Analysis & Profiles 1.8.2016 08:21 pm

Time running out for SA economy

Jac Laubscher

Jac Laubscher

Credit rating agencies, the IMF and SA citizens want economic growth to be boosted – and quickly, but how realistic are our prospects?

The core issue for the South African economy remains steps to bolster economic growth, both in the short and long run. The credit rating agencies have made it clear that this will be the game breaker in their decision later this year whether to further downgrade South Africa’s sovereign debt, resulting in sub-investment status for its foreign currency-denominated debt, and its local currency-denominated debt also being at risk.

In the IMF’s recently-released Article IV Consultation Report, the conviction that economic growth is the key to resolving South Africa’s various challenges echoes through it like a refrain.

But then South Africa does not have to pursue higher growth only to please the ratings agencies and the IMF ̶ the plight of its citizens demands it. The first requirement for addressing an unemployment rate of 27% and its concomitant problems of poverty and inequality is to grow the economy.

What is also clear from the pronouncements of both the credit rating agencies and the IMF is that while they were generally pleased with the new-found urgency of the South African authorities post Nenegate and the show of solidarity between government, business and labour, they are looking for action, and quickly. With only four months left before the rating agencies make their calls, time is running out.

That this is acknowledged by the Minister of Finance unfortunately provides cold comfort. Mr Gordhan has, for example, not been able to get his way with the leadership of SARS and the SAA, being openly defied by President Zuma, while the Hawks are still looking over his shoulder.

One can only speculate about the lack of visible progress. The lack of concrete action may be due merely to the municipal elections and the need for campaigning (perhaps more so than in the past because of the elections being more hotly contested), causing a disruption in getting things done, and that once the elections are out of the way we will see a burst of energy on government’s side.

Or it could be a renewed demonstration of a lack of focus and proper prioritisation, brought about by the current administration being in denial about the dire state of the economyf. (In a speech in the Nelson Mandela Metro on 23 July President Zuma “bashed economists and the media for reporting that the economy was deteriorating‚ saying the country was fine”, as reported by Business Day.)

However, one cannot but wonder whether the problem is not a more fundamental one. Both the ratings agencies and the IMF have expressed their satisfaction with the involvement of the private sector in finding a solution to South Africa’s growth conundrum and seem to expect it to play a decisive role in the future. The question is whether the government (and not only the Pravin Gordhan faction) is prepared to allow the private sector to play such a dominant role.

Repeated accusations against “white monopoly capital” do not make for a healthy relationship between business and government. But more fundamentally it brings into play the whole idea of a South African developmental state with the state as the leading force, and whether that could form an insurmountable obstacle to cooperation between business and government.

Political analysts seem to be in agreement that the ANC is no longer the unified broad political movement it once claimed to be, that it has lost its cohesion and that instead of being an alliance of entities with a common history of fighting apartheid (mainly the ANC, SACP and Cosatu) it now represents a collection of factions fighting one another to gain the upper hand. However, the direction in which the ruling party seem to be moving could ironically make it easier to achieve ideological unity and thus reach consensus by making it less compelling to take fringe opinions into consideration.

When the Zuma administration came into power in 2009 it rewarded its supporters (as politicians are apt to do!) by allocating key economic functions to them. The SACP got to control the Department of Trade and Industry and the opportunity to push its ideology, and a new department (Economic Development) was created as a vehicle through which Cosatu could channel its economic thinking.

With the SACP’s influence in government likely to be greatly diminished and in time possibly disappearing altogether because of its fall-out with President Zuma, and Cosatu much diminished in stature after its split, greater ideological consistency within the ANC, in particular with regard to the respective roles of markets and the state in the economy, is becoming a real possibility.

But what will a new consensus look like? Under what ideological umbrella will a reformed ANC unite? How will the ANC’s desire for economic transformation (being increasingly pushed along by the progress the EFF is making) be accommodated in its economic ideology?

Judging by developments in recent times the most likely outcome is a gradual drift towards a form of state capitalism, which has an easy fit with the idea of a developmental state (bearing in mind that the pre-1994 SA economy already contained strong elements of state capitalism). The South African government’s fascination with China and Russia as role models also points in this direction.

In his recent essay on state capitalism, Joshua Kurlantzick looks at a long list of avowed state capitalists, while pointing out that many other countries display elements of state capitalism. The list includes from inefficient state capitalists such as Iran, Russia and Venezuela, to those that can be regarded as highly efficient, e.g. Singapore, Norway and Malaysia. As far as political systems are concerned, they vary from autocracies such as Saudi Arabia, Russia and China, to democracies such as Brazil, India and Indonesia.

Kurlantzick concludes that “the variety of state capitalists testifies to the model’s adaptability, and the economic success of several of the most prominent state capitalists demonstrate the model’s strengths”. However, he emphasises the vulnerability of state capitalism to corruption, cronyism and patronage, and its negative implications for efficiency.

Kurlantzick categorises South Africa as leaning towards inefficient state capitalism although close to the upper end of democratic practice, as judged by the yardstick of responsiveness to popular sentiment. This is somewhat anomalous, perhaps due to the still weak foundations of democracy resulting in a leaning towards an autocratic personality-driven style of government. Kurlantzick sounds the warning that “the most autocratic state capitalists tend to eventually stifle entrepreneurship, prey on their own people simply to support a small group of leaders, fail to encourage effective management by economic policymakers, and undermine their own growth”. South Africa should take note.

Furthermore, no country is free to adopt whatever economic system it may prefer without asking itself where it fits into the dominant world system. As Georgi Derluguian observed in his overview of the collapse of the Soviet Union and its effect on other communist countries, “all communist states eventually reverted to capitalism”, the reason being that “socialism in one country may not last unless the whole capitalist world system is replaced by a different historical system where capital accumulation is no longer the paramount priority”.

As for Russia, it is not unthinkable that the Russian economy could collapse in time in spite of its transformation because of its failure in building a diversified economy that can play in the international space. China’s opening up to a greater role for markets in its economy is a further illustration of a country being compelled to play by the rules of the world system if it wants to benefit from it.

South Africa’s policymakers therefore have to realise they also are bound by the constraints imposed by the world system, whether they like it or not. To think that closer ties with the likes of China and Russia will somehow provide an escape route from this constraint is wishful thinking as they themselves are bound by it.

State capitalism is not inevitably bad, as demonstrated by the example of Singapore, as long as the same efficiency standards apply as in the private sector and a way is found to cooperate with the latter. But that the South African government will have to get its act together quickly and produce concrete, visible results is glaringly obvious.

References:

Joshua Kurlanzick: State Capitalism. How the return of Statism is Transforming the World. Oxford University Press. 2016.

Georgi Derluguian: What Communism Was, in Immanuel Wallerstein, Randall Collins, Michael Mann, Georgi Derluguian and Craig Calhoun: Does Capitalism Have a Future? Oxford University Press. 2013.

Jac Laubscher, Economic Advisor: Sanlam Limited

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