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It’s easy to confuse economic policy and politics in South Africa’s present climate of prolonged and damaging labour disputes. But it’s also premature to assume that the government’s battle with public-sector unions will destabilize the long-term drive to liberalize the economy. Zwelinzima Vavi, general secretary of the country’s biggest labour federation Cosatu, which engineered the strikes, says the ruling ANC alliance of government, labour and the South African Communist Party has fundamental differences over the balance of power.
South Africa has been assiduously courting Bric (Brazil, Russia, India and China) nations, other emerging markets and the US, EU and Japan, to boost trade and diversify the economy. However, despite calls from unions and the vocal ANC Youth League for greater state intervention, finance minister Pravin Gordhan says the private sector accounts for some 70% of economic well-being.
Despite this gambit by labour to have considerably more say in economic policy-making, Gordhan has already mooted a 7% per annum growth rate, from a peak of 5.1% average annual gross domestic product growth between 2005 and 2007.
“We require substantially higher growth than ever achieved,” Gordhan tells Emerging Markets in an interview. “And the aspiration is to get all groups in South Africa to agree.”
There are many uncertainties over South Africa’s economy, including proposed constraints on freedom of the media and the flow of state information, loud protests against electricity prices, widespread corruption, a lack of transparency in the awarding of mineral rights, the practice of labour broking, and discord over calls to nationalize the nation’s mines.
But in economic terms, government planning focuses on monetary policy and inflation management in supporting sustainable growth and employment, reducing the cost of longer-term borrowing, and in defending real incomes, especially in light of the global recession.
Gordhan says the government will balance its perspective on the value of the rand in terms of the low-growth outlook in major trading partners such as the US and EU. “The inflation band of 3% to 6% remains in place, but the Reserve Bank needs to apply its judgement very carefully.”
In the 17 years since the end of apartheid, the growth of the black middle-class has boomed. However, statistics from the Department of Trade and Industry show that between 1994 and 2008 consumption-driven sectors of the economy grew by an annual 7.7%, compared with the productive sectors of the economy, which grew an annual 2.9%.
With this in mind, the government’s 2010/11 to 2012/13 Industrial Policy Action Plan seeks to promote long-term industrialization and diversification beyond reliance on traditional commodities and non-tradable services, making exports and import-substitutes more competitive. It emphasizes labour-intensive production and services sectors to help employ the millions without jobs.
Gordhan says the government is adopting a growth plan in which key components are macroeconomic stability, microeconomic reforms that increase competitiveness and reduce the cost of doing business, and a review of the major economic sectors.
To this end the government has already been loosening foreign exchange controls and easing tax restrictions across the board, with a view to encouraging inward investment.
South Africa has little choice but to follow this route. The country has significant structural hurdles to higher growth, not least a creaking infrastructure, disincentives to broader private domestic investment, legacy education, skills and capacity deficits (and attendant fiscal constraints), and a slew of unwieldy state monopolies in the power, telecommunications and transport sectors, among others.
Herbert Mkhize, executive director of the National Economic Development and Labour Council, through which government, labour, business and community organizations negotiate economic, labour and development issues, says debate continues to rage over the country’s exchange rate.
“I can’t speak with authority on whether the government will revisit its current stance on this. The stance is, of course, that government has no intention of intervening in monetary policy, particularly the exchange rate,” Mkhize says. “But labour has now won the battle to have this issue on the agenda, although whether the outcome will favour them is another matter.”
Cosatu spokesperson Patrick Craven says one of South Africa’s biggest problems is the low level of wages and the number of people employed. “There is a limited market for goods and services. We need to increase the level of demand among low-paid workers and create employment.”
A WEAKER RAND
He says South Africa’s economy will never grow optimally if it continues to rely on the export of raw materials, and that there is a need for more manufacturing and investment in mining. “Commodity trade benefits are very narrowly spread. Inflation targeting shouldn’t be used as a justification for keeping rates high. We at Cosatu certainly don’t want to see runaway inflation, but we don’t think that is a danger for now.
“In the short term, we believe that cutting interest rates combined with allowing the rand to fall will give a boost to manufacturing and job creation. In the longer term, we need a new growth path – which has been endorsed by the Department of Trade and Industry through the Industrial Policy Action Plan,” he says.
Infrastructure deficits are being addressed by the government’s Medium-term Expenditure Framework, with some R800 billion earmarked for infrastructure growth. But one of the biggest structural impediments to growth is a tax base of about five million people (excluding company taxes) among little more than 12 million full-time employed.
This funds monthly welfare payments to more than 13 million people (amounting to about 4% of GDP), while official unemployment hovers at around 25%, and may be as high as 40% when underemployment is factored in.
Along with the 1.3 million state workers on strike, private-sector unions have demanded – and received – wage increases well upwards of two times inflation, at the same time that 1.1 million workers in the private sector lost their jobs during the global recession.
The government says future wage negotiations must link wage growth to productivity, and that it cannot manage its budget in a way that favours the employed at the expense of the poor and jobless.
The country’s formal sector has a long-established bargaining system for wages and benefits. And legislation on basic wages only applies to lowly-paid and vulnerable workers such as domestic workers, farm workers and those in the hospitality trade.
Saki Macozoma, president of Business Leadership South Africa, an association of the country’s largest corporations and major multinational companies, says South Africa’s official economic policy stance has not changed.
“However, there is greater sympathy than before at the rhetoric level for the position of the unions. At a practical level the finance minister is sticking to his guns on fiscal discipline characterized by policy instruments such as inflation targeting,” he says.
“The politicians will say that they will wait for the planning commission to provide the country with alternatives to choose from for the long term. So the alliance will hold until the next conference. Every contradiction will be explained away as ‘debate’.”