South Africa’s economic slowdown is not cyclical – we have a massive structural problem, writes UP economics professor

Posted on July 27, 2020

In economics we distinguish between a structural or cyclical slowdown; the latter is usually temporary.

A typical business cycle in economics is cyclical and looks like a sine curve: it has peaks and troughs at regular intervals, and can be likened to the seasons: after winter comes spring, then summer, autumn, and low and behold, winter again. It is predictable.

My body weight is also cyclical: over the festive season I eat and drink more than usual and gain a few kilos. Then in January I hold back a bit, start exercising more, and the weight gets back to equilibrium. This is cyclical weight management, and I’m in control of it.

However, if you watch the TV programme My 600-lb Life (My 600-Pound Life) you see a person who lies in bed 24/7 and someone needs to feed them. The person is often addicted to fast food and has eaten too much of it for a lengthy period of time, and now needs a very strict weight loss programme or even surgery to become normal again. The situation has developed into a structural problem, and the person will not get back to “normal” without changing the structure of their behaviour, and they often even need surgery.

Now, if we look at a typical business cycle in economics, it follows a sine-like curve. A country could grow fast for a while; it then needs to invest more and employ more labourers, which puts upward pressure on wages and capital, rental prices, and interest rates. Higher prices reduce the country’s competitiveness in the world and demand for its produce decreases. Production decreases, and firms need fewer labourers. The economy contracts and slows down; prices and interest rates decrease. Then it becomes affordable to borrow money again for renewed investment, and soon the economy grows again. If you plot GDP over time you will see the sine-like curve.

This, however, is not the typical picture in South Africa. The next upswing of the economy is not around the corner. Interest rates and prices are at the lowest levels in decades, but investors do not have the confidence to invest in the economy, as would be the normal thing to do. 

The body of the South African economy consists of firms employing capital and labour that should produce competitively in the world. This body is supported by a government to whom they pay taxes and on whom it relies to deliver electricity, water, roads, police and other essential services.

However, this body is sick. It feels weak and wants to lie in bed like someone weighing 600 pounds. The majority of labourers have been educated poorly, because the primary and secondary education system in dysfunctional, but they demand high wages which do not match their contribution towards the output of the firm. This is a structural problem. The whole system is not functioning. The government is corrupt and dysfunctional. Instead of making it easy for business to prosper, they make it difficult. The red tape to either start or maintain a business is overwhelming. Municipalities do not pass the Auditor General’s requirements; officials earn high salaries, but water, sewerage and electricity services are not provided adequately, if at all. Eskom is owed billions of rands.

Within this context, let’s imagine China, which went into the COVID-19 pandemic first, comes out of it first, and it starts growing at 10% per year. This is potentially fortuitous for us because it will significantly increase China’s demand for primary resources, of which South Africa has plenty. China might also have an increased demand for manufactured goods from countries that can provide them fast and at competitive prices.

What could be fortuitous won’t happen because a bloated, immobile body cannot achieve this; it has serious structural problems throughout the whole economy that prevents productivity movement and growth. If, for example, our railway system does not function properly to get the primary resources to our harbours, or the harbours do not function properly to upload the resources swiftly onto the big freight carriers, it is a structural problem. If our manufacturing plants are not able to employ educated, committed, skilled workers who can perform whatever is required with a high degree of efficiency and reliability, and deliver what the Chinese firms require, it is a structural problem. And they will seek other markets.

The low levels of growth in South Africa in so many ways are undeniably structural. This is not going to get better without major behavioural changes and restoration. This is not a regular sine curve with peaks and troughs that we can manage like seasonal weight gain and weight loss. We have been experiencing low growth for a decade or more, without a decrease in the unemployment rate. We are dealing with a 600-pound body. We need a surgeon to intervene with a major operation, and we have to embark on a long-term recovery programme, with a strict diet and exercise.

Tito Mboweni is our economic surgeon and he needs to be given the full authority to do what is required. We are lucky to have the right Minister of Finance, but he has to be given the green light to implement all the policies he advocates and in which he believes, to restore our country to some sense of normality, productivity and growth.

Professor Jan H van Heerden is Professor of Economics in the Faculty of Economic and Management Sciences at the University of Pretoria.

 

- Author Professor Jan H van Heerden
Published by Buyi Nkonyane

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