Is the current euphoria about the economy justified?

FALLING INTEREST rates, forecasts of 3-4 per cent economic growth and a resurgence of business confidence have all combined to ensure a rapturous response to President Thabo Mbeki’s vague promises of economic reform and a clamour to see Standard & Poor’s raise South Africa’s credit rating to investment grade. The question that must be asked is whether the president can deliver the reform he has promised. After all, Mandela’s presidency began with the same optimism and rapid growth — only to be followed by a fall in the value of the Rand, a radical policy change, and a further Rand collapse. Five years later growth was under 1 per cent and over half a million jobs had been lost.

This time some of the fundamentals are better. Inflation is down to 7.9 per cent, the budget deficit is only 2.8 per cent of GDP, debt is shrinking and the Reserve Bank’s forward book is being wound down. Such figures, together with the president’s conversion to capitalism, have induced euphoria in much of the business establishment, a mood that blends seamlessly with the hegemonic self-confidence of the political elite. But the unpalatable truth is that the boom may be short-lived and may not produce the sustained economic expansion that the country needs.

There are three reasons to take this more pessimistic view. First, the cyclical recovery the country is currently experiencing will soon suck in enough imports to produce a growing trade deficit. Since reserves are tiny Reserve Bank governor Tito Mboweni could be forced to raise interest rates to throttle back demand. Already bank economists are predicting this could happen by November. Such a turn of events would kill the boom and threaten to leave Mbeki economically marooned in the middle of his term of office just as Mandela was. The only way to prevent this is to attract large capital inflows to offset the deficit and the only way to guarantee large capital inflows is by privatisation. However it takes time to prepare large enterprises for privatisation. The government has started the preliminary restructuring process but can it manage any major privatisation by the end of this year and will it maximise its returns by conceding to foreign investors the management control they will want?

Second, the torrent of applause for Mbeki’s promise of greater labour flexibility has obscured the fact that he has not promised much. He has talked only of helping small business and of amending the Labour Relations and Basic Conditions of Employment Acts. What business needs is across the board flexibility and some relief from the Equity Employment Act, potentially the most crippling law of all. Membathisi Mdlalana, the minister of labour, is still happily promising "to make retrenchments more difficult" — that is, greater inflexibility. Both Mdlalana and the president need to think hard about Freeplay Engineering, a South African firm leading the world with a product of huge export potential — clockwork radios. It has just announced that it is moving half its jobs and most of its production to China where labour costs are much lower. For, despite trade minister Alec Erwin’s constant appeals for South Africa to make trading alliances with other developing countries, that is where the most cut-throat competition undoubtedly comes from. If more South African jobs are not to be exported in this way real labour flexibility is needed — fast.

Lastly, not all the economic fundamentals are better than in 1994. The skills base has fallen thanks to the emigration of large numbers of professionals. The shortages this has created in many growth industries will become more pronounced as the economy revs up. Such emigration needs to be stemmed, but the country is still sending out the wrong messages. Sam Ramsamy’s decision not to send the men’s hockey team — which had won the African championship and was in the world’s top eight — to the Olympics because it did not have enough black players is a case in point. Whether they care about hockey or not, to young white and brown professionals this action says — "however good you are, you are not wanted; race is what counts not merit." Mbeki will need to do much more than tinker with the labour laws if the country is to achieve sustained economic growth and deserve that investment grade credit rating.