GDP slump highlights critical need for reform - Sunday Tribune

9 June 2019 - The figures underline the inescapable challenge facing President Cyril Ramaphosa’s administration: far-reaching policy reforms are unavoidable if South Africa is to stage an economic recovery.

Frans Cronje and Ian Cruickshanks

South Africa’s weak growth performance reflected in this week’s announcement of a 3.2% slide in GDP is ultimately a function of hostile government policy.

The figures underline the inescapable challenge facing President Cyril Ramaphosa’s administration: far-reaching policy reforms are unavoidable if South Africa is to stage an economic recovery.

The GDP data released by Statistics South Africa this week shows year-on-year growth at 0%, and a decline in quarter-on-quarter performance of -3.2%. This suggests that South Africa is headed for recession in 2019.

Stock exchange indices and foreign sales of SA Inc are indicative of plummeting investor confidence. Bloomberg data shows that by May year-to-date, foreigners had sold off R44bn of SA equities. In addition, bond flows reversed sharply in the month of May with a R3.6bn outflow.

Business confidence is down across most major sectors, led by manufacturing where the Purchasing Manager’s Index (PMI) fell to 45.4 index points in May, down from 47.2 in April. Agriculture, mining, energy, construction, and trade sectors all contracted year-on-year.

Consumer confidence has drastically slowed, as shown by the results of retail sector companies as well as household final consumption expenditure. Household final consumption expenditure decreased by 0.8% in the first quarter.

This dismal performance is ultimately a reflection of the economic impact of government policy that is hostile to growth and investment.

Five key policy issues illustrate where the problem lies.

·         First and foremost is the issue of ruling party ideology that seeks to place the state at the centre of the economy, crowding out private investment, and introducing all manner of inefficiencies, costs, and unintended consequences.

It is an ideology that identifies investors and the private sector as a public enemy. The state of affairs at Eskom is a case study of the consequences of this ideology in operation. 

·         Second, is the related policy of Expropriation without Compensation (EWC), which is a major obstacle to South Africa’s economic recovery, job creation and raising the living standards of poor people. The threat of EWC extends far beyond land and no asset classes are safe from seizures. Unless the policy is taken off the table in its entirety, South Africa will not stage an economic recovery.

·         Third, is race-based empowerment policy, which is a tax on investment, an inhibitor of job creation and contributes to SA’s high skills outflow. There is a need to turn to a non-racial policy of Economic Empowerment for the Disadvantaged (EED), as proposed by the IRR.

This model does three key things. It uses a socio-economic means test to determine disadvantage – scrapping the ineffective reliance on race as a proxy – to reach right down to the grassroots by equipping the poor with the sound schooling, housing, and healthcare they need to help them get ahead. It does this by redirecting the billions budgeted for schooling, healthcare, and housing/community development into tax-funded vouchers that go directly to beneficiaries to enable them to make more and better choices for themselves. And it creates a scorecard for businesses that awards points for jobs and salaries provided, as well as all contributions to capital investment, tax revenues, export earnings, R&D spending, successful innovation, and topping up the vouchers of the most disadvantaged.

·         Fourth, is hostile labour market regulation, including the National Minimum Wage, which prices poor people out of jobs and deters investment.

The pressing need for labour reform is underscored by the country’s steadily mounting unemployment crisis. Since the African National Congress (ANC) came to power, joblessless has grown from 3.67 million to 9.99 million.

Success in bringing down unemployment is dependent on the structure of GDP and education, but, as a general rule, South Africa has created 100 000 net new jobs a year per point of GDP growth per year over the last 20 years.

To reduce the black unemployment rate to the white rate, which is competitive with developed economy norms, will require the creation of around one million net new jobs per year over the next decade. An economic growth rate of 5% will get South Africa halfway there.

·         Fifth, is the very weak performance of South Africa’s schools. About half the one million children who enter the school system drop out before matric. Just 6,9% of matric candidates will pass maths with a grade of 70% to 100% – a smaller proportion than was the case in 2008. In the poorest quintile of schools, less than 1/100 matric candidates will receive a distinction in maths – a key determinant of the potential to enter the middle classes. The black higher education participation rate is just 15,6% while that for Indian and white people (aged 20–24) is 49,3% and 52,8%. Yet, in 2018, less than half of people over twenty have even a matric qualification.

All five areas will have to see wholesale policy reversals if South Africa is to stage an economic recovery.

However, President Cyril Ramaphosa’s new Cabinet appointments offer no apparent prospects for such a reverse in policy.

The likelihood is rather that the Cabinet announced last week will shepherd South Africa into a recession amidst significant job losses and declining standards of living. Should that occur, further credit rating downgrades are inevitable, which will increase the cost of capital as South Africa slips further down the economic spiral.

Frans Cronje is CEO of the Institute of Race Relations (IRR), and Ian Cruickshanks is the IRR’s chief economist.