It's time to kickstart the economy
It looks like it may be a hat trick, but in a negative sense: 1.5% economic growth in 2014, the same expected again for 2015 and now a growing consensus that 1.5% will again be the number for 2016.
If those numbers materialise, it would mean that for three years in a row economic growth will only equal population growth, leaving no room for increases in per capita income. This would be the longest period of stagnant per capita incomes since democracy. This would also mean the single most important force for social and economic progress, rising per capita incomes, would have come to a standstill in South Africa.
It is worth noting that this is not the worst in our history: during the political transition from 1990 to 1993, we had four years of declining per capita incomes; during the 1980s, we had declining incomes in five years of that decade; and, in the mid-1970s, we had three years of declining per capita incomes. We are now looking at stagnating incomes, not declining ones.
Nevertheless, it is serious.
More than electricity
It is worth getting a handle on precisely what went wrong.
Last year, the low growth was a result of electricity shortages and strikes – five months in the platinum industry and one month in the steel and engineering industry. The Reserve Bank estimated that the two strikes cost the country at least 1% to 1.5% in forfeited growth. Electricity shortages would also have extracted its pound of flesh, some speculate as much as 1% of growth. Add those numbers back in and last year’s 1.5% would have been substantially better.
This year, the lack of electricity is still suppressing economic growth. So far, strikes have been subdued, although disputes are still unresolved in the gold and coal industries. It’s too early to say labour unrest will not again be a factor.
A new constraint has appeared – the first serious drought in many years. It has knocked agriculture, causing that sector to decline by more than 16%.
It is clear that electricity will still be a constraint in 2016. The recent news from Eskom that the Ingula scheme will add more than 1?000MW to the grid during 2016 will certainly help in 2017, but not next year.
Even if good rains return and strikes are limited, the danger now is the decline in commodity prices. This will have serious implications for our terms of trade. The lower oil price will help us, but we export more commodities than we import oil. The weak rand will help somewhat, but not fully. That largely explains why most economists have pencilled in less than 2% growth for 2016.
These headwinds leave very little room for other mistakes. Everything else needs to go right to resist them and register higher growth.
But we had a lot of other things going wrong too – a serious decline in confidence, a yawning gap between the public and private sectors, and a serious lack of co-ordination in critical growth sectors.
Better co-ordination is particularly important: think tourism undermined by visas, agriculture by uncertainty over land reform and water rights, and mining by delayed legislation and the resultant uncertainty.
The low growth problem can only be overcome with a joint effort between government, business and labour. Each of them could sit and wait for the business cycle to turn, which eventually it will, but it could be a long wait. The economy now needs a little help from its friends.
One of the recommendations of the National Development Plan is a social compact between those three groups to put the country on a new growth path. Being the elected leaders of the country, the government must take the initiative. An invitation to a meeting to discuss economic recovery will carry more weight coming from the president than from even the most well-respected and successful businessperson.
The steel and mining industries are engaged in such trilateral discussions and, although the discussions must still bear fruit, it shows that the process is possible.
An example from history could be useful. In 1933, Franklin D Roosevelt was inaugurated as president of the United States. It was in the midst of the 1930s depression that followed the Wall Street Crash of 1929.
The share market lost 80% of its value. FDR’s focus was the economy, and recovery from the depression was guided by a philosophy of “the moral equivalent of war”. One of the first pieces of legislation he sent to Congress was the National Recovery Act (NRA).
The Act aimed to get business, labour and government to agree on “codes of fair practice” for each industry that “would establish production targets and set wages and prices”.
It also launched a public works programme and increased taxation to pay for it. The Act was received with enthusiasm. It sailed through Congress in record time; business and labour leaders applauded it; newspapers hailed it.
Three months after FDR signed the Act, nearly two million people (no typing error) lined the streets of New York to celebrate the NRA, complete with a Miss USA and a Miss NRA lending glamour to the procession. A ticker-tape parade, not for a triumphant sports team or pilots flying across the Atlantic for the first time, but for an Act of Congress.
But the Act was declared invalid by the Supreme Court in 1935 (on the grounds that its delegation of power to the executive violated the Constitution) and today the judgment of historians is that “the NRA … [was] a sincere but ineffective effort to alleviate depression”.
So what was the good of the NRA then? Well, in the three years after the Act was passed, growth was 9%, 10% and 14% respectively. Unemployment decreased from 25% in 1933 to 17% in 1936.
Other actions by the government did more to alleviate the depression, but the NRA changed the mood, helped to establish confidence and restore energy, and so helped to change the country.
For South Africa, not so much an Act of Parliament but a social compact of sorts between government, business and labour could do a lot to build confidence, narrow the gap between the public and private sectors and enhance co-ordination. Call it “social capital”, “building trust” or “creating cohesion”, but the critical economic players have to agree on a plan for the economy. The alternative is to wait for the business cycle to turn and endure stagnation for even longer. It’s our choice.
JP Landman is an independent analyst. This was first published by Nedbank Private Wealth in a newsletter to its clients.