Can South Africans Handle Hard Times?

This Brief suggests methods that may be adopted in an effort get through the hard times ahead.

The International Monetary Fund’s World Economic Outlook Update published on 19 January estimates and projects growth in South Africa as follows:

2014    -    1.5%
2015    -    1.3%
2016    -    0.7%
2017    -    1.8%

These projections are lower than before. The National current National Treasury projection for 2016 is 1.7%. The Minister of Finance will announce a revision of this projection when he presents the Budget on 24 February.  

For population growth, we have two estimates. On the one hand, the United Nations projects a population growth rate 0.90% per annum between 2014 and 2017. On the other, Statistics South Africa, estimated population growth between 2014 and 2015 at 1.65%, having risen in recent years. On both views, average living standards will fall in 2016, and if Statistics South Africa is to be believed, they fell in 2014 and 2015 as well.

Why should this matter? The projections imply that the drop will be no more than 1.3% over three years. Such a drop will be uncomfortable but not catastrophic. British democracy survived a public sector wage cut of 10% in 1931. Greece has seen a 26% drop in real per capita income since 2007, and its democracy has survived. The United States saw a 3.6% drop in real per capita income between 2008 and 2009. 

Perhaps we shall get through the next few years relatively unscathed in social and political terms. If we do, this is because we have successfully followed five maxims:

  1. Be aware that fault lines open in hard times. South Africans fight like rats in a sack in hard times. This is a result of a high inequality and our political past.  In good times, most people move forward at a pace which softens conflict. In hard times, conflicts get worse and our fragilities expose us to danger. Greater social and political conflict can impact back on economic performance leading to a vicious downward spiral.

Consider a passage written by Trudy Makhaya in Business Day on 19 January 2016:

A sense of entitlement. Rent-seeking. Poor work ethic. Crony capitalism. Incompetence. Lack of merit. Victimhood. Race-based policies. These are words and phrases that I, and many others, use as we grapple with what ails the South African economy and society. For a high-growth, inclusive and sustainable economy to flourish, we need clean institutions, efficient business and productive employees.

But these words and phrases have also become code words, part of a lexicon that is deployed to demonise black aspiration.

But one should not stop there.  Other terms like ‘racism’ are also coded, with the assumption that racism is a one way street.  It isn’t. Vuyiswa Bhefile Ka Hlazo posted the following on Facebook last year:

You know I can’t wait for the day the majority of this country would say ‘we have tolerated enough your white s*** racist tendencies. ..I will with no mercy cut their tongue out with a machete.  [IOL 26 October 2015]

The author is employed in the Oudtshoorn municipality and his posting resulted in a disciplinary enquiry, in which he showed remorse.  He was given a written warning.

There are certainly South African racists. Just as there are crony capitalists and rent seekers. 

Dangerous animosities are building up.  Politically exploiting them would be reckless in the first degree.  

  1. Don’t score own goals. Leave aside Cabinet reshuffles and their aftermath. There are other things to talk about.  

We entered the global financial crisis with our banks virtually intact and quite a bit of fiscal space, built up by prudent policies in the preceding ten years. In retrospect, we used up this space too quickly and the consequence has been a rapid build-up of public debt.  Moreover, we have been told more than once that the line will be held in public service wage negotiations, only for it not to be.  The consequences have been felt across the entire economy.  

Ratings agencies have now announced that they will be watching our fiscal discipline carefully. We are right on the cusp of junk status. Standard and Poor have us on a BBB- rating with a negative outlook. Konrad Reuss, the sub-Saharan Head of Standard and Poor, is reported to have said on 14 January 2016 that South Africa would be downgraded if further policy mistakes are made [1]. It is a warning we need to keep front and centre. Brutal choices await us. 

Tighter fiscal policy is coming. There will almost certainly be significant tax increases in the coming budget, and an attempt to lower the budget deficit.  Monetary policy is also under pressure. The Governor of the Reserve Bank has already warned that inflation is about to breach the upper limit of the 3% - 6% target range. Inflation is fairly easily propagated in an economy with limited competitiveness, such as ours. And propagated inflation is likely to be accelerating inflation. A depreciating currency has introduced a price shock into all our imports. Tighter monetary policy is coming.

Rising taxes and rising interest rates will reduce household disposable income, which is likely to drop faster than GDP per capita. One of our eleven official languages has a word of advice: Vasbyt.

The government has also manoeuvred itself into a corner over the national minimum wage. A period of austerity is the worst time to introduce it. Moreover, it raises a sharp conflict between economic and political rationality. Julius Malema knows this. He has set up his tanks in the government front garden, demanding a national minimum wage of R 4 500 per month.

One thing the National Treasury might usefully do is to eliminate contingency funds entirely from the Medium Term Expenditure Framework. This would harden the budget constraint, specifically requiring that allocation of new funds for one purpose will immediately be felt to have an opportunity cost for other purposes. 

  1. Accept that you cannot placate noisy interests with squirts of cash for a while. An incompetent engineer faced with a badly functioning machine may attempt to hammer on a plate here because steam is coming out where it shouldn’t, or squirt in oil there because there are grinding noises or red hot gears. A competent engineer switches the machine off, dismantles it to the extent necessary and fixes it properly. Better still, she carries out preventative maintenance, so the problem does not arise.

A case in point is the uproar over university and student funding. The warning signs have been there for some time, but they weren’t acted upon.  And when the hurly-burly’s done, when the smoke of non-negotiable demands and pseudo-solutions dissipate, it will become clear that no-one – not the National Treasury, not the Department of Higher Education and Training, not the universities and not the students – will get exactly what they want.  The best that can be achieved is an uncomfortable working compromise.

  1. Focus on the essential task of keep the ship afloat and moving forward in heavy seas.  If you can enter in your imagination the world of a hundred years ago without wincing, keep a copy of Joseph Conrad’s story Typhoon at their bedside. If you can’t, don’t open it.  
  2. Communicate. The government is accountable to the people. It particularly needs to explain difficult circumstances to them and the tough choices which need to be made. Denialism and evidence of incomprehension are equally damaging. They leave a vacuum all too easily filled by misperception and hysteria.  

You enjoyed the movie Sinister 2? Should these maxims be breached, you can look forward something even more spectacular: the international economic relations tables in the South African Reserve Bank’s Quarterly Bulletin.

Charles Simkins
Senior Researcher   

[1] - Creamer Engineering News, 21 January 2016