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In a sobering assessment of the state of the South African economy, Marius Oosthuizen, an economics and leadership expert at the University of Pretoria’s Gordon Institute of Business Science (Gibs), warns that the country has run out of money and politicians have run out of ideas. He explains why ANC policy is not working to generate the higher level of economic growth needed to create jobs. Bloated state-owned entities like Eskom are dissected, too, in this in-depth discussion. Oosthuizen says an alternative is for regions and cities to circumvent problems. – Jackie Cameron
Marius Oosthuizen on the South African economy:
South Africa has been in an economic downward spiral for a number of years. Of course, there are a number of contributing factors to that. But there is a real sense that at the moment, during Covid and the Covid pandemic – but not only because of the Covid pandemic – we really are heading toward somewhat of a, what I would describe as a fiscal cliff. An environment in which growth is low, or non-existent. At the same time as that, government spending continues to rise. There doesn’t seem to be the political will to reign in government spending.
Now under normal conditions, if the economy had been growing for a number of years and we had some reserves – and we hadn’t been in deficit – one might of said we were weathering the Covid storm. But as you would know, South Africa has already had 10 years of this economic decline and so, the product of that has been that our sovereign debt levels have been rising year on year. At the start of 2020, we were over 50% debt to GDP.
In the next year, we’re probably going to reach 100% debt to GDP. The consequence of that is dramatic. South Africa already has a very constrained tax base, but really what we’re saying is that this small tax base of ours is going to have to carry the country’s debt burden. In addition to that, it’s going to have to carry the financing costs of that debt burden. It’s got to try and do this while we sustain a growing number of social grants and while the country is in an environment where it has a dire lack of investment. We’re facing an environment where we’ve run out of money, as a country.
On the implication this has on the country and finances:
If we look at examples around the world of countries like Argentina – or others that have gone through a fiscal crisis – what very often happens is you first have a fiscal crisis, which means that you’re not creating enough revenue to sustain your spending. That fiscal crisis precipitates a crisis in your financial markets. Then the fear and the uncertainty in the financial markets leads to a wave of disinvestment or divestment. It leads to a run on the currency.
The weakening of the currency very often then leads to a fundamental step down in the economic value of that economy. Costs go up, inflation rises, confidence is damaged for a long period of time. Now, South Africa has been flirting with that scenario for a number of years. We’ve seen successive downgrades by the ratings agencies, pointing to these obvious problems – that we’re not sustaining our deficits. We’re not growing our revenue base. We’re not reining in public spending. We’re not curtailing corruption in the public sector quickly enough. We’re not improving business confidence quickly enough to see investment return, which would drive growth.
Then of course, underlying all of that, we have a rising unemployment level that leads to social uncertainty and pressure on the political system. So if South Africa does not begin to address these issues, we start to see a scenario in a year, in two years time where we see a fairly significant reduction in the value of the currency.
On expropriation without compensation fitting into SA’s economic policy:
I think when we talk about land expropriation within the context of South Africa, we have to do so sensibly, pragmatically and carefully. South Africa is a unique case in some ways because of our history, because of the ways in which we had entrenched, racialized oppression through apartheid. So we have to take account of that. Because of that, I would argue that we do need a robust land reform program in South Africa of which expropriation would form a part. Now, where it becomes more tricky is that that has to happen, first of all, within the confines of the law.
It has to happen in a way that understands the impact on the markets and fundamentally on property rights. Property rights – in the framework of our Constitution or the framework conditions that allow this economy to exist. If you destroy property rights and you undermine the framework conditions of our constitutional order. This open economy that trades with people around the world goes away very, very quickly. Investors lose confidence and the economy will shut down. We’ve seen that play out in Zimbabwe.
On state-owned entities such as Eskom:
I think South Africa, again, has its peculiarities, right? So most of our state-owned enterprises weren’t started by the ANC. They were, in fact, started by the Afrikaner nationalists under apartheid as part of what one could call a quasi socialist project to uplift the white middle class. So they took the instruments of the state – this is the Afrikaners – they built these state-owned enterprises. They industrialised the economy through Eskom, Transnet, Prasa and the other state-owned enterprises that they built and they gave preference to white employees in management.
They use the university system to to to develop engineers and other competencies. They really created quite a powerful – for its time – early, industrial complex (or a cluster) that drove manufacturing in South Africa. So some of the industries we see – in energy, we see Eskom – some of the chemicals industries we see in South Africa, even automobile manufacturing and the cluster that sits around that, finds its roots in Afrikaner quasi socialism.
Now, what the ANC has done, is they’ve come into power. They’ve taken over these state owned enterprises and to be very frank, I don’t think they fully understood the functioning of this industrial cluster at the heart of our economy. So what they did, instead of using as the Afrikaners had done, cheap energy with cheap steel to drive the competitiveness of the industrial cluster, what they did is they used the they used Eskom and the other state-enterprises as a jobs opportunity for pals. So we saw the expansion of the wage bill of these state-owned enterprises.
But at the same time, we saw the reduction in the efficiency and the effectiveness of these state-owned enterprises. So this idea that you can use these entities to employ, you can raise our admin costs – things like electricity – and at the same time reduce the governance and efficiency and expect a good outcome was completely misguided. Now, instead of the state-owned enterprises being an asset to our economy, they’re a burden to the economy. Instead of the state-owned enterprises driving input into a productive private sector, we see the private sector and the working class bailing out the state owned enterprises year after year, and they’ve become a burden on the fiscus.
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