The story can be found here. But the aspect of the paper which I didn’t address was the answer to the crucial question posed by the group: why has South Africa so badly underperformed its developing country comparators for so long?
The paper proposes three possible explanations: an external story – the end of the country’s growth was the consequence of the end of the commodity supercycle; a macro story – SA’s debt build-up and macroeconomic failures; and a microeconomic story – the persistent loss in productivity in the economy and the investment slowdown triggered by microeconomic policies.
I would like to reflect here a loose summary of the findings of this august group. There are three possible explanations, the group poses: an external story, a macro story, and a micro story.
The external story
The paper says that SA’s growth deceleration is often understood in the context of the end of an era of ever-improving terms of trade. “Given the relative importance of the mining sector to South Africa’s economy, a stagnation or reduction in commodity prices would ultimately imply a shock to economic activity primarily through a direct income effect, and the impact on mining exports and investment, but also through channels such as the availability of international finance and the real exchange rate. Moreover … the mining industry directly and indirectly affects fiscal balances through tax revenues, lower nominal GDP growth and other channels.”
However, the group discounts this explanation, saying the growth slowdown has little to do with the direct impact of reduced nominal mining gross value added, as it is the rest of the economy’s contribution that explains the downturn in GDP.
The commodity price shock to mining exports has indeed significantly contributed to export stagnation through the 2010s. But, it says, South Africa’s terms of trade have actually improved since 2007.
The fall in export commodity prices can explain at most a quarter of the decline in GDP growth, and does not explain the current fiscal dynamics, the report concludes.
The macro story
This is a more complicated issue, but one of the main arguments is that large public deficits crowded out private spending, leading to lower growth. Another aspect is that fiscal adjustment efforts from about 2012 onwards were self-defeating, also lowering growth.
SA fiscal policy in the decade after the global financial crisis was to maintain the budget deficits in order to provide countercyclical support to the economy. So why did this not work? The paper suggests that the composition of the increased expenditure had too much current expenditure and too little capital expenditure, which had a lasting negative impact on the allocative efficiency of government spending.
This might not have worked, but what it didn’t do was crowd out savings from firms or households. Part of the reason has to do with the financing which came primarily from foreign portfolio inflows. “On balance, while South Africa’s macro policy resulted in a large debt build-up, the arguments and evidence that macro policy slowed GDP growth are not compelling,” the paper finds.
A microeconomic story
Here, the paper finds its main culprit. The two main “microeconomic” issues are the sectoral roots of the productivity slowdown, and political factors behind the investment slowdown.
“Over the last decade, parastatals have been hit by an ‘operational, financial and governance’ crisis… Many factors … have resulted in a substantial increase in Eskom debt, rising from 2% to 9% of GDP in 12 years…”
Ultimately, “the micro story provides the most comprehensive account of the circumstances that led to the current growth challenge and a framework through which it is possible to evaluate the effectiveness of macroeconomic policy in the recent period,” the paper finds.
To put it brutally simply, the paper finds statistically what all South Africans know in their hearts: SA’s decline can’t be blamed on commodity prices or an overzealous reserve bank – the main arguments of politicians. Instead, the decline lies at the feet of those very politicians. DM168
This story first appeared in our weekly Daily Maverick 168 newspaper which is available for R25 at Pick n Pay, Exclusive Books and airport bookstores. For your nearest stockist, please click here.