In economics, we distinguish between a structural slowdown and a cyclical slowdown. The latter is usually temporary. File Photo: IOL
In economics, we distinguish between a structural slowdown and a cyclical slowdown. The latter is usually temporary. File Photo: IOL

OPINION: SA’s economic slowdown is structural

By Opinion Time of article published Jul 29, 2020

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By Professor Jan van Heerden

JOHANNESBURG - In economics, we distinguish between a structural slowdown and a cyclical slowdown. The latter is usually temporary.

A typical business cycle looks like a sine curve: it has peaks and troughs at regular intervals. It can be compared to the seasons: after winter comes spring, then summer and autumn, and, low and behold, winter again. It is predictable.

My body weight is also cyclical: over the festive season, I eat and drink more than usual and gain a few kilos. Then in January, I hold back a bit, start exercising more, and the weight returns to equilibrium. This is cyclical weight management, and I’m in control of it.

However, if you watch the TV programme My 600-lb Life, you see a person who lies in bed 24/7, and someone needs to feed them. The person is often addicted to fast food and has eaten too much of it for a long time, and now needs a strict weight-loss programme or surgery to become normal again. The situation has developed into a structural problem, and the person will not return to “normal” without changing the structure of their behaviour, and they often need surgery.

If we look at a typical business cycle in economics, it follows a sine-like curve. A country can grow fast for a while; it needs to invest more and employ more labourers, which puts upward pressure on wages and capital, rental prices and interest rates. Higher prices reduce the country's competitiveness and demand for its produce decreases. Production decreases, and firms need fewer labourers. The economy contracts and slows down; prices and interest rates decrease. Then it becomes affordable to borrow money again for renewed investment, and soon the economy grows again. If you plot gross domestic product over time you will see the sine-like curve.

This, however, is not the typical picture in South Africa. The next upswing of the economy is not around the corner. Interest rates and prices are at the lowest levels in decades, but investors do not have the confidence to invest in the economy, as would be the normal thing to do.

The body of the economy consists of firms employing capital and labour that should produce competitively in the world. This body is supported by a government to which they pay taxes and on which it relies to deliver electricity, water, roads, police and other essential services.

However, this body is sick. It feels weak and wants to lie in bed like someone weighing 600 pounds. The majority of labourers have been educated poorly, because the primary and secondary education system is dysfunctional, but they demand high wages that do not match their contribution towards the output of the firm. This is a structural problem.

The whole system is not functioning. The government suffers from corruption and is dysfunctional. Instead of making it easy for business to prosper, it makes it difficult. The red tape either to start or maintain a business is overwhelming. Municipalities do not pass the auditor-general's requirements; officials earn high salaries, but water, sewerage and electricity services are not provided adequately, if at all. Eskom is owed billions of rands.

Within this context, let’s imagine China, which went into the Covid-19 pandemic first, comes out of it first, and starts growing at 10 percent a year. This is potentially fortuitous for us, because it will significantly increase China's demand for primary resources, of which South Africa has plenty. China might also have an increased demand for manufactured goods from countries that can provide them fast and at competitive prices.

What could be fortuitous won't happen, because a bloated, immobile body cannot achieve this; it has serious structural problems throughout the whole economy that prevent productivity movement and growth.

If, for example, our railway system does not function properly to get the primary resources to our harbours, or the harbours do not function properly to upload the resources swiftly on to the big freight carriers, it is a structural problem.

If our manufacturing plants are not able to employ educated, committed, skilled workers who can perform whatever is required with a high degree of efficiency and reliability, and deliver what the Chinese firms require, it is a structural problem. And they will seek other markets.

The low levels of growth in South Africa are undeniably structural in many ways. This is not going to get better without major behavioural changes and restoration. This is not a regular sine curve with peaks and troughs that we can manage like seasonal weight gain and weight loss. We have been experiencing low growth for a decade or more, without a decrease in the unemployment rate. We are dealing with a 600-pound body. We need a surgeon to intervene with a major operation, and we have to embark on a long-term recovery programme, with a strict diet and exercise.

Finance Minister Tito Mboweni is our economic surgeon, and he needs to be given the full authority to do what is required. We are lucky to have the right Minister of Finance, but he has to be given the green light to implement all the policies he advocates and in which he believes, to restore our country to some sense of normality, productivity and growth.

Professor Jan H van Heerden is a professor of economics in the Faculty of Economic and Management Sciences at the University of Pretoria.

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