Most consumers in South Africa are probably feeling punch drunk as they have to contend with a seemingly unrelenting barrage of unfavourable political and economic developments. These include regular monthly increases in the petrol price, the rising costs of energy and water, the recent hiking of the VAT rate (and other sin tax rates), the growing likelihood that short-term interest rates have bottomed out, the persistent weakening of the rand exchange rate, and the festering uncertainty about property rights.
While some of these developments are not of our own making (e.g., the marked increase in the international price of oil in US dollars; the widespread depreciation of emerging market currencies), many are symptoms of underlying domestic structural fault lines. So, while economic growth this year could be a bit firmer than last year, it will hardly be enough to swell the tax base sufficiently to cope with the demands being placed on the fiscus. In fact, the budget deficit remains unsustainably high, while household balance sheets are being squeezed by high fuel prices, still high interest rates, and the first increase in the VAT rate in more than 20 years. Ultimately, there can be little doubt that – directly or indirectly – consumers are bearing the brunt of the fiscal profligacy and political largesse that has prevailed for the best part of a decade.
In the circumstances, unemployment is likely to remain at 25% or more over the next few years. In this regard the issue of productivity needs to be highlighted. When all is said and done, productivity growth lies at the heart of economic growth and development. However, productivity growth in South Africa is sluggish, to say the least, for reasons that are well-chronicled. These include low efficiencies in the use of labour and capital; a variety of challenges (including regulatory and financial barriers) that prevent businesses from maximizing their potential; and a low competitive base. Indeed, the entire labour market-employment-education nexus requires a radical transformation.
These realities are confirmed in the World Economic Forum’s (WEF) 2017/18 Global Competitiveness Report (GCR), which tracks the performance of 137 countries by measuring those factors that drive long-term growth and prosperity. To this end 114 indicators are grouped into 12 pillars. Mauritius is ranked highest in Africa (ranked 45th in the world), followed by Rwanda (ranked 58th), and then South Africa. Compared to the previous year, South Africa dropped 14 positions (to 61st place) in the overall rankings, after having previously improved from 56th in 2014/15 to 47th (and second in Africa) in 2016/17. South Africa’s major weaknesses lie in health and primary education, labour market efficiency, higher education, and institutions.
The WEF also lists, in descending order of importance, the most problematic factors for doing business in countries. Until last year the biggest obstacles in South Africa were typically linked to labour force and bureaucracy deficiencies, while government instability was virtually irrelevant as an obstacle. For 2017/18 the three biggest obstacles are corruption, crime and theft, and government instability.
This major reprioritisation of concerns is a reflection of political uncertainty in 2017, which lowered the confidence of South African business leaders, along with a deterioration in the country’s institutional capacity and integrity. Institutions matter – a lot. With few exceptions the prosperity of a country is closely correlated with its institutional quality. When institutions (defined as the legal and administrative organisations that form an enabling environment for wealth creation) fail, trust is eroded and the stock of social capital depreciates, thereby compromising economic growth and development.
Moreover, collaboration between the public and private sectors is a crucial co-creator of productivity growth; in the absence of strong institutions, however, the collaboration between the public and private sectors may become dysfunctional, with both sectors colluding in the pursuit of personal gain at the expense of consumers and taxpayers.
In the long term, failure to engender and maintain institutional capacity and integrity, along with an inappropriately educated workforce, obstacles in accessing finance, and political and government instability will produce, at best, mediocre growth and patchy wealth creation.
Many South Africans were probably expecting a major and rapid turnaround in the country’s economic fortunes after the ejection of former President Zuma. However, with the best will in the world, one person, and seven months cannot undo a decade of mismanagement and the warped allocation of scarce resources. A political and leadership revolution is still playing out. And for now President Ramaphosa’s major challenge is to keep the ruling ANC together and record a convincing victory at next year’s election.
Assuming success in this, he will then, feasibly have 10 years to ignite a renaissance; to herald in a “New normal.” Radical transformation is required to escape from the seductive allure of credit-driven spending; and to revamp labour market arrangements, and the education system, both of which are displaying signs of partial dysfunctionality. Above all, a restoration of the aesthetic and moral fibre of society is called for, so that normlessness, entitlement, and selfishness give way to ethical behaviour; the eradication of elitism, autocracy, and illegitimacy; and the establishment and entrenchment of a shared image of a desired future, with government playing a key visionary role, moulded by foresight and long-term planning.
At this crucial juncture of South Africa’s post-apartheid era, the game-changing question is whether President Ramaphosa has the ability and will to introduce and implement a plausible turnaround strategy. However, there is no quick fix that will yield immediate tangible results.
Prof André Roux is an Economist and Lecturer at the University of Stellenbosch Business School (USB).