South Africa’s new president Jacob Zuma is unlikely to shift policy far to the left. Economic reality will limit his options.
For months, the talk was that South Africa’s newly ascendant left would rip apart long-standing conservative economic policies, at a time of unprecedented economic crisis.
Burgeoning discontent over South Africa’s stubborn income inequality, high unemployment and poor social service provision, after all, had contributed to the rise of South Africa’s president, Jacob Zuma. Unionists, the Communist party and the black working class all rallied to his support.
In the bull years between 2003 and 2007, annual growth averaged 5%, while the budget deficit jumped from 6% of GDP in 1996 to a 1% surplus in 2007. Yet since 1994, poverty rates have doubled while basic social service provision remains woefully inadequate for the majority.
It was only logical, many supposed, that the old economic order – characterized by pro-market liberal reforms – would be supplanted in the wake of a Zuma victory. The ruling ANC party had declared that the country needed a new growth model. And the party’s election manifesto replaced its previous mantra “accelerated and shared growth” with the term “developmental state”.
Patrick Craven, spokesman for the Congress of South African Trade Unions (COSATU), tells Emerging Markets: “We call for a more interventionist and developmental state and reject the neo-liberal agenda adopted by the government to date.”
Zuma has promised a more social-democratic regime that emphasizes the role of the state in the economy, providing jobs, boosting labour rights, unveiling public investment programmes, and rural development.
Not so radical
But it is far from clear whether Zuma’s presidency will trigger a lurch to the hard left that many had envisaged. The former deputy president under the Mbeki regime has signalled that his government will uphold orthodox economic policies. He has courted foreign investors and heaped praise on black capitalists.
The reason is simple. The president’s room for manoeuvre is constrained by economic reality: a substantial current account deficit. And South Africa’s reliance on foreign capital to fund the deficit has hardly abated.
This year the deficit is set to narrow to 5.8% from 7.4% the year before, as plummeting imports and energy prices only marginally offset the impact of slowing exports on the country’s external position. The IMF forecasts South Africa’s economy will contract by 0.3% in 2009, having shrunk by 1.2% in the fourth quarter of last year, as capital flows dry up, while manufacturing and mining sectors continue to be savaged by vanishing demand for commodities and exports.
In an interview with Emerging Markets last October, finance minister Trevor Manuel argued that policies would have to adapt as the economy headed for choppy waters. “Policies that are always rigid tend to shear, so you need a measure of flexibility.” But he warned: “If you have some small-time ideology you tend to make things very difficult for policy-makers.”
He also lambasted critics of his economic policies for failing to acknowledge the pitfalls of the radical change in course they demand. “My constant plea to detractors is: this high horse you want to ride – you might want to dismount it, the legs are too high, and you know you can only fall off and kill yourself in the process,” he told Emerging Markets.
Tug-of-war
Zuma is now caught in a tug-of-war between those who see state activism as a pragmatic economic boost and those who see it as a precondition for growth. Analysts expect the president may have to disappoint his socialist allies on further government expansion in the short term, and instead concentrate on less costly adventures such as greater employment rights and improving the delivery of services.
The government has already budgeted for a 4% fiscal deficit this year – on the back of declining revenues rather than new spending projects. In addition, the need to signal medium-term fiscal consolidation to investors and the current sky-high cost of borrowing “will constrain greater spending”, argues Jean-Francois Mercier, Citigroup economist in Johannesburg.
But in many respects, South Africa had embraced a greater role for the state before Zuma’s march to power, through a sharp rise in welfare benefits and public spending.
And in the next three years alone, a massive $90 billion infrastructure programme is needed to pay for electricity and housing investment, as well as preparations for the 2010 World Cup. “We had a need to invest handsomely in infrastructure before this [global financial] crisis came around,” outgoing president Kgalema Motlanthe told Emerging Markets in early April.
Pragmatism
Initially, Zuma can market existing government projects as activist pro-poor policies to shore up his leftist power base, argues Mercier. “Zuma will consolidate South Africa’s pre-existing move towards a greater role for the state, but no serious move to the left is likely.” The need to court foreign investors and sustain growth in productive sectors will enforce pragmatism, he says.
Given a sharp rise in state activism globally, South Africa may now appear as if it is benignly following the international consensus. But with the prolonged global downturn, it will be increasingly difficult to achieve the 6% growth needed to make inroads on poverty alleviation.
And that alone is likely to pour fuel on the hotbed of domestic discontent that propelled Zuma into power in the first place.