Tough Times

South Africa’s economic performance is highly correlated with that of our traditional economic partners, including Britain, Western Europe the US and Japan. Evidence of the extent of this economic inter-relatedness follows from the fact that each time Europe has gone into recession in the last two decades, South Africa has followed. Thus, whilst internal factors – such as the political landscape, considerations of nationalisation, currency volatility and stability of electricity supply – will matter to South Africa’s economic performance in 2012, external factors will matter at least as much.
THE PAFTOTY SCENARIO

Sadly, on the external front, there is not much reason for optimism from our traditional trading partners this year. These historically advanced economies remain mired in structural problems that include huge debt mountains in the private and public sectors; generous social welfare spending commitments that are untenable; demographic decay; and fiscal and monetary policies that have proved ineffective in the aftermath of the global financial crisis. We refer to this quagmire of malaise in which the advanced economies find themselves as a PAFTOTY scenario, where the acronym stands for “pissing around for ten or twenty years”.

The PAFTOTY scenario borrows from Japan’s experience of the last twenty years, which has seen the economy moribund despite furious stimulatory policy efforts. Amongst others things, Japan’s economic stagnation is explained by the same factors that appear in many other advanced economies today: vast indebtedness, demographic decay and policy inadequacy.

At present, 65 percent of the world’s economic footprint is represented by these advanced, but troubled, countries. Thus, as things stand, we are facing a decade or two of “polishing the brass on the Titanic”, effectively going nowhere economically in the advanced world. For those exposed to the South African economy, this is a reason to be worried.

SINFOOH DRIVERS

Whilst the economic recovery of the developed world over the last two years has been anaemic, many other economies have seen swift growth. China, India and Brazil – the clear drivers of the emerging economies – grew by 7.5% in 2010 and an estimated further 6.0% in 2011. At this rate of growth, these economies are doubling in size every decade. In this vein, the African economy continues to grow quickly, now having grown faster than Asia in eight of the last ten years. This dynamism in emerging markets gives rise to a second acronym – SINFOOH – which stands for “the sky is not falling on our heads”.

THE THINGS THAT MATTER

In spite of the gloomy outlook for many of the advanced economies in 2012, there is a raft of countries which boast excellent fundamentals in six factors which correlate with socio-economic (rather than economic) welfare. 

  1. A high savings rate. This funds a high rate of investment in fixed capital that, in turn, translates into economic growth.
  2. A favourable demographic structure. If more people are entering the workforce than leaving it, this adds to the nation’s productive capacity and economic welfare.
  3. An improvement in the nation’s relative physical health. The state of a population’s wellness, and ongoing improvements in access to healthcare and healthcare infrastructure, lead to further enhancements in socio-economic welfare.
  4. Rising education levels with improved access to education and the education infrastructure. The more advanced the education a country’s population, the greater its likely rate of economic growth.
  5. Improving quality of a country’s institutions and policy, including monetary, fiscal and industrial policy. Transparent policy-making and policy stability contribute as much to improvements in economic welfare as policies themselves. In essence, a transparent and stable policy setting translates into greater investment certainty.
  6. Finally, the degree of economic openness. The extent to which the factors of production (goods, services and capital; people and ideas) are able to move freely between nations plays a role in determining growth and economic performance.
BEYOND BRICS

There are at least 20 countries which have these factors in abundance, including all five of the BRICS (Brazil, Russia, India, China and South Africa) which represent a combined population of three billion people. But there are others countries, like Peru, Chile, the Philippines, Vietnam, Iraq, Egypt, Nigeria and, most recently, Mongolia that also are able to tick the boxes. What this means is that, with a richness of success factors and proper application, these factors can be processed into rapid socio-economic advancement. Notably, a region showing signs of improving success factors is sub-Saharan Africa (SSA).

Given this global backdrop, we see some modest tailwinds that have helped the South African economy to achieve reasonable growth in 2011, possibly of the order of 3.0% for the full year. Whilst this is better than many of our advanced counterparts, for South Africa to effectively address our structural unemployment problem the economy needs to grow at 10% per annum, far in excess of recent figures and well-above government’s target of six percent. To move the economy from pedestrian and stale to greater dynamism requires bold policy steps, and vibrant economic partners. The most obvious option in terms of the latter aspect would be for the South African economy to integrate with the SSA region.

SUB-SAHARAN AFRICA: FILLED WITH HOPE

In 2000, The Economist ran the now-infamous cover labelling Africa “The Hopeless Continent”. Since then, however, Africa’s progress has been anything but hopeless. Over the ten years to 2010, Africa’s annual output grew by 4.7%, almost twice as fast as the previous decade and much faster than the global average growth rate of 2.6%. In sum, SSA represents an extraordinary partner to help the South African economy achieve much faster economic growth.

The sky is indeed not falling on our heads. Cumulative BRICS growth over past decade totals $12 trillion, equivalent to the size of the US economy. Assuming the same growth rates apply, the BRICS economies would replace Italy ten times or Greece 40 times over the next decade.

WHAT ABOUT SOUTH AFRICA?

So what are the implications for South Africa? This country needs to ensure that the six factors listed above are embedded in our society, our economy and our political landscape. We need to be effectively integrated with the rapidly-growing world economies – not just being among them, but working together with them.

We stand on the cusp of 2012 with a new set of policy initiatives launched by the South African government. But in reality we don’t need new policies. As Demosthenes said 2000 years ago, our three most important needs are “action, action and action”. It is critical that South Africa should avoid slipping into a PAFTOTY state – a risk that we run if we continue toying with policy rather than implementing it. South Africa has many positives going for it – a successful tourism industry; the homecoming revolution; superb fiscal and monetary policy discipline; vibrant neighbours; and a windfall from the R1 trillion infrastructure spending pipeline, which has one of the highest job multipliers and substantial spill-over effects. In this setting, South Africa has an exceptional civil society and a world-class private sector.

MY THREE WISHES FOR 2012

So, if I were to be given three wishes for South Africa in 2012, my list would be simple: “education, education and delivery”.

Without education, all else is wasted. We need to start at the very earliest point of education, in the foundation phase, and overhaul the system all the way to Matric. It may take 15 years to achieve, but we will grow a set of world-class matriculants who will change the face of South Africa for ever. We have seen countless examples of countries which have used education to rise above their history; countries such as South Korea, Rwanda, Singapore and Vietnam.

You may not be able to change your past, but you can change your future.