Things Are Getting Rough in South Africa’s Economy

    July 29, 2015

    (The following article, by consulting economist Cees Bruggemans, published in 2015, is reprinted here with kind permission.)

    Things are getting rough [in the South African economy].

    How rough we will discover in due course, but safe to say a lot rougher than so far observed, at least in recent times.

    There are various causes. One is pressure from without. Another is too many poor decisions within making for key weaknesses in the South African economy. Yet another are policy aims that deviate, often wildly, from the way the inherited system is structured and operates, seeking “change”, often irrespective of consequences.

    What this yields mostly is bewilderment at every turn.

    South African economy and mining

    Cees Bruggemans on South African Economy

    Cees Bruggemans

    Aussie may be known as the Lucky country, but our natural riches have created similar luck in our midst. But this comes with dependencies. Our exports remain for two-thirds commodity related, mostly not beneficiated, with prices obtained in global markets. And no realistic Plan B in sight, considering electricity constraints and a failing education system foreclosing on alternatives.

    When things turn sour globally, and commodity demand falls off, export price declines can be steep even if merchandised import costs are mostly maintained. That impoverishes, the miners & their dependents, and the nation.

    A commodity exporter therefore lives by the vagaries of the global economy, and presumably adjusts to it as well as it can.

    This is where theory meets practical politics and can surprise deeply.

    A private market economy adjusts to demand & price weakness by cutting output. And if prolonged enough, by making more permanent changes to its capacity and employment. Not doing so erodes financial viability, to the point of failing and takeover by new shareholders able & willing to make such decisions.

    Even so, government feels it isn’t wise of private enterprise to consider laying off 50 000 workers, for consider the social upheaval such unemployment might cause. This is indeed serious, until considering the existing 8 million unemployed & discouraged about which government has so far done little to get them into the mainstream, except offer them limited social welfare.

    Is government preventing mining to adjust to new realities? Not necessarily, but making it difficult, as it doesn’t suit ideals, does seem a feature.

    Government trying to buy a new class of manager

    While this trade impoverishment is going on, government is intend on changing the appearance of things. To this end, it is pouring billions into creating a new class of business managers. For their enterprises to be successful, it has been decreed that such businesses need access to cheaper basic materials and favoured-status public contracts.

    Local businesses have proved unwilling to subsidise such social engineering.

    Meanwhile, with global trading conditions deteriorating, and competition intensifying, especially Chinese producers have found it attractive to dump excess product here at cutthroat prices.

    This has done various things to the South African economy. It has given China large inroads in some of our more basic sectors, such as steel, and it is destroying local capacity and jobs. It also creates lower input costs domestically, potentially achieving what could not be arranged before?

    One other reading of this willingness to allow Chinese imports is that it teaches local businesses better manners when dealing with government, to comply better with its wishes. But before we get to that stage, foreign shareholders may well decide to fold.

    This isn’t necessarily the end of the story either if government agencies were to fund friendly sources to buy up such derelict capacities cheaply & proceed within its chosen policy frame. But we aren’t there yet. It may, perhaps, only be the next stage.

    Meanwhile, existing shareholders, employees & suppliers are so much fluff in the wind as they battle hurricanes & rough seas, foreign imposed and apparently internally condoned.

    Tourism is a case apart. No clear beneficiaries, only victims, except perhaps politically, when considering areas of greatest impact. But this is to think logically while nothing necessarily is.

    The areas highlighted here are only small corners of a much bigger canvas. It is in the firm grip of game changers. This may cause many things to still change, except a few givens. Such as poverty, the legions of outsiders. And their ranks still swelling as more failure is enforced, from without temporarily through adversely changing global conditions, and from within plausibly more longer term through policies of choice.

    But this is to run ahead of the storm.

    Cees Bruggemans

    Consultant economist

    Bruggemans & Associates

    All info was correct at time of publishing