Why aren't we Growing Faster?
Why is South Africa Not Growing Faster?
South Africa avoided a technical recession by growing 0.7% on a seasonally adjusted and annualised basis in the 3rd quarter. I’m not sure what is more disappointing, the low number or the fact that this is actually a marked improvement over the second quarter, when the economy contracted by 1,3%. Manufacturing, finance and trade sectors saved the day by contributing positively to growth, while mining agriculture and construction declined. External factors did play a part in the poor performance: mining is suffering from declining commodity prices and slowing growth in China and agriculture is bearing the brunt of the local drought. Growth prospects nevertheless remain poor and the Reserve Bank recently downgraded its growth forecast for 2016 to just 1.5% (see last week’s Louwdown).
A presentation by Ricardo Hausmann, Professor of Economic Development and Director of Harvard’s Centre for International Development and cited by Martin Wolf in the FT, provides interesting insights into SA’s growth dilemma. The report was published by the Centre for Development and Enterprise in November 2014, but is probably even more relevant today given the recent slowdown in growth and rise in unemployment.
South Africa’s Economic “Speed Limit”
At 25.5%, South Africa has one of the highest unemployment rates in the world. However this number understates the crisis because it excludes people who have given up looking for work. Only 43.8% of SA’s working age population is actually employed. This is around 30 percentage points lower than China and 25 percentage points lower than other developing countries like Brazil and Indonesia. Achieving the global norm of 60% employed would require an increase in formal and informal jobs of nearly 50%.
South Africa has had major fiscal expansion and accommodative monetary policies, but these have not improved long-term growth prospects or unemployment. A key reason is that the tradable part of the economy (mining, agriculture and manufacturing) is shedding jobs. Increased government spending has driven consumer spending on tradable goods like cars that are largely imported (and financed by bank loans) and on locally produced non-tradables (finance, tourism, retail, construction, transportation). The non-tradable sector is less labour intensive and more skills intensive. South Africa has a major skill shortage, which means that the non-tradable sector is effectively fully employed. Worse still demand for skills means that shifting an engineer from a tradable sector (e.g. manufacturing) to a non-tradable sector (e.g. banking) costs around 200 blue-collar jobs.
The best way to grow the tradable sector (and employment) is through exports. However SA’s recent export performance has been “dismal”. Falling commodity prices (e.g. gold) have taken per-capita export earnings back to 1960’s levels. Not all of this can be blamed on the end of the global commodity super cycle as countries like Canada, Malaysia and even economically troubled Argentina have seen their exports triple or double over the same period. Brazil, Chile, China, India, Indonesia, Mexico and Turkey have all managed to diversify their exports. Unfortunately the large decline in SA’s mining export value per capita has not been compensated for by an increase in manufacturing per capita.
Raising the Speed Limit
Professor Hausmann makes 4 recommendations to permanently increase SA’s economic speed limit.
1) Policy and thinking needs to focus on feasible and achievable growth objectives. Mineral beneficiation has long been considered the panacea for SA’s economic woes, but focusing on this difficult objective is unnecessarily costly and prevents policy makers seeing other opportunities. Instead, Prof Hausmann advocates looking at the knowledge and know-how associated with mining and leveraging it in unrelated industries.
2) The focus of BEE legislation needs to shift from changing ownership to creating jobs. Scorecards need to be adjusted to reward companies that generate opportunities at the bottom of the corporate ladder, not just at the top.
3) Wage agreements need to be realistic as well as ‘progressive’. A large portion of the growth in government spending has gone into wage increases that have been well ahead of productivity increases and that have left government with increased levels of debt and vulnerability to credit downgrades. Unions also need to adapt their aversion to ‘labour brokers’ as temporary employment agencies are amongst the easiest ways for the unemployed to gain access to work.
4) SA should follow the example of countries like the US, Canada and Australia and solve its skills shortage by attracting talented migrants to its shores. Unfortunately recent immigration reforms have “made a bad policy even worse”. According to former Reserve Bank Governor, Gill Marcus, one skilled migrant creates 8 low-skilled jobs. However new regulations not only block the inflow of much needed skills, but make it even more difficult for foreigners to open businesses and create jobs in SA.
(Business Day, FT, CDE, Stats SA)
Andrew Louw CFA