Three pillars for economic success
The South African economy entered recession a picture of good health. Although business has contracted and various economic measures declined since mid-2008 we cannot ignore the fifteen years of prosperity that followed the country’s first democratic elec
Pillar 1 – Trade reform
South Africa’s international trade prospects were severely curtailed during the Apartheid era. The moment international trade sanctions were lifted the country rapidly moved from forced (and possibly preferred) protection to competition. One of the best measures of trade openness is a graphic representation of trade (exports plus imports) as a percentage of GDP. South Africa languished below 35% through the 1980s, but quickly surged to 50% and better as trade conditions normalised. Economists say the recent contraction in this measure is due to recessionary forces rather than the re-introduction of restrictive trade policies. Levels of international trade plummeted as global demand dried up.
Should government intervene to save jobs and sectors? There are some who feel government is too sentimental to remain involved. Case in point is the long-term effort by certain ministries to prop up the ailing domestic textile industry. Instead of creating better work opportunities government is wasting resources in an attempt to extend the life of a dying sector. Attempts to stop local clothing companies from importing cheap clothing have exacerbated the situation rather than improving it. Consumers end up paying more for clothes, clever importers simply find the next ‘cheap’ market and clothing and textile manufacturers still struggle to make ends meet. Free market policy dictates the world’s production will go where labour productivity and input costs are optimal… South Africa doesn’t offer this where textiles are concerned – and with existing labour policies – never will!
Free and open trade is essential for long-term economic performance. “Trade reform has a bigger impact over a long period of time” than many other economic factors, said Kamp. Recent trends have been toward powerful trading blocks such as the European Union. South Africa is also investigating such partnerships. There are moves afoot to create a 15-country common currency region in Southern Africa by 2015. This would certainly bolster the regions trade prospects going forward.
Pillar 2 – Fiscal turnaround
Much has been written about South Africa’s massive public sector infrastructure expenditure. In committing this kind of cash to the country, government is fulfilling its primary function, creating an environment in which citizens (and corporate citizens) can prosper. During Trevor Manuel’s tenure as finance minister South Africa struck an impressive fiscal discipline balance. Expenditure was carefully budgeted and supported by improved efficiencies in revenue collection. The only stumbling block was in implementation. Unfortunately the conversion of budget to service delivery has been hampered by poor management, corruption and capacity constraints.
The private sector is one of the largest benefactors of fiscal discipline because solid fiscal policy creates a stable platform for investment. After the first democratic elections government quickly realised it would have to reduce the 50% corporate tax rate if it wanted to lure foreign direct investment. Over the years that followed the rate was quickly lowered to 35% (in 1994) and to 30% (in 1999). Two further cuts brought the corporate tax rate to an internationally acceptable 28%. Going forward government’s fiscal discipline challenge will be to avoid reaching a 50% (or higher) government debt to GDP ratio. The country has been sliding on this measure of late, and it would be counterproductive to return to the 45% plus levels experienced between 1995/6 and 1998/9!
Pillar 3 – Monetary policy
The third pillar for economic prosperity is sound monetary policy. The ruling party deserves praise for creating stability in this area of the economy too. Under previous Reserve Bank governors, Chris Stals and Tito Mboweni, the central bank confirmed its autonomy. It was given rein to apply the policies it felt were appropriate for the domestic economy. The good news is incoming governor Gill Marcus is keen to assert this independence. Should government exert more influence on the central bank? It’s not a good idea. One reason lies in this fantastic definition of inflation. “In the long run inflation is an outcome of less efficiency!” Much of this inefficiency is courtesy of a bloated public sector that wouldn’t encourage inflation targeting if it ran the bank!
The three disciplines discussed in this article heralded phenomenal improvements in South Africa’s GDP per capita. One of the reasons for the steady GDP per capita improvement is a change in the country’s employment demographics. We’ve shifted from manufacturing and mining to services. As a consequence we have higher wages – but full employment is hampered due to severe skills shortages.
How to prosper to 2020
With these pillars in place South Africa has enjoyed the “biggest growth in private sector investment we’ve ever seen,” said Kamp. He had a number of suggestions to power South Africa through the next decade. His first bit of advice to government was not to reinvent the wheel. The country will prosper by building on the successes of the past. If we apply the three pillars of trade reform, fiscal discipline and monetary policy we cannot go wrong. But there are other hurdles to overcome. South Africa lags equivalent developing market economies like Korea and Mexico by some margin. And one of the main problems is the country’s dismal education performance. We rank a pathetic 45 out of 45 countries in recent international literacy tests and can only make 38 out of 45 in an international science survey. You might even recall our previous minister of education addressing poor basic math performance by withdrawing the country from future assessments. There’s no better way to improve at something than to forge ahead in ignorant bliss!
To make further progress we must improve the country’s price of labour to capital. This requires growing our skills base and improving productivity. In our view the best way to achieve this will be to create a flexible apprenticeship system, offer wage subsidies and encourage cooperative (rather than adversarial) labour relations. It might also be wise to steer away from the sentiment expressed by organisations like the Black Management Forum. Playing the race card every time skills shortages are discussed will certainly not improve the situation.
Editor’s thoughts: South Africa is a land of opportunity. Our challenge is to develop our human resources to their full potential. How would you address the country’s dismal performance in international science and math surveys? Add your comments below, or send them to [email protected]
