A generation of young people have grown up in post-apartheid South Africa, have not experienced the racially oppressive laws which characterized the apartheid regime, and have had the privileged of growing up in a democratic country. Despite these accomplishments, there remains a large and growing gap between the countries accomplishments and its urgent socioeconomic needs.
A large portion of South Africa’s population remain excluded from the formal economy. With incessant slow economic growth, the country is struggling to raise the average living standards of its citizens. This is characterized by three significant trends in South Africa’s economy : unemployment, inequality and exclusion. Whilst there are strong historical reasons for these trends, behaviour by the private sector and economic policy choices of the government across successive administrations, have exacerbated past trends. Furthermore, South Africa has solidified its integration into the global economy, and as such have felt the “external shocks” related to the global political economy.
Inclusion in the economy, of the excluded majority of citizens, can be a source of economic growth. Much research has been done on this phenomenon globally, and an array of policy suggestions remain untested. But with the passage of time, the passivity which was brought on by the political change in 1994, can not be sustained as growing calls for economic change, specifically inclusion, intensify.
Whilst some of these issues, particularly exclusion and income inequality, are legacies of the apartheid era, with the passage of time, if left unaddressed, these issues become mountainous challenges. As such, what is needed is a review of South Africa’s policies, followed by substantive action.
High debt-consumption, low manufacturing
Prior to the global financial crisis between 2007 and 2010, the South African and the United States economies had similar negative trends. Both countries experienced economic growth due to debt-driven consumption. Both countries had rapid growth in financial services sectors and significant declines in productive industrial sectors, which led them into more dependence on manufactured imports and large trade tarrifs. The trends in the South African economy was very different to those witnessed in the other BRICS countries. These countries had growing productive sectors, characterized by large increases in exports and trade surpluses.
In addition, countries that have been able to mobilize rapid and sustained industrialization, such as South Korea and India, have displayed three characteristics in particular: a high and sustained share of manufacturing in Gross Domestic Profit (GDP), a high rate of fixed investment in GDP, and rapid growth in the value and sophistication of manufactured exports.
It has been argued, that prior to the global financial crisis, the South African economy performed well because of sustained GDP growth over a period of time. Despite acknowledgments that unemployment remained too high and that inequality increased, there seemed to be a belief that as long as GDP continued to grow, South Africa as a whole would benefit through a trickle down of wealth.
This economic growth, since the end of apartheid, and specifically in the five years before the global financial crisis was unsustainable because it required growing private sector indebtedness and accompanied decline in productive and manufacturing sectors. During this period, manufacturing contribution to the GDP declined and the contribution of the services sector, particularly financial services contribution to the GDP grew. This in itself is not a problem. But the reason for the growth of the services sector is what is problematic. There was a massive increase in credit extension in South Africa. A large part of the increased indebtedness of the private sector was due to increased debt of households. Moreover, research indicates that a large part of the increased extension of credit was for increased consumption rather than fixed investment.
As such new investment and capital stock was build in areas of the economy fueled by debt-consumption, with a marked decline in investment in manufacturing, mining and productive services.
South Africa did not have a high and sustained share of manufacturing in Gross Domestic Profit (GDP), a high rate of fixed investment in GDP, and rapid growth in the value and sophistication of manufactured exports.
South Africa’s priorities need to be re-calibrated to focus on productive and jobs-rich investments, as the apex of its economic objectives. Its economic policies should focus on supporting industrial development and it needs to shift the economic path away from debt-driven consumption, towards increasing competitiveness and productivity of industry.
South Africa finds itself in a position not dissimilar to that leading up to its first democratic election in 1994. It needs to undergo rapid economic transformation, that does not merely change the ownership of industries, but changes the structure of the economy.
This requires a social compact, as stated by President Cyril Ramaphosa, between established corporates, emerging black businesses, labour and the state, to chart an economic path forward that prioritizes productive and jobs-rich investment.
Since the end of Apartheid, South Africa’s core economic problems have not been tackled in a comprehensive manner. With public finances already stretched, the priority must be on the private sector to create more jobs. In this regard, the dialogue between government, labour and business is encouraging, but the talks need to produce substantive action. One solution to the employment problem may lie in social bargaining, to build on the ongoing government-business-labour negotiations to agree on policy positions in the interest of the business sector, in exchange for job retention and hiring commitments.