HSF FOCUS
The Zuma administration harmed economic growth in several ways. There was zero interest in the patient promotion of growth. Instead, elite enrichment by any means possible was the central focus. To the latter end, institutions essential to growth were hollowed out and partly repurposed for private accumulation. Revelations of outrageous corruption failed to lead to investigation and punishment. The quality of management and accountability in the state and state owned entities declined. Fiscal space was used up rapidly and the public debt to GDP ratio soared. Vague symbolic appeals to ‘radical economic transformation’ were used to divert attention from the increasing mess, increasing uncertainty.
The replacement of Zuma has brought a change in tone, but it remains to be seen how far attention to economic growth can be sustained in the medium term, given competing demands for attention in the form of political firefighting and the 2019 election. Still, if achieving economic growth requires persistence, so does the advocacy of measures to promote it. Accordingly, FOCUS publishes four articles on growth by leading economists in this edition.
The central point is that South Africa is stuck in developmental terms. Johannes Fedderke argues that potential economic growth (the speed limit for the economy in the medium term has dropped to below 2% since 2010. The International Monetary Fund concurs. Its April 2018 projection implies a potential growth rate of 1.8% in the early 2020s. Given a population growth rate of 1.1% in the same period, the tiny growth in real per capita incomes, if maintained, imply that it would take a century for living standards to double.
Fedderke shows that poor growth performance has long been a feature of the South African economy, arguing that unbalanced growth, product market distortions, a misconception of the relation between inequality and growth, and political economy constraints are responsible. Unbalanced growth under South African circumstances is concentrating labour absorption in low productivity sectors, making policy that drives up the real price of labour likely to be particularly counterproductive. Instead, supply side measures are needed, with particular attention to international competitiveness and access to world markets needed to increase competition in the South African economy. High levels of concentration in output markets lead to high mark-ups, lower productivity growth and they reinforce labour market inflexibility.
While there are endless studies on inequality, there is virtually no analysis of the relationship between inequality and economic growth. Fedderke finds that growth and inequality determine each other in a benevolent way. In particular, the impact of growth on labour absorption, and hence inequality is strong. He also finds that there has been erosion in the quality of governance, dampening economic growth.