Risk consultancy Eunomix has forecast, based on a detailed statistical analysis of SA’s economic trajectory and the government’s performance, that the country will be a failed state by 2030.
So far, so predictable. But what makes Eunomix’s analysis really interesting is that the developmental strategy it is proposing represents a new "middle way" of looking at SA’s political economy at a time when the country seems out of fresh ideas.
The government’s newly minted economic recovery plan — agreed to by business, government and labour, and awaiting cabinet’s signature — relies heavily on a state-led infrastructure drive to restart growth, despite the state’s manifest lack of capacity to play a leading development role.
Eunomix CEO Claude Baissac believes the approaches put forward by what he loosely terms "the reformists" (organised business and the National Treasury) and the "radicals" in the ANC and the tripartite alliance will fail and, ultimately, accelerate SA’s decline.
Baissac doesn’t consider the deep pro-market reforms and fiscal austerity being punted by business and the Treasury as politically feasible, and warns that following such a path would accelerate the already powerful drive towards economic populism.
But neither can the status quo be allowed to continue.
Eunomix’s model shows that on current policies the economy will grind lower until SA becomes a failed state in 2030 — or sooner, if more radical policies are pursued.
Instead, Eunomix proposes a dual-track approach of progressive economic restructuring rather than abrupt, painful reform. This strategy would prioritise employment generation and maintain necessary welfare and other social expenditure, with only selective reforms, while targeting investment at infrastructure.
According to Baissac, most successful late-developing nations adopted dual-track economic development, with one foot in statism, the other in selective market reform; one foot in protectionism, the other in liberalisation. China’s paramount leader Deng Xiaoping famously called this approach "crossing the river by feeling the stones".
In SA’s case, it means those reforms that are fiscally and technically unfeasible and politically unacceptable should be eschewed in favour of gradual economic restructuring that builds political buy-in as incomes rise, letting the results speak for themselves.
Baissac concedes that while this approach can’t immediately deliver fast growth, it can arrest SA’s decline and, over the medium term, deliver faster and more durable growth by alleviating the deep political economy impediments that have previously constrained progress.
To achieve it would require establishing a "sufficient" alliance between all those who stand to lose the most from SA’s economic collapse and are willing to compromise. Pulling off such a grand bargain would, however, require astute political leadership.
"That is the opportunity presented to [President Cyril] Ramaphosa and his faction," says Baissac. "There definitely is an opportunity here. A moment to be seized or lost."
The tripartite recovery plan agreed to in Nedlac is an attempt to do exactly this, but while it specifies encouraging reforms in the areas of energy, telecoms, transport, business licensing and regulation, skilled immigration and the like, it does not touch the labour market.
With an unemployment rate of 30% and climbing, and two-thirds of 15-to 24-year-olds out of work, SA has the world’s deepest unemployment crisis. Though the government wants more labour-absorbing growth, it has been unable to stare down its labour allies. Indeed, it has yet to accept that it will be unable to materially reduce unemployment without labour market reform — and the latest Nedlac plan fails to change that.
The problem is that to get millions of young, relatively unskilled people into jobs, SA will need to create many new, labour-intensive firms. However, the country’s labour market institutions (bargaining councils and minimum wages) penalise these kinds of firms. In fact, they have shut off a whole spectrum of lower-paid jobs and industries, resulting in an economy with a lower level of employment at higher wages and a concentration of fewer, more profitable firms.
As Baissac sees it, SA’s rejection of labour-intensive, export-orientated growth as a cornerstone of development (because it would imply wage suppression to enable SA to compete with cut-price Asian countries) has been its "foundational mistake".
The state needs to refocus expenditure where it is most needed for socioeconomic and political stability, while starting to create dollar- generating
— Claude Baissac
export revenues and employment while slowly reforming the economy. I don’t see another path
He argues that now, in exchange for government maintaining the welfare state, the current level of public sector employment and slowing the pace of fiscal consolidation, the left needs to be persuaded to drop its opposition to the idea of a dual labour market. This would enable the creation of mass employment for low-skilled workers.
To achieve this, SA should overhaul its strategy on special economic zones (SEZs) to attract, at scale, labour-intensive, export-orientated industries (in areas such as agroprocessing, light manufacturing, renewable energy and data centres) as opposed to the capital-intensive firms that have largely been courted in the past.
Even mineral exploration and development, long neglected but vital to the future of mining, could be given SEZ status.
All this would be achieved by easing elements of BEE and labour law inside SEZs, along with allowing far greater private sector involvement in their governance and administration.
"From a labour union standpoint, it requires either a profound shift in what they prioritise (saving existing jobs vs projecting an idealised economy) or having to accept the bargain under threat of massive public sector cutbacks once SA reaches the fiscal cliff — say two to three years from now," Baissac explains.
Ann Bernstein, who heads the Centre for Development & Enterprise (CDE), agrees that the only real solution to SA’s unemployment crisis is faster, more labour-intensive growth. This requires accepting that a low-wage job for young, inexperienced people is better than no job, and reforming the labour market accordingly.
She has long argued that one way to start changing the labour market is to have a special SEZ, possibly in the Eastern Cape, where certain rules don’t apply in order to attract foreign direct investment and start doing what has helped move millions of people out of poverty in Asian countries — provide low-skilled, and initially low-wage, jobs in factories.
"I wish the government would follow up on this proposal. I think it could demonstrate that SA has choices and could be a way of starting to test a whole new approach," Bernstein said during a CDE webinar last week.
When challenged by a listener that she was advocating "sweatshops", she said that the worst possible outcome is what SA has now — very few jobs. The country is "a living experiment" of having followed the approach that it was better to have no job than start off in a low-skill, low-wage setting.
Apart from the difficulty in persuading labour to do a U-turn, there are two other problems with the dual-track approach. The first is that it would allow the government to avoid deep fiscal tightening and long-overdue public sector reform at a time when the country is on the brink of a sovereign debt crisis.
Baissac’s response is that cutting spending dramatically to slow the pace of SA’s decline so that the debt ratio reaches 100% in one year rather than two years is "absurd" when the sources of growth are exhausted.
Agriculture and mining, two labour-intensive and essential pillars of the economy, have been hobbled by unceasing policy change and the Eskom crisis, he points out. Instead, scarce resources have been directed towards an ill-fated, capital-intensive industrialisation strategy. In the end, the primary and secondary sectors have buckled under poor policy and bad governance.
"Debt will get up to 100% because the engine of growth is broken. It will get to 150% eventually," he argues.
"My point is that the state needs to refocus expenditure where it is most needed for socioeconomic and political stability, while starting to create dollar-generating export revenues and employment while slowly reforming the economy," he adds. "I don’t see another path."
A think-tank suggests a new economic reform strategy that rejects the approaches of the ANC and business
The second problem is that Baissac’s approach assumes the state has the capacity to overhaul and implement a new SEZ strategy successfully.
Eunomix argues that the main reason SA hasn’t done more in the way of structural reform — and can’t be expected to do more — is because it would be too harmful to the ANC’s key constituency: those who depend on public services, grants and jobs.
But the Ramaphosa government hasn’t been able to deliver even noncontentious reforms, such as cutting red tape for the small business sector. This suggests that, in addition to SA’s deeply embedded political constraints, it also suffers from a huge state capacity problem.
Baissac agrees that the dual-track approach requires a modicum of capacity and political will. In a declining state there is a time limit to its adoption, beyond which failure becomes inevitable. The concern for SA is whether it has reached this point.
Eunomix thinks there’s a 75% chance that SA will become a failed state, with the pandemic proving to be "the last nail in the coffin of strategic fiasco". But that means there is still a 25% chance that SA could avoid this fate.
Much will depend on the government’s new economic recovery plan and whether there’s sufficient political will and technical capacity to land it. For all the reasons outlined by Eunomix, we’re not holding our breath.
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