SA must confront its demons if it is to achieve long-term growth

Economists and ratings agencies are revising growth forecasts for this year and next upwards as the economy basks in a commodity price boom and bounces back from last year’s Covid crash. But no-one sees it lasting: the economy might grow at more than 4% this year (a level last seen before the global financial crisis), but over the next few years it’s forecast to revert to its pre-Covid stagnation.

The government’s economic reconstruction and recovery plan unveiled in October last year was meant to turn around that trajectory and put SA on the path to sustained longer-term growth. It identified four “priority interventions” which have been getting lots of airtime and sound plausible as quick-fix growth strategies. The trouble is that two of the four — infrastructure and localisation — are by no means guaranteed to ensure a sustainable lift in SA’s economic growth rate. Poorly handled, they could even have the opposite result.

Monetary or fiscal stimulus measures or commodity prices could boost growth in the short term. But it’s common cause among economists that a country can sustain high rates of growth over the longer term only if it keeps increasing its productivity — the output it gets from its combined inputs of capital, labour and technology. In the words of eminent economist Paul Krugman: “Productivity isn’t everything, but in the long run it is almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.”

SA’s own experience demonstrates this. Productivity and the growth rate climbed in the decade after democracy, as the economy opened up to the world and strong institutions were created. But in the “wasted” years from 2010, when growth slumped to an average of hardly more than 1%, productivity collapsed, Reserve Bank research has shown. This probably reflected intensifying corruption and misgovernment as state capture eroded institutions, the research suggests.

On the face of it, the government’s infrastructure investment drive could improve the efficiency of the economy and the intention is that it should — though it is clearly no quick fix.

Though President Cyril Ramaphosa established Infrastructure SA and the Infrastructure Fund last year and 50 projects worth R340bn were gazetted with much fanfare, bankers say only three projects have come to the market so far, and at least one is not the kind of catalytic infrastructure project that would improve SA’s growth potential. But the infrastructure build programme should come with a health warning even if projects do take flight. Inefficient investment in infrastructure can stifle growth, rather than enhance it. SA was investing fairly heavily in public infrastructure during that wasted decade, but efficiency crashed there too — the amount of investment to create each unit of output was four times the 2000 level. Medupi and Kusile, anyone?

Then there’s localisation and industrialisation. Never mind that SA’s highest productivity and growth gains came when the economy was opening borders, not closing them; nor that SA’s undoubted success in local manufacture of face masks and ventilators during Covid is not a template for long-term economic growth.

Trade, industry & competition minister Ebrahim Patel’s new policy on localisation seeks to reduce SA’s non-oil import bill by 20% over five years. It sees this as raising the economic growth rate by five percentage points over baseline. Against this, a survey by Intellidex for Business Unity SA finds that while localisation targets could be achievable over the medium term, the right conditions do not exist in most sectors — and it warns that prices could rise about 20% if the government pushes on with localisation when the capacity, and the competitiveness, are not there.

There certainly are areas where the government could do a lot more to favour highquality local manufacturers. And SA has plenty of potential to develop local goods and services if the conditions are right.

But a localisation policy is not the obvious way to foster an economy that is more efficient and grows much faster and for much longer, creating many more jobs.

Shiny big “interventions” won’t do it. In the end, there is no easy way to avoid confronting the devils that have long plagued SA’s economy and crushed its potential: unreliable and expensive electricity; costly, inefficient ports; a poor education system; corrupt or incompetent officials; and a host of regulatory obstacles.

The order of priority can be debated (except for electricity, which tops everyone’s list). But SA has little hope of breaking out of its 1%-2% growth trap without some serious progress on these issues — and a focus on shiny interventions could even make it worse.