doctor, South Africa has had numerous economic policies and plans designed to lift the country out of its socioeconomic difficulties. But, whatever the name of the policy, that has not translated to improving the country’s outcomes. With the National Development Plan, for example, are you able to critically analyse why it’s just not managed to meet with expectations?

ASGHAR ADELZADEH: Yes. Actually, we’ve spent a lot of time in trying to do exactly what you said, trying to see what are the recommendations, what has actually come out of these policy documents, so that we can view the scenario round there, what if that thing happens, if it takes us where they say it’s supposed to takes us.

So, the National Development Plan has some big projections, like a 6% higher unemployment rate by 2030, eradicating poverty, and doubling the size of the economy. So, part of the main problem I think in South Africa is that we have long-term growth like the NDP, but then the policies are done at short-term levels, which is N … [3:49] which is austerity focused.

We want high growth rate, we want higher employment creation we want poverty [reduction], but then we are stuck in the austerity-driven approach to macroeconomic policy year after year because of those pre-year….. So I think that that means that basically our a long-term goal it’s become impossible to achieve if we are continuously having policies that are trying to achieve short-term goals.

That’s one source of this problem, I think. There is also a problem of, and this problem is seen around the world, which is that you can’t do the same thing over and over and expect different results. You get similar results.

So, South Africa in the last 22 years has adapted this policy framework; where we have never generated large employment; poverty has gradually got worse – we have about half of the population or close to it in poverty; we have the high unemployment rate, as we know; and inequality has got worse.

So, that’s why this moment I think is important, where the country is at a crossroads and we can look at and say, well, in terms of economic policies do we continue this austerity approach to economic policy, or we switch to more growth-oriented …… goals?

NOMPU SIZIBA: So, Doctor, given you background and the work that you do, what economic models have you formulated specifically for South Africa?

ASGHAR ADELZADEH: Well, what we have done is that we have said what if the established status quo policy continues the next 12 years? Where will we be? So, we used the model of South Africa that we have, that captures the working of the South African economy and its interaction with the household, and we simulated that impact, the policies. And the government – one of the things we say is that, well, macroeconomic policy remains unchanged; we need macroeconomic reform, we need the structural reform, we need …… for example, tourism, we need to increase agriculture, labour productivity or [make it] competitive.

We say, what if those things happen, where will we be in 2030? We simulated that and we found out that by 2030, in the next 12 years, the average annual growth rate will be less than 3%, the unemployment rate by 2030 will be almost 24%, the poverty rate will be 28%. So, in other words, the status quo, if we still use this tool and move forward, look at it, it improves things; obviously unemployment comes down but still we will have 24% of it.

So, what else can be done to get a different result? What are the policy tools that we have that we can utilise? Then we look at more interventions and other policies that I can elaborate if you like.

NOMPU SIZIBA: Yes. What has your research told you about the most effective policies at a macro- and microeconomic level to help with basically our three main ills, which are unemployment, poverty and inequality?

ASGHAR ADELZADEH: I think that’s exactly the kind of questions that we need to ask our policymakers. If they are proposing things, what are the projections about how effective these things will be in dealing with those key issues that you’ve raised.

So, what we’ve done is we said, okay, we did things on macro-policy, which haven’t taken us that far, let’s introduce what is done, what can we do on industrial policy, trade policy, what can be done on macroeconomic policy in terms of public investment, in terms of government investment in economic infrastructure, social infrastructure, social services. And we introduce those, including monetary policy, allowing monetary policy to help achieve 6% growth, and [allowing] inflation targeting to be 8%, to allow interest rates to be lower. And then also credit extension for SMMEs, helping the growth of the SMMEs.

NOMPU SIZIBA: Yes.

ASGHAR ADELZADEH: When we simulate that, we find that these help economic growth, we get another 1.5% on average growth rate, we get above 4.7%. The unemployment rate goes down and comes below 20% to about 18%. The poverty rate comes down to 22%. So, we get more improvement relative to the first status quo. But still we have a 10% unemployment rate.

What else can we do? Therefore we have added social security changes, EPWP (Expanded Public Works Programme) to expand EPWP, and we introduce the caregiver grant for child support and care dependency, and also for the PIC, the Public Investment Corporation, to invest about R100 billion in the manufacturing sector. Besides this, they have promised to invest R500 billion, the Public Private Growth Initiative. When we are adding those and we run that, we get to about a 5.7% growth rate, the unemployment rate comes down from 27.5% to 12%, so we get about a 60% reduction in unemployment, the poverty rate comes down to about 13%. So it’s a significant decline.

So it’s a mix of these. There is no silver bullet, there is no one solution that can solve all those problems. But it’s a combination of macro, micro, social policy, private sector, that can come together, plus bring down the poverty, unemployment, inequality and increase our economic growth.

NOMPU SIZIBA: Yes. But what about the real problem that we have in South Africa of young people who are not in education, who are not in employment, haven’t had a day’s training in their life, have been sitting on the unemployment heap for years and years? Where do they fit into all these ideas that you are raising? Would we have to have, as we have, the likes of the PIC investing in manufacturing, for example, would that have to be in areas that could accommodate low-skilled labour?

ASGHAR ADELZADEH: That’s an excellent question. I’m glad you asked that. Look, part of the policy scenario we’ve done is what if we jack up, do more for the agricultural sector, for the tourism sector, for the service sector to upload some of that unemployed youth. But South Africa has about 10 million unemployed, expanded unemployed who, about 60% of them, have less than matric – in other words, they are unskilled.

At the same the economy not only creates not that many jobs, but also these jobs are becoming more and more skill-intensive, asking for more skills. So, realistically the economy is not set up to generate the labour market, to generate jobs for a lot of unskilled, unemployed.

So, what we have said is that, for that portion of the population – unskilled, unemployed – that have been sitting and living in poverty and need to have a livelihood, the Expanded Public Works Programme, which is now the sort of things we discussed, is to try to gradually remove towards what is called an “employer of last resort” for the unemployed and unskilled.

NOMPU SIZIBA: Yes.

ASGHAR ADELZADEH: This group, for which the economy has not created jobs and is less likely to create jobs for, our programmes will create part-time jobs, pay R160 for a day of work. That programme helps unemployment decline about 3%, it reduces poverty by about 6%. So, it helps that segment of unemployment, which is lower skilled and poor, so that it can have a win-win situation in terms of job creation for those part-time jobs.

And, at the same time, when the economy is investing in education for the next generation to be more skilled and available and ready to be absorbed by the economy as we move forward.

NOMPU SIZIBA: Last question, Doctor. It’s one thing to have economic policies, models and forecasts for a country. But then it’s quite another to implement those because one of the general criticisms that have been levelled at South Africa is our lack of implementation of policies. How do we overcome this?

ASGHAR ADELZADEH: Oh, you have some good questions, I must say! Look, one of the things that modelling does, at least, is that the whole implementation is a complicated institutional – and many factors are involved. But at least one of the advantages of this modelling work in forecasting is impact analysis. It provides a set of policies that we talked about. The model generates results, the key indicators annually. So, we have a time trend for these key indicators that together provide and take us to that eventual desired outcome.

Now, single time trends that we are generating today for the next 12 years can give us, enable us as a way for the Department of Planning and Evaluation to monitor these key indicators. Where we’ve got to be on these paths, and if we are moving away from those paths and why, to try fine-tune policies in order to stay on the paths, because if we stay on the path, according to the indicators, we know they take us to poverty coming down, unemployment coming down.

So there is that element of implementation, where monitoring evaluation can use this planning to also monitor and fine-tune policies all the time. But obviously the issue of implementation, institutional capabilities and other factors come into play.

NOMPU SIZIBA: Yes. Thank you so much for your time this evening, Dr Asghar Adelzadeh.

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I don’t think there is a mathematical algorithm that can factor in corrupt, devious and short sighted cadre politics.

End of comments.

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