There are many wise and some wise crack quotes available out there about South Africa’s present economic predicament which include that the government is shifting the deck chairs on the Titanic; in bankruptcy nothing happens for a while and then everything happens at the same time or you are fiddling while Rome burns. The message of all these are the same and it is the one that the business sector and international investors have been shouting from the treetops with a loudhailer, that South Africa is in a deep crisis and talking, soothing and negotiating that President Cyril Ramaphosa tends to favour, are not going to solve the problem. We need hard, decisive decisions and structural change. Ann Bernstein, the head of the Centre for Development and Enterprise looks at how economic theory applies to the South African situation and says the country “seems poised” to test the Dornbusch rule that applied to Mexico in the 1990s. – Linda van Tilburg

By Ann Bernstein*

Economist and Latin America expert, Rudi Dornbusch said about Mexico’s financial implosion in the 1990s, “a crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought.” Colloquially known as the Dornbusch rule, it is one that South Africa seems poised to test.

Eskom is on its knees, as is Prasa whose failure leaves millions of workers with fewer, more expensive commuting options. Municipalities can neither fulfil their service delivery goals nor pay their bills. Faced by a slowdown in investment and, more recently, consumer spending, more and more businesses are retrenching staff if not closing. Emigration appears to be at a multi-decade high. Unemployment, long the country’s most critical challenge, is deepening.

Given the breadth of the crisis, you might think that the country’s political leaders would be determined, focused and driving the public service as hard as possible to find and implement solutions. Certainly, SA’s union leaders and its usually acquiescent business leaders have been considerably more vocal about the depths of the present crisis. But our political leadership – the president very much included – seems mostly to have been stunned into paralysis.

Of course this is disguised by firm assertions of how much is being done but it is hard to see any significant results. Nor is it obvious that the president has fully grasped the roots of the current crisis.

It’s not just state capture, nor is it merely the fact that the ANC is divided and corrupt. There are key aspects of ANC policy that have pushed and are pushing the country into such deep trouble. Examples include: an on-going attachment to state-led development when the state is unable to do its basic job; appointing people into critical positions who don’t have the appropriate skills or who approach their tasks as if satisfying the ruling party were the sole criterion of success; a failure to improve basic education for the poor and build a skilled workforce; and a deep-rooted suspicion of business and competitive markets that holds back growth.

These are the roots to our crisis which need to be accepted and then changed.

The first and most critical step is to begin to show the urgency and sense of mission that times of deep adversity demand.

The president has failed to level with the country and failed to explain just how desperate our situation is. If anything, he has tended too often to pretend that the structural collapse he oversees is a figment of South Africans’ collective imagination. His credibility erodes every time he makes statements that contradict the reality that citizens experience.

By failing to explain the depth and real causes of the crisis, he fails to lay the political groundwork for driving the reforms that are so urgently needed. This is one key reason he is getting so little traction in the ruling alliance in his attempts, limited though they have been, to chart a new course.

The president needs to tell the truth about where we are. And then he needs to show that he is straining every sinew to turn it around.

No-one will rally to his banner if they neither understand the depth of the crisis nor believe he is working night and day to turn this around.

SA cannot and does not have to fix everything at once. The president needs to choose a few priorities that trump all else and then stop being diverted by policies that undermine these priorities.

He needs a plausible game plan, a strategy for selling it, and the capacity to actually make it happen. He needs to build a coalition for fundamental reform. Of course this has dangers, but endless consensus seeking and compromise is leading the country to disaster while undermining his credibility and capacity to lead.

A key component of this, is that he has to be prepared to take more risks.

He has taken some risks already – especially on state capture – and there are a large number of people in the ruling alliance who would be happy to see him fail and who will exploit any missteps. This is amply demonstrated by the responses of his supposed comrades to the inability of Eskom to deliver on his ill-advised promise that there would be no load-shedding during the festive season.

But in a time of crisis, failing to lead because of a fear that you may encounter political difficulties in your own party means that long-term failure is guaranteed. Indeed, this is one of the reasons we are where we are. What is the point of preserving one’s political position and then failing to use it?

Concretely, there are steps that, if taken would help restore some confidence, begin to demonstrate a firm hand at the tiller of state and lay the foundation for re-igniting the economy. None, it must be said, is likely to generate a boom, but, individually and collectively, they may help staunch some of the bleeding, signal a change in direction and start to build momentum for further reform.

Among these, the most important is to have something to show for the commitment made (or was it a hope?) by Tito Mboweni in the medium-term budget policy statement. The finance minister said that the three-year spending projection he presented in October would be reduced by R150 billion before the budget was finalised in February 2020.

It is not obvious what the right course for fiscal policy is in a time of chronic slow growth, but one thing we do know is that spending growth needs to flatten. Reducing the R6.2trn that government expects to spend over the next three years by R150bn would reduce annual spending growth from 6.3% a year to 5.3% – hardly austerity. Anything less than that will mean accelerated fiscal slippage since growth and revenue projections must now be lower than they were in October, while additional resources have been committed to various bailouts.

Here, we should all be watching what happens with public sector wages: it is simply untenable for public servants to continue to see rapid real wage growth in this economic environment.

We also need to see progress in dealing with state-owned companies. Continuing to bail them out in current circumstances cannot be defended. Why this extraordinary attachment to SAA and at such great cost? For a president who talked so much about evidence based policy making, we have yet to hear the case for retaining a high-cost, failing state airline.

There are no easy ways to fix the SOCs, and it will likely cost a great deal of money in the short-term even for the state to walk away from some of them, but too many are costly fiscal albatrosses whose continued failure holds back growth and national development.

Eskom is a special case. A world without SAA would soon look little different from a world with it. But considerably more generating capacity is needed just to keep the economy where it is, much less encourage growth. This is why Eskom cannot be allowed to fail.

At the same time, realism is essential. Nothing about Eskom’s performance in the past 20 years suggests that it could deliver new generating capacity at anything like competitive costs. There really is no option but to – speedily – unlock the shackles that have prevented the private sector from generating more power. It beggars belief that a new Eskom II should be under consideration.

The last of this very short list of immediate priorities is to make sure that state capture-related prosecutions start soon. We are two years into the supposed new dawn with only a handful of arrests.

Is the state actually going to try to punish those who looted it? Will it ever have the courage needed to protect itself against members of the political elite? And, if it fails to do this, what will stop the architects and foremen of state capture from reinserting themselves into the flow of public funds? This is a prospect too grim to contemplate, but unless arrests of senior people are made and prosecutions begun, citizens and investors have every reason to think it might well never happen.

No doubt, the president is in a difficult position. But so too is the country. Only he has the constitutional and political power to make the changes that are so desperately needed.

Without these, it is hard to see the proverbial tunnel, never mind the light at the end of it. It is time, the president of all South Africans acted in the national interest. Indeed, it is his duty to do so.

Ann Bernstein is head of the Centre for Development and Enterprise, South Africa.

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