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What seems to be the problem?

Tough choices and troubled times are facing South Africa if it's going to improve its weakening economy. Economic inequality is one of the highest in the world, GDP per capita has dropped, while youth unemployment is going up. And these are only a few of the struggles the country is faced with today.

The current economic model along with the rapidly increasing government obligations brings instability and troubled times for South Africa.

Experts are unanimous: If the next President continues working toward a policy of radical economic transformation encouraged by President Zuma, the country will head towards an economic crash in the next global downturn.

What seems to be the problem?

The political changes during the last few years make the future look more and more uncertain. President Jacob Zuma reinforced the political model of radical economic transformation supported by the left-wing party, while internationally recognized politicians such as Trevor Manuel and Pravin Gordhan have been pushed out of politics.

A few days ago, at the World Economic Forum's meeting in Durban, it became clear that the political story has changed for the worse.

The South African economy is contracting at a time when the rest of the world is in a repeated recovery. The problems in the labor market have deteriorated. Youth unemployment recently reached over 55% of the workforce and general unemployment has been stuck at around 25% of the workforce for the last decade.

Statistics show that over the last five years, the current account deficit has been going up by 5% of GDP per year. Wages have increased by 7-8% per year while productivity growth has been close to zero. This means that South Africa’s competitive position has worsened despite its depreciating currency.

Right now South Africa’s economic model leans towards a failed economic nationalism model, based on import substitution strategy, which in fact has been the main reason for the economic crises in many African, Asian and Latin American in the last 50 years.

State Owned Enterprises (SOEs) as well as high priority domestic industries enjoy protection in the form of regulatory barriers, subsidies and high tariffs.

A small group of privileged workers with strong political clout in unions gain the benefits, but the overall outcome is cost increases that have crushed employment growth outside the protected sectors.

The rapid loss of competitiveness resulted in a shrinking of the industrial sector. Experts say that this negative tendency will continue and even get stronger in the coming years, unless the pattern is broken.

Clearly the weakening economy is a result of wrong made decisions and political changes. What will happen now, we all wait to see. As for now, the future looks uncertain!

Is there any Hope?

Political uncertainty, weakening economy...South Africa is now faced with many struggles and difficult decisions have to be made. What will be decided for the future of the country?

We are actually not that far from the answer. The future of South Africa will be decided in autumn when the ANC will select a new leader to succeed President Zuma.

Right now Cyril Ramaphosa, Deputy President, and Nkosazana Dlamini-Zuma, Secretary General of the African Union, are represented as the two front-runners in the media, but whether either of them will be able to win a majority is far from certain.

The only thing we can be certain about right now is that if the new ANC leader continuous favoring and pushing forward with the radical economic transformation model, the consequences will be catastrophic. If wages continue to increase in excess of productivity, the current account deficit and the foreign debt will keep on growing, which will keep dragging the country deeper into debt.

The latest IMF report on debt sustainability analysis, indicates that the gross debt could reach 70-75% of GDP in 2020. Considering that the debt in the SOE sector adds another 10-15% of GDP to the debt stock, the debt level has become a major risk factor.

In such a scenario, there is a clear risk that growth will continue to remain weak.

But there is a more hopeful scenario

where the ANC elects a leader with the ambition to ‘’renovate’’ the South African economy.

Let’s say that this new government presents a program focused on correcting the inequalities and improving competitiveness. That way South Africa could achieve a significantly higher growth rate, possibly 4-5% per capita growth. With the right policies it would be possible to decrease the unemployment rate.

The improvement program should concentrate on:

Labor market reforms that will lead to stronger growth. It is vital to improve labor relations in a way that aggressive industrial actions will be toned-down. A possible wage bargain model based on the standard that a competitive export industry sets the wage anchor for the domestic sector and a working toward a decentralized wage setting.
Improvement of the business climate. The main goal here has to be a reduction in corporate taxation, which will provide a strong incentive to increase the levels of investment and the capital stock. Any attempts to protect the domestic sector and specific industries should be stopped.
Thorough repair of the education system. The most effective way to ‘’fighting’’ inequality is by providing a good education. The current education system still works under the apartheid system and factors such as lack of national leadership; local government interests and teacher union conservatism have so far prevented reforms. This has to be changed.

These are only a few points that a well-planned improvement program should consist of. The question is will the next government be willing to apply the reforms!

South Africa falls into
Who is to blame?
Is there a way out?

For the second time in eight years, South Africa has fallen back into recession. The economy of the country shrank by 0.7% in the first quarter of 2017, followed by a 0.3% reduction in the final three months of 2016.

What does it mean?

A technical recession happens when an economy “shows” negative economic performance in a two consecutive quarters. It refers to a decrease in the economic output, also described as negative economic decline.

Simply put, a technical recession implies that the economic activity of the country is deteriorating and in this case it’s particularly serious because the country needs strong economic growth to “repair” unemployment, which currently stands at more than 27%.

We also have to consider the fact that living standards of citizens can’t recover without economic growth. The second is that the economy needs to grow for the government to be able to increase revenue to be able to meet its growing social welfare budget.

Why did it happen?

Economic activity constricted in a wide range of sectors, including construction, manufacturing and transport. Only mining and agriculture made a positive contribution to output growth.

The important question is whether this recession will continue or whether there will be a turn around to economic growth.

Who is to blame?

Although, no one can say whose fault it is, we must keep in mind that recessions are rare events, as policies are generally aimed at economic growth.

Fast economic growth depends on investment, but investment depends on confidence and positive expectations about the future of the country.

Experts note that President Jacob Zuma’s administration doesn’t raise confidence, which in fact partly explains passive investment. Right now South Africa seems to be a less attractive investment destination.

The lack of confidence is also reflected in decreased demand, which in turn results in shrinkages of economic output.

What is the way out? What measures have to be taken to get the country out of economic stagnation? Will they be successful?