South Africa has been stuck in a middle-income trap for the past two decades, and runs the risk of slipping if the country remains on a stagnant policy trajectory, according to Moody’s Investors Service.

Moody’s recently completed a policy analysis on income convergence to higher-income status among key emerging market countries, including South Africa, over 35-year and 20-year cycles, the results of which came out earlier in November. 

For South Africa, the sovereign credit ratings agency assessed data from 2000 to 2020. Current circumstances notwithstanding, including the post-pandemic waves of economic shocks and supply chain disruptions, South Africa is faltering on the policy front.

The country’s policymakers are trying to solve problems that were relevant 20 years ago, and are demonstrating fundamental misalignment with the shifts taking shape globally. Simply put, South Africa’s policy framework is 20 years out of date, and out of step with the accelerating trends in economic developments around the world.

The country’s policymakers are still talking about industrialisation while their peers elsewhere are looking at innovating around the unfolding realities of deglobalisation, deindustrialisation and digitalisation.

Moody’s identifies deglobalisation, deindustrialisation and digitalisation as the big three themes of the present era that economies must contend with. 

Emerging market countries that have been able to craft their policy frameworks to capitalise on these changes are better positioned to absorb the tidal wave of shocks on the horizon. 

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Moody’s observes that it takes 35 years to close a 50% income gap. A failure to hit that mark – or to get close to the target – often results in economic and social strife.

In the BRICS context, China and India are leading the way in closing the income gap, while South Africa and Brazil are struggling for economic form. 

“Overall, South Africa [and Brazil] … are particularly falling behind, recording declines in per capita income shares relative to the US,” according to Moody’s.  

The benefits derived from economies graduating to high-income status include high productivity growth accompanied by structural transformation. Moreover, countries which pivot to high-income status show greater economic complexity, human capital and innovation, better macroeconomic management and governance, notes Moody’s. 

The point of divergence between those countries that break through the high-income status ceiling and the others that don’t, is policy adaptation. The former group recognises that the world has changed, while the latter is still sold on old-school growth models.

Moody’s Anushka Shah explains: “As trade and supply chains become less interdependent, stronger adoption of digitalisation and automation and a move to service-oriented growth models are likely to be more prominent drivers of productivity.”

The structural trends outlined by Shah mean that some of the factors which drove income convergence in the past may no longer be as effective in the present context. In fact, what may have worked yesteryear for the attainment of high-income status may not necessarily be as effective, and could instead facilitate fast-tracked decline. 

Admittedly, globalisation enabled countries to become upper-middle and high-income economies. These economies “… reap[ed] the benefits of technology and knowledge transfer through FDI [foreign direct investment] and by following emulation-based growth strategies”, Moody’s reports. 

However, Moody’s warns that a scenario may play out where trade patterns and supply chains will be less interdependent, and countries will become more inward-looking, making it more difficult for economies to climb out of middle-income status. 

“Such a trend was underway before the trade tensions between the US and China and more inward-looking policies by both, but has been exacerbated by the pandemic,” Moody’s states in its analysis. 

Moody’s observations become particularly stark when assessing what currently preoccupies South African policymakers. 

The tone and tenure of the country’s structural reform programme still stakes its fortunes on the old growth models, which Moody’s says are fast-becoming irrelevant relics of the past. 

Earlier in November, on the same day that the Moody’s research report was released, the finance minister delivered a speech at the Southern Africa-Europe CEO Dialogue. The contents of the minister’s speech and those of the Moody’s report were like day and night.

The speech would not have been out of place if it were delivered in the mid-2000s, South Africa’s boom years – it is peppered with the basics of that time, such as making rail and ports more efficient, deepening ties with trade partners, attracting more investment and so on.

In some respects, the Moody’s report puts a dent on previous assertions that South Africa is awash with good policies and ideas, but lacks implementation. 

Perhaps the reason these good policies and ideas are failing to launch or gain traction is because they are calibrated for a bygone era. BM/DM