Practise distinguishing actual and potential growth, interpreting output gaps and cycles and evaluating policies for sustained, inclusive and environmentally viable expansion.
The decline of South Africa's economy
South Africa is the most industrialised country in the continent of Africa but it is also an economy with much economic inequality.
Recently governments in South Africa have aimed to reduce economic inequalities by redistributing incomes and increasing both job and investment opportunities for all sections of society. Unfortunately, the reforms have been undermined through poor organisation and management. State railways, port facilities, airways and electricity production have been affected.
Government statistics for the first quarter of 2020 show that South Africa's economy contracted by 3.2 %, the biggest quarterly decline of actual economic growth in a decade (see Fig. 1.1). Gross domestic product (GDP) per capita was US$6130 in December 2019, 5.8\% lower than in December 2018.
Fig. 1.1 South Africa annual growth rate, 2008 to 2019
This economic decline is reflected in the electricity supply industry, which is a state-owned monopoly. It is struggling to survive mainly due to mismanagement. For several months it rationed electricity consumption and introduced regular power cuts for households and industries. The rationing policy led to decreases in production and increases in unemployment. The company's debts added significantly to South Africa's current national debt to GDP ratio of 56\% and are seen as the biggest threat to the economy.
Further evidence of economic difficulties can be found in the mining industry, a significant part of South Africa's economy. A controversial reform was introduced to give more equality of ownership. Already facing rising costs and growing bureaucracy, many mining firms, including multinational companies, stopped investing altogether which reduced potential economic growth. The mining industry declined. Thousands of jobs were lost despite South Africa having significant deposits of platinum, gold and iron ore.
For South Africa's economy to grow it needs to address major infrastructure issues. Also, in disadvantaged communities the education system is weak contributing to a skills shortage and a rise in the unemployment rate to 27 % (see Fig. 1.2). Increased production is further hindered by restrictive trade union practices.
Fig. 1.2 South Africa's unemployment rate
Fig. 1.3 South Africa's foreign direct investment (FDI) net inflows
An analyst said: 'A critical reason for low economic growth has been a lack of private sector investment and FDI (see Fig. 1.3). The lack of investment wasn't just due to the political policies but also to uncertainty and mismanagement which led to continued inequalities.'
Sources: The Daily Telegraph, 6 July 2019 and ceicdata.com
Define what is meant by actual economic growth and analyse the relationship between economic growth and unemployment as illustrated by Fig. 1.1 and Fig. 1.2.
Evaluate whether attracting investment and managing uncertainty are the most effective ways to improve the prospects for South Africa's economy.
What is most likely to increase if an economy enters a negative output gap?
business confidence
economic growth rate
inflation rate
unemployment rate
Increasing public sector debt is a good policy
Politicians do not usually think it a success to borrow a large amount of money but, in June 2020, when the economy was approaching a recession, the United Kingdom (UK) borrowed five times as much as it did in June 2019. This made the government debt only just a little less than the total size of the economy. The ratio of public sector debt to gross domestic product (GDP) was 99.6%. It was the highest figure for 60 years. Public sector net borrowing is shown in Fig. 1.
Borrowing is what the government ought to be doing in a recession in order to finance the spending used to boost aggregate demand. The question in 2020 was how long could the borrowing of such large amounts continue? There can be problems with a large public sector debt. An expansion of government borrowing might increase interest rates if investors require more compensation because they think the risk of holding government bonds has increased. This interest rate rise would affect the rest of the economy.
There is also a theoretical objection that government borrowing could 'crowd out' the private sector, especially when the economy is close to its productive capacity and unemployment of resources is low. This would not happen when there are unemployed resources in a recession.
The UK Finance Minister suggested that a high ratio of public sector debt to GDP was justified; it is the stability of the ratio that is important. This reasoning can be justified. Reducing government spending in order to reduce borrowing would risk stopping any recovery and make the situation worse. Economic recovery is necessary to restore economic activity, which in turn will restore the government's finances.
However, economists cannot know with any precision what the limits of public sector borrowing should be. For many years, Japan has maintained a ratio of public sector debt to GDP of over 200% with no difficulty. But what is suitable for Japan may not be suitable in a different type of economy.
State what is meant by 'a recession'.