Why the South African economy performs so poorly

2018-12-14 13:38

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The recent investment conference was meant to provide a platform to showcase growth and investment prospects in an economy with vast potential and enormous natural resources. This inaugural conference has come at a time when the economy does not perform and was forced into a technical recession, the private sector refuses to invest in the economy and the government through the State Capture Commission is under scrutiny in terms of how it has managed its resources during the past decade. It is therefore too early to can see what the results of this initiative will be.

South Africa is a leading economic powerhouse in Africa with a sophisticated banking sector. A truly emerging market in the developing world that offers world class infrastructure for both domestic and international investors. This country has the most industrialised economy in Africa and is a leader in almost every sector on the continent. It contributes approximately 16% of the continent's GDP and is the 30th largest in the world according to the World Economic Forum’s 2016/17 Global Competitiveness Report.

South Africa’s prosperity since the beginning of the millennium years can be largely attributed to strong leadership in the public sector and its decision to embrace fiscal prudence. During this period the government balanced its expenditure with revenues and created an environment for consistent average growth through its Growth, Employment and Redistribution (GEAR) programme an initiative that has required considerable political will and I am afraid not enough credit has been given to the Mbeki Administration for such notable achievements. 

All the indications are there that South Africa was once an investment destination of choice. But what has gone wrong with the South African economy and what will it take to rescue it?

There is no doubt that huge structural damages have been done to the economy. We have witnessed the consistent weakening of the state-owned enterprises (SOEs). Not only have these entities been reduced to operational inefficiencies, beacons of financial mismanagement and the collapse of governance at all levels but highly schooled and skilled workers were literally driven away.

Eskom forms an integral part of the South African economy. No country in the world can prosper without electricity. There is a need for a serious look as to how the power utility is conducting its business. According to Ted Blom, energy expert, Eskom is on the verge of collapse. According to him the stage 1 and 2 load shedding introduced by Eskom is of a minor disruption. The worst is still to come. The core of the problem is Eskom’s lack of building coal mines. 

The lack of a skilled workforce is rated by the WEF as the third most problematic factor for doing business with South Africa and is clearly an obstacle to economic progress and performance. To make matters worse the International Monetary Fund (IMF) has downgraded South Africa’s GDP expansion forecast for 2018. 

In the funds latest Global Economic Outlook, it estimated that the South African economy would grow by 0,8% this year down from its initial projection of 1,5% in April. In addition, the Fund expects the economy to expand by 1,4% in 2019 down from its April projection of 1,7%.

There is a clear need for the government to change its approach in dealing with domestic and international business communities. It is no secret that the relationship between the government and business has become tense and, in many respects, dysfunctional. I am afraid that fiscal and monetary policy alone cannot rescue the situation and set the country on a sustainable better growth path. 

Fiscal and monetary policies are useful tools to deal with the structural impediments in the economy. The restoration and strengthening of institutional integrity-especially state-owned enterprises is one of the pre-conditions for sustainable growth. Without bold leadership the country will continue to drift along a low growth path with poverty levels likely to rise.

- Jaars is a deputy director in the public services and writes this article in his personal capacity.

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