Economic policy uncertainty and the loss of South Africa’s growth momentum: Can the decline be reversed?
Some of the structural weaknesses in the economy today are clearly the result of the rapid trade liberalisation policies pursued by the ANC from the mid-1990s to the early 2000s. The subsequent failure to adopt a labour-intensive reindustrialisation policy has saddled the economy with the highest unemployment rate in the world.
The gradual loss of growth momentum in the South African economy, which resulted in a real per capita income decline since 2014, is threatening to endanger the country’s developmental aspirations and worsen the already glaring income and wealth inequality.
From youth unemployment rates hovering well above 70% among the 15-24 age group to the inexorable decline in savings and gross fixed capital formation rates, most indicators of future economic performance are displaying red flags. Eunomix Research has recently projected that in the absence of a vigorous structural transformation of the economy, South Africa is at risk of falling back to lower-middle-income status by 2028.
While the structural aspects of the weak economic performance have been extensively discussed by various researchers and policymakers, the influence of economic policy uncertainty on the loss of performance has received much less attention. It is, for example, frequently reminded that the narrowness and shallowness of the structural foundation of the economy constitute a major constraint on its growth potential. They also underly the country’s inability to overhaul the exclusionary production and allocation system left in place by the apartheid regime.
What has been less often highlighted is the role that inconsistent policy response and pervasive uncertainty about long-term economic policy planning have played in the loss of control over the growth trajectory.
Economic policy uncertainty results from the lack of clarity and predictability of future government policy orientation or regulatory frameworks governing economic activities and entrepreneurship. Since private investors and business leaders make their investment decisions based on expectations about the future economic policy environment, decreased predictability of policy decisions makes it risky for them to plan for future operations.
That risk prompts many of them to delay investment spending, thereby slowing economic expansion. Policy uncertainty also causes changes in the spending behaviour of private households, which can result in adverse demand shocks and slumps in the country’s aggregate production.
Whereas many of the factors affecting policy uncertainty have only a short-term effect on production decisions, prolonged ambiguity of future policy decisions has a lasting impact on capital investments and, ultimately, on an economy’s long-term growth prospects.
In a recent study based on a sample of 26 countries, variations in economic policy uncertainty were also found to come together with an increase in necessity entrepreneurship (the urge that individuals feel to set up their own small businesses in response to employment loss or loss of other sources of income). In many instances, a drop in employment opportunities pushes people to resort to precarious entrepreneurial activities as an alternative source of income, but with limited prospects of stability.
The results of the study also show a sharp decrease in entrepreneurial activities in the period that directly follows the rise in policy uncertainty. This apparent reversal in entrepreneurial activities has important implications for a country grappling with high youth unemployment rates, as is the case in South Africa. The slump in the entrepreneurial drive as uncertainty begins to wane may suggest that entrepreneurial ventures set up to escape the distress of losing one’s job during periods of heightened risk tend to be ephemeral. It would therefore be imprudent to rely on them as a source of long-term self-employment generation.
Empirical results of previous studies have shown that firms tend to adopt more prudent borrowing and investment policies when economic policy uncertainty is high, because a rise in uncertainty also increases borrowing costs. By reducing firms’ capacity to invest in capital accumulation, increased borrowing costs can have an adverse effect on labour productivity, lead to weaker employment growth and, in the end, result in bleak growth prospects for the entire economy.
Available data show that the World Uncertainty Index for South Africa, which is highly correlated with the corresponding economic policy uncertainty index, has considerably increased after 2014. Existing research on the effects of economic policy uncertainty on growth performance provides ample empirical evidence to suggest that the co-occurrence of heightened policy uncertainty and the loss of growth momentum of the South African economy is not coincidental.
Despite the political stability of South Africa with the same ANC remaining in control since the advent of democracy in 1994, only a few observers would consider the successive economic policies pursued by the ruling party as having given a consistent development orientation to the country’s economy.
The recurrent shifts in growth strategy, compounded by the open factional divergence in ideology within the ruling party, has contributed to increasing confusion instead of providing the assurance of strategy coherence that entrepreneurs need to make long-term investment decisions. The hollowed state capacity for policy implementation constitutes an additional risk factor for many economic operators in search of predictability of the growth trajectory.
While the global economic conditions that affect all integrated economies are inherently unpredictable, it is ultimately the consistency in policy and the adherence to a clear development strategy that helps mitigate the adverse effects of uncontrollable external factors.
Some of the structural weaknesses observed in the economy today, such as the collapse of the textile industry and the concomitant premature industrialisation, are clearly the result of the rapid trade liberalisation policies pursued by the ANC from the mid-1990s to the early 2000s, as noted by many South African economists. The subsequent failure to adopt labour-intensive reindustrialisation policy has saddled the economy with the highest unemployment rate in the world, yet no credible plan has so far been put forward to solve this thorny problem.
But even as the current peak in uncertainly exogenously generated by the pandemic has worsened an already bleak outlook for the economy, the official policy response (based on the discussion document drafted by the ANC’s economic transformation committee) has done little to reduce policy uncertainty as it remains vague on the party’s actual capacity to marshal the necessary human and financial resources to make the desired transformation possible.
The striking incoherence between the chosen capital-intensive industrialisation options and the insufficiency of human resource stocks required to pursue such a growth trajectory has already been pointed out. To avert the ominous scenario in which the economy continues to disintegrate before our own eyes, the ruling party ought to go beyond the rhetoric of economic transformation and design convincing policies, with concrete budgets and human resource mobilisation capable of inspiring optimism and trust in a better future. DM
Prof Alexis Habiyaremye is senior researcher at the DST/NRF SARChI Chair in Industrial Development based in the School of Economics, University of Johannesburg.
Dr Indu Khurana is an associate professor of Economics and Business at the Hampden-Sydney College, Virginia, USA.
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