16 July, 2015

South Africa’s Dim Economic Prospects

by Hussein Solomon

The opening sentence in the editorial in this morning’s Sunday Times could scarcely be bleaker, “Our economy is trapped in stagflation, characterised by low growth, high inflation and, to add salt to those painful truths, rising unemployment”. Worse, when one looks at the trends – there is no shining light at the end of the tunnel.


South Africa’s business confidence index has declined to 84.6 index points – its lowest level in 16 years. The lack of business confidence is seen in corporate South Africa choosing not to invest its billions in the country as well as the emigration of high net worth individuals. To put matters into perspective, 8000 dollar millionaires have left South Africa since 2000. These individuals also tend to have the scarce skill sets that the country so desperately needs if we truly wish to grow the economy. Manufacturing production has fallen for the second consecutive quarter and the economy, according to some economists, risks recession and further credit-rating downgrades.

Yet, things did not have to be this way. South Africa’s economic wounds are self-inflicted. In recent travels to Ethiopia I have watched that country grow with young people leading the drive in business innovation. In Kenya the entrepreneurial spirit of young people is amazing with the number of tech start-ups staggering. Sadly, when I ask my final year BA students what they intend to do – it is generally to work for government. This at a time – when the incompetence of our bloated civil service has become legendary even on the African continent. What 21 years of African National Congress (ANC) rule has successfully accomplished was to kill the entrepreneurial spirit of South Africans whilst at the same time creating dependency on the state through social grants and the like. This, despite the fact that it is just not economically sustainable. Given rising debt, it seems that government is considering raising personal income tax yet again. Give the small percentage of tax payers employed in the formal sector this is hardly an effective strategy. Moreover, it will only further undermine growth as consumption decreases as well as increase the emigration of further skill sets.

It is not rocket science to get South Africa to grow. We need to radically restructure our education system so skills sets produced align with our economic needs. We need to instil into our young people a strong work ethic and entrepreneurial skills. Government needs to look upon business as an ally for development and not an enemy. We need to ensure that our labour market is flexible. We need to eliminate the red tape to facilitate business start-ups. We need to guarantee a stable electricity supply without which growth is impossible. We need to end corruption which has increasingly become institutionalized. And, yes we need to make hard choices - taking on the trade unions. At the end of the day – we should be more concerned with the millions unemployed and get them working as opposed to further entrenching the labour aristocracies which our trade unions have been transformed into.

Yet, as I write this I know two things. First, the Zuma government lacks the vision and the political will to implement any of these reforms. A case in point is the moribund National Development Plan adopted by the ANC and not implemented. Second, time is running out. Our economic challenges will escalate in the short-term. The recent 30 percent plunge of the Chinese stock-market holds grave challenges to our domestic economy given our dependence on the Chinese market for the export of our raw materials. The fact that the US Federal Reserve is contemplating an increase in interest rates will also negatively impact on us as foreign investors look for better returns on Wall Street as opposed to the Johannesburg Stock Exchange.

Unless, we as a country can begin making painful decisions in the short-term, we will all suffer in the long-term.

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