In marking the 10th anniversary of the largest financial crisis since the Great Depression, this research, published by the Bureau for Economic Research (BER), looked back at the performance of the South African economy between 2010 and 2017.
Since the financial crisis, domestic economic growth has underperformed relative to both South Africa's emerging market peers and average global growth. Since 2014, domestic growth has also come in lower than the average for advanced economies. The reasons for the malaise have been well documented, with the lacklustre performance of the SA economy post-crisis ascribed to both global and domestic factors.
The research suggests that domestic factors, rather than global factors, explain the lion's share of the underperformance. These domestic factors include falling confidence, widespread policy uncertainty, mismanagement of state resources, and various other structural constraints which conspired to weigh on domestic economic activity. This is borne out by the fact that domestic growth tracked the global average quite closely pre- 2008, but began diverging notably in 2010.
The research attempts to quantify the cost of these “lost years" in terms of the size of the economy, employment growth and tax revenue. Based on relatively simple assumptions, it is determined that the domestic economy could have been up to 30% larger than was the case in 2017. Under the assumption that the domestic growth trajectory matched that of our emerging market peers, the economy could have been around 30% (or close to R1 trillion) larger. Under the more realistic assumption that we tracked average global growth post-crisis, the domestic economy would have been 15%, or R500 billion, larger in 2017.
The underperformance of the SA economy between 2010 and 2017 also had a significant negative effect on its ability to create meaningful employment opportunities. In fact, under different sets of assumptions, we could have had between 500 000 and 2,5 million more job opportunities over the 8-year period, with the unemployment rate dropping as low as 15% in 2017 under the most optimistic scenario.
Another direct consequence of the weak post-crisis performance of the economy can be seen in the deterioration of the government's financial position. Persistent tax revenue shortfalls over this period, which can be partially linked to the weak state of the SA economy, contributed to the deterioration in government finances and escalating government debt levels.
Under a post-crisis growth trajectory that closely matches that of our peers, combined with a sustained improvement in collection efficiency, total tax receipts over the eight years would probably have been higher by between R500 billion and R1 trillion.
While these results are based on a range of relatively simple assumptions, these simple “back-of-the-envelope" calculations do provide some insight into the cost of the stagnation in the economy between 2010 and 2017. It will take several years to undo the damage done over the post-crisis period through domestic policy missteps and mismanagement of public resources. The new administration under President Cyril Ramaphosa needs to urgently implement clear and well-articulated policy to boost private economic activity. Only then can SA start along the path to recovery.
*The article appears in the latest edition of the Stellenbosch University Research Publication. Click here to read more.