AS SOUTH AFRICA enters its second post-apartheid decade, the possibility that it will become a high-growth dynamic economy remains in doubt. Without an economic growth rate that soaks up labour surpluses, the republic cannot overcome massive unemployment and the sort of poverty rates that lower confidence among investors about the political future.
The ANC government is on a high – it won the bid to host the football World Cup in 2010, celebrates 10 years of democracy this year, and was re-elected with 70% of the vote in the April general election. A further boost to government confidence is the strength of the rand, which has appreciated by 50% over the past 30 months.
In response to worries that government delivery is not fast enough and that its push for ownership and participation in the economy to reflect racial demographics is also tardy, the ANC is becoming increasingly activist. The worry is that it might view macroeconomic stability as sacrosanct but not take the same view of all free market precepts.
Even on the most optimistic projections, South Africa's economy will still be relatively modest even if it proves to be the engine of regional growth. By 2050 Goldman Sachs forecasts that it will only be 20% the size of Russia's.
Goldman points to the Aids epidemic as a damper on population and growth rates. On a 10-year outlook, Goldman found that South Africa would deliver 5% average annual growth "if the right policies were in place" and 3.5% over the next 50 years.
Lagging the labour market
Even this may be optimistic, though. The economic growth and job-creation record since 1994 has not been propitious. Average annual growth since 1994 of 2.7% is much better than in the previous decade but is well short of the 6% required to absorb new labour market entrants.
Last year growth was 1.9% and in the budget presented in February the treasury said it expected growth of 2.9% this year and 4% in 2006. Local economists have begun to shave the projection, in part because of the effect on exports of the strong rand.
Investment over the past decade has been sluggish, and during the 1990s was lower than in the 1980s. Net investment has declined from an average of 14.6% of GDP during the 1970s to 2.3% in the early 1990s. Average annual growth in the capital stock has slumped from 5% in the 1970s to 1.3% since 1994.
Because of growing capital intensity of economic activities, even high levels of investment might offer largely jobless growth. The unemployment rate has continued to grow since 1994 and is between 30% and 40% depending on the definition used.
Some economists stress rigid labour markets point to skills shortages as the main cause of this. The government insists that stricter labour laws introduced since the end of apartheid making it harder to fire workers are not the cause of high unemployment. But the IMF has repeatedly pointed to the labour laws as a significant cause, and much of the business community takes a similar view.
What the labour laws have certainly done is close down the chances of South Africa's becoming a labour-intensive manufacturing base that could compete head on with Asia. Taiwanese clothing factories serving the regional market have located in neighbouring Lesotho rather than South Africa because of lower wages and more business friendly labour laws.
One result of the persistently high level of unemployment is that there have been no substantial inroads into poverty. On top of that, the HIV/Aids epidemic has already greatly exacerbated the difficulties of improving living conditions, and according to actuaries South Africa has some way to go before it feels the full demographic impact. Based on extrapolation from the annual surveys at antenatal clinics, around 20% of adults between the ages of 15 and 49 are HIV positive.
After considerable resistance, the government eventually agreed to the use of anti-retroviral therapies a few months before the elections in April. The roll-out is in its early stages and it will be some time before there is any indication of the impact.
One clear area of success for the government in the past 10 years has been in the provision of housing, electricity, and water. The number of houses built is impressive but mounting concerns are being voiced by housing policy experts about their quality. The move to formal housing is also putting pressure on family budgets because of the burden of water and electricity charges.
Defying what would have been catastrophic conflict and the successful pursuit of Washington Consensus economic policies are necessary but not sufficient conditions for building confidence, delivering services and creating a winning economy.
"The last 10 years were fairly easy for economic policy," says Goolam Ballim, group economist at Standard Bank. "It is easy to improve fiscal balances when you are the party that delivers freedom and hope." He continues: "For me South Africans are preoccupied with looking at the foundations. We should ensure the house has a roof."
There is little doubt that the ANC has indeed laid the foundations of macroeconomic stability. By contrast, the apartheid regime government did not practise fiscal restraint. In the 1992/93 tax year the fiscal deficit was 7.3% of GDP. As a result of restrained spending and improved tax collection, the deficit had been reduced to 1.1% of GDP by 2002/03.
Mainly reflecting a trend towards a marginally more expansive fiscal policy driven by infrastructure spending and social uplift, the Treasury's latest forecast for the 2003/04 budget deficit is 2.6% of GDP.
Since the adoption of a three-year rolling medium-term expenditure framework in 1998 there have been few surprises in the budget numbers, except a deficit number that is usually lower than expected.
The other dimension of macroeconomic stability has been monetary policy. Since 2000 the Reserve Bank of South Africa, the central bank, has used an inflation target that is set by the government. The rand crisis of 2001 was an important reason it missed its earlier targets but for each of the past 10 months it has met its 3% to 6% CPIX inflation target. Bank watchers believe the central bank will keep rates where they are this year.