SA needs to spend its way towards growth
After 30 wasted years of ANC misrule, South Africa is now an unviable society that has record levels of unemployment, poverty and inequality, with African women bearing the brunt of the government’s failed economic policies.
From 1994 to 2023, GDP per capita, an imperfect measure of average living standards, grew by 21.8% — a dismal performance by any reasonable yardstick. By comparison, from 1994 to 2022, GDP per capita, in local currencies, grew by 735% in China, 394% in Rwanda, 334% in Vietnam, 264% in Ethiopia, and 266% in India, according to the World Bank.
In 2023, South Africa’s GDP per capita was lower than it was in 2007. After 16 years of declining average living standards, GDP per capita is expected to decline for another three years. We cannot continue like this. Our unemployment crisis is a national disgrace, a heartbreaking betrayal of the dreams and promises of our liberation. We have the world’s highest unemployment rate. During the fourth quarter of 2023, there were 11.7-million people out of work, and the unemployment rate was 41.1%. For African women, it was 49.1%. There were 8.8-million young people not in employment, education or training. This is how revolutions start.
About half the country’s population lives below the upper-bound poverty line, and one in five people have inadequate access to food. South Africa is the world’s most unequal country in terms of incomes and wealth. An analysis by Thomas Piketty and others in 2022 said, “The top 10% own close to 86% of total wealth, and the share of the bottom 50% is negative, meaning that this group has more debts than assets. Since 1990, the average household wealth for the bottom 50% has remained under zero.”
There are four ways of slicing the data to understand how we got here. First, the three decades of democracy can be seen as a story of two halves or 15-year periods. From 1994 to 2008, GDP grew by 3.6% a year — a solid but far from spectacular performance. The wheels came off during the second period from 2009 to 2023, when GDP growth collapsed to 1.2% a year. By comparison, 155 emerging markets grew by 4% a year over the same period without much effort.
Second, we can look at the performance of the economy according to political administrations. There was annual GDP growth of 2.7% under Nelson Mandela (1994 to 1998), 4% a year under Thabo Mbeki (1999 to 2008), 1.9% under Jacob Zuma (2009 to 2017), and 0.5% a year under Cyril Ramaphosa (2018 to 2023), who blames the Covid-19 pandemic for his poor record. However, the economy was collapsing before the pandemic, and South Africa’s recovery has been one of the slowest in the world. If one excludes the two years of lockdowns, there has been GDP growth of just 1.1% a year.
Third, we can analyse macroeconomic policy regimes. In 1996, the government introduced the Gear policy — a slash-and-burn plan to reduce debt, though there was no debt crisis. There were sky-high interest rates, and public investment was slashed by a quarter from 1998 to 2001. From 1996 to 2002, there was annual GDP growth of 2.9%. The unemployment rate soared to 40.6% during the first quarter of 2003, from 33% in 1996. The number of unemployed people increased from 4.6-million to 8-million.
After the end of Gear, from 2003 to 2008, there were expansionary macroeconomic policies, including large decreases in interest rates and rising government spending. Public investment — by general government and public corporations — grew by 13.9% a year in real (after inflation) terms, and more than doubled from 2002 to 2008. Public investment increased to 6.9% of GDP in 2008, from 3.9% in 2002. Private investment increased to 14.7% of GDP, from 10.2%. And gross fixed capital formation, a measure of total investment, increased to 21.6% of GDP from 14% during the same period. The economy grew by 4.5% a year and created 3.1-million jobs, while the unemployment rate fell to 28.7%.
During the third period, from 2009 to 2023, average living standards declined. There was a modest recovery from 2010 to 2013 after the global financial crisis. But there was a collapse in economic growth after 2014 as the National Treasury’s austerity policies began to bite. Public investment declined by 32% from 2015 to 2023. Investment by public corporations, mostly Eskom and Transnet, fell by 45.9%. The collapse of Eskom plants started in 2018, not 2007. The period from 2018 to 2023, under Ramaphosa, accounted for 95% of the energy shed since 2007. The deterioration in Transnet’s operational performance also started at the same time. The number of unemployed people soared by 5.7million from the fourth quarter of 2008 to the fourth quarter of 2023.
Finally, if we evaluate the three decades of democracy, the economy grew by 2.4% a year from 1994 to 2023. On the demand side, the economy created 7.8-million jobs as employment increased to 16.7-million at the end of 2023, from 8.9-million in 1994. On the supply side, the labour force increased by 14.9-million people to 28.5 million. The number of unemployed people increased by 7million people to 11.7-million, up from 4.7-million. Since 1994, GDP growth has been too low to create jobs for the flood of annual new entrants to the labour market and those previously unemployed.
The “skills mismatch” theory of unemployment is a fallacy, as there are 973,000 unemployed graduates and the economy does not have millions of unfilled vacancies. There are no jobs, and 661,000 young people lost their jobs over the past 15 years. There is a demand problem, as a 16-year recession in average living standards means there is too little money in the economy. Since the private sector can’t invest in an economy that does not grow, the government must increase spending.
A major problem has been chronically low investment, which has averaged 16% of GDP over the past three decades, far below the 30% target in the National Development Plan (NDP). On average, private investment has been 11% of GDP. Public investment has been 5% of GDP — half the 10% target in the NDP. The IMF has shown that public investment in developing countries has a multiplier — the additional GDP generated by each dollar of investment — of 2.7. The insanity of austerity is that the government cuts public investment despite clear evidence it can generate the resources to more than pay for itself and create millions of jobs for people with low levels of skills.
South Africa needs a new macroeconomic policy framework that will require the Treasury and Reserve Bank to co-ordinate policies to achieve a 6% annual GDP growth target. The government must spend into the economy the difference between the 1% GDP growth forecast and the target. Assuming a multiplier of 1.5, this will require additional spending of R200bn in the first year. South Africa Inc cannot run out of the currency it issues. It has a public sector balance sheet that has assets of R4-trillion and can mobilise the resources it needs to chart a new path for economic development.
✼ Gqubule is an economist