SONA22_ A Brief Analysis

 

On Thursday evening I sat glued to the television listening to President Cyril Ramaphosa’s 5^th State of the Nation Address (SONA) from the Cape Town City Hall. I was watching as a student of Econometrics, and hereunder will provide a brief analysis of what I believe to be the most crucial elements of SONA 2022 with regards to the economy. Firstly, allow me to give very brief definitions of a few terms that are relevant for my short analysis:

 

·         COORDINATION FAILURE is defined as a situation whereby, the inability of agents to coordinate their behavior leads to an equilibrium that is worse off than another possible equilibrium (Todaro, 2015, p165).

·         A COMPLEMENTARITY is an action taken by an agent which increases the incentives for other agents to take similar actions (Todaro, 2015, p166).

·         A BIG PUSH is a concerted economy-wide effort to initiate or accelerate economic development across many economic sectors (Todaro, 2015, p166.)

·         MIDDLE INCOME TRAP is a situation whereby  a country develops to a certain  level (normally middle income) but cannot move through to high income status. Normally caused by high inequality or low innovation capacity (Todaro, 2015, p166). 

·         UNDERDEVELOPMENT TRAP is a poverty trap at the national or regional level, in which the state of underdevelopment tends to repeat itself over time (Todaro, 2015, p166).

 

Listening intently to President Ramaphosa, I became even more convinced that, indeed, our country is and has for some time now been suffering from both the middle income and underdevelopment traps. It should not be difficult for any individual who reads the above definitions to agree with me.

 

President Ramaphosa clearly stated that, “ Unemployment has been caused by low growth, which has in turn resulted from a long-term decline in investment”. This suggests that there has been a coordination failure in the South African economy, whereby government has not created an environment where the private sector could invest, hence the low growth and high unemployment. This in turn,  has led to the country being in a state of both the middle income and underdevelopment traps.

 

President Ramaphosa  also stated that, “we have been held back by an unreliable electricity supply, inefficient network industries and the high cost of doing business”. With such problems we are faced as a nation, it is clear that the only way forward would be for the country to embark on what Michael Todaro refers to as an economy -wide effort to accelerate growth simply referred to as the “BIG PUSH”.

 

I will now link some of the president’s announcements to some of the definitions I have outlined earlier to perhaps paint a clearer picture of the route he intends to take us on:

 

1.       For any business activity to flourish, we need a stable and reliable electricity supply: the most crucial step to alleviating this step has been the separation of Eskom into three separate entities. This will allow for the generation of electricity to be the job of private entities.

 

·         A good example is Argentina: in the early nineties the country  found itself  in a similar situation we find ourselves in, in terms of an unstable electricity supply. The state-owned company was unbundled into three separate privately owned firms, responsible for generation, distribution, and transportation. These actions led to a situation where  public funds were no longer  getting drained by the electricity sector, and in three years the price of electricity fell by 40 percent. In turn, this  led to increased production capacity from industries because of stable electricity supply.

 

·         Now in the case of South Africa, the government has chosen not to allow the distribution to be left to the private sector because left to themselves the private sector would most likely look for ways  to simply make the most possible profit , to the possible detriment of the average South Africa.

 

 

2.       The key task of our government is to make it easier for business to start and grow:

 

·         The president also stated that he would involve a respected businessman, Mr. Sipho Nkosi,  to help cut the red tape that currently hinders the ease of starting and running a business, making it  smoother process than is currently the case.  This will help in speeding up job creation.

 

3.       The country needs more innovation:

 

·        President Ramaphosa stated also that one of the ways to spur innovation would be by providing more access to broadband data through the auctioning of spectrum. This will also help reduce the price of data so that more South Africans can afford it. In the 21^st Century, access to free Wi-Fi is important to allow for innovation but also to allow for jobseekers to find the jobs  they want.

 

With regards to the definitions that I have stated, government is asking for there to be more collaboration between the many different actors in the economy to avoid a COORDINATION FAILURE leading to a “NEW CONSENSUS”. Through such actions government is allowing for a BIG-PUSH that would allow South Africa to get out of the MIDDLE INCOME and UNDERDEVELOPMENT TRAPS that the country currently finds itself in.

 

Possible Criticism of Speech:

 

Criticism by some that President Ramaphosa contradicted himself by stating that South Africa needs to create a developmental state while at the same time admitting that we need to work with the private sector, possibly comes from a misunderstanding of what we mean by the term within a South African context at least.  I understand such criticism, however I do believe that it comes from a place of not fully comprehending what the president was saying.

 

The developmental state is not meant to be a completely capitalist or socialist agenda. In most cases the developmental state comes about through the combination a liberal open economy model and central-planned model. The theory of such a state is based on using advantages of the private sector while ensuring effective and efficient regulation from the state (Bolesta, 2007). For example, government can create an environment which make it easier for the private sector to invest. With more investment there are more jobs created which means less unemployed people. At the same time, more revenue is being collected through personal income tax but more importantly corporate tax as well (I say importantly because in the case of South Africa, corporate taxes as a percentage of government revenue have been falling for a while, burdening the average South African worker in the process (figure 1 below shows this). In such a situation, it could become more affordable for government to create a Basic Income Grant (BIG), as the would be more revenue coming into the state coffers but most importantly the number of recipients in need of the BIG would be reducing through the private sector led job creation initiatives. 

 

Figure 1.

 

 

In my own assessment, this was one of the best SONA speeches in our recent history  because there was finally a shift by a sitting ANC president away from old and outdated ideologies which have clearly proven to be ineffective in solving problems such as low growth, poverty, and unemployment. For the first time an ANC president has admitted that the job of the state is not to create jobs but rather to create a  conducive environment upon which the private sector operates and creates jobs, drives growth and alleviates poverty. It is my hope that this was the crucial step we have been waiting for as the new generation of South Africa, where the party puts its past to one side in order to focus on economic strategies that have been proven to work in the creation of jobs. I am not saying that the party should forget its past, afterall I would not have had the chance to have the privileged life that I have had, had it not been for the sacrifices that many members of the party had made. However, we need to realize that speaking of the past and reminiscing of those days will not help the country move forwards into a collective shared prosperity.

 

 

I will end of with one more figure to inspire thought:

 

Below is a final figure, to highlight the need for a private-sector led (job creating) growth path, on the top we have the debt-to-GDP ratio and on the bottom we have the unemployment rate. Both have been rising since 2008, which is evidence that although the government has been spending more money, they have been as well as not had the capacity to create jobs. The Question then remains where was all that money(debt) going???

 

Figure 2.

                                    

 

 

 

 

 

Abongile Vika is a student, currently completing his Master of Econometrics degree at the University of Pretoria.