Assume that the ANC wins the national election by a comfortable margin, that President Ramaphosa remains at the helm of the party and the country for the next 10 years, and that he slowly but surely instills a spirit of constitutionalism (as opposed to populism). Can we now assume that economic growth will climb to 5% within the next year or two, that millions of new jobs will be created, that the “lights will stay on”, that most forms of crime will be of a petty nature, and that decent health care will be available and accessible to all?
Of course not. With the best will in the world, one person cannot undo a decade of mismanagement and the warped allocation of scarce financial and human resources. The predicament in which society and the economy finds itself can be attributed to a combination of external forces and internal, self-inflicted weaknesses.
Regarding external forces, the desired economic growth path of 6% per annum for a period of at least 20 years has to be achieved in a global economic environment that is less friendly and more volatile than 10 years ago. Indications are that world growth, especially in Europe, will remain sluggish for the foreseeable future, while trade tensions and the more robust oil price increase the risks for further contraction.
In some ways SA has “painted itself into a corner” with regard to its socio-economic lethargy, living beyond their means in the following ways:
– Domestic expenditure exceeds domestic production
– Government spending exceeds government revenue
– Exports exceed imports
– Household expenditure exceed household income
– Investment demand exceeds savings supply
The loss of fiscal discipline since 2008 is of particular concern. In the period between 1995 and 2008, a large measure of progress was recorded with regard to the country’s fiscal situation: government spending growth stabilised, government spending was re-prioritised, the country’s tax collection effort became increasingly efficient, the budget deficit had been narrowed (relative to GDP) to acceptable levels, and the public debt ratio was reduced. These improvements enabled the government to embark upon a programme of fiscal expansion to counteract recessionary conditions.
However, the large rise in government debt since 2008 (currently approaching 60% of GDP), together with other fiscal developments, has attracted the attention of inter alia the well-known credit ratings agencies. This is largely due to government expenditure decisions unrelated to the financial crisis. Of particular concern is the fact that about 30% of the rise in the spending-to-GDP ratio can be attributed to government wages, 15% to goods and services, and 11% to transfers. This is in addition to repeated rescue packages for inefficient state-owned enterprises. Moreover, the contraction in economic activity (and therefore the tax base of the economy), together with the political inexpedience of lowering government spending, is more than likely to result in relatively high budget deficits in the next few years, with a concomitant rise in the government debt to GDP ratio. Meanwhile, the budget will come under increasing pressure as a result of a rising debt servicing burden.
Consumers are also living beyond their means. Household consumption expenditure on goods and services has exceeded household disposable income for more than a decade. As a consequence, the household debt-to-disposable income ratio has averaged just below 80% since 2006, compared to a long-term average of between 50% and 60% in the previous few decades. In addition, the ratio of household savings to disposable income has been negative for most of the period since 2006. In 1992 it was as high as 6.1%.
The overarching and cross-cutting implication of the growing indebtedness of ‘SA (Pty) Ltd’ is that the country lives in perpetual hope that its various deficits will be financed by non-residents, at an affordable cost. Until about five years ago this outcome was generally achieved, as foreign savers found the country to be sufficiently attractive to warrant meaningful direct investment. But this might have been not so much a vote of confidence in SA, but rather a motion of no confidence in the short-term economic outlook then prevailing in the USA, Western Europe, and Japan.
On reflection, SA’s relatively robust economic growth performance during the first few years of the 2000s was largely driven by consumer and investment spending, which, in turn, was accommodated by rapidly expanding debt levels. The latter is not sustainable. In fact, as both the household and government sectors attempt to restore the integrity of their balance sheets, growth in these sectors is being curbed.
When all is said and done, productivity is a prerequisite for international competitiveness and economic growth and development. Labour productivity is the most common measure of productivity, largely because labour costs constitute the largest share in the value of most products (in SA wages and salaries represent more than 50% of the cost of producing GDP). Capital productivity measures the output per unit of capital employed (fixed capital, inventions and land resources). Total factor productivity (TFP) measures the efficiency of all inputs to a production process; i.e., it is not only labour or capital. Its level is therefore determined by how efficiently and intensely inputs are utilised in production. It plays a critical role in explaining economic fluctuations, economic growth and cross-country differences in per capita income. Factors contributing to TFP growth include innovation, the availability of skilled labour, the cost of conducting R&D, the availability and efficiency of technology, and the availability and ability of management to harmoniously and resourcefully blend the available inputs.
The productivity of labour has, at best, stagnated over the last 10 years, while remuneration growth has increased by more than 6% per annum. As a result, the unit costs of labour have escalated to be almost three times higher today than at the beginning of the 21st century. All of this has occurred during a period of near-recessionary conditions and chronically high unemployment.
SA’s TFP performance over the last three decades has been disappointing when considered according to its own historical development, as well as when compared with other countries of a similar nature. There were 15 annual declines in the country’s TFP between 1990 and 2014. Consequently, the level of TFP in 2014 was 22.6% lower than in 1989.
The reasons for the sluggish TFP performance can be attributed to, inter alia, low efficiencies in the use of labour and capital, a variety of challenges (including regulatory and financial barriers) that prevent businesses from maximising their potential, and a low competitive base. A key question, therefore, is whether we will manage to generate sufficient appropriate skills to match the demands of employers? The OECD stated recently that the biggest challenge is the unequal quality of school education, its low average level and the high drop-out rates.
Generally, the prosperity of a country is closely correlated with its institutional quality. When institutions fail, trust is eroded and the stock of social capital depreciates, compromising economic growth and development. Collaboration between the public and private sectors is a crucial co-creator of productivity growth, in the absence of strong institutions, however, the very collaboration may become dysfunctional, with both sectors colluding in the pursuit of personal gain at the expense of consumers and taxpayers.
Unfortunately, there is large body of both anecdotal and documented evidence suggesting that some of the once-proud institutions and institutional values were dealt a cataclysmic blow during the almost decade-long leadership of former President Jacob Zuma. This was also accompanied by a warped allocation of financial and human resources.
This is the legacy that President Ramaphosa has to contend with and repair. The crucial question in this regard is whether we will be able to restore and preserve the integrity, autonomy, and competence of our democratic institutions. Institutions establish constraints – both legal and informal (norms of behaviour) – thereby determining the context in which individuals organise themselves and their economic activity. Moreover, institutions influence productivity, mainly through providing incentives and reducing uncertainties.
A victorious ANC and its leader will not in and of themselves determine the country’s future. However, President Ramaphosa will hopefully restore the aesthetic and moral fibre of society, so that normlessness, entitlement, and selfishness give way to ethical behaviour. He also needs to eradicate elitism, autocracy, and illegitimacy, and establish and entrench a shared image of a desired future, with government playing a key visionary role, moulded by foresight and long-term planning.
Professor Andre Roux is an economist and lecturer at the University of Stellenbosch Business School (USB).