It is common knowledge that the South African economy is in a precarious position. Most of the key macroeconomic variables are moving in the wrong direction: economic growth is edging towards 0%; inflationary pressures are working up a head of steam more rapidly; the current account deficit is uncomfortably wide; net financial inflows have declined significantly; the rand exchange rate is at a very low level; and job creation has stagnated. Meanwhile, poverty levels are high; income remains unevenly distributed; and civil society is becoming restless and angry. Add to this toxic cocktail changes in the global economic architecture: China has just recorded its lowest economic growth rate in decades, Brazil and Russia are in recession, and commodity prices are way below the peaks of a few years ago. South Africans can therefore be excused for feeling that they are facing one of the most distressing periods in the last two decades.
To further complicate matters, policy makers have virtually no room to stimulate the economy, as they are faced with having to make a trade-off between efficiency (society getting the most that it can from its scarce resources) and equity (the benefits of those resources needing to be distributed fairly among the members of society). In the short term, the trade-off dilemma is even more compelling: Should policy aim to achieve and maintain fiscal and monetary rectitude, or should limited (state) resources be allocated – willy-nilly – to boost growth and incomes in what will probably turn out to be an unsustainable fashion?
The fact is that concerns about fiscal sustainability have re-emerged with a vengeance . The ratio of government debt-to-GDP has increased significantly – from some 25% in 2008 to around 50% – driven, inter alia, by a marked increase in the share of government spending in GDP (attributed in no small measure to large salary outlays on a bloated civil service, the cost of sustaining a sizeable social welfare system, and repeated rescue packages for inefficient state-owned enterprises).
The harsh truth, therefore, is that investors – existing and potential – have become disenchanted and disillusioned by the current unfortunate juxtaposition of macroeconomic and financial realities. They are concerned that the high levels of creeping debt may become financially and politically unsustainable. As a deficit nation (with a disturbingly low level of gross savings for its size), South Africa is capital hungry. It is therefore vital for South Africa that foreign capital should be forthcoming and that the cost of that funding should be kept as low as possible. To this end, it is crucial that the relevant policy makers show an intent and commitment to ‘get the basics right’. In the short term, that is about fiscal and monetary discipline, and investor-friendly and predictable, surprise-free policies. This implies fiscal restraint, i.e. narrower budget deficits over the next few years; a commitment to eliminating wasteful and unjustified government spending; and confining ‘hand-outs’ to the humanely minimum.
However, one of the biggest concerns regarding the economic development of South Africa is the risk that the current feeling of despair translates into a pathological state of mediocrity. It is worth considering that never before has a period of economic stagnation not been followed by a phase of recovery and growth – although the timing, strength and duration of the latter is not predictable. So, while in the short run we are in survivalist mode, it is also important not to be caught napping when the economy does recover. It is therefore a time for debt consolidation (private and public); for enhancing efficiencies and productivity; and for honing those managerial skills needed to convert innovative ideas into commercial opportunities. It is a time for scanning the environment and exploring new markets – internationally, in the rest of Africa, and at home. And, as we look beyond and through the current sobering situation, we should remind ourselves that many investors want a positive story. Investors are aware of the many real and latent positive features of the South African economy. These include the following:
- An upper middle-income economy
- Among the 30 largest economies in the world
- Widely-respected and progressive legal framework
- Recent confirmation of the sanctity of the constitution
- Sophisticated and respected financial infrastructure
- Diversified economy
- Monetary policy sanity prevails
- 49th ranking out of 140 countries for Global Competitiveness
- A nascent window of demographic opportunity
Above all, we need to visualise the longer-term picture, and not only fixate on the current economic woes and turbulence. The importance of appropriate skills development, well-functioning infrastructure, an entrepreneurial revolution, and visionary political, corporate and civil society leadership cannot be emphasised enough. If these issues are addressed in a systematic and systemic fashion, South Africa could rise above its current malaise of economic mediocrity.
Is this wishful thinking? Is this yet another example of an economist tilting at windmills and making a prediction that defies common sense? Strictly speaking, we cannot predict the future; it is not possible to have knowledge about the future (to know what will be), because we have very few scientific facts about the future. What we could and should be trying to do is make forecasts which cover a range of possible outcomes. Nonetheless, economists are expected to make predictions – statements about a specific outcome or event which has not yet been observed. A model is constructed before those events occur in the hope that the model will predict those events. The problem is, of course, that most models (and therefore predictions) are based on the assumption that the past can be extended into the future. This assumption ignores the reality that the course of economic events is strongly influenced by often unpredictable human behaviour. As a result, only one possible realisation of the future is considered, while large changes within the forecast period are neglected. The main reason for poor predictions is therefore not poor economics or poor modelling; it is about the unpredictability of changes in the content of the human mind. That is not to say that we cannot, with a fair degree of accuracy, model the domestic effects of a particular type of behaviour. But we can’t know for sure what other variables may enter the picture or how they will affect the model.
Oxford University Professor David Hendry uses an analogy from rocket science to illustrate this point: a rocket launched to the moon is forecast to reach its destination at a precise time and point, and usually does. But if it is hit by a meteor and knocked off course, or destroyed, the forecast is systematically and horribly wrong. This is surely not indicative of poor engineering or a bad forecasting model, and certainly does not invalidate Newtonian gravitation theory. In a similar vein, the failure of economists to predict the 2008/09 crash was not so much because of poor economics or bad models, but rather as a result of the unanticipated strength of responses by households, businesses and governments to global imbalances.