Bold economic reforms are needed to repair South Africa’s social fabric
These are dark days for South Africa. As routine power outages continue to stymie its people and companies alike, a wave of xenophobic violence responsible for at least seven dead since January has further dimmed sentiment towards the country. The outburst seems to have largely subsided, partly thanks to the intervention of the army. But to prevent such tragic episodes from happening again, longer-term fixes to South Africa's structural problems are sorely needed.
The attacks reflect widespread frustration among the country's poor, for whom 21 years of democratic rule have largely failed to generate opportunities and change. Despite a broad reduction in poverty since 1994, income inequality in South Africa remains among the world's highest: the average white household still earns around six times the average black household, and a fifth of the 54-million population lives on less than one dollar a day. About one in four South Africans is out of work.
The government reckons it needs GDP growth of more than 5 percent a year to tackle these woes. As things stand, this is a tall order. Crippled by protracted strikes and electricity blackouts, South Africa’s economy grew 1.4 percent last year, its slowest since a 2009 recession. Low inflation should support private consumption in 2015, but lacklustre exports and investment, despite a weaker rand, will limit growth to about 2 percent. Elevated twin deficits, high gross financing needs and low reserve coverage leave the economy vulnerable to external shocks.
It’s not that Pretoria’s macroeconomic response to the slowdown has been inadequate. The 2015 budget wisely chose the path of fiscal consolidation, without compromising spending on the poor and infrastructure. The central bank has aptly balanced elevated inflation and the softer outlook; declining oil prices and public expenditure should allow it to delay a rate increase. But with potential growth down by half from about 4 percent some years ago, South Africa must now focus on relieving the structural bottlenecks choking its economy.
Most urgent is putting the country back on the grid. In the short run, a peak-load pricing approach to managing demand – while continuing to protect the poorest households – would limit the impact of electricity shortages on the economy. Over the medium-term, higher tariffs, coupled with efficiency-enhancing measures and greater private participation in infrastructure, would help sustain the power supply industry.
Equally crucial is improving industrial relations, easing labour market rigidities and reducing skills mismatches – perhaps as part of a social bargain calling for wage restraint, private hiring commitments and public provision of better education and training. Raising competition in IT and banking would reduce costs for households and SMEs; lowering trade barriers would further integrate South Africa with its fast-growing neighbours. All would increase scope for counter-cyclical macro policies, foster job-rich growth and facilitate a rebalancing towards exports and investment.
Switching Africa’s most advanced economy back on will take time. But the announcement of credible reforms, coupled with some quick wins, would send a powerful signal. South Africa must push the button now.