By Paolo von Schirach
October 28, 2013
WASHINGTON – Any Eurozone government would be ecstatic hearing a forecast of a 2% GDP growth for the current year. But in South Africa this prediction recently delivered by Finance Minister Pravin Gordhan in a speech to Parliament is actually bad news. The country needs at least 5% growth just to tread water. Therefore 2% is close to a disaster.
Enormous gap between rich and poor
While South Africa is by most measures the most advanced economy in the entire Continent, its post apartheid unresolved problems are immense. (The old White dominated regime ended in 1994). South Africa’s significant wealth is still mostly concentrated in the hands of the White minority. Most Blacks live in poverty, without basic services, such as water and electricity, let alone proper schools and modern health care systems. The official 25% unemployment rate does not even begin to capture millions of jobless Blacks in rural areas who are not registered anywhere. The government now run by President Jacob Zuma, leader of the African National Congress, ANC, made promises of investments in social services that it could not keep, in part because of lack of resources, and in part because of its incompetence. And now we have to add a sluggish economy. It is clear that 2% GDP growth will not generate the resources necessary to fund the social services aimed at improving the living conditions of the poor.
Social tensions
And the country now is in turmoil. First there was Julius Malema, the now disgraced former head of the ANC youth wing. He was talking loudly about expropriations and nationalisations as quick political remedies for excessive inequality. Then there were several violent miners’ strikes, accompanied by police brutality, including one instance of mass killing of strikers. And now we have the auto workers led by Irvin Jim, a self-proclaimed Marxist who keeps a portrait of Hugo Chavez in his office. The auto workers want double-digit pay increases. But the South African auto industry, mostly assembly plants owned by foreign brands such as BMW and Mercedes, survives on thin margins. Significantly higher labor costs may kill it.
No growth strategy
South Africa is a very complex country characterized by huge inequalities that still follow racial lines. However, the only positive way to bridge its enormous income gaps is to generate significant new growth. And this is not happening. The ANC government is run by mediocre and often corrupt party functionaries who have little managerial experience. Fresh foreign investments are not pouring in on account of the political tensions that generate uncertainty.
In the meantime it is only natural that those who have some bargaining power, such as the auto workers union, will demand more and more, so that their members will enjoy a somewhat higher standard of living. They fight their own battles. They do not think strategically about what it takes to make the South African economy more competitive.
The problem is that by global standards South Africa is already non competitive. Its only real wealth is in platinum and gold, coveted precious metals. Manufacturing is there; but it is not strong. If you add higher labor costs, then many companies will just be unable to fight against cheaper Chinese or Indian imports.
Austerity for the elites will do very little
In his budget speech to Parliament, Finance Minister Gordhan announced also a slew of austerity measures supposedly aimed at the notoriously lavish life styles of Ministers and other high-ranking public officials. This was his way to show the people that even the privileged few will have to make sacrifices and tighten their belts. So, no more super expensive official cars. Ministers will no longer travel first class. There will be strict monitoring of expenses. It will be forbidden to serve alcoholic beverages at public functions.
All this may sound nice. But these austerity measures, even assuming enforcement, are only cheap populism that will leave the larger macro economic picture totally unchanged. Besides, privilege and corruption are deeply entrenched in South Africa. Even if they take their government credit cards away, the top ANC elected leaders and appointees will still do very well.
The problem is that while they enjoy the perks of power, they do not have a clue on how to spur South Africa’s growth .