Will SA become a failed state by 2030?

JANICE ROBERTS Editor, MoneyMarketing

South Africa is heading towards economic and political collapse by 2030, unless it changes its economic model. That’s the conclusion of a report written by Claude Baissac, CEO of Johannesburg-based risk consultancy, Eunomix.

The socio-economic consequences of COVID-19 have been brutal for the country. “South Africa entered the pandemic highly vulnerable, weakened by a ‘lost decade’ of abusive governance and poor growth,” Baissac writes.

In April 2019, he was quoted by Bloomberg as saying that the likelihood of arresting SA’s decline was limited by “the unsustainable structure of South Africa’s economy, in which economic power is largely held by an elite that wields little political influence, a product of its apartheid history and its status as one of the world’s most unequal societies. The ability of politicians to make the unpopular decisions needed to boost growth is hampered by this imbalance.” Eunomix’s pre-pandemic model forecasted that South Africa would fall into lower-middle income and very high fragility in the early-2030s. The coronavirus pandemic has sped up the clock.

Apartheid state

The report, described by Baissac as “a strategic, structural analysis of the fundamental impediments to growth in this country,” finds that the design of the apartheid state to exclude black people led to the creation of one of the most unequal societies in the world. “The apartheid elite was incentivised to resist large-scale labour mobilisation because doing so would have shifted the politicaleconomic balance toward the majority. The regime feared a black middle class as much as it did a general uprising.”

While the advent of democracy in 1994 ended formal political exclusion, the ANC replicated a central attribute of apartheid by spurning job-intensive growth policies. Instead it raised wages and supported the poor through welfare. “While apartheid suppressed the majority, democracy has subsidised it, but both locked it out of the productive economy, and in doing so precluded durable development,” Baissac writes. “Rejection of labourintensive export-orientation as a cornerstone of development has been the foundational mistake of democratic South Africa.”

Zuma administration

The report finds that the administration of former president Jacob Zuma inherited a relatively sound economy only to face global recession. Indifferent to policy detail, opposed to fiscal prudence, Zuma seized the moment by focusing on expanding the role of the state. In so doing, he had the support of the ANC’s left “who hungered for the state-centrism it believed Mandela and Mbeki had abandoned”. The fragile foundations of growth were destroyed by worsened policy, fiscal recklessness, institutional capture and largescale corruption.

Ramaphosa’s course

Buttressed by a left remorseful of its support to Zuma on one side and nationalists on the other, Ramaphosa has sought a course in-between. “Adopting superficial pro-growth discourse, he has maintained the strategy and thus accelerated social, economic and political adversity.”

Baissac explains that macroeconomic policy is in the hands of the right in the ANC. “They tend to be more orthodox and they really do believe that you can create economic growth through macroeconomic policy.” Microeconomic policy has been given to the left “and they are absolutely opposed to any of the macroeconomic policy approaches of the right, as well as any changes to the cost of doing business.” He believes that both approaches are flawed and could hasten the country’s downturn.

The report states that South Africa’s shallow economy rests on a small working population that is burdened by high debt and taxes, while unemployment, poverty and inequality are at record levels.

“Agriculture and mining, pillars of the economy, have been relentlessly targeted for transformation, handicapped by unceasing policy change and uncertainty – not to mention the Eskom crisis.

“In doing so, the ANC has sapped the foundation of its mineral-energy complex development focus. It has reduced the growth, revenues and unemployment contributions of these sectors, turning a vital source of competitiveness away.”

For Baissac, the COVID-19 pandemic is the last nail in the coffin of strategic fiasco. “We can’t carry on like this,” he tells MoneyMarketing. “We can’t have no growth, very low investment and a decline in employment in all the productive sectors, while maintaining the labour regime, as well as perpetuating a welfare state and simultaneously investing in infrastructure. It just can’t happen.”

‘Dual-track’ strategy

His recommendation is for the country to adopt a ‘dual-track’ strategy of developing significant levels of social support bolstered by a vigorous special economic zone (SEZ) policy, which promotes growth and employment, even if this is at lower wages.

He explains that many successful late-developing nations adopted dual-track economic development, “one foot in statism and the other in selective marketreform, one foot in protectionism and the other in liberalisation.” Deng-Xiaoping, who was the paramount leader of the People’s Republic of China from 1978 until 1989, famously called this prudent approach ‘crossing the river feeling for stones’. Baissac states that in none of these cases did export-oriented labour-intensity replace established strategies – whether collectivist, importsubstitutive, or capital-intensive export-driven.

“Restructuring, rather than reform, is the shared attribute – a progressive process set over a decade or more, that gradually gains acceptance and support through the polity as labour-intensive export-led growth makes its case through employment creation and growth acceleration. Eventually, the tracks merge into diversified economies with low levels of unemployment, more sustainable fiscal resources and high levels of social capital providing improved socioeconomic resilience.”

Baissac acknowledges that the dual-track strategy’s initial growth would be low: “I don’t see any scenario in South Africa where you’ll have economic growth in the next two, three, or four years.”

Special Economic Zones

The seed of a dual-track strategy for South Africa that would lead to mass employment for low-skilled workers, can be found in the country’s SEZ program, he says.

SEZs are geographically designated areas set aside for specific targeted economic activities. These industrial hubs are supported by special measures that are not available to the country’s wider economy. There is, however, a need for the country to reform its SEZ strategy. “The SEZs have cost a fortune; they are targeting the wrong sectors and they do not offer a particularly attractive set of investment conditions,” Baissac adds.

His report states that the economic impact of the SEZs has in the past been low due to their focus on capital-intensive industries, high infrastructure and subsidies costs, and awkward governance structure. Priorities would include the simplification of the SEZ law and regulations and the elimination of unnecessary red tape. The current SEZ tax and customs regime are broadly adequate, as long as their administration is significantly improved.

“The planned one-stop-shop should give way to a single delegated SEZ licencing and permitting authority where SEZs are represented. Investment in the development, management and promotion of SEZs would be meaningfully opened to the private sector – thus lifting a burden on government resources and generating scarce private sector investment.”

The SEZ Board would introduce effective private sector representation and influence. Central to the strategy would be the streamlining of labour practices and the easing of black economic empowerment requirements in the SEZs.

One of the difficulties of the dual-track approach would be the almost impossible task of convincing labour to change its priorities, meaning that compromise would be important. “The notion that all social partners have to agree on everything at all times amongst themselves and with government for any policy strategy to be implemented is clearly the path to disaster,” Baissac says. “When I speak about the grand bargain, I don’t mean necessarily a negotiated grand bargain, but rather what I mean is government simply stating its position and its willingness to make compromises on the proviso that other parties make compromises too.”

At the time of writing, there had been no government or business reaction to Baissac’s report.

Eunomix™ advises governments and corporations on reducing fragility, decreasing risk and improving resilience.