Squarely facing the ANC-created monster - Biznews

5 January 2022 - The South African economy is trapped in a vicious cycle of low growth, high unemployment, high government budget deficits, bad governance, vast, poorly run sectors dominated by state enterprises, and declining private investment.

South Africa’s economy is in a downward vortex, fed by a perfect storm of undeniable and dizzying factors outlined in what seems almost cruel detail by the Daily Friend’s Jonathan Katzenellenbogen here. The IMF says we’re among the world’s most contracting emerging markets with a joblessness rate to match. The late Johnny Clegg’s almost sangoma-like lyrics of ‘sifun’umsebenzi’ have never resonated more loudly as our jobless army marches, ready to plunder and burn again on the slightest Machiavellian whim. Reversing the spin requires a fresh start from a new government, not a narrow, tardy mealy-mouthed King Canute-like response from the current incumbents dragged down by the detritus of the remaining scum floating in the backwaters of what passes for service delivery. Doubling down on a failed agenda just won’t do it, this convincing thesis suggests. – Chris Bateman

Jonathan Katzenellenbogen

The South African economy is trapped in a vicious cycle of low growth, high unemployment, high government budget deficits, bad governance, vast, poorly run sectors dominated by state enterprises, and declining private investment.

A vicious cycle makes matters worse with each iteration as one factor feeds into another, yielding increasingly negative results.  As an emerging market we should be on a virtuous cycle, generating fast growth.

With the economy in a vicious cycle, the outlook is for continual deterioration. The evidence of South Africa’s predicament in a vicious circle is compelling.

Since 2007, the country has faced almost constant drops in the annual growth rate, and the past decade has seen a flattening, and a decline, in our per capita income. Even with last year’s growth rebound, unemployment has risen.

According to the International Monetary Fund, our economic contraction of -6.4 percent was among the largest in emerging markets in 2020. The expected rebound last year of 4.6 percent, and the projection for South African growth this year of 1.4 percent, are very low compared to other emerging markets. Emerging market and developing countries are expected by the Fund to grow by 5.1 percent this year.

The growing and recent record high unemployment rate alone is evidence of how the country is trapped in a vicious economic cycle.

The third quarter unemployment numbers of nearly 35 percent of the working-age population, using the narrow definition of those who have been looking for work, and close to 47 percent under the expanded definition that includes discouraged work-seekers, are records that make our jobless rate among the highest in the world.

Direction of travel is clear
There is no telling how much further the economy will deteriorate in this vicious cycle, but the overall direction of travel is clear, despite occasional spurts, such as that most recently due to last year’s commodity price windfall.

There are many factors that reinforce one another in the low-growth South African vicious cycle. Low growth reduces the tax take, raises the budget deficit, which means higher government borrowing and debt, which raises country risk, and results in higher borrowing costs for all, which constrains access to capital, which in turn further lowers growth. And add in poor governance at local and central government, as well as the state-owned enterprises, and there is additional reinforcement to the cycle. Poor law enforcement, whether it be controlling last year’s mass looting or preventing the theft of rail tracks and electric cables, is gaining increasing traction in this vicious circle.

As state-owned enterprises are so poorly managed and in a state of disrepair, we pay way over what we should for basic services like transport and electricity, yet still have to subsidise them. Tens of billions have been spent on subsidising Eskom, yet there are still power outages and price increases. Transnet is poorly managed, which in turn damages our export capacity and ability to generate jobs and growth.

Protection of the big players in telecommunications and the failure to allocate additional bandwidth also mean the cell phone companies are able to charge well over what they could in more competitive markets.

By contrast a virtuous cycle displays investment, growth, and lower unemployment as reinforcing factors. Good governance, profitable state-owned enterprises, and ease of starting businesses all sustain this cycle.

Flattening the economy
The big open question is how far this vicious cycle will go flattening the economy. The longer the cycle persists, the more growth potential is damaged. Investment does not keep up with depreciation of physical assets, and skills are lost to emigration.

As both virtuous and vicious cycles are positive feedback systems, the only way they can be broken is with the intervention of some external factor. To break South Africa’s vicious circle, broad wide-ranging reform is required, but that is impossible without a fresh start from a new government.

Government’s narrow vision for reform falls far short of what is necessary for a turnaround. Indeed, much of the agenda would reinforce the existing vicious cycle and tighten the trap.

It is well and good that the government wants to make transport and power generation a lot more efficient, but its policies can hardly achieve this without privatisation and restructuring at Transnet and Eskom.

Good ideas
The government is allowing the private sector to produce increasing amounts of renewable energy, but there is no plan to deal with the ageing fleet of coal-fired plants or the future of the entire sector. And no one dares mention that privatisation, changing corrupt procurement practices and reducing the work force might be good ideas.

Then there are the long delays in implementation of projects and policy change. We are still waiting for the allocation of new broadband spectrum which would allow additional and lower-cost services.

On unemployment, ANC thinking focuses almost entirely on big government job programmes and the Presidential Job Summit to get big business to employ, but no mention is made of the need to scrap the inflexible labour regime that sets the conditions and wages that curb job creation. The market does not match this wage-setting by big business and the unions, and the result is world-record unemployment levels.

Rather than reforming, government displays enthusiasm only for doubling down on a failed policy agenda. One illustration of this is the policy of ‘localisation’, which Trade, Industry, and Competition Minister Ebrahim Patel is intent on pursuing. Under this policy certain goods would have to be made in South Africa, although it makes no competitive sense to do so. The policy simply serves to protect local industrial interests while harming development in the country and forcing local consumers to pay higher prices.

Quick benefits
South Africa desperately needs to change its investment story by bringing about wide-ranging reforms. This would open enormous opportunities should it be politically achievable. Getting investors to look afresh at the country as a new emerging market opportunity could result in quick benefits.

With an economic turnaround and a more flexible labour market, the country might gain a boost from its growing labour force. That in itself would be an important push for growth.

Perhaps, ultimately, the real shock for reform will come as the vicious cycle takes the country so far down that it will lead to the election of a government with a fresh outlook.

Jonathan Katzenellenbogen is a Johannesburg-based freelance financial journalist. His articles have appeared on DefenceWeb, Politicsweb, as well as in a number of overseas publications. Jonathan has also worked on Business Day and as a TV and radio reporter and newsreader.

This article was first published on the Daily Friend