South Africa in the grip of stagnation | Business| Economy and finance news from a German perspective | DW | 26.08.2014
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South Africa in the grip of stagnation

As South Africa continues its fight against a full-blown recession, analysts have debated different concepts of putting the economy back on track. DW asked economist Patrick Bond about his vision for the African nation.

DW: South Africa narrowly avoided slipping into recession in the first half of this year. In the first quarter the economy did shrink by 0.6 percent, but it put in modest growth of 0.6 percent in the second quarter from April to June. Now, for economists a recession is two successive quarters of negative growth. Why is the South African economy stagnating?

Patrick Bond: Well indeed it´s worse than stagnating, because gross domestic product (GDP) is actually declining in growth considering resource outflow. Take platinum, our coal, our gold and some of the other minerals. So if we make a simple correction, which is to adjust for the natural capital that's depleted, we're in very negative territory. And that stagnation comes from a reliance on primary exports and a deindustrialization that seems to be getting worse and worse.

We're not turning the huge resources in the mineral space into further activity. And frankly, I don´t think that even if we had avoided strikes - with the metal workers having shut down much of the industrial economy - even adjusted for that, our industrial sector is still stagnant. That's the core of the problem.

To what extent is South Africa being buffeted by adverse global conditions?

Take the slowing of the Chinese economy, declining commodity prices plus Europe´s stagnation - that´s one of our primary export markets - and the very weak growth in the US economy! So, really the only growth area has been our consumer credit-based consumption, based on the huge debt that ordinary people have. Now that´s also begun to hit the limits.

Our sixth largest bank, African Bank, went bankrupt last week and in fact Moody´s responded by downgrading all of the major banks which was seen as a bit of an overreaction, but it shows that the overextension of our credit system to fuel even that very weak growth now also has limits.

Diamond mine in Johannesburg

An over-reliance on exporting primary commodities may be harmful

Indeed we have a foreign debt that's hit about a $140 billion and the last reserve bank statement says that this is quite a dangerous territory. The last time we were in this 40-percent debt-to-GDP ratio on the foreign debt side was back in 1985. It led to a debt crisis. White business then split from the white Afrikaaner ruling party and it was the end of Apartheid, so big things happened when there were these kinds of problems.

What does the government need to do to ensure that growth picks up?

Well, there are two basic positions. One comes from the establishment. It´s called the National Development Plan (the NDP) and it's endorsed by most of the major political parties. The third largest party is the Economic Freedom Fighters on the left and the biggest trade union, the metal workers and indeed the entire trade union movement has said we don't like this NDP because it still keeps South Africa excessively reliant on a sort of financialized economy with mineral exports as the core strategy.

I would agree with that latter position and critique. We have after all the most unequal country in the world in wealth terms and it has gotten worse since 1994 because of liberalization and that´s led as well to an extremely high rate of social protest, probably the highest in the world.

The World Economic Forum also has measured the South African working class militancy as the highest in the world, and in February this year PricewaterhouseCoopers rated our corporate class the most corrupt, subject to fraud and bribery, the most corrupt in the world.

So, social reform is required as well as economic reform, right?

Yes indeed. There is a general social grant policy, about 16 million people get the grants, but they tend to be rather tokenistic in the whole scheme of things, about 3 percent of GDP goes to those grants and that puts South Africa about the fourth lowest in terms of social spending of the top 40 economies, according to the Organization for Economic Cooperation and Development [OECD].

Economist Patrick Bond

Patrick Bond says the focus needs to be on domestic consumption, not exports alone

So even though we've got this extreme inequality, extreme class struggle - the massacre two years ago at Marikana platinum mine is just one of the reflections of that intensity - the government still hasn’t coughed up enough money to affect the Gini coefficient [a measure of statistical dispersion intended to represent the income distribution of a nation's residents and gauge inequalities in a given society].

How do you see the South African economy performing in the third and fourth quarters of this year?

No real change. I think the big question everyone is asking is is there a Chinese soft- to-hard landing in the works as for example the real estate and construction sectors really slow down? The raw minerals and the steel, many of the imported copper - in other words, the things that Africa provides China - will be in lower demand.

I think the big question then is would that not signal to the ruling class here that maybe they need to start another accumulation trajectory, like the Chinese, one that's more based on inward consumption rather than export orientation?

Patrick Bond is a political economist at the University of Kwazulu-Natal.