South African economy: Long expectations

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By Cees Bruggemans, Chief Economist of FNB.

I was asked recently on a Durban radio station what my expectations were longer term.

Provided the world favours us in coming years, with our export prices, export volumes and especially capital inflows, and provided we don’t deviate too much from our trusted middle class ways, we should do relatively well this coming decade.

Not outstandingly well, but typically well, gradually acquiring modernity and spreading it more widely throughout the population.

This year South Africa is celebrating a century of territorial integrity. Despite our many social and economic imbalances and shortcomings the country has come a long way if we contrast how 5 million South Africans were situated in 1910 as compared to what nearly 50 million are today.

A continuing modest pace of development wouldn’t mean poverty would be banished from our midst shortly, but another generation or two near zero population growth and steady if unspectacular GDP gains should do it much more convincingly than experienced so far.

As to why the world would favour us and why we wouldn’t deviate too much from trusted ways, there is a kind of repetition tied up with this.

Asia is in a hurry to catch up with advanced world living standards, it has a ten-to-hundred-fold per capita increase still to go in the coming generation and now has the necessary internal momentum to go it alone (already much less export dependent to create its own internal demand than during its preparatory stage). It is a wonderful speeding growth train to hitch your wagon as emerging commodity producer.

The advanced West has had a huge financial setback in recent times, creating large asset losses and much new unemployment (well over 10% when also taking into account discouraged work seekers). It is also very impatient to undo these things.

New for us in terms of sheer size and impact is probably our favourable regional positioning in Africa, and the continent’s likely outperformance in coming decades, commodity-based, infrastructure and trade driven.

Thus there are now three external locomotives pulling us along at present, and likely to gather both speed and distance as the years pass by before the next disruption temporarily ends this new growth run.

At the same time global inflation is low and likely to remain tamed for the foreseeable future. Sizeable resource slack should keep core inflation low near zero for some considerable while (labour and businesses alike having very poor pricing power at present) even as demand/supply tightness in global commodity markets ensure OECD headline inflation to bounce back towards 2% this year.

Not a formula where central banks will shortly have to kill the economic expansion, even if policy normalization will be matching economic recovery.

Instead, years of dynamic economic expansion probably lie ahead, unless caught short by ‘events’. The most recent one was financial in nature. Its shock potential has now probably been greatly reduced (just like tension in the earth’s crust is temporarily reduced by a major earthquake). However, there do remain other global issues such as war and epidemic flu to keep wary about.

But other than that it looks like plain sailing in the 2010s as governments and central banks can be expected to eventually normalize their policies, restoring their national finances back to health, while the larger world will want to recover lost ground or otherwise progress further with catch-up.

Domestically, however, the noise factor in South Africa is very high and not only because of vusuvelas and now kuduvelas. Political ‘robustness’ has always been a feature in our evolving democracy and the present is therefore not exceptional.

Yet despite much robust ‘debate’ about policy activism, orthodox policy seems to treasure macro stability most.

This doesn’t grant automatic insight into how to preserve well-functioning assets or institutions or how to successfully achieve the kind of changes that will yield long-term improvement. But it does apparently invite conservatism in not making some of the mistakes others blatantly did, especially financially.

If these are the main outlines of our next decade, there is still less happy detail to take into account.

Our market economy still has many shortcomings. Most economic sectors are marked by corporate concentration and large labour unions. This is one reason why business competition and labour market flexibility are limited.

Reducing labour market flexibility even more would worsen our structural rigidity. In contrast, there remains scope to reduce the trade barriers so that global competition may stimulate our large corporate and labour union players within acceptable performance boundaries.

We want more productivity gains, less inflation, more job growth. Only a more flexible high-performance system will give us that in a fast moving competitive world.

This is up to a point our reality, but probably not enough so. When coupled to a redistributing, often inefficient public sector, a major inflation bias is maintained that keeps interest rates high and limits risk-taking. Artificially substantially lowering the cost of money in real terms would merely invite these institutional weaknesses to create an even greater inflation momentum.

This aside of our exposure to global commodity price surges and episodic currency devaluation and the manner in which such regular and big volatility destabilizes our macro picture, constraining risk taking yet more.

Our inflation behaviour and the interest rate levels it invites, especially the periodic tempering, are an important check on our growth momentum, potentially keeping business cycles short and private fixed investment muted compared to what it could be if investment horizons were less compelled to focus on likely short-term checks and more on blue sky potential. It is the difference between how Chinese business managers see the future and how South Africans do.

Fundamentally, our human capital and how we use it are at the heart of the growth issue.

Half our population hasn’t been through an industrial experience and may not go through one, given the way we are organized. And inviting them to go straight to top of the class and enter a tertiary services revolution is all very nice, but also very elitist, yet our education system isn’t geared for excellence. We can only wish this approach could deliver the shortcut we all desire.

What we are left with is a very slow skill transformation and labour absorption into productive employment. It does over time deliver the goods of a transformed structure, only because population growth has dropped so low, rather than that growth is so fast.

The state seems to realize it has a capacity problem, which ordinary citizens experience as partial or even non-delivery of promises and evidence of institutional decay.

Such a crumbling state is a deadening hand rather than a facilitating agent of rapid progress. This despite outer manifestations of modernity such as communication infrastructure, roads, airports, shopping malls (much of it private driven).

It is health care, education, security, municipalities, public infrastructure and bureaucratic organs of state where retreat rather than progress can often be noticed. Though not unique to this country, what matters is the influence over our development progress. Wishing it wasn’t so won’t make it go away. Our pace of advance is shaped by these realities.

So far we seem to remain Mr and Mrs 3%-3.5% growth, though some will say it is already less than this modern 100-year norm, while others claim it to be higher (but only time offering conclusive proof, and that with a regular schedule of global windfalls coming our way).

Current global prospects should make outperformance by us also feasible, provided we outdo ourselves. But reality is often an insidious lethargy, preventing institutional change durably transforming our performance.

Talking about it can be fun but ultimately is meaningless if there is no follow-through. Future generations won’t care, for we will have delivered their future by then. Indeed, if they remember us at all, it will be for our awkward backwardness, given our quaint social behaviours and rudimentary technology as seen by them.

It is the present living generation, and the still interim next one, who pay the price for any present inaction, with income still too low, employment too narrowly based, social services too narrowly provided, and hardship too widely prevalent.

As to long term predictions about our pace of development, the safest one is probably to project a steady if unspectacular continuation of our 100-year norm, reflective mainly of our lingering institutional realities.

This suggests average annual growth of 3%-3.5% within a global context as projected here, with some other countries outperforming us by a factor of two, and a few even by three. But that will apparently bother few locals in our parochial isolation, despite all well-intentioned protestation to the contrary.

Source: Cees Bruggemans, FNB, January 13, 2010.

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