A 30-YEAR EXERCISE IN WASTED POTENTIAL

Democratic South Africa exceeded economic expectations in the first 15 years of its existence. Then policy and governance failures derailed trend growth and the fiscal position

Few countries in transition have managed to get a grip on their public finances as well as South Africa did after the advent of democracy in 1994.

The speed with which the young democracy achieved fiscal stability was rewarded initially with strong growth and an investment-grade credit rating.

But 30 years later South Africa, now a junk-rated delinquent, faces a seminal general election having squandered that strong start. In the past 15 years, the country has wiped out all the fiscal progress made in the first 15.

The causes are many but our fiscal crunch boils down to years of unsustainable spending on a burgeoning but inefficient government in a low-growth environment.

South Africa’s economic progress after 1994 can be divided into two halves: the pre-global financial crisis period (1994-2008) when it grew strongly and the fiscal position improved dramatically; and the postcrisis period (2009-2024) when trend growth and public finances steadily declined.

The step down in South Africa’s economic performance is stark: real GDP growth slowed from an average of 3.6% between 2000 and 2009 to just 1.7% from 2010 to 2019 (see graph).

Most of the first period dovetailed with Trevor Manuel’s tenure as finance minister (1996-2009). In seven of these years the budget deficit turned out to be lower than the budgeted amount.

How did Manuel do it? Initially, spending was reduced through an austerity programme while the privatisation of almost R54bn worth of public assets freed up further resources, enabling the government to reduce debt and increase social spending to encompass the black population without causing an overall increase in the share of public expenditure in the economy.

The introduction of inflation targeting in February 2000 was another important step in that it allowed the government to get control over inflation. This allowed the whole structure of nominal interest rates to fall, reducing the government’s debt service costs and galvanising the strongest private sector fixed investment upswing (relative to total fixed investment) in the country’s history.

But it was the National Treasury’s successful macroeconomic and trade liberalisation reforms, coupled with the terms-of-trade boost conferred by a global commodities supercycle, that really got the economy flying.

The economy grew by 5% a year on average in the five years up to 2008 and added 1.5-million jobs — the fastest pace of job creation at any point in the previous 20 years.

So buoyant was revenue that the Treasury was able to dramatically expand the public sector wage bill and public welfare grants but still deliver an overall budget surplus in 2006/2007 and 2007/2008. By 2008, the ratio of public debt to GDP was a mere 28.3%.

Unfortunately, South Africa patted itself on the back too soon, confusing a temporary commodity-related upcycle with having solved all its economic problems.

Michael Sachs, a former head of the Treasury’s budget office, puts it well: “It’s where you have a typical developing country boom and say, ‘Everything’s great, we’ll have socialism now,’ and then you say, ‘Oops.’”

South Africa’s decline started with the global financial crisis and accelerated through the state capture years (2009-2017).

In 2009, Jacob Zuma was ushered in as the country’s president, derailing political support for Manuel’s growth plan, the accelerated & shared growth initiative for South Africa (AsgiSA). It was built around the recommendations of a panel of 12 Harvard University economists, established by Manuel in the mid-2000s.

The panel identified several structural constraints holding the economy back: the volatility and level of the currency; the lack of a cost-effective, efficient national logistics system; the skilled labour shortage; a lack of competition; the regulatory burden on small business; and deficiencies in state organisation, capacity and leadership.

If AsgiSA had been implemented then, South Africa would probably be a different place today. Instead, almost all of these constraints are as binding now as they were two decades ago, if not more so.

In addition to neglecting to implement a coherent economic growth strategy or the country’s subsequent longer-term vision, the national development plan, Zuma and his acolytes sabotaged key state-owned enterprises (SOEs) through flagrant rent-seeking.

Though the Treasury and Reserve Bank narrowly escaped the machinations of state capture, and the

Rebuilding is always so much harder than knocking down. This is the lesson of the past 30 years. It’s sad that the country has had to learn this the hard way

South African Revenue Service has clawed its way back to respectability, most SOEs (including systemically important ones such as Eskom and Transnet) have continued to flounder. This has exerted a severe drag on economic activity and cost the fiscus billions in annual bailouts.

But the causes of the economic decline stretch far beyond the current preoccupation with load-shedding and port and rail inefficiencies. The crux of the problem is that South Africa’s growth constraints are complex, deep-rooted and intertwined while the required reforms — such as tackling powerful unions, slashing public consumption spending and reducing SOEs’ monopoly role — are politically unpopular.

This is why so little progress has been made in overcoming them and why the country’s productivity growth and so many other key economic indicators — such as employment growth and the investment ratio — have weakened substantially since 2009.

In fact, at about 14% of GDP, our fixed investment ratio is now one of the lowest of any emerging market. (Countries that sustain rapid growth tend to boast investment ratios of 25% or higher.)

The corollary of slowing growth and investment has been mounting debt. Between 2009 and 2017, a period which marked the end of a 10-year commodity boom and a tightening of global financial conditions, South Africa’s debt stock grew from R525bn to R2-trillion.

Sachs says that, “with perfect hindsight, we should have pushed down on expenditure a bit more every year from 2012 onwards, maybe linked to a strategy to improve the productivity of the public sector”. But he recalls that even the International Monetary Fund believed, each year after the global financial crisis, that growth was about to recover. So the need to push down on expenditure was not seen as urgent.

Towards the end of this period, the fear took hold that the economic and fiscal situation had deteriorated to such a huge extent that the country was headed for a debt trap. So when Cyril Ramaphosa replaced Zuma as president in 2018 on a reform ticket, there was great hope that he would immediately root out corruption and implement the reforms required to kick-start growth.

Instead, growth has continued to slow on average over the past five years and the country’s fiscal position has deteriorated even further.

Today, at 74% of GDP, the debt ratio is at its highest point since 1947. The Treasury’s self-imposed limit of 50% has long been forgotten and the country has not run an overall budget surplus since 2007/2008.

The cost of servicing this debt mountain consumes 20c of every rand collected as revenue. This is choking the economy and the public finances, crowding out funds that could be used to generate growth or alleviate poverty.

It would have been inconceivable from the high point of 2008 to think that the country would, over the ensuing 15 years, allow the fiscal situation to deteriorate to the point where debt service costs are set to consume a greater share of the budget than health, basic education or social development.

In the 2024 budget the Treasury has had to double down on fiscal austerity to plot a course that will allow the debt ratio to stabilise at 75% next year.

But, given all the upside risks, the plan lacks credibility.

To be fair, it hasn’t helped that the economy was battered by the pandemic from 2020, followed by the war in Ukraine and a global cost of living crisis. But though the external environment has been extremely challenging in recent years, domestic factors have arguably weighed more heavily on the economy.

A key weakness is that Ramaphosa has proved to be an ineffective leader, unable to stare down special interest groups or dismantle the corrupt networks in his own party, let alone revive growth.

The combination of slowing growth and rising debt, coupled with the Ramaphosa administration’s painfully slow progress on economic reform, has meant South Africa has continued its grinding descent from mediocrity to marginalisation despite the end of state capture.

There may be some light on the horizon in that the load-shedding burden looks set to ease.

This, together with expectations of better freight rail and port performance due to greater private participation, suggest that the growth rate could rise from 2023’s dismal 0.6% to average about 1.6% over the medium term.

But, of course, the country needs to grow by 3%-4% to address the brewing fiscal crisis and make significant inroads into unemployment. This will require that far greater political urgency is channelled into tackling all the key growth constraints. An election result which fails to deliver this outcome will entrench or, at worst, accelerate economic stagnation and decay.

Indeed, South Africa’s economic problems have always been largely political in origin. On the upside this means that with better governance and policymaking the economy could take off. But after so many disappointments, confidence will be slow to revive.

Rebuilding is always so much harder than knocking down. This is the lesson of the past 30 years.

It’s sad that the country has had to learn this the hard way.