Gordhan fails to lay basis for economic transformation
FINANCE Minister Pravin Gordhan promised South Africans a budget that he claims lays the foundation for the structural reforms envisaged in the next government.
He urged South Africans to work together to radically change the economy.
However, radical economic transformation means different things to different people and his budget is certainly not radical in the sense that it proposes changes in the structure of the economy, including its ownership patterns.
This budget fails to set appropriate macro-economic parameters within which people’s lives will change for the better.
Like all budgets before it, the 2014-15 budget fails to lay the foundations for a radical transformation of the economy in the interests of the vast majority.
It is premised on an inappropriate use of economic statistics.
For example, in its attempt to catalogue economic gains since 1994, the medium-term budget reports that 5.9-million jobs were created.
There is no doubt that this number is just insufficient, especially when you notice that it implies 295,000 jobs were created a year for the past 20 years.
What Gordhan does not mention is that the unemployment rate, which takes into account the growth of the labour force, actually increased from 31% in 1995 to 36% last year. The evolution of inequality and poverty over the past 20 years is a subject for another day, but it certainly does not tally with the rosy picture we are being fed.
The second instance where economic statistics have been abused in the budget is where it reports the so-called gain in the ratio of exports to gross domestic product (GDP). We are told that this ratio increased from 26% in 1994 to 29.7% last year.
However, it is well known that the exports-GDP ratio on its own does not provide sufficient information about economic performance. What is important is the trade balance — how much we export relative to what we import.
If you look at this statistic correctly, you will notice that in the first quarter of 1994, the trade balance was 0% of GDP. However, since 2003, the trade balance systematically worsened to a deficit 6.5% of GDP.
Gordhan himself commented that the figure on the current account "is not right". If this is the case, why is the medium-term budget punting the decontextualised 3.7% change in the exports ratio, over a 20-year period, as an "economic gain"?
Gordhan is faced with an economy that suffers from structural imbalances, which his and his predecessors’ policies have dismally failed to change over the past 20 years.
As a percentage of GDP, the capital account is about 2%, which is hardly enough to finance the huge investment savings gap in the private sector.
Add to these imbalances his own budget deficit of 4%, which he hopes to cut to 2.8% over the next three years, to the detriment of the infrastructure development programme, basic social services and perhaps public sector workers.
Look, for example, at the increase in child support and foster care grants, from R800 to R830, and from R300 to R315, which, besides their paltry level, are increases that are below the inflation projections of the medium-term budget itself.
His first headache, of course, is the current account deficit, which is made up of the trade deficit and net payments for services and income (profits, dividends, etc) to foreigners.
At present, the trade balance drives the current account. The moment the economy grows weak manufacturing, inappropriate trade policies and poor management of the exchange rate start sucking in a disproportionately large amount of high value-added imports relative to exports.
In addition, as the large exporters have significant foreign ownership, growth brings with it a large outflow of profit income from the economy.
This macroeconomic configuration is one of the big sources of South Africa’s vulnerabilities.
The result of huge outflow profits and the weak industrial base is reflected in the investment-savings balance.
The moment domestic investment rises, the current account enters into a deficit, as the economy imports a large amount of capital goods. We are now sitting with investment expenditure that exceeds domestic savings on the one hand, and a current account deficit on the other.
How does Gordhan propose we finance these deficits, besides his own? All he says is that we should just export more and become more competitive. The question is: how do you export more when your monetary policy does not allow the currency to adjust the trade deficit, when your industrial base is rapidly shrinking, and when your economy is wired to the volatile exchange rate through import-parity pricing practices?
Since 1970, the composition of exports has not changed: 70% of exports are from raw materials, petrochemicals and basic steel products, which have very little value added. High value-added capital goods such as electrical equipment and electronics are, to a large extent, imported.
The ratio of manufacturing to gross value added has declined sharply over the years, from 20% in 1994 to 11% last year. Surely this is not the kind of radical economic transformation that is capable of laying the foundations for sustainable growth.
The medium-term budget itself acknowledges the problem of high economic concentration, when it notes that 5% of exporters account for 90% of the value of exports. However, this fact is not a discovery, this is how the South African economy has been; it has been untransformed and the transformations that have occurred were more regressive than progressive.
Gordhan claims that his budget creates a stable environment for the private sector to thrive. It does not. Faced with the unfavourable investment-savings gap and the current account deficit, he is forced to whittle down the deficit.
However, the danger of doing this is that it may well slow down the recovery and raise the unemployment rate.
Gordhan is also encumbered by an unforgiving monetary policy framework. The Reserve Bank has just raised the repo rate, to the dismay of many, as a pre-emptive measure to rein in the currency.
He acknowledges that this monetary action forces him to moderate public expenditure. However, reining in the currency blocks one of the important adjustment channels that may ease his current account headache.
Gordhan is more concerned about the inflation scare than about the legendary unemployment rate, which is now also underpinned by persistent deindustrialisation.
There can be no stability with a persistent and growing current account deficit. Add to this the heavy reliance on unpredictable and now insufficient short-term capital flows to finance it.
There cannot be stability when investment is not supported by adequate savings, and when large amounts of surplus are sent abroad because of the excessive foreign ownership of the economy.
South Africa is in desperate need of a developmental macroeconomic policy.
• Malikane is an associate professor of economics at the School of Economic and Business Sciences at Wits University.