Economy is stuck in crises because government keeps doing the same thing

Economy is stuck in crises because government keeps doing the same thing

Neoliberal economic policy for 25 years has made the country the most unequal in the world

Heterodox economic views and policies helped the ANC formulate and advance its popular vision for postapartheid SA from the early 1940s to early 1990s. However, the organisation began to embrace mainstream free market economics, or neoliberalism, after the Ready to Govern conference of 1992, and especially with the adoption of the Growth, Employment & Redistribution (GEAR) policy in 1996.

This was not an inconsequential change. It shaped the post-apartheid government’s role in the economy, the ANC government economic policy choices, and the country’s growth and development outcomes in the past 25 years.

Between 1996 and 2001 GEAR failed to meet its five-year key macroeconomic targets of growth and employment. The government’s response was twofold: continuing with GEAR’s policy framework and adopting the growth diagnostic approach to identify “binding constraints” on the economy, and to use mainly supply-side microeconomic interventions to lift those constraints.

The expectations were that this approach would unlock the economy’s potential for accelerated growth and employment by adhering to free market economic thinking, and that the absence of “rigidities, frictions and market failures”, would propel the market to produce necessary growth with full employment.

Over the past two decades this same mainstream view of the economy has informed government economic policy and planning. However, the promised outcomes sharply differ from reality on the ground, as the following 10 key economic indicators attest:

• Between 1995 and 2019 the average GDP growth was the third lowest among Group of 20 (G20) countries.
• The unemployment rate was consistently far higher than all the G20 countries during the 25 years between 1995 and 2019.
• The government’s average annual revenue-GDP ratio for the period 1995—2020 was almost the lowest compared with 38 developed and developing Organisation for Economic Co-operation and Development (OECD) countries.
• Relative to OECD countries, the SA government spent the lowest share of GDP on the delivery of public goods and services and on providing social protection between 1995 and 2020.
• Short- and long-term interest rates have consistently been among the highest for OECD countries over the past 25 years.
• Real interest rates were above the GDP growth rates for 19 of the 24 years between 1996 and 2019. The positive gap between the real interest rate and GDP growth has contributed to the rise of the debt-GDP ratio.
• The earlier positive gap between export and import shares of GDP has gradually diminished in the past 25 years.
• The share of manufacturing employment in total employment reduced from 15.6% in 1996 to 9.2% in 2019.
• The UN Industrial Development Organisation’s competitive industrial performance index for SA declined 17% between 2000 and 2019.
• Annual growth of credit extension to the private sector has significantly declined since 2010.

Neither fiscal nor monetary authorities have presented any evidence that the current combination of fiscal austerity, a restrictive monetary policy and a suite of supply-side measures is likely to produce macroeconomic outcomes envisioned by the National Development Plan.

In fact, the government continues to pursue that economic policy, fully aware that it will not improve macroeconomic outcomes. According to joint National Treasury and World Bank projections, the outlook under current macroeconomic and supply-side microeconomic policies, at least until 2026, will continue to be bleak: stuck in low growth and high rates of unemployment.

Crossroads

Until 2019, every post-GEAR government plan predicated on maintaining status quo macroeconomic policy identified a set of constraints and vowed that the removal of constraints would produce high rates of growth and employment.

The latest government plan — the 2019 Treasury strategy document and the current recovery plan — pursues the same methodology but now bluntly predicts an outlook of low growth and high unemployment.

The government has therefore reached an important crossroads: it may opt to continue with the mainstream economic views and policies of the post-1996 path, which it now knows will not deliver the needed levels of economic growth and employment, or it could learn from other countries that have adopted heterodox economic views and policies over the past 50 years to influence the working of market economies and achieve far better outcomes.

Our modelling and simulation work show that the economy does not need to be stuck with poor outcomes. We have used an SA econometric model to design and quantify a six-pillar policy scenario that prioritises economic growth, employment and socioeconomic development. The pillars are: specific macroeconomic policy reforms, microeconomic reforms, social policy reforms, trade and industry reforms, private sector policy reforms, and provincial growth and development reforms.

Our writing on macroeconomic policy and performance not only provides details of each policy pillar but also the model projections that show a policy pathway to 2030 that could halve the poverty rate, reduce the unemployment rate to 12%, increase economic growth to 6% and reduce inequality by 16 percentage points.

Neoliberal

The neoliberal orientation of the government’s economic policy during the past 27 years has led the country to become the most unequal in the world, with the highest rate of unemployment and persistent low economic growth. Maintaining status quo economic views and policies would, even by the government’s own account, perpetuate the country’s chronic crises of low growth and high unemployment, poverty and inequality.

Heterodox economic views with the alternative six-pillar policy framework have the potential to generate inclusive growth, with the benefit of rising prosperity accruing to poor and working-class families. This alternative approach challenges the economic orthodoxy that continues to underpin government economic policy.

There is nothing radical about the proposed changes. They reflect traditional differences in economic views and policies of conservative and progressive governments around the world. What is different and maybe radical is to ask a political party and government that embraced neoliberalism more than two decades ago to consider changing its economic orientation and policy by recognising that insisting on the same mainstream policy framework for another 25 years will only mean perpetuating poor macroeconomic outcomes and persistent high poverty and inequality.

• Dr Adelzadeh is director & chief economic modeller at Applied Development Research Solutions and Co-Director of the Economic Modelling Academy. This article is a summary of the chapter on macroeconomic policy and performance he wrote for a recently released book, ‘The Evolving Structure of SA’s Economy: Faultlines & Futures’ by the Mapungubwe Institute for Strategic Reflection. 

First published in Business Day on 17 October 2023: https://www.businesslive.co.za/bd/opinion/2023-10-17-asghar-adelzadeh-economy-is-stuck-in-crises-because-government-keeps-doing-the-same-thing/