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April 2019

Fundamental restructuring: A continued tension between long-term policy and strategic questions

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Shocks and mega trends shaping the global economy have altered how economies around the world need to be organised, managed and thus the instruments therein repurposed. One such mega trend is the rapid level of urbanisation that is taking place in the rest of the developed world and Asia, where roughly 1.2 million people a week migrate from rural areas to urban centers in Asia. We see this same trend in the Gauteng province, albeit at a smaller scale, where over 300 000 people migrate into the Gauteng province annually from other provinces. Placing significant pressure on the quality of available infrastructure, basic services, the environment and the availability of jobs.

A second mega trend shaping the world economy is the declining fertility rates in the Americas, Europe and China. The resultant outcome of this feature is an aging working population.   The potential labour force in the U.S. grew by 2.5 percent per year between 1974 and 1981. It has been declining since, because of aging, and is expected to be just 0.5 percent per year over the next decade. In China, the situation is even direr: The workforce has actually fallen significantly. The U.S. is struggling with a lower but still positive growth rate, while China has to cope with almost no growth and perhaps some declines. The ongoing trade negotiations between the US and China have also contributed to slower global economic growth forecasts, with declining global PMI numbers, a change in posture from a hawkish US Federal Reserve to a more dovish outlook in 2019, uncertainty with respect to the outcome of Britain’s negotiations to exit the EU and slowing Chinese economic growth. Amidst these developments, after a decade since the previous financial crisis, fears of another financial crisis have been exacerbated. Albeit, these fears are not necessarily founded as there has not been a credit boom as in the last crisis as yet, nor is there an abnormal liquidity squeeze and a number of regulations have since been promulgated to manage the quality of underlying credit.

Evolutions in the nature and form of industrialisation can also be attributed to the shifts in the world economy which manifests itself in the advent of the Fourth Industrial Revolution. Whereby advances in technologies such as automation, quantum computing, artificial intelligence and machine learning will have a real impact on jobs, wages, working conditions and the ethics of technology in the formulation of industrial policy.

Fluctuating international crude oil prices in 2018, compounded by a depreciating currency saw a rise in the price of petrol at the pump for South African consumers. A rise in consumer price inflation and a US Fed hawkish posture by increasing interest rates led the South African Reserve Bank to do the same in addition to underlying weaknesses in the fundamentals of emerging markets.

To illustrate the point of South Africa’s positioning in the global economic landscape is that the South African economy comprises less than 1% of the global economy and its population comprises less than 1% of the global population. Yet, it has the most traded emerging market currency, exposing it to market fluctuations and changing sentiments.

Contrary to some parts of Asia, Americas and Europe faced with the challenge of a declining working population exposing them to risks of slowing growth. South Africa and the continent of Africa find itself in the position of having high fertility rates and a young demographic dividend with the median age being 20 years in Africa.

A loss of competitiveness in key sectors of the South African economy such as manufacturing, agriculture, trade, construction and mining has pronounced the youth unemployment problem in SA. Despite the loss of competitiveness, SA remains Africa’s most industrialised nation, highlighting the need for the over $1bn worth of annual infrastructure development required in the continent.

Finance is the largest contributor to the nominal GDP number at 20% followed by government, trade and manufacturing. This structure of the economy does not boast well for a nation that has a significantly young demographic that is of working age and yet locked out of participating meaningfully in the economy. Poor education outcomes and a high unemployment rate are the two major structural burdens SA faces with respect to its youth. A mismatch in terms of skills that are required in industry versus the skills that are available in the labour market are an outcome of the over 600 000 learners who fall out of the schooling system prior to reaching matric. The inability to access employment opportunities exacerbate the levels of poverty and wage inequality. Amidst all of these pertinent strategic questions of homelessness, unemployment and poverty that need to be addressed with the greatest sense of urgency, longer term policy considerations compete for the same level of attention and detail.

For instance, Africa will have 1 billion new middle-class consumers in the next 15 years. This therefore, serves as a tremendous opportunity for institutions, governments and the private sector to invest in this growing market. Given its demographic dividend, the developed world is likely to be searching for its workforce here in the continent. South Africa’s future is not divorced from that of the rest of the continent. Therefore, diplomatic work on trade, strong institutions, peace and stability in the region should be an apex priority. In the past year alone, there were more babies in Nigeria than all of Western Europe. And so, it therefore leaves the question, are we doing enough to secure a sustainable growth path for African economies and its young people? Contentious issues such as famine, climate change, the economy, healthcare and technology are pertinent questions that require attention. If we are indeed to accept that the tensions between long-term policy considerations and strategic questions exist. It leaves a question to be answered; they exist to do what?