Despite an upswing in the global economy, South Africa’s economy is stagnating. Political uncertainty is the key contributor to this apparent decoupling from the global economy. Radical economic transformation and redistribution are being prioritised above growth and sound economic policy. However, higher economic growth based on simple policies and market reform has the power to be transformative and improve the lives of the poorest South Africans.
South Africa’s economic growth is stagnating
South Africa’s economy is expected to grow by less than 1% in 2017, and growth is projected to improve only marginally in 2018. The cause of this slowing growth is two-fold:
1. slowing demand, brought about by a lack of consumer confidence and increased taxes eating into consumers’ pockets, and
2. weak investment spending by businesses, whose confidence levels about the future are equally low.
To change our growth prospects, we need economic policy to free the private economy
In Professor Brian Kantor’s book, Get South Africa Growing, he promotes the implementation of several pro-market economic reforms and less government intervention and regulations. The book is full of practical advice, but the essence of his policy recommendations can be summed in one word: trust. Trust the market to work and simplify the rules that govern business. Complex rules, regulations and tax codes become barriers to entry (by raising the fixed costs of operating) and prevent the market from allocating resources to their uses most valued by society.
However, radical economic transformation is dominating headlines – at a cost
Leaders are prioritising economic transformation to an extent that could put growth at risk. Politicians aren’t prioritising growth, and neither is there a demand from communities to force a reprioritisation of policy. Using three different scenarios, we show how much income for ordinary South Africans is at stake. If South Africa does not focus on growth, poverty will remain an issue as South Africans will be unable to earn income that is generated in a growing economy.
The importance of economic growth in eradicating poverty
1. Staying as we are now | 1% growth per year
According to National Treasury’s 2017 Budget Review, the gross domestic product or GDP for 2016 is estimated at R4.3 trillion. That means that domestic economic activity in 2016 generated R4.3 trillion worth of income in the South African society. This is shared between employees (labour), their pension funds (capital) and government, which redistributes these gains around society.
If South Africa maintains its current slow growth trajectory of approximately 1% per year, the economy will grow to only R4.8 trillion over the next decade. This amounts to an additional cumulative R2.5 trillion (in today’s money) of income, profits and taxes for South Africans.
2. Returning to normal | 3% growth per year
If our political environment regains some normality, South Africa would benefit from the current global upswing in economic activity. It is only recently that the domestic economy has decoupled from global growth. A return to business as usual could see the economy recover to about 3% growth per year. The faster growth rate, stimulated by global activity and more certain domestic politics, would result in R7.8 trillion in cumulative additional economic activity (in today’s money). This is nearly 3.2 times as much additional income for South Africans over the next decade when compared with an economy growing at 1%.
3. Focusing on growth | 5% growth per year
If South Africa embraced growth-enhancing reforms and policies that raises the productivity of the economy, annual growth can accelerate to 5%. Although this is still well below the growth rates achieved by other emerging market economies, it would mean an additional R13.9 trillion in income over the next decade. This is nearly 5.7 times the additional income available from the 1% economic growth base case.
Figure 1: Additional income generated over the next decade in R’ trillion (up until 2026)
Sources: National Treasury 2017 Budget Review, Denker Capital
To raise the living standards of ordinary South Africans, growth is essential
The reality is that encouraging economic growth is one of the most transformative things that policymakers can do as redistribution of existing wealth on its own won’t raise the living standards of ordinary South Africans. Although radical economic transformation and redistribution grab all the headlines, it is market-oriented reform and the associated growth that could quietly transform the lives of many poor South Africans.
For a discussion on eradicating poverty in South Africa, listen to our first #DenkerThoughts session
The session, held in July, involved a panel discussion between Professor Brian Kantor, Judge Dennis Davis, and Denker Capital portfolio manager, Madalet Sessions.
Read more about South Africa’s prospects and what this means for investing in our next newsletter
Look out for an article in our next newsletter on how important it is to be prepared for all outcomes amidst ongoing uncertainty in the South African economy.
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