Policy missteps and the mismanagement of public resources between 2009 and 2017 could have cost South Africa R500 billion in potential GDP growth – while also losing out on as many as 2.5 million new jobs.
These are some of the findings in a new research note published by the Bureau for Economic Research (BER), which used rudimentary calculations to work out how much South Africa lost out on through economic stagnation after the 2009 financial crisis – when it could have tracked the same growth trends as its peers.
While the note uses relatively simple ‘back-of-the-envelope’ calculations, it does provide insight into the order of magnitude of the cost of the stagnation in the SA economy during that period.
“Since the financial crisis, domestic real GDP growth has underperformed relative to both our emerging market (EM) peers and average global growth,” said Harri Kemp, an economist at the BER and author of the research note.
“Since 2014, domestic growth has also come in lower than the average for advanced economies. The reasons for the malaise have been well documented, with the lacklustre performance of the SA economy post-crisis ascribed to both external (exogenous) and internal factors.”
Reasons for decline
“In our opinion, domestic factors, rather than external factors, explain the lion’s share of the underperformance,” Kemp said.
“These include falling confidence, widespread policy uncertainty, mismanagement of state resources, and various other structural constraints which conspired to weigh on domestic economic activity. This is borne out by the fact that domestic growth tracked the global average quite closely pre-crisis, but began diverging in 2010.”
Kemp’s research also attempts to quantify the cost of these “lost years” in terms of the size of the economy, employment growth and government revenue.
Based on relatively simple assumptions, it is determined that domestic real GDP could have been between 10% and 30% higher by 2017, he said.
Under the assumption that the domestic growth trajectory matched that of our emerging market peers, real GDP would have been 29.3% (or R915 billion) higher.
“Under the more realistic assumption that we tracked average global growth post-crisis, the domestic economy would have been 15.4%, or R481 billion, larger in 2017,” said Kemp.
“The impact of the post-crisis malaise can also be assessed in terms of foregone employment opportunities associated with below-par domestic GDP growth,” said Kemp.
“After declining in the decade before the financial crisis, the domestic unemployment rate has ticked up steadily between 2010 and 2017 as domestic economic activity was insufficient to absorb new entrants into the labour market.”
The research shows that the economy could have created between 500,000 and 2.5 million more job opportunities over the 8-year period.
“This means that the unemployment rate could have been 5 to 15 percentage points lower than the 27.5% recorded in 2017,” said Kemp.
He noted that persistent tax revenue shortfalls over this period, partially linked to the underperformance of the SA economy, contributed to the deterioration in the fiscal situation.
“Under a different post-crisis growth trajectory, one closer to that of our peers, and a sustained improvement in collection efficiency, total tax receipts over the 8-year period would probably have been higher by between R500 billion and R1 trillion,” he said.
Unfortunately, the outlook for economic growth does not bode well for a strong recovery.
The latest BER forecast pegs growth in real GDP at just 0.6% for 2018 and 1.5% in 2019.
“Based on the BER’s current forecasts, the 2010s look set to be the worst growth decade in SA’s post-WWII history,” said Kemp.
For the period 2020 to 2023, growth is expected to average just 2.4% – significantly below the long-run average of 3.5%.
“It will take several years to undo the damage done over the post-crisis period through domestic policy missteps and mismanagement of public resources,” he said.
“The new administration under president Cyril Ramaphosa needs to urgently reignite confidence through clear and well-articulated policy in order to boost private investment and consumer spending. Only then can SA start along the path to recovery.”