Economic Growth Only Possible If Government Swallows Some Bitter Medicine

Economic hardship is biting South Africa hard and could become a lot more painful in the weeks and months to come. Good rhetoric has come out of government about reducing regulations and freeing up the economy, but the hard truth is that the work required...

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Economic hardship is biting South Africa hard and could become a lot more painful in the weeks and months to come. Good rhetoric has come out of government about reducing regulations and freeing up the economy, but the hard truth is that the work required to bring about meaningful change has not been done. In 2019, the International Monetary Fund (IMF) added its voice to the chorus calling for change. Acting on the IMF’s warning will entail the following: Deregulating the labour market, removing the national minimum wage (a massive barrier to entry), downscaling Eskom and allowing competition in the sector, and drastically cutting government spending.

According to the IMF, “the economy has been left with high and rising debt, low growth, and limited fiscal space to respond to shocks”. When you are ill, you try to identify the cause of your illness and take the necessary medicine. The cause of South Africa’s economic malaise is submission to the idea that government spending and control of the economy is how things should be. If we do not take the necessary medicine and start radically reducing regulation, and demand more economic and individual freedom, the IMF’s latest warning will come to fruition and we will be left with nothing.

Earlier in 2019, the Reserve Bank projected 0.6% GDP growth. How precisely do we expect people to create or find jobs in this kind of environment? According to the IMF, our three biggest challenges are “Persistently weak economic growth”, “Deteriorating fiscal and government debt”, and “Major difficulties in the operations of state-owned enterprises (SOEs)”. The last two challenges are major contributors to the first. The amount of the GDP that government takes grows larger every year, leaving less space for businesses to grow and operate. In October 2019, the government debt-to-GDP ratio was projected at 60.8%; in February the estimate was 56.2%. The projected debt ratio is 64.9% in 2020, and 68.5% in 2022.

Clearly, people are not receiving much bang for their buck in terms of government spending. To the public, numbed by the many scandals and stories of ineptitude exposed in newspapers almost daily, it’s becoming obvious that more spending does not result in more growth or more jobs. That government needs more money in the form of higher taxes to ‘spend us’ out of the current economic problems, is a fallacy.

Debt must be serviced, or collected, at some point down the line, whether we are talking about the government or the average South African household. Relying on increased government spending as a method to boost growth is fallacious – debt service costs are now the government’s fastest growing expenditure item. And then there are the SOEs. The problems associated with keeping SAA and Eskom functioning have been well-documented, yet these dinosaurs are still with us.

As of July 2019, Eskom’s debt sat at around R440bn; a massive yoke across the shoulders of the struggling economy. Minister of Finance Tito Mboweni’s strategy paper contained a proposal to unbundle Eskom. It is an excellent idea, and coupled with deregulation, it would remove the continued burden of Eskom on government and allow households and firms to sell the excess electricity they generate. However, at the time of writing, the attacks against Minister Mboweni’s various proposals leaves me doubtful that any political will exists to implement what he put forward. The vested interests that have a firm grip on government will not encourage any move that may dilute their power.

Despite the IMF’s warning, and many others besides in previous months, it appears that only some members of government (such as Mboweni) have woken up to the awful economic reality caused by the socialist policies of increased spending and control. Amending the Constitution to allow for expropriation without compensation will not give people jobs or encourage anyone to invest in South Africa. Nationalising the healthcare sector through the National Health Insurance scheme will not solve any of our health or economic problems. Changing management or dictating that people’s pensions must be given to SOEs will not solve any of the problems at those companies. Competition in healthcare and energy, not a state-enforced monopoly, is the only logical and moral way forward.

To solve South Africa’s economic problems requires a paradigm shift on the part of government. The focus must shift from “the state must take care of everyone and solve everything for us” to “South Africans can do things for themselves.” For too long, we have believed the notion that the economy should be managed and resources redistributed by government, rather than adopting the very radically transformative notion that individual rights should be protected and people should be free to grow their own businesses and create prosperity for themselves.

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