South Africa’s low economic growth was not cyclical as many commentators seemed to think, but structural, former deputy finance minister Mcebisi Jonas, has argued.
Speaking at The Directors Event, Jonas said the South African economy has grown at an average of 1% since 1990. In contrast, China has grown 8.5% since 2000 while India has expanded by 7%. Albeit off a low base, Africa has grown by more than 4% on average.
The South African economy slipped into recession earlier this week after two consecutive quarters of negative GDP growth.
The former deputy minister, who was fired from the position earlier this year in a controversial cabinet reshuffle that triggered several credit rating downgrades, highlighted four reasons for South Africa’s dire economic situation.
1. Dependence on unreliable sources of foreign investment
Jonas said the reason South Africa was not growing like some other developing economies, despite its sophisticated infrastructure and business capability, was its dependence on unreliable sources of foreign investment to finance its growth ambitions.
Countries like Brazil, Turkey and South Africa were extremely vulnerable to external shocks.
“We remain locked into the global markets as primary commodity exporters and find ourselves extremely vulnerable in times of low commodity demand and prices.”
Jonas said more diversified economies with higher levels of manufacturing value-add have enjoyed higher and more equitable growth and have proved far more resilient in the recent global downturn. South Africa’s manufacturing value-add as a percentage of GDP was around 12%, compared to China’s 32% and South Korea’s 31%.
2. Insufficient investment in fixed capital
Jonas said South Africa’s fixed capital investment as a percentage of GDP was around 18%, while China’s was 47% and South Korea’s 30%.
Tough questions had to be asked on why many large South African firms were investing more in other developing countries than at home, he said.
Policy uncertainty, especially in areas like mining, had to be addressed.
The cost of electricity and logistics, broadband and labour – where wage increases outstripped productivity – were also of concern.
“If we can’t address these fundamental structural issues as a country we are going nowhere.”
3. Inherent inequality
Jonas said countries with high initial conditions of asset inequality seemed to be slower growers than countries with high levels of equality. This had to do with a number of factors including reduced aggregate demand and the heightened social and political instability that inequality generated.
Unfortunately there was no quick fix to this problem, he added.
Simple asset redistribution without growing investment and productivity might reduce inequality but it would also increase unemployment and poverty, he said.
South Africa rather had to focus on creating new wealth and assets in which the previously disadvantaged had a growing share. Although the country had a very sophisticated fiscal redistribution programme, efforts to reduce wealth and asset inequality had not had the desired impact, he said.
While BEE policies had created some wealthy black business people, real inequality had increased across all race groups and poor education and training had added to the country’s woes.
Jonas said the focus should shift to creating more black entrepreneurs through incubation programmes and venture capital funds as well as jobs for the low-skill segments of the population.
4. Inability of state to lead structural economic reform project
Jonas said the state had a critical role to play in driving a radical economic reform agenda, but the lack of focus on policy, insufficient technical capability within the state and the capture by narrow political business interests were a significant deterrent.
The Public Protector’s State Capture Report and the Gupta leaks demonstrated that government’s ability to drive transformation and growth was constrained by high and deep levels of corruption and capture within the system. State-owned companies had to focus on driving the economy, offer cheap and secure electricity supply and cheap port handling costs, but corruption within SOCs resulted in costly electricity and a whole range of other issues, he said.