South Africa at historic crossroads

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By Cees Bruggemans, Chief Economist of FNB.

For the past forty years, South Africa has tried, at times desperately, to maintain the higher growth performance that the 1950s and 1960s post-WW2 world seemed to promise, even ordain.

Yet the country was already for generations irrevocably committed to a confrontation that would take it through military, financial, economic and social purgatory from which it would only slowly start to re-emerge post-1994.

Meanwhile, the post-WW2 golden period of global high growth came to a crashing end in the swamps of Vietnam and its excessive US defence spending, the soaring rhetoric of the Great Society and its excessive US social promises, in an era where nobody wanted to lift the US tax burden.

And thus global imbalances deepened, currencies became unstable, inflation soared, fixed investment became hesitant, growth and employment faltered, and South Africa lost an important long-term Western prop, despite short-lived support from precious metal windfalls.

—————

During South Africa’s spell of self-induced purgatory for most of the 1970s, 1980s and early 1990s the world didn’t stand still.

Japan continued its relentless advance, subsequently joined by the four South East Asian Tigers in their economic take-off.

China made its historic turn in the late 1970s, joined by Russia and Eastern Europe in the late 1980s (imposing a decade-long adjustment burden on Western Europe). And India did so from the mid-1990s.

The world thus changed out of recognition while we were mostly otherwise engaged back home, economically stagnant and using up our physical, human capital and financial resources.

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When South Africa re-emerged post-1994 in a by then far more acceptable new political format, it felt challenged by its poor economic showing (and the heightened expectations of its populace and newly invigorated political elite).

And thus the search for the Holy Grail of fast economic growth started anew.

What had escaped one bunch of nationalists, engaged as they were in political cul-de-sacs, so the new bunch was about to experience as they considered an ideological detour reminiscent of earlier mid-20th century detours by other countries overseas that had led nowhere except deeper into societal stasis.

This fate was ultimately prevented by a new crew of quick-thinking technocrats ultimately in tune with the outside world. And so we progressed quickly to GEAR, which eventually was superseded by Asgissa.

The essence of these economic blueprints was to grow fixed investment and exports more while also fully catering to household consumption and the growing new middle and worker classes and providing more generous safety nets for the many poor, redistributing the growth dividend as we evolved.

Yet it was an eclectic approach that did too little to really push public sector fixed investment and efficient social service delivery. It also did not fully succeed in boosting private business confidence, finding new export opportunities, containing the consumptive urge while boosting saving, thus making possible a faster, more self-contained growth path than what actually happened.

Aside of short windfall-driven episodes, South Africa remained a mediocre 3.5% growth performer. It did not discover within itself the magic to transform towards 5%, 7% or even higher AVERAGE growth performances as so clearly Japan and the South East Asian Tigers had done earlier and China and India have been playing out daily this past decade.

——————-

This is where we found ourselves when the curtain went up on the Greatest Financial Disaster in History in 2007.

Thankfully we just skirted this disaster, though not without a temporary export collapse and the discovery that our household consumption, saving, credit and housing behaviours had also progressed too far along American lines and had to be reigned in.

Meanwhile, our public sector had apparently lost its will to push infrastructure development hard, our private business sector had lost some of its inner confidence, becoming again much more defensive, while apparently many of our new political class more than ever felt the need to push for the fruits of redistribution rather than supporting selfishly the cause of growth.

And thus after a short, speculatively-driven consumption boom during 2005-2007 and short sharp recession of 2009, we find ourselves newly perched on the 3%-3.5% growth trajectory, with a significant loss of growth drivers and focused purpose.

Could this ever change? Could we still one day join the BRIC countries in their breathtaking growth performances?

——————-

After months of tantalising glimpses, Economic Development Minister Patel this week put yet more flesh on the government’s proposed New Growth Path.

Its broad outline has a few simple ingredients that, provided they can be achieved and sustained over time, could substantially contribute to finally getting South Africa off its century-long 3.5% growth trajectory.

This could then launch the country on a much more exciting growth path, warranting eventually perhaps even a place at the BRIC table (provided South Africa in time also takes most of its immediate African region along with it, giving the country for the first time critical mass in the 0.5 to 1 billion population range, like parts of Asia before it).

The deceptively simple suggestion is for fiscal policy to be MORE disciplined, for monetary policy to be somewhat LOOSER while continuing to target low and stable inflation, to achieve through this and other protective policy supports a more trade-competitive exchange rate, and finally to mix an all-important X-chromosome ingredient into the cake.

This ingredient needs not to be discussed in public (if that were to be too inflammatory) as long as it could be agreed behind closed doors AND be depended upon (admittedly only possible in a culture where politically the various economic and social factions in South Africa TRUST each other, however lightly and superficially).

Little suggests at present that such TRUST exists in the necessary quantities to make things work.

Many are the examples of societies also devoured by civil war-type conflict, unable to get a national act together making for a genuine breakout in performance and growth and the rewards this brings in time.

There are, however, also historic examples in which countries with deep fault lines did succeed in overcoming their shortcomings, striking historic deals and achieving breakout to superior economic performance.

Is South Africa on the brink of such deals and what could then naturally follow, provided the world economy continues to expand robustly as it has in recent decades (despite the many problems assaulting us daily)?

—————-

One dare not hope too much. One prefers to rely on actual delivery of the necessary ingredients without which an economic breakout will not happen, condemning the country to modest 3.5% growth, unrepentant redistribution, still deeper and glaring inequalities and potentially in time yet more rather than less political unrest.

One can see the senior political leadership gathering under its wings the various elements that could deliver such a historic understanding, creating the base for an eventual breakout once private enterprise and organized labour buy into its proven manifestations, with especially business turning once again less defensive and more adventuresome.

The Minister of Finance can deliver a more stringent fiscal policy, constraining public sector spending and aiming for larger budget surpluses provided the political leadership can bring the spending departments to heel.

The SARB could technically see its way clear to move to even lower interest rates, provided the other ingredients were all there, in the process possibly also seeing the currency weaken somewhat.

But most critically would be the x-chromosome (wage moderation), leading by example in politics, in the public sector, among senior managements and among unions, without necessarily giving up market-related realities.

The latter aspect would be crucial in regaining trade competitiveness as we shift our macro-economic balance. Without it, all would be an exercise in futility, and both the fiscal and monetary authorities highly skeptical at what was being engineered.

——————–

And so, it seems, for the umpteenth time this past century, we have yet another Plan, another historic Deal on the table which could lead us away from mediocrity, provided most would see the advantage of participating.

It is something we can most fervently hope for and work towards, though victory will have to await actual delivery. Prematurely talking about that would not mean much, except perhaps to wet appetites, necessary by itself. So cheerleading there will be. Enjoy.

Source: Cees Bruggemans, First National Bank, November 24, 2010.

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