South Africa gearing up for another growth boost

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By Cees Bruggemans, Chief Economist of FNB.

After being missing in action for two years, ever since the World Cup soccer ended, with civil engineering turnover dropping 40% in 2010 and barely lifting off the floor last year, it would seem the nation is being prepared to get another adrenaline boost in what remains of this decade through infrastructure construction and other accompanying efforts.

The winning of the World Cup Soccer bid in 2004 unleashed a wave of focused infrastructure commitment. Across much of the public sector the carrot was held high. If the nation was going to be a successful host, much was needed to be done.

This resulted in many major infrastructure projects being launched in close wave-like proximity by mid-decade. The operational term was ‘bunching’.

It turned out the private sector was after all quite capable (as steadfastly predicted) of meeting this increased workload but many public sector entities experienced capacity problems in sustaining the pace.

In too many instances it turned out to have been too much of an effort, with not enough public means to sustain the challenging pace. As projects were completed, there was too little follow-through. A period of consolidation followed.

But with the economy struggling, political promises not being met and many infrastructure pressures mounting, political focus appears to have finally been regained.

The earlier indigestion has sufficiently receded for a new effort to be possible?

Thus we find in recent months apparently a renewed focus on infrastructure needs and the imperative of launching another wave of major projects to strengthen the longer term growth performance of the country and thereby reinforce political continuity.

This practical push follows an extended period of policy conceptualisation, in which petty bickering was a major feature. Looking back, one can see the shrill demands from the fringes for nationalisation being denied and the push from the Left for a New Growth Path being eventually subsumed in a counter-push from the Centre for its Vision 2030, a common sense based approach offered up by the National Planning Commission.

This synthesis seems to be close to complete, with the “new-new” policy emphasis offering a clearer picture of greater state intervention in the economy across a wide spectrum of initiatives.

There is a wish for more import-substitution and export-beneficiation to push industrialisation, with a greater regional use of export-zones, a greater emphasis on resource nationalism to gain greater state rents, a massive infrastructure effort to debottleneck export capacity the old-fashioned way and for private finance to fund most of it (about which presumably more in this week’s budget as institutional means are invited to get mobilised).

The entire effort isn’t without its contradictions.

From the moment the new political dispensation took hold in 1994, the new government’s main choice was for power maximisation, given the historic backdrop and the non-negotiable determination to secure the long-term future in her own image, leading to cadre deployment on such an overwhelming scale that over the intervening years it prevented growth maximisation due mainly to a mismatching of skill and talent in the economy.

This focus hasn’t apparently changed much (if it hasn’t intensified). Power maximisation remains the main objective even if alongside it there remains the outspoken wish for growth maximisation to address poverty and inequality, except that the latter has struggled to be achieved, given the many supply side handicaps put in its way (as if it was some Sea Biscuit capable of still outperforming even against the greatest odds).

Instead of growth maximisation flowing naturally from the country’s resource deployment, the pace at times had to be forced despite debilitating weaknesses, not unlike a budding Olympic athlete following the wrong diet and lifestyle, yet forcing herself from time to time to compensate through extraordinary effort and focus (though with no results guaranteed).

Despite woeful education results, mounting supply side bottlenecks in electricity, rail, municipal and water capacity, underperforming exports relative to EM peers, with the public sector struggling to meet its targets as too many of its cadres favour operational over capex budgets, and the private sector intimidated as much by awesome global risks as the many domestic political agendas, the economy has nevertheless struggled onwards, achieving modest growth of 3%, maintaining financial stability and even achieving some structural change through very limited employment expansion.

Be that as it may. The objective of power maximisation isn’t going to go away, while need for performance and social delivery continues to mount.

And thus again the wish for yet another redoubled effort, another wave of focused trying, as the country attempts to boost its performance in the coming decade, with important leadership decisions ahead.

Certain import-substitution efforts in public procurement linked to long-term energy and rail transport investment makes an awful lot of sense. There are natural economies of scale, the technologies aren’t beyond us, there are long lead times, was done before for decades to great effect (prior to 1985) and why it took so long to restart these efforts is anybody’s guess.

Export beneficiation is more challenging, for the state seems to know more than private market interests as to how to channel the fruits of our endeavours, and possibly willing to spend extra on incentives to steer such efforts. But whether this will amount to genuine value-added maximisation, when taking all costs into consideration, remains to be seen.

The same applies to increased resource nationalism, where the state appears to want to increase its rent from the natural resource endowment, but hopefully without causing private participants to withdraw, or becoming unwilling to participate in future.

More promising is to focus anew on debottlenecking our now very tight infrastructure constraints in order to get a much greater traditional export effort going.

Presumably this is in addition to the existing R800bn three-year public infrastructure budget (mainly incorporating Eskom power station, municipal, provincial and existing rail and road efforts).

We were told in the State of the Nation speech earlier this month that there will be major rail, road and water/dam efforts in the east, north and west of the country over the next five to seven years that look like being additional efforts.

To this picture we can quietly also add the next wave of Eskom commitments beyond its current two coal-fired power stations and private electricity efforts, which will be in a class of their own in the 2020s (some coal-based, much of it presumably nuclear, along with renewable).

But where’s the money going to come from?

Presumably not from an increased tax burden (unless you want to add increased disincentive to insult in hobbling the economy yet further), while saving on operational budgets is likely to be vigorously resisted by the many cadres so preoccupied.

That leaves institutional means, provided it doesn’t become an invitation for higher tax burdens by refusing to pay market finance charges and thereby impose a social-minded contribution.

This brings other contradictions to the fore.

We would apparently love to be like China, another developmental state, which has organised its affairs in such a way that it has access to unlimited pools of citizen savings at minimal costs, as citizens are starved of consumption alternatives while the absence of social safety nets forces them into desperate levels of saving, with alternative personal investment capabilities carefully limited, leaving only low-return cash deposits.

Such a feature marking true developmental states doesn’t apply to us, and neither does the notion that unions will be tame or non-existing and public sector bureaucrats proving superior in allocating investment funds and running industrial projects. It just doesn’t describe our many complex realities. Yet this apparently may not prevent anyone from trying.

This week will show whether our capital market will be pushed into action, tapped by public corporations and government issuing a lot more debt and on what terms.

The political will seems to be gearing up for another big infrastructure push and it will be interesting to see the time tables unfold, and business, markets and public taking time to absorb the magnitude and adjust their thinking.

It would seem 2013-2016 could see a major industrial effort underway, which if it materialises would rub off on the private sector, encouraging it to extend its planning horizons and gearing to meet the opportunities on offer, in the process upping the growth rate yet further and creating more employment opportunities which would also bolster household incomes and consumption (and government tax coffers).

Still missing in action for some time is likely to be household credit-based consumption as the new credit culture will take some years fully vesting.

This should limit household consumption growth to its pace of the recovery to date. This would free available resource space in the economy for the public and private investment effort and export catch-up.

So there is promise beyond 2012 as the country gears up for yet another wave of focused effort. It now remains to be seen just how focused we will get this time.

Source: Cees Bruggemans, FNB, February 19, 2012.

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