Economic Assessment of South Africa 2008: Achieving Accelerated and Shared Growth for South Africa

 

Contents |  How to obtain this publication | Additional information

 

The following provides a summary of chapter 1 of the Economic Assessment of South Africa  published on 15 July 2008.

 

Contents                                                                                                                             

 

Mainstream economic policies have brought impressive economic performance, but remaining problems are still huge

The democratically elected government that came to power in 1994 inherited an economy wracked by long years of internal conflict and external sanctions. Against that backdrop, economic performance since 1994 has been impressive. In particular, the successive governments during that period have shown considerable prudence, refraining from resorting to economic populism in an effort to boost short-term growth. As a result, public finances were stabilised, inflation was brought down, foreign capital was attracted in growing amounts, and economic growth, after lagging for a time, improved. The awarding of the 2010 FIFA World Cup to South Africa is just one sign that South Africa is now seen as a stable, modern state, in many ways a model for the rest of the African continent. However, there have also been notable weaknesses in the economic record to date, especially as regards unemployment, inequality, and poverty. Social problems such as HIV/AIDS and crime have been prominent as well, and these twin scourges also have a strong negative economic impact. Indeed, there are strong bi-directional links between economic and social problems, as is shown by the recent attacks on immigrants, who are blamed for aggravating unemployment and downward pressure on wages. One challenge for the future will be to maintain the macroeconomic prudence which has fostered fiscal and external sustainability while dealing with these formidable problems. This will also make it easier to tackle more boldly some of the legacies of apartheid which are still holding back progress for many black South Africans. This is especially true as regards education, competition policy, and the functioning of labour markets.


Growth has improved, supported by rising terms of trade... 

Although there was some initial improvement in growth performance after the stagnation of the last years of apartheid, income growth per capita for the first decade of the democratic era was modest, and South African living standards continued to diverge from the OECD average (Figure 1). While output per worker grew steadily, growth in the labour force far outstripped that of employment, pushing unemployment to extremely high levels. Investment increased slowly, and South Africa’s export performance was weak, with a steady decline in global market share. From 2004 onward economic growth picked up substantially, through improvements in the rate of increase of both employment and capital formation. An important spur to the growth acceleration was the surge in the prices of South Africa’s main export commodities. The supply response in mining was actually muted, but on the demand side higher natural resource export receipts gave an impetus to domestic spending. Consumption has grown more quickly than output every year since 2004. Recently there also has been an increasing contribution to growth from investment, in part reflecting a ramping up of public infrastructure spending.


Figure 1. GDP per capita in PPP terms


1.  Excluding Hungary, Poland, Slovak Republic and Turkey.
Source: World Bank, WDI database on line, and OECD estimates.


...and macroeconomic policies remain credible, although tested by current global economic conditions

The budget deficit, which exceeded 7% of GDP in 1993/94, was reduced progressively through both revenue measures and expenditure restraint, and for the last two years the budget has been in surplus. The turnaround in budgetary performance has brought the public debt burden down to moderate levels, which in turn has contributed to improved investor sentiment towards South African assets. That improvement was reflected in strong portfolio inflows and successive upgradings of South African’s sovereign credit ratings. The medium-term budget plan calls for surpluses to continue, though this is recognised to be a cyclical phenomenon, as on a cyclically adjusted basis the budget has remained in deficit and is projected to remain so. As to monetary policy, the South African Reserve Bank (SARB) has, like the National Treasury, earned a reputation as a credible and competent agency. Its operational independence is constitutionally guaranteed, and it has established a broadly successful record under inflation targeting since 2002. The targeted measure of inflation declined from about 7% prior to the adoption of inflation targeting to just over 3% in early-2005, and expectations quickly converged to the SARB’s target zone. When inflation subsequently began to turn up, the SARB repeatedly raised interest rates, 10 times in all since 2006. Nonetheless, inflation has continued to rise, and a combination of global and domestic economic circumstances are providing a stern test to monetary policy. South Africa is exposed to considerable inflationary pressures from surging food and energy prices, import price pass-through from the recent weakness of the rand, and electricity tariffs which are likely to rise rapidly this year and next. The SARB itself now expects inflation to remain above the target range until the second half of 2010.


The large current account deficit is the main source of macroeconomic vulnerability

Since 2003, South Africa’s current account deficit has grown steadily, reaching 9% of GDP in the first quarter of 2008. Such levels, though high, are not extreme by international standards, but they do expose South Africa to the risk of a financial crisis associated with a sudden stop of capital inflows. This risk remains moderate, given that South Africa’s net foreign liabilities are still modest and that debt in particular is very low, with a large proportion of the net capital inflows coming in the form of equity investment. Moreover, the deficit does not correspond to public dissaving, but to private savings-investment behaviour. On the other hand, the size and pace of increase of the deficits cast doubt on their sustainability, and recent experience across a range of countries shows that adjustments of external imbalances are often sudden and disruptive, and sometimes occur well before debt ratios get very large. Moreover, while increases in investment have been increasingly responsible for the widening of the current account deficit, South Africa’s savings-investment gap has up until now mostly reflected not anomalously strong investment but unusually low savings. This is more suggestive of a consumption boom than of an inflow of capital to exploit attractive investment returns.


Growth could be strengthened further, however...

The welcome acceleration of real GDP growth in the past few years has done little to improve South Africa’s ranking relative to other middle-income countries, as faster growth has been a worldwide phenomenon; South Africa’s growth rate still trails behind those of the most dynamic emerging economies (Figure 2). And while trend growth of total factor productivity also appears to have turned up, it is still only around average for a country of South Africa’s per capita income level. Moreover, the faster rate of growth in the past four years has been accompanied by only a modest decline in unemployment, and the government’s development strategy, the Accelerated and Shared Growth Initiative for South Africa (AsgiSA), foresees further increases in growth rates to an average of 6% a year between 2010 and 2014 in order to achieve the objectives of halving unemployment and poverty.


Figure 2. Real per capita GDP growth rates, 1994–2003 and 2004-06


Source: SARB database and World Bank, WDI database.


....and needs to be more broadly based

Given that the development strategies articulated by the governments of the democratic era have been oriented to improving the lot of the historically disadvantaged majority black population, the most disappointing aspect of post-apartheid economic performance is the emergence and persistence of extreme levels of unemployment, particularly for less-skilled younger blacks, together with the continuation of widespread poverty and the widening of inequalities. The failure to bring unemployment down decisively is probably the greatest source of popular discontent about the government’s economic policies, despite numerous successes, and it naturally leads to pressures to try more radical and activist solutions which risk being wasteful and counterproductive. This is recognized by the government, which aims to promote more employment-intensive growth. The government has also pursued the route of affirmative action to address historic inequities, but the Black Economic Empowerment initiative (BEE) to this end has often been criticised for primarily enriching a small number of already well-off blacks rather than raising the incomes of the poor.


AsgiSA, the current national development strategy, represents a well-designed approach...

The formulation of AsgiSA was in many ways a courageous process. The government consulted widely with social partners and sought international expert opinion on economic development. The result was a strategy that first identified a limited number of constraints to faster and more broadly shared growth, and then outlined a set of policy interventions to remove those constraints. The diagnosis of the constraints to growth is broadly sensible. Deficiencies are identified in state organization, capacity, and strategic leadership, along with high cost and low efficiency of the national logistics system and some infrastructure. The economy is rightly seen as suffering from a shortage of skilled labour, and high barriers to entry and low competition in some sectors of the economy. It is likewise persuasive that the regulatory environment could be improved, reducing the burden on small and medium-sized enterprises in particular. The identification of the strength and volatility of the rand as a key constraint is probably the least clear-cut of the identified constraints, at least at this time, since much of the appreciation of 2003 06 has been unwound of late, and to some extent volatility of the exchange rate reflects the variability of key export commodity prices.


...but the mapping from constraints to policies is not always convincing

While the policy interventions set out in AsgiSA are each aimed at addressing one or more of the identified constraints, in some cases the linkage between the constraint and the policy solution is weak, while in others the policy action looks insufficiently strong to remove the constraint to faster and more evenly shared growth. For example, the emphasis on industrial policies risks preserving the apartheid-era pattern of protected national champions insulated from foreign competition and enjoying high mark-ups. This runs counter to the acknowledged need to enhance the level of competition in the economy. Also, the emphasis on government programmes and initiatives is at odds with the recognition of failures of government planning, coordination, and administrative capacity as one of the constraints to achieving faster and more widely shared growth. In addition, in the area of education the focus appears too narrow, with comparatively little emphasis on improving basic education. 
 

How to obtain this publication                                                                                   

The Policy Brief (pdf format) can be downloaded in English. It summarises the OECD assessment. The complete edition of the Economic Assessment of South Africa 2008 is available from:

 

 

Additional information                                                                                                  

 

For further information please contact the South Africa Desk at the OECD Economics Department at eco.survey@oecd.org.  The OECD Secretariat's report was prepared by Geoff Barnard and Christian Gianella under the supervision of Andreas Wörgötter. Research assistance was provided by Corinne Chanteloup.

 

 

 

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