In a week when the Rand has plunged, wage claims in the mining industry have been particularly crazy and inflation ended up slightly higher than expected with the repo rate remaining unchanged, it is easy to get drawn into a panic about the South African economy. This post wants to suggest that there are also some very good structural reasons to panic as well.
In an earlier post I wrote about growth prospects and how all the drivers of growth are currently quite weak. Then I came across this post by Michael Spence at the Project Syndicate blog. He writes about growth and austerity following the Reinhart and Rogoff story and the case of Southern Europe, but in a number of places he might as well have been writing about South Africa:
From the standpoint of growth and employment, public and private debt masked an absence of productivity growth, declining competitiveness in the tradable sector, and a range of underlying structural shortcomings – including labor-market rigidities, deficiencies in education and skills training, and underinvestment in infrastructure. Debt drove growth, creating aggregate demand that would not have existed otherwise. (The same is true of the United States and Japan, though the details differ.)
In South Africa we do not have the excessive levels of debt that you find elsewhere. We do however have a combination of socio-economic imbalances and low growth rates that have made ratings agencies question our ability to sustain current debt levels. The result has been a ratings downgrade in 2012 and another warning already this year. With the deficit currently at 5.2% of GDP, the Minister of Finance has outlined the plans to reduce this to 3% of GDP.
There are questions about whether this is even possible. Projections show that tax revenue has to grow with 11% through to 2015/16. That is faster than the nominal GDP, projected to grow at 9.5% over the same period. This means higher tax rates, new taxes, or more efficient tax collection to earn the increased tax revenues. At the same time spending must grow by only 8% over the period.
This clearly means less support for consumption-based growth, but is there any chance that a sounder fiscal footing can restore confidence and in that way aid growth? I strongly doubt this. In an environment of weak growth globally, exchange rate fluctuations, labour unrest, inflationary pressure and policy uncertainty (the Business Licensing Law as a prime example) a bit more fiscal discipline is unlikely to do the trick.
So, when we worry about what is happening in the macro-economy, we should keep in mind that policymakers’ hands are pretty much tied!