Fashionable road will lead to ruin in near future

First Published in Business Day on   October 10th, 2021   |   by   Isaah Mhlanga

Fashionable road will lead to ruin in near future

SA's exports are largely raw materials and are weakly integrated into global and regional value chains

Colin Coleman has nailed his colours to the mast of expanded social security in his opinion piece, "SA doesn't have a debt problem. It has a growth problem - and a solution" (October 3).

He chose to play to the populist gallery in place of sound economic analysis. Business leaders have a responsibility to enlighten rather than go with every fashionable wind, especially in the face of the severe economic strain the country is going through.

At the National Investment Dialogue, Coleman made extraordinarily reckless remarks that SA doesn't have a debt problem. It has a growth problem - and a solution. His solution? An increase in wage support, which would be funded by debt at a time when debt is unsustainable, or tax increases when the tax base is shrinking. He canonised his bizarre solution in his opinion piece.

In sum, Coleman's main contentions are that SA's debt of R4-trillion (71% of GDP and rising) is not a problem, that SA has a growth problem (having averaged 1.7% from 2010 to 2019 and 1% from 2010 to 2020), and finally that the solution to SA's growth problems lies in a stimulus package through an employment incentive scheme (or a basic income grant), improving competitiveness, raising productivity, and reducing the cost of business.

For Coleman, this stimulus could be financed by loading more debt without negative consequences if economic growth rises between 2.5% and 3%. He is clearly out of touch with SA's realities.


SA’s debt servicing costs in 2019/20

While one can hold some sympathy for Coleman's second conclusion, namely that SA has a growth problem, his attribution of the causes of low growth is misplaced. Examples such as China and the US, which Coleman points us to, are not the best comparisons: these economies' growth models, fiscal capacities and market structure are vastly different from SA's.

From 2000 to 2009, SA's trading partners' trade-weighted economic growth averaged 4.5%, while the simple average growth was 4.2%. Emerging and developing markets' economic growth averaged 6.1%, while SA's average growth over the same period was 3.6%.

The driver of much of this growth for SA and other commodity-exporting emerging and developing economies was the commodity super-cycle which came to a screeching halt with the onset of the global financial crisis (GFC) of 2008.

From 2010 to 2019, the trade-weighted growth of SA's trading partners averaged 3.8%, just marginally higher than the simple average of 3.7%. For emerging and developing economies, the average growth was 5.1%.

By contrast, SA's average growth rate more than halved to 1.7% from its average annual growth rate in the prior decade. From this picture, it is clear that SA has a growth problem. This is where Coleman offers a sensible observation, beyond which he engages in quirky economics.

Let me turn to aspects that throttled SA's growth in 2010 and 2019. First, there was a global and structural shock to commodity prices. In the distant past, commodities lifted economic growth, but since 2014 these have started to act as a drag on growth.

SA's exports are largely raw materials and are weakly integrated into global and regional value chains. This disarticulation does not help to sustain growth and employment on a diversified basis. It also exposes SA to risks related to vagaries in international trade.

Coleman argues, wrongly, that the commodity price cycle we have seen since the recovery from the Covid-19 pandemic is not a flash in the pan but a long-term secular response to a changing global economy driven by climate change.

Climate change concerns mean that coal, one of SA's major export earners, will experience a structural decline in coming years. Given that global adjustments are under way, with many countries undertaking green transition strategies, it is clear that platinum, a major export revenue earner for SA used in the catalytic converters for diesel cars, will suffer a decline in demand. This means Coleman's hope for a commodity super-cycle that would lift SA's growth could be in vain.

Commodities that may see growing demand are those linked to greening the economy. But the sorts of commodity cycles that are multi-year, which we witnessed in the past, have faded in the sunset. The World Bank commodity price forecasts show that, on average, between 2022 and 2025, coal, zinc, lead, tin, iron ore, silver, and gold will decline each year. Aluminium and platinum are projected to rise by an average of 1.5% and 1% per year; this can hardly be a commodity super-cycle.

To base a commitment to permanent spending like an employment incentive scheme (or a BIG) on a source of economic growth and tax revenues that is highly uncertain such as a future commodity super-cycle is reckless. It would be a strategic error for political decision-making.

Offering an R800 employment incentive or wage subsidy to the 12-million unemployed people could lead to a temporary spike in employment, but this will not be sustainable for a country in the absence of vital sources of growth. Parlaying a R115bn stimulus will widen the debt hole in the country and saddle future generations with debt.




It is speculative for Coleman to suggest that commodity-tiered growth is on the horizon. Apart from the fact that the economy will be in the doldrums for the foreseeable future, leakage from imports will mean tax revenue collections will not rise enough to become a countervailing factor to debt.

As far as a wage subsidy is concerned, a study by Bhorat et al in 2020 on the employment tax incentive scheme makes several findings that contradict a wage subsidy as a solution.

At the aggregate level, the researchers find that the wage subsidy has negligible or no impact on employment levels. Therefore, the wage subsidy is no panacea to unemployment; it will only serve as a cash transfer to participating firms, mainly large companies.

Another issue that has dominated the national debate on the relationship between macroeconomic policy and social policy is the extent of social spending.

The government already provides extensive social protection in the form of health care, education, housing, community amenities, defence and subsidisation of transport through the taxi industry.

The problem is how the government manages its social protection measures and delivers social services. State capacity and efficiencies in fiscal allocations and delivery are what need to be improved.

The total social spending viewed from this functional spending lens amounted to R687.2bn in the fiscal year 2010/2011, which is 78% of the total R880bn consolidated expenditure.

By 2019/2020, social spending had doubled to R1.4-trillion, accounting for 76% of total consolidated spending, which is a decline as a share of total spending.

Coleman's assertion that SA does not have a debt problem is a substitution of economic rationale with a hunch.

Simply put, the reason the government had to reduce the share of spending on housing, transport, public order and safety and defence is because SA's gross debt rapidly rose by more than three times from R990.6bn in 2010/2011 to R3.3-trillion in 2019/2020.

This resulted in SA's credit ratings being downgraded to sub-investment, and consequently debt servicing cost significantly rising from R66.2bn in fiscal year 2010/2011 to R204,8bn by fiscal year 2019/2020.

The share of debt service costs in the total consolidated spending went from 7.5% to 11.2% over the same period and is projected to rise to 16.2% by 2023/2024.

If we look at public investment spending by the government, it is also clear that the rising debt service costs crowded out investment and effectively put the government on an investment strike.

I have previously pointed out that investment by the general government contracted by an average of 1.4% per year between 2010 and 2020. Investment by public corporations contracted by an annual average of 3.3%.

Even with the Eskom power plants build stripped out, investment by public corporations still show negative growth. Investment by the private sector contracted by 1.2% over the same period. Consequently, total investment in the country contracted by an annual average of 1.7%.

SA needs investment-led growth rather than profligate expenditure that will generate no returns in the economy today and for future generations.

Finally, rising debt has been at the expense of investment in infrastructure that would boost growth through improved competitiveness, productivity and ease of doing business.

This debt has, in turn, choked economic growth and job creation opportunities. We need sounder economic policies and interventions rooted in pro-growth and investment-led measures to turn the socioeconomic tide for the better.

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