Avoid populist economic policies
Emerging economies are under strain but SA is not helpless
Emerging-market economies have come under intense pressure since July, with currencies depreciating, growth slowing, and interest rates rising. Some of this has to do with strong economic outcomes in key advanced economies and the expectation of higher global interest rates.
And some has to do with uncertainty about trade and tariffs and their impact on existing patterns of trade and production around the world.
But the extent to which emerging-market economies are affected by these global developments differs widely, suggesting the importance of local factors in understanding how resilient we are to them.
SA has become caught up in the global contagion, our economic resilience in doubt, and not without some reason.
According to Stats SA, we experienced a second quarter of recession from March to June this year, of -0.7% measured on a quarter-on-quarter seasonally adjusted and annualised basis. Parsing the numbers, we can see that investment and household consumption have again underperformed, by -0.5% and -1.3% respectively, alongside more volatility from the agricultural sector (-29.2%).
Weak investment is especially problematic as it detracts from economic growth in the short term, but also in the long term, dragging down the economy’s potential growth rate — the rate we can achieve before inflation starts to rise. Compared with the previous year, the economy overall grew by 0.4%.
We are different from many other emerging markets, as S&P Global Ratings analysts were at pains to point out in several recent notes focusing on better-contained debt levels and our much lower foreigncurrency-denominated debt.
After many years of increasing publicdebt levels, fiscal consolidation is reducing financial vulnerabilities but implies less growth from public-sector consumption.
And, with a better-anchored inflation- targeting framework, currency depreciation has had a smaller effect on consumer prices.
These positives do not mean we cannot do things better, however, and try harder to set ourselves apart. In particular, we could more clearly avoid the kinds of populist policies that in the current global economic climate have contributed to financial contagion in Argentina and Turkey.
Our currency has depreciated by 15% against the US dollar since August 1, reflecting in part the perception that South Africans are discussing policies that risk undermining the macro framework rather than inducing stronger economic growth and job creation. What do we need to steer clear of?
The central problem is avoiding the temptation to pursue economic policies that have short-term, populist benefits but longterm costs.
Because we cannot assess the costs well, the short-term benefits predominate in decision-making, leaving the unintended consequences for another day.
For a range of emerging-market economies, populist decisions of the past that resulted in ever-higher public or private debt to finance consumption have contributed to, and still are contributing to, the market contagion we have seen in recent weeks.
Another task is to get more out of our public spending — ridding institutions of corruption and improving health and education outcomes, for example.
A key mistake of populist solutions to economic problems is to equate increasing aggregate demand and printing money with higher real incomes of households. This explains why, time and again, persistently pushing up demand and inflation ends in failure, with countries requesting bailouts from the International Monetary Fund.
We need to be clear that they are not the same and recognise that raising living standards is really about increasing knowledge, skills and productivity.
To make good on that understanding, and be responsive to our distressing investment performance in this and previous years, a greater focus on improving the investment climate across our diversified economy would be a good place to start.
Part of our task is to highlight our strengths, our commitment to democratic institutions, to fiscal transparency and to consolidation, to low inflation, and to our floating currency, which has kept foreign currency debt enviably low.
But much more than that needs to change in SA to set us apart as a resilient economy, growing sustainably and equitably to address our acute unemployment, inequality and poverty challenges.