The direct consequences of the crisis for South Africa are obvious, for example the volatility in South African financial markets in 2008-2009, the 2009 recession, the reform of financial regulation in imitation of international trends, South Africa’s higher international profile as member of the newly formed G20 group and later the BRICS countries, and the shift in South Africa’s foreign trade from Europe to China.
However, one should not lose sight of the indirect consequences and the long-term effect thereof.
From a South African perspective, the financial crisis could hardly have come at a worse time. The crisis hit South Africa during a period of political transition and policy shutdown following the ANC congress at Polokwane in December 2007. South Africa had an interim president in the person of Mr Mothlanthe in anticipation of the 2009 elections and Mr Zuma’s acceptance of the presidency, after which it would obviously take time for the new administration to find its feet.
The result was not only a change of president, but effectively a change of government. Although in name the same party was in power, the post-Polokwane ANC differed in many respects from its predecessor, specifically with regard to its economic ideology.
The change from Mr Mbeki’s government to that of Mr Zuma was more comparable to a change in government from, say, the Conservative Party to the Labour Party in Britain. This discontinuity played a decisive role in the South African government’s response to the global crisis.
The new Zuma cabinet included several ministers with a strong ideological preference for a larger role for the state in the economy and they regarded the financial crisis as justification for their point of view. For them it was the end of neo-liberalism (a highly misused term, but let’s leave it at that), and the announcement of the victory of the development state – the crisis did originate in the USA and not China! (although the end result of the sharp rise in credit in China since 2008 from 130% to 200% of GDP is still uncertain).
Unfortunately the mistakes of the international investment banks were generalised as if they were typical of the private sector as a whole and the business sector should therefore be placed under the authority of the state to ensure it acts in a socially responsible way. This is one of the main causes of the tension between the state and the business community with which we are saddled today.
The crisis brought the disadvantages of an insufficient divide between state and party to the fore. The dominant role played by the ANC as political party in the policy formulation process and its institutionalisation in decisions taken by congress every 5 years results in a lack of adaptability to changing conditions. Decisions take at Polokwane in December 2007 were thus enacted without taking account of the negative impact of the financial crisis on the South African economy.
Secondly, the crisis created the climate for a global deterioration in fiscal parameters against the backdrop of the Great Recession. Anticyclical fiscal policy à la Keynes was the order of the day and those countries that had the necessary fiscal room to manoeuvre were expected to stimulate their economies, not only in their own interest but in the interest of the greater good. South Africa was one of these countries (with a budget surplus and low level of government debt) and policymakers referred to the shovel-ready capital projects that could be implemented.
Unfortunately the end result was quite different: a sharp increase in consumption spending by the state, specifically social grants and the wage and salary bill, financed by loans, was justified as anticyclical policy. Compared to its peer group, South Africa showed the greatest reversal in its fiscal position for the smallest benefit in terms of growth and employment. The loss of growth momentum in the economy over the past two years is an indication that this stimulus has had no permanent benefits.
The crisis thus laid the foundation for the fiscal predicament in which South Africa finds itself today. Escaping from the vice of slow-growing state revenue and an imbalance in government spending at the cost of capital spending will require more than just putting on the brakes as envisaged in the recent medium-term budget. If government consumption spending is not reduced in absolute terms, the degree of freedom within which the government pursues its economic policy will remain extremely restricted for years.
The third indirect consequence of the financial crisis for South Africa was that the achievability of a sustained growth rate of 6%+ was shown to have been an illusion. The impact of the Great Recession on the South African economy has once again highlighted our dependence on global windfalls such as a sharp increase in commodity prices and the inflow of foreign capital. South Africa’s potential growth rate of 3,5% has been reconfirmed and the question has even been asked whether it is not in fact lower.
South Africa’s inability to formulate a comprehensive growth policy and adhere to it over a long period of time has also been exposed once more. The political discontinuity referred to earlier has contributed to this. Apart from the fact that GEAR was never implemented fully, ASGISA died a silent death after Polokwane 2007. In its place came the New Growth Path, followed by its little brother, the Industrial Policy Action Plan. In spite of these plans the performance of the economy has continued to deteriorate.
Still later the National Development Plan with its long-term vision followed. Even if the current discord over the NDP were to be resolved, a question mark would still hang over South Africa’s ability to persist with such a strategy for 20 or 30 years, notwithstanding changes of government.
The question of whether the financial crisis has ushered in a new era is therefore also resonating in South Africa. That era is already starting to unfold and until now it has unfortunately now been a positive picture. To turn it around will be a challenge, but not impossible.