1. NS4053 Winter Term 2015 South African Convergence

2. Overview Haroon Bhorat and Alan Hirsch, “South Africa: Perspectives on Divergence and Convergence,” Brookings, October 2015 Overview As one of the strongest and most diversified economies in Africa, many expected big things after achieving democracy in 1994 Unfortunately it seems South Africa was not ready to make the leap to convergence As the following graphs suggest, South Africa has underperformed most of its peers. 2

3. Historical Growth I 3

4. Historical Growth II 4

5. Historical Growth III 5

6. Historical Growth IV 6

7. Reasons for Underperformance I Reasons for underperformance At the point of transition to democracy in 1994 the legacy of apartheid and inequality was pervasive However early in the second decade of democracy it seemed some of the backlogs were rolled back, and the growth rate picked up to levels similar to many emerging countries At the onset of the global financial crisis, which hit South Africa severely, the growth rate fell back below many emerging economies In retrospect boom of 2004-2008 based on a credit bubble supported by rising prices for commodities The underlying sources of growth was weak 7

8. Reasons for Underperformance II The country experienced poor export performance exports when other emerging markets were expanding real output Poor economic performance symptomatic of an overall low level of investment Though foreign investment poured in – mainly portfolio capital – little direct investment to increase output Average investment levels remained well below peers In sum, for many of the factors associated with convergence Globalization (trade and direct investment) Level of investment South Africa well below peers 8

9. Reasons for Underperformance III 9

10. Inclusive Growth I Demographic Transition, Education and Inclusive Growth Sub-Saharan Africa’s share of world’s population expected to shift from 12% in 2010 to 16% in 2030 Will have significant implications for labor markets Region projected to have the fastest growing working age population in the world However South Africa lags the region in 2020-2050 South Africa’s working age population grows at 0.6% per annum Nigeria’s working age population will grow at 3.0% Means no real demographic transition projected for South African economy 10

11. Inclusive Growth II No demographic transition means South Africa must grow by Getting more out of existing resources Tapping the growing consuming market Given the current high levels of unemployment 25% means that a lower demographic growth rate is not a liability for medium-run economic growth One of the possible mechanisms for convergence as shown by some of the Asian economies remains through improved human capital. Improved human capital may also help to smooth out the income distribution 11

12. Inclusive Growth III Unfortunately South Africa comes up short in this area too Again country lags other emerging economies The global average for math and science was between 26 and 28 percentage points higher than South Africa Even more telling, estimates of South Africa’s production function. They suggest that there is a weak or non-responsive schooling system in South Africa with respect to impacting on productivity gains and economic growth. The implication is that South Africa’s economic growth path would be both uneven and highly unequal This growth path would be delivering growth to those with high initial endowment's of land, capital, and education 12

13. Inclusive Growth IV 13

14. Inclusive Growth V To explain the distributional outcomes from economic growth authors use a Growth Incidence Curve (GIC) for South Africa over 1995 to 2010 – 15 years of democracy The graph suggests the gains from economic growth have been unevenly shared across the income distribution In particular since 1995 those households at the top end of the distribution have seen their real per capita income rise by over 2 percent per annum Mean income increased at a real average annual rate of just 1% while the median incomes declined marginally Those in the middle income distribution have witnessed a decline in theer incomes For the very poor the state has an extensive social protection scheme – causing their incomes to remain steady or increase a little 14

15. Inclusive Growth VI 15

16. Assessment I Assessment The poor returns from human capital driven by the poor quality of the schooling system have served to reproduce a highly unequal growth path in South Africa There are limits to a redistributive state, especially when growth is low South Africa’s long run growth trajectory remains defined by low levels of per capita economic growth in comparison with its emerging peers Low levels of investment and mediocre export growth coupled with an unhealthy dependence on portfolio inflows all serve to reinforce an un-dynamic growth path 16

17. Assessment II Country needs to address a number of long-run impediments to growth Invest in energy to address its long-run energy gap – brownouts common Increase the pace of investment and policies that encourage increased savings rather than growth through government consumption, consumer credit extension and reliance on foreign portfolios Interventions to lift constraints in the labor market including Encouraging skilled in-migration, and Reducing the level of conflict in labor relations Finally a commitment to improving the quality of basic and post-school education and training 17