ISS 2030 Scenario updated: Eskom problems puts 2% cap on economic growth – for years

Jakkie Cilliers, executive director of the Institute for Security Studies, updates his 2030 scenario first published early last year. Conditions have deteriorated in the last 18 months primarily as a result of electricity supply problems. Cilliers says this has put a cap of just 2% on economic growth until well into the next decade, bringing all kinds of unintended consequences. – Alec Hogg

Alec Hogg is with Jakkie Cilliers, the executive director of the Institute for Security Studies in studio. Jakkie, thanks for coming through. February last year, you put out a paper on scenarios for South Africa in 2030. I remember there were sporting analogies used – ‘Bafana Bafana, a nation divided’ or ‘Madiba magic’ or ‘Mandela magic’. You’ve updated this. A lot’s happened in the last 18 months or so, perhaps starting with the election. Is there much of a change in the way that you view the 2030 scenario now?

Alec, what we’ve done is we’ve updated the scenarios using updated data from the Stats SA on population, which makes quite a difference on growth forecasts and of course, we’ve brought the energy crisis into perspective and really, tried to quantify that. This lowers growth forecast because there’s a cap on growth for a number of years ahead. Seen based on that, where are we headed? What is the margin for error, and what could be possible?

So in February 2014, we were in a much better state – in our minds, anyway – than we are today.

Yes, I think so. There’s been a slew of bad news since then. There’ve been the elections and I think, like many forecasts, the election results are the start of change in South African – the start of quite fundamental, political change – that we think are going to roll out with other implications. What this paper does is it looks at the long-term prospects for issues like poverty alleviation, employment, and unemployment etcetera. It looks at what the impacts are of those drivers of changes on our politics and therefore, on our economics. The sort of, point of departure is that inclusive politics drives inclusive economics and we need to get the inclusive politics right and South Africa (as you alluded to) is a bit of an unhappy spot at the moment, for a variety of reasons. A lot of it is related to sense of leadership and sense of lack of direction. This feeds into the paper and the analysis.

How much of it is sense and how much is reality?

In the paper, we make the point that South Africa is in a slightly worse spot than it was a year ago, in terms of the very obvious cap that the electricity crisis has placed on our growth. Then there is the issue of policy incoherence, which is a big issue for us. These rates together with the fact that we’re heading (at the end of 2017) with a transition in leadership within the ANC, from Jacob Zuma to his successor. It means that it’s difficult to foresee that there’s going to be a great degree of clarity on the direction of the country. In a sense, with a global financial framework that is slightly less facilitating than we thought it would be a year or two ago, the margin for error is a little bit less. Therefore, we look at those drivers and then ask ‘what is still possible’. Not ‘what is still possible’ because many of the structural drivers of South Africa (of growth) are quite positive. We’re in a sweet spot, population-wise. We’re located in a high growth region, etcetera, so there’s lots of positive news.

Will the Constitutional Democracy hold? Many sensible people in this country are putting all their hopes on that. We’ve seen a number of challenges from Government against the Constitution (the Judiciary coming under pressure).

Yes, it does. We believe it’s highly unlikely that the Constitution/Courts/Judicial system will not hold. We’re heading to a situation where people can see the start of change and therefore, the power of the Zuma Administration, which has been dealt a bad hand with the global recession that started when Jacob Zuma came into the presidency and then, bad implementation and poor policy. Some of these are legacy decisions for which, I think he’s not given credit (if I can use that word). He’s been dealt a bad hand and Government is certainly struggling, I think, to provide clear direction and there seems to be a lack of planning. There’s lots of excellent analyses of where we are, but no clear vision and that clear vision is not going to come, really, before 2019. That’s really, the challenge that we’re in. We’re in a bit of a holding pattern and although the margin for error is thinner than it used to be, I don’t think that South Africa and its Constitutional democracy are under threat.

That’s good news, but when you say it’s in ‘a bit of a holding pattern’, there are decisions being made today that will reverberate for many years into the future. The $100bn nuclear power plant scheme, for instance, which apparently, the ANC has now signed off. Current interest rate is ten percent. Does that mean we’re going to have ten percent increase in electricity charges, indefinitely?

Until 2022/2023, electricity places a cap of (according to Nhlanhla Nene) two percent growth.

Say that again. Between, now and 2023 (because we don’t have enough electricity), this economy cannot grow at faster than two percent.

That’s the argument that he has given (internally) to the ANC and it’s been leaked on two occasions. Now, it may be that renewables coming on stream and other factors lift this. It’s also true that electricity demand is growing slower than forecast, this is an unduly pessimistic view, but that is the view of Government. Government is saying (the Minister of Finance) that we have an absolute cap on growth. That may change but at the moment, that translates into growth rates that are lower than what South African needs and therefore, there will be reductions in employment creation and increases in poverty. Taken together with the run-up to the political transition that we see in 2017/2019, it means that we’re facing a period of turbulence. A period of change that will also provide hope for a new leadership and for new direction, but there’s going to be a period in which, things are going to get a little bit worse before they get better, I’m afraid.

How hairy can they get on a social level?

I think that South Africa has invested, despite all the challenges we face, significantly in a large national police force. It’s not a service, in my view. We have the instruments to maintain control in South Africa. What we need and what I think most South Africans are crying out for is leadership and inspiration. This recapturing of the vision of South Africa: it is not a vision that is only determined by race, but a vision that is determined by maybe (1) class. It’s a vision that sets a new future for South Africa and it’s a vision that presents some degree of blue skies down the road. That’s difficult. It’s important to understand of course, which you and your listeners would know better than I would, that the global growth environment is much more difficult and challenging. That’s not going to change. South Africa is one of many emerging markets that are facing severe challenges at the moment. That just goes back to the point that our margin for error has gone down.

What about the BRICS scenario? I ask this because there is the sense that the Zuma Administration is putting all its eggs into the China basket. The Chinese will come and rescue us. The Chinese will bring in the new BRICS Development Bank. They are going to fund this infrastructure program that has stuttered. Is that a realistic thought?

I just returned from China last week. I think that China is into China and South Africa needs to be in this for South Africa. China’s investment support for infrastructure development in South Africa and the rest of Africa is to feed Chinese business. We need a Government that gets behind business. Without growth, nothing is possible. Yes, it needs to be inclusive growth. Yes, it needs to be growth that grows this disadvantaged. All of these things are necessary, but we need growth. We need rapid growth. We need much higher growth than the two/three/four percent that we are forecasting. It’s important. When we look at the long-term future of South Africa, our growth rates eventually force upwards to four/five percent over time – that’s over 10/15/20 years – because the structural conditions in South Africa are good and because the ANC has invested in the long-term drivers of growth. For example, education and water sanitation.

Working Age Population - South AfricaSocial issues.

All these things that create human capital, despite the wastage that has accompanied this; these structural drivers of growth will eventually kick and they will transform South Africa, but it could be done so much quicker. We need real policy innovation if we are going to see growth rates in this country kick up to above the four/five percent. We need growth rates in excess of five percent on average, for 10/15 years, to break the back of unemployment in this country. Currently policy will not deliver that.

Unemployment 2nd quarterTalking about unemployment: structurally, we have an issue there. We have labour relations, which are tenuous to say the least. We also have inflexible labour legislation, according to the World Economic Forum at least – one of the worst in the world. Is that another one of these barriers to growth?

Without any doubt. We need a much more flexible labour system, but we need trust. We need Government to get behind business and the private sector. Not a private sector that pays the kind of excesses to top executive as we’ve seen in South Africa, which poisons our industrial and labour relations. We need a common vision of where the country’s going where everybody gets behind and that is not the case. The sense is that it’s the leadership, which is lacking and we are all (I guess) hoping that come December 2017, the new leadership within the ANC will provide that, but there’s no guarantee.

We have nearly two-and-a-half years to wait (a holding pattern, as you’ve mentioned it). What about your 25-year old who’s come out of university with a great qualification? What kind of scenario would you paint for them?

Many countries are struggling and when you travel around Africa as I do and you come back to South Africa – or indeed, elsewhere in the world – there is a lot, which this country has to offer and that Africa has to offer. Africa is the next high growth region and South Africa is well positioned next to Africa. We have so much potential. If we can get over ourselves. If we can get over our hang-ups, (which is easy to say as a White South African)…if we can, really focus on inclusive growth and what is needed to achieve inclusive growth. Nothing else. That’s what we have to focus on; it must be inclusive growth.

It means different things to different people. What does inclusive growth mean to you?

It means that we investigate new ways of unleashing the entrepreneurship of ordinary South Africans.

Of all colours…

Of all colours and particularly, Black South Africans. You can just think of the 18-million Black South Africans who are trapped in the former homelands, denied private property, and denied their rights… Unleashing that investment potential that they have, would be a huge change. It would require an important shift in the values that currently drive South Africa because we have a socially conservative President. The ANC (increasingly) in our scenarios going forward, will become a rurally based party over time. Slowly, the urban base is seeping away and these factors are going to change things.

Quick comments: long and short. As they say in investments, ‘long’ means something you’re positive about and ‘short’ is something you’re not as positive about. South Africa in the future – long or short? Just one word.

South Africa – long. Definitely.

The DA’s chances in the next election.

Next election (2016) are Local Elections. DA may take Johannesburg. Then in 2019 (the next National Elections): the ANC will win I think, without any doubt. What we now think is that by 2024, the ANC may lose its 50 percent majority. The DA will not come close to 50 percent, but the ANC may lose its 50 percent. This is a change to what we previously thought.

All right. Let’s go back to our ‘long and short’ game. Electricity prices.

I think that electricity prices must increase. Unfortunately, there’s no option.

Johannesburg Stock Exchange.

The Johannesburg Stock Exchange has probably had its boom. Going ahead, it looks short.

Employment in South Africa.

Structurally, unemployment in South Africa is not going to change for the next 10/15 years, at 21-million people.

So you’d be short on that one, too. Do you have any optimistic view to end off with?

I think South Africa remains a country with huge potential in Africa. We need to get our leadership sorted out. We need to get some of our governance sorted out. With regard to infrastructure, in terms of long-term structural growth potential – it’s all there.

Jakkie Cilliers is the executive director of the Institute for Security Studies.