What has driven our GDP growth?
The main measure of a country’s economic performance is the growth in its gross domestic product (GDP) from year to year in real terms (after allowing for inflation). This is often held up as the primary measure of success of a country, although it is important to look at issues such as poverty, GDP per capita, gini coefficient, education levels, crime, corruption and general happiness as well. In this blog, I have a look at SA’s GDP growth performance over the past 35 years from 1980 to 2014. This period spans the 14 years prior to the end of apartheid and the 21 years thereafter. During this period we had five presidents and it was extremely eventful, especially during the period prior to and after the transition to majority rule. I include a very busy chart at the bottom of the blog – you may have to click on it to see all the useful detail.
During the entire 35 year period, SA had an average GDP growth of 2.4%, which puts us in line with developed economy growth rates and lagging behind developing economy growth rates, in some case meaningfully so (e.g. China). The average growth during the final 14 years of apartheid was 1.6% and the average since majority rule has been 3.1%. The president that was at the helm when our economic growth was the highest was Thabo Mbeki who presided over an average growth rate of 4.1%. The lowest growth rate was an average of 0.6% during the tenure of FW de Klerk. Nelson Mandela at 2.7% outperformed PW Botha at 2.2% and under Jacob Zuma, we have seen average GDP growth of 1.7%, which has been particularly weak when compared with the much stronger growth under Thabo Mbeki.
The blame for weak economic growth is often placed at the feet of the government of the day and in many cases this is rightly so. It is the job of government to create an environment that is conducive to economic growth. First and foremost, it is important that a country is peaceful and that economic activity is not disrupted due to violence. The NP government prior to majority rule often failed to deliver this and it is no wonder that 3 out of the 4 recessions (periods of negative GDP growth) experienced by SA over the past 35 years fell during the pre-majority rule period. The country has certainly become more peaceful over the past decade, but there are risks to the status quo, including xenophobic violence, service delivery protests and industrial action.
In addition to ensuring a peaceful environment, it is also important that government delivers an environment where industrial action by unions does not put undue pressure on the economy. This has been a recurring problem in SA, both prior to and after majority rule. However, this seems to have become a greater problem in SA during the presidencies of Thabo Mbeki and Jacob Zuma. The fact that the major union federation, Cosatu forms part of the governing alliance limits the ability of government to effectively crack down on industrial action, although it has facilitated long-standing agreements in the past. It is time for such agreements to again be concluded to avoid continued disruptions in an environment of weaker economic growth.
One of the main reasons why economic growth recovered so strongly in the mid-1990s compared with the last decade of apartheid was that foreign direct investment (FDI) returned to the country after being forced out as a result of sanctions. Investment in SA continued well into the 2000s, but there are now clear risks to such investments continuing at the same pace. The main hurdles to FDI are industrial action, electricity supply and weak commodity prices. Other contributing factors that have been put forward as risks to FDI are uncertainty surrounding ownership requirements (especially in the mining sector) and corruption, although I consider these as secondary factors. In addition to forming a new compact with labour unions to limit industrial action, it is imperative that government and Eskom successfully deals with the electricity crisis that we are experiencing. I have addressed issues surrounding this topic in my blogs on private electricity producers, electricity-hungry aluminium smelters and suggestions surrounding forming joint ventures in the sector.
By far the most important factor determining relative rises and declines in GDP growth over the past 35 years appears to have been commodity prices and whether those rose or fell in the preceding years. The recessions we saw over the past 35 years all seem to have been influenced by this. The 1982 to 1983 recession was preceded by a 30% fall in gold and platinum prices in 1981; prior to the 1985 recession, gold and platinum prices fell by around 20%; platinum prices fell by more than 30% over the 2 years prior to the 1992 recession; and our last recession in 2009 followed a collapse in the platinum price in 2008. It is also interesting to note that the average increase in gold and platinum prices during Mbeki’s presidency was over 12% while for de Klerk they declined on average, explaining to a large extent why Mbeki presided over the highest and de Klerk over the lowest average economic growth. Under Jacob Zuma, we have seen 2 years of declines in gold and platinum prices during 2013 and 2014 and this has not abated during 2015. It is therefore important to see the weaker growth under president Zuma in this context.
However, one thing that the ANC government has not been able to sustainably achieve since majority rule in 1994 is to lift trend economic growth to new levels. GDP growth rate exhibited a brief period of strong growth during the mid-2000 (averaging 5.5% from 2005 to 2007), but this was more a result of high commodity prices than due to the necessary structural changes needed to sustain the trend. The main structural issues facing SA are a low savings rate, poor education outcomes, a lack of skills, cost and availability of labour (made worse by unions and industrial action), a strong and volatile currency and increasing pressure on infrastructure (especially electricity supply). I have addressed many of these issues in previous blogs, including the SA education system and the need to attract more skills in conjunction to protecting certain industries.
In addition, in an environment where commodity prices are under pressure (and could remain under pressure), it highlights the need for SA to reduce its dependency on raw commodity exports. It is imperative that more is done to add value to raw commodities before exporting them while at the same time investing in parts of the economy that are less dependent on commodity prices.
Now is a time for action, but the problem seems to be that government is either 1) satisfied with the status quo in certain areas (most problematic is education outcomes); 2) is having to operate in crisis mode (electricity supply); 3) is experiencing bottle necks with programmes that could make a difference (the National Development Plan); 4) or is taking steps that decrease (cadre deployment) or not taking steps (fighting corruption) that could increase efficiency. As I have highlighted in a previous blog, the SA government is akin to an undervalued share. To revalue, we either need performance to improve from current management (think of your legacy President Zuma), we need new management to come in (start speaking out and doing more vice President Ramaphosa), or we need a hostile take-over (more power to the opposition). I believe that the odds are in favour of moves in the right direction on all three of these fronts, but I am concerned at the time it may take to lead to positive outcomes.
What do you think? Do you accept that weak commodity prices have been a serious drag on our economic growth? Do you have other ideas for lifting trend-growth in SA? Do you think the ruling party will feel the necessary pressure to improve the situation? Do you believe they are capable? I would love to see your feedback.
In the mean time, keep your talking straight!