Growth too slow to solve SA goals – economist

Growth is too slow to solve South Africa’s developmental problems, but the more immediate question is if it is actually “low” or if it is all that South Africa is capable of at this point.

This was according to emerging markets economist Peter Attard Montalto in his latest Economics Insights newsletter, who said that potential growth was very low in South Africa.

Montalto said while new estimates put short-run potential growth at around 2.3%, Nomura's growth accounting framework sees medium- to long-run potential at 2.8% rising to 3.3% "only under currently announced policy and infrastructure plans".

He said the latest (2010) price update of national accounts provides a good opportunity to reassess what is going on under the bonnet in the South African economy.

"Discussion of potential growth is particularly important in South Africa given its significant unemployment challenge (36% “true” unemployed from the formal sector), wider development, and inequality issues) and the policy environment that tries to address this."

Montalto added that the political economy of potential growth in South Africa is unusually deep.

"While all countries have GDP targets and policy initiatives, the 5% to 6% mindset in South Africa has been pervasive since 1994, and particularly through the latter part of President Thabo Mbeki’s term into the current post-crisis environment under President Jacob Zuma.”

Policy despondency

He said reading ANC policy resolutions and seeing how these are turned into a plethora of government policy plans (RDP, GEAR, AGISA, NGP, NDP, etc.) all to meet this growth level has led to great despondency.

"There have been many failed plans, plans not implemented, and plans that could work being set aside when a new plan is needed for PR reasons that they appear almost meaningless now."

He said the NDP is slightly different in that it has a much larger amount of buy-in from across the political spectrum, "but ultimately, it is a glorified marketing document".

However, he said, it was the most detailed (if internally contradictory) document on the policies required to reach 5% to 6% growth.

"We very much view the infrastructure programme, changes at Eskom, reforms coming through from the Department of Public Enterprises, Youth Wage subsidy, and others as simply running to stand still.

"An expanding population and expanding labour force require a certain level of progress to stand still, but there has been little that take meaningful steps forward.

"This is particularly important considering the increasingly competitive world for FDI (foreign direct investment) dollars, and a lower global potential growth post world crisis, thanks especially to the eurozone, more constrained position of capital creation by banks and slower productivity increases (and China, Russia, etc… the list could go on)."

Looking at labour, Montalto said capital has been a major restraint on potential growth and in turn on future labour creation.

Employment contrast

Referring to the graph below, he said there is a stark contrast between the employed and unemployed (from the formal sector), which shows the true nature of the major underinvestment in capital in the economy (particularly infrastructure) between the early 1980s and around 2004, and the situation has only really turned around since then.

"We will only be above the 1983 peak in per capita capital stock in the next few years. Such data also speak to the increasing propensity of South African companies to hoard more or invest more in capital outside South Africa."              

Explaining the labour imbalance, Montalto said under apartheid, potential growth was strong but reliant on exploited labour and state-funded and directed capital accumulation.

An isolated economy saw minimal total factor productivity growth given both sanctions and the concentration of low-value-added output.  

The years after apartheid started to crumble and the country saw risk-averse companies shed labour from the formal sector, a collapse in capital growth, but Total Factor Productivity (TFP) starting to pick up.

TFP subsequently boomed in the years after 1994, although the economy failed to add significant labour. While the gains from freedom were clear, the amount of Foreign Direct Investment (FDI) and investment - particularly by government - remained low, he said.

Drag of state-owned enterprises

"Part of the drag here was the restructuring of the substantial state-ownership of enterprises, which, given that they were built up for an isolated economy, were not fit for this purpose and hence some underlying capital construction was going on.

"Easy global monetary policy led to FDI inflows, technology transfer, a booming middle class and a slowing but still strong post-democratic dividend for the economy between 2004 and 2008. Large companies expanded rapidly while strong growth provided some scope for SME growth and, with that, labour growth."

Montalto said the period between 2008 and 2014 saw strong capital growth as the government's focus on public sector investment really took off, but huge cycles in labour layoffs and then a slow pace of re-accumulation meant labour growth through the whole period was low.

"TFP also fell sharply as the post-94 dividend was expended and underlying policy and supply-side constraints became more binding on the economy, especially in a world of much less FDI flow. A marked increase in strike action also takes its toll together with more acute issues around electricity supply."

For the period after 2015, Montalto predicted a moderate pace of TFP growth as government policy changes and as long-run shifts in the economy occur (such as education and training), start to pay dividends, and as some FDI resumes.

He also sees labour growth increasing.

Source: Fin24


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