The decision to form a unity government has been broadly welcomed by economists.
In February 2008, when the world was tumbling into the worst financial crisis in post-war history, then French president Nicholas Sarkozy assembled some of the world’s renowned economists to identify the limits of GDP as a measure of economic progress.
As they conducted their work, led by Joseph Stiglitz, they watched the crisis deepen, seemingly without warning. In their final report, commission members noted the failure of private and public accounting systems to deliver the warning that the world economy’s rapid growth from 2004 to 2007 may have been achieved at the expense of future generations.
The crisis, the commissioners agreed, held a very important lesson: “Those attempting to guide the economy and our societies are like pilots trying to steer a course without a reliable compass.”
Four years later, in South Africa, the government would set out its aspirations for the economy in the National Development Plan (NDP). Its aim, outlined in the document’s vision statement, was for South Africans to live in a country remade by 2030. “We have created a home where everybody feels free yet bound to others; where everyone embraces their full potential. We are proud to be a community that cares,” it reads.
But economic policy has long been at odds with this vision. Last week, in the wake of another crisis — and with many others forming on the horizon — the National Planning Committee released its 10-year review of the plan. The review held a damning assessment of the government’s ability to fulfil its promises of a better economy and a society given the tools to thrive.
But crucially, South Africa’s limping NDP speaks to the failure of economic policymakers around the world to adjust in the wake of the pain inflicted by the 2008 crisis — and to use the episode as an opportunity to break from the past and imagine the world anew.
In her 2017 bestseller, Doughnut Economics, English economist Kate Raworth writes that in the aftermath of the crisis, politicians offered a buffet of economic visions that had the effect of making her feel like she had stepped into a Manhattan deli, “hoping for a simple sandwich, only to be confronted with an endless choice of fillings”.
“Angela Merkel suggested ‘sustained growth’. David Cameron proposed ‘balanced growth’. Barack Obama favoured ‘long-term, lasting growth’. Europe’s José Manuel Barroso was backing ‘smart, sustainable, inclusive, resilient growth’. The World Bank promised ‘inclusive green growth’,” Raworth writes.
“Other flavours on offer? Perhaps you would like it to be equitable, good, greener, low-carbon, responsible or strong. You choose — just as long as you choose growth.”
South Africa’s medium-term strategic framework for 2009 to 2014 (Jacob Zuma’s first term as president) prioritised “higher and more inclusive growth” — a target the economy would ultimately fail to achieve, its real GDP growth decelerating more than in other emerging markets and never recovering to pre-crisis levels.
Inclusive growth, or indeed many of the other options on offer, would prove to be elusive as the financial sector maintained its stranglehold on the economy.
One easily-missed detail of the 10-year review of the NDP relates to the high levels of concentration in South Africa’s financial sector, which is also one of the most profitable in the world.
Citing Reserve Bank data, the market share of the country’s top five banks has increased significantly from 74.2% in 2001 to 89.5% in 2019. Although the sector’s return on equity (ROE), a measure of its profitability, has declined, this was from a very high base of 29% in 2001 — the highest in the world.
The sector’s ROE stood at 17% in 2019. To put that into perspective, the United States banking sector’s ROE held below 10% during the decade that followed the 2008 crisis and recently hit a 14-year high when it hit 14.7% in the first quarter of 2021. South Africa’s financial sector has enjoyed generally high long-term interest rates — entrenched through inflation targeting, deployed as a means of protecting macroeconomic stability — leading to greater spreads and thus higher profitability.
The problem with having a powerful, but small, financial sector is that its growth rarely translates into gains for the real economy.
This much is suggested in the 10-year review, which notes that, unlike in other developing countries, South Africa has a negligible community banking sector that re-circulates savings of the poor for the benefit of the poor. “Instead, the savings of the poor … are reinvested largely for the benefit of the middle class and the rich (housing loans, credit card overdrafts, retail expansions).”
The review further notes that less than 10 % of the assets managed by pension funds are reinvested in the real economy, which means that capital valued at 50% of GDP is not being deployed to achieve NDP goals. “This cannot continue, especially in light of fiscal constraints,” the review cautions.
In a chapter that appeared in the 2021 book Structural Transformation in South Africa, researchers Antonio Andreoni, Nishal Robb and Sophie van Huellen note that financialisation in the country has conspired to deprive the economy of the resources needed to spur investment-led structural transformation.
“The prevailing economic policy framework and the additional measures taken to buffer the economy from crisis,” they write, “have essentially socialised the costs of these developments, while the benefits accrue to international investors, domestic finance capital, speculative asset traders and wealthy beneficiaries of asset price inflation.”
Considering the recently revived angst over South Africa’s fiscal predicament — which has created the impression that the country’s public sector simply cannot afford to reinvest in its breathless economy — you would think that the financial sector would be the target of greater indignation. After all, while the banks have reaped the benefits of higher interest rates, the economy and the public purse have suffered.
Instead, workers and the country’s poorest look to bear the burden of the ineffectual economic policy which has given the sector ample room to grow.
If South Africa’s policymakers have any compass at all, this is the direction it is leading us — further away from the NDP’s promises and closer towards the brink of social and economic destruction.