Summary - The South African economy is much better run today than it was in the 1980s and for most of the 1970s at least. The ending of apartheid and the emergence of democracy enabled South Africa to rejoin the global economy. This compelled South Africa to re-impose financial discipline and to carry out some much-needed efficiency-boosting reforms.
So it is crucial that South Africa does not now fall into the familiar trap of taking it for granted that the improved economic situation of recent years will not only continue but automatically get appreciably better over the coming years.
When international economic growth hits another downward cycle, as sooner or later it must, South Africa will be highly vulnerable unless it recognises now the dangers of asking too much from business.
A key factor here is black economic empowerment (BEE). BEE can add to South Africa’s productive abilities by mobilising great reserves of innate business talent that was for generations effectively left to rot.
But BEE also imposes immense demands of implementation on corporate South Africa. That is all the more reason why other onerous, regulatory “diktats” to business should be subjected to strict cost-benefit assessment.
It is vital also that South Africa’s political leadership and the private business sector ultimately work together, even while often vigorously adopting differing positions on many issues. But that relationship is under great pressure in South Africa today.
President Thabo Mbeki is clearly aware of this. He noted last year: “There is a serious disjuncture between the political and business leadership in our country.”
But Mbeki himself is central to that problem. In his weekly letter on the African National Congress (ANC) website, his view there is basically that any business-government rifts are virtually all by definition the fault of business.
Moreover, it sometimes appears as if Mbeki believes that no white business figure has any moral right to criticise the government at all, even on the margin.
This attitude can have a serious impact on foreign direct investment (FDI). The United Nations Commission for Trade and Development reckons South Africa gets at most about 70 per cent of the FDI flows that it “should” receive in terms of its economic size and sound macroeconomic management.
South Africa has suffered for many years from inadequate levels of total new fixed investment (or “capital formation” as it is now officially dubbed).
In 2004 South Africa did enjoy, though that’s arguably an inaccurate description, a huge inflow of easy-come-easy-go funds into portfolio investment. This capital flowed in because foreigners liked the combination of high interest rates — especially when set against those in the United States (though the position has been changing there), the European Union and Japan — with the backing of a strong currency.
But as the gap between South African interest rates and those in the major industrial nations narrows, and as the rand becomes vulnerable to a fast rising deficit on South Africa’s current account of the balance of payments, the possibility of a sharp reversal of fortune on the portfolio investment side is ever more likely at some point ahead. There are a number of key reasons that explain South Africa’s lack of attraction for FDI, superficially surprising given the economy’s size and the improved rate of yearly economic growth. These negatives include the over-rigid labour law regime, the ongoing concerns about the level of state intervention in business activity, all potential implications for non-resident investors of BEE, and even some residual fears about possible nationalisation moves down the line.
Such fears are surely grossly over-stated. But recurring if invariably vague threats from within government about the use of expropriation policies in such areas as land and mining, inter alia, necessarily add fuel to them.
This, however, brings us back to Mbeki and his occasional bursts of anger at criticism.Verbal assaults from the president tend only to raise questions about his general composure. And in a highly competitive world contest for FDI, South Africa can’t afford to give anything away.
Fortunately, however, Mbeki also has a habit of accepting previously unpalatable truths when he finally sees their remorseless logic. An anonymous “discussion document” has been published on the ANC website that effectively urges that South Africa’s over-rigid labour policies should be made much more flexible to promote increased employment.
The South African economy is much better run today than it was in the 1980s and for most of the 1970s at least.
To what extent that is a reflection of a higher technical calibre of macroeconomic managers now — crucially, Finance Minister Trevor Manuel, Reserve Bank Governor Tito Mboweni and their senior teams — than in the 20 years and more before 1994 is necessarily unprovable. In any case, it doesn’t finally matter.
What is certain is that the ending of apartheid and the emergence of democracy enabled South Africa to rejoin the global economy. This compelled South Africa to re-impose financial discipline and to carry out some much-needed efficiency-boosting reforms.
These developments are currently producing predictably encouraging results. In the four year period from 2001 to 2004 the average annual rise in real gross domestic product (GDP) was over 3,3 per cent. Vitally, average real disposable household incomes — that is, after eliminating inflation distortions — increased by almost 2,0 per cent per capita per year in that time.
That is very genuine progress. But South Africa also took on board in the 1990s a “social market” economic model, based essentially on that of the former West Germany.
Ironically, that action by South Africa came just as that model was starting to show a great many weaknesses in the modern world — as a unified but struggling Germany now painfully illustrates. German unemployment is now at its highest since the pre-Hitler depression. But the general paternalism that was the hallmark of Germany is also sagging under pressure in many areas. Again, however, South Africa has embraced rather too many of those ideas whose time has gone.
The “no” votes in Germany and Holland on the proposed new constitution for the European Union (EU) were the product of many diverse and even conflicting reasons. But the ultimate cause was the economic failings of the EU. These in turn have much to do with gross over-regulation, even if many of those Europeans unhappy with their financial lot do not all see things directly that way.
So it is crucial that South Africa does not now fall into the familiar trap of simply taking it for granted that the improved economic situation of recent years will not only continue but automatically get appreciably better over the coming years.
That desirable scenario is certainly attainable. Manuel isn’t just indulging in mere wishful thinking when he talks of South Africa looking to move on to average yearly rises in GDP of five to six, and even seven, per cent. These are perfectly feasible prospects. But that applies only so long as South Africa builds on what has so far been achieved. There can be no assumptions that the hard work is over. On the contrary, it has just begun.
The re-entry of South Africa into the mainstream global economy offers glittering opportunities. But these can all too easily be thrown away by, in particular, a greatly over-heavy state hand across far too many areas of the economy.
South African business is already heavily burdened by government controls, overt or implied. Think labour. Think health. Think employment equity. Think skills. Think of the severe barriers against employing badly needed foreign expertise within South Africa. Think financial services. Think mining and minerals. Think administered prices. Think pensions. Think pharmaceuticals. Think a host of other issues and sectors.
Yes, there’s much regulatory action that can be justified. But the collective impact on business — and even more on local government, as a central example, where there is a desperate shortage of even half-qualified people to do the jobs required of them — takes a heavy toll.
The South African government would be well advised to heed the following comment: “Something is seriously wrong when teachers feel unable to take children on school trips for fear of being sued; when the Financial Services Authority, that was established to provide clear guidelines and rules for the financial services sector and to protect the consumer against the fraudulent, is seen as hugely inhibiting of efficient business by perfectly respectable companies that have never defrauded anyone; when pensions protection inflates dramatically the cost of selling pensions to middle-income people; where health and safety rules across a range of areas are taken to extremes.”
That speaker? Some reactionary non-transformed business leader in Johannesburg or Cape Town? No. Britain’s social democrat prime minister, Tony Blair, in June 2005.
When international economic growth hits another downward cycle, as sooner or later it must, South Africa will be highly vulnerable unless it recognises now the dangers of asking too much from business.
A key factor here is black economic empowerment (BEE). There is no dispute that in principle this is absolutely essential for long-term socio-political stability. Moreover, BEE can add to South Africa’s productive abilities by the mobilising of great reserves of innate business talent that was for generations effectively left to rot.
But BEE also imposes immense demands of implementation on corporate South Africa. That is all the more reason why other onerous, regulatory “diktats” to business should be subjected to strict cost-benefit assessment.
It is vital also that South Africa’s political leadership and the private business sector ultimately work together, even while often vigorously adopting differing positions on many issues.
The key point is that a sound working relationship between government and business is a necessary, though far from sufficient, condition for satisfactory and broadly sustained economic growth in South Africa. But that relationship is under great pressure in South Africa today.
President Thabo Mbeki is clearly aware of this. He noted last year: “There is a serious disjuncture between the political and business leadership in our country.”
He is definitely right about that. But Mbeki himself is central to that problem. Before dealing more with that, however, it must be stressed that Mbeki has also played an exceptionally crucial role in pushing the ANC into the post-Soviet economic world. The 1996 Gear (growth, employment and redistribution) macroeconomic strategy was politically driven by Mbeki.
This provided a formal “declaration of intent” that South Africa would pursue sound fiscal, monetary and currency management policies, would embrace the main tenets (but not every instance) of globalisation and trade liberalisation and would rely more on market-oriented than command economics.
That has largely, but far from wholly, been the case and South Africa is now seeing the gains. The prime credit lies with Mbeki.
But there have been worrying signs over the past few years that the more South Africa’s economic rating globally rises, as it has, the less committed Mbeki appears to be now to some critical areas of the original market-friendly thinking underlying Gear.
This at any rate is often the impression given by Mbeki — particularly in his weekly letter on the African National Congress (ANC) website. His view there is basically that any business-government rifts are virtually all by definition the fault of business.
Moreover, it sometimes appears as if Mbeki believes that no white business figure (other, maybe, than a few with established ANC pedigrees) has any moral right to criticise the government at all, even on the margin.
This was particularly evident in a 3 000-word broadside he launched in September last year on Tony Trahar, CEO of mining giant Anglo American.
In an interview with the United Kingdom’s Financial Times, Trahar said Anglo had “no plans whatever” to move its head office from “cost effective” and “business friendly” Johannesburg to London. Trahar added that political risk in South Africa was declining under Mbeki.
Financial Times readers might well have assumed Trahar was after a few brownie points from Mbeki. If so, they would have been totally wrong.
This was how The Economist summed up the situation after Mbeki’s fusillade at Trahar. “Compliment? How dare a white tycoon say any political risk remains in South Africa,” raged Mr Mbeki. “Anglo American had profited from apartheid when political risk was high and labour cheap. Now it fails to invest at home and bad mouths the country abroad.”
I have deliberately quoted from The Economist rather than from any of the many reports in the South African media. That’s because The Economist (and the FT) have highly influential readerships in the United States, Europe and Asia.
So the impressions that Mbeki gives through respected foreign financial publications are patently of major potential world impact.
There was plenty more in similar angry vein from Mbeki about (and it was about, not to) Trahar. In a move to close off the one-way row Trahar telephoned Mbeki to try and defuse the situation. Anglo also pointed out that it had actually invested over R100bn in the South Africa economy since 1999.
The furore died away, but without any public (or private, apparently) withdrawal or softening of any kind of any the charges levelled at Anglo as a group and Trahar personally by Mbeki.
On the surface that might appear to be the end of the matter. But the deeper situation is much more complex. South Africa still suffers from a chronic deficiency of foreign direct investment (FDI) in new job-creating factories.
Unctad (the United Nations Commission for Trade and Development) reckons South Africa gets at most about 70 per cent of the FDI flows that it “should” receive in terms of its economic size and sound macroeconomic management.
That estimate is, of course, little more than a questionable rule of thumb. But it does confirm that South Africa is falling way short in this vitally important area.
Furthermore, many South African economists reckon that Unctad’s 70 per cent figure massively understates the true shortfall between the FDI which South Africa receives and the amount it ought to be able to attract.
Indeed, the South African Reserve Bank reports that the yearly levels of FDI between 2002 and 2004 were respectively R7,9bn, R5,4bn and R3,8bn. But that’s really only small change.
Note that although South Africa has suffered for many years from inadequate levels of total new fixed investment (or “capital formation” as it is now officially dubbed) the level of such investment totalled over R226bn in 2004.
In other words, the FDI factor hardly features as a proportion. This is often not appreciated, however, because of confusion between total foreign investment in South Africa and the specific FDI content.
In 2004 South Africa did enjoy, though that’s arguably an inaccurate description, a huge inflow (almost R45bn) of easy-come-easy-go funds into portfolio investment. That means non-resident buying of South African equities and bonds and other non-productive assets plus bank deposits and the like.
This capital flowed in because foreigners liked the combination of high interest rates — especially when set against those in the United States (though the position has been changing there), the European Union and Japan — with the backing of a strong currency.
But as the gap between South African interest rates and those in the major industrial nations narrows, and as the rand becomes vulnerable to a fast rising deficit on South Africa’s current account of the balance of payments, the possibility of a sharp reversal of fortune on the portfolio investment side is ever more likely at some point ahead. Probably before late 2006, if not earlier. The Reserve Bank’s Quarterly Bulletin for June 2005 suggests, in fact, that this process may well have even begun.
The central fact is that the flood of portfolio investment in South Africa last year played a big role in pushing the rand exchange rate to excessive levels, but did little for the long-term economic fundamentals of South Africa.
There are a number of key reasons that explain South Africa’s lack of attraction for FDI, superficially surprising given the economy’s size and the improved rate of yearly economic growth (well over 3,0 per cent per annum on average between 2000 and 2004).
These negatives include the over-rigid labour law regime, the ongoing concerns about the level of state intervention in business activity outlined above, all potential implications for non-resident investors of BEE, and even some residual fears about possible nationalisation moves down the line.
Such fears are surely grossly over-stated. But recurring if invariably vague threats from within government about the use of expropriation policies in such areas as land and mining, inter alia, necessarily add fuel to them.
This, however, brings us back to Mbeki and his occasional bursts of anger at criticism, above all from sources that he believes either have no right to make such comments or are perceived to be tainted by direct or indirect association with the former apartheid regime.
Mind you, that attitude is perhaps inevitable. How often do politicians anywhere concede that they and their colleagues could be a central part of a problem?
But Mbeki is inclined to arrogance and to an intemperate reaction to criticism, above all to even mildly expressed reservations from within South Africa except from sources without impeccable ANC “struggle” connections.
This was particularly evident in the Trahar incident noted above. But Mbeki’s tirades against some politically innocuous figures — such as rape victim Charlene Smith and Barloworld economist Pieter Haasbroek — who have made public utterances that have angered him definitely suggest he would be advised on such occasions to take a much more laid-back approach.
Verbal assaults from the president in such instances tend only to raise questions about his general composure. There’s no real importance in any one incident (Trahar aside, perhaps). But collectively they add up. And in a highly competitive world contest for FDI South Africa can’t afford to give anything away.
Fortunately, however, Mbeki also has a habit of accepting previously unpalatable truths when he finally sees their remorseless logic. An anonymous “discussion document” has been published on the ANC website that, after an obligatory re-run of some familiar tirades against sundry “enemies of the people”, effectively urges that South Africa’s over-rigid labour policies should be made much more flexible to promote increased employment. This is precisely what so many market-oriented economists have long been vainly asking for.
A relaxation of existing labour policy has such profound implications, for the broad constituency of the ANC as well as the country’s economy, that it must have had the ultimate authorship of Mbeki.
Another plus internationally for Mbeki has been the decision to fire Jacob Zuma as South Africa’s deputy president. True, Mbeki hardly had any choice after the damning court evidence of the financial links between Zuma and convicted fraudster Schabir Shaik. But the populist support for Zuma from within the Cosatu trade union federation and the ANC Youth League did make things politically harder for Mbeki.
However, this raises the question of just how serious the level of political and other corruption is in South Africa — and how much it matters.
The global NGO Transparency International, which monitors corruption, finds that South Africa is down at 48 of the 140 nations surveyed, with the highest ranked countries (essentially the Scandinavians) the least corrupt and such notorious nations as Nigeria at or near the bottom.
But the links between corruption and economic growth are rather blurred. For example, South Africa is regarded as fractionally less corrupt than South Korea and a lot less corrupt than China. But these are two of the modern world’s most extraordinary success stories.
The cynical but far from original conclusion must be that nations that do well (above all, in Asia) can afford to incur some image of corruption. But that does not apply to countries in Africa, which suffer from general world scepticism about their economic prospects.
On that basis it was vital that Mbeki acted over Zuma as he did.
