skip to Main Content
Menu

RAMAPHOSA’S INVESTMENT DRIVE: A POUR DOWN MIRACLE OR TRICKLE DOWN ECONOMICS AT WORK?

RAMAPHOSA’S INVESTMENT DRIVE:  A POUR DOWN MIRACLE OR TRICKLE DOWN ECONOMICS AT WORK?

Two weeks ago President Cyril Ramaphosa finally hosted the investment summit he promised during his inaugural state of the nation address early this year. The summit came a few weeks after South Africa hosted a jobs summit in an attempt to deal with the surge of unemployment that has since seen South Africa’s unemployment rate increase to 27.5 percent in the third quarter up from 27.2 percent in the second quarter of 2018. The unemployment numbers were unsurprising given that the economy contracted for two consecutive quarters. Nonetheless, the high level of unemployment is worrying given that it feeds into poverty and income-wealth inequality and is thus the greatest threat to South Africa’s democratic project.

It is threat that is well established in the corridors of political and economic power and Ramaphosa as the torch bearer of the ANC knows that unless he tackles this issue, the ANC can never rest assured that it will rule until Jesus Christ comes back as former President Jacob Zuma once said. I therefore found it interesting that Ramaphosa chose to host a jobs summit before an investment summit given that the principle of cause and effect as I have written about in various articles would dictate that an increase in capital formation is what will lead to an increase in demand for labour.

Given this, Ramaphosa’s discussion around creating jobs may have been futile without discussing the elephant in the room, the low investment appetite for South Africa, both on the domestic and international front. For an economy to at least grow at three percent per year, it is would need to see investment spending make up about 30 percent of gross domestic product (GDP). The implication of growing at three percent is that using the “rule of 70” which allows you to calculate how many years it would take for South Africa to double the size of its economy. South Africa’s estimated size of $350 billion would take 23 years to double if we grew at three percent but alas we are not. If we were to grow at the current  0.7 percent  it would take us 100 years to double the size of the economy and needless to say we would see real GDP per capita continue to fall and  lead to a worsening of the poverty crisis.

South Africa’s current level of investment as a percentage of GDP only stands at 19 percent, which is well below the 30 percent needed to make some progress in creating new jobs. However, it must be understood that our challenges run deep. If we look at the fact that the expanded definition of unemployment means that our unemployment problem actually sits at about 50 percent. The implication of this is that those who were discouraged from finding jobs and by virtue left the labour market will upon economic recovery be motivated to re-enter the labour market. The implication of this is that we may see the growth of labour supply outstrip the number of jobs created and this will see unemployment remain stubbornly high.

This is how we can best describe the Mbeki years that many economists and political analysts called the years of jobless growth, which may not be right observation! The economy was creating jobs but there was excess labour supply which was pushed by increased entrances into the labour market by both new entrances fresh from formal schooling/ tertiary education and those who were discouraged. The key question to ask is, will Ramaphosa’s investment drive which saw R290 billion pledges being made by mostly big business to invest in the economy produce conditions that will see labour demand outstrip labour supply.

If “Ramanomics” (Ramaphosa’s economic model of increasing big business investment as way of stimulating economic growth) is the way the ANC choose to go, then I am afraid to say it will be “Mbekinomics” all over again. What he must do in conjunction with attracting big business is to focus on creating polices that will support small, medium and micro businesses and attract more people into the entrepreneurship space. By increasing the pie of businesses in operation, particularly black businesses, we could see economic growth reach the five percent needed to really eat away from unemployment but also would increase the tax revenue base for the government. In many ways economic policies pitched to increase the success rate of the most vulnerable of businesses, will ensure that we avoid the trap of trickledown economics that has failed to truly transform the South African economy and bring real and tangible changes. Ramaphosa, I plead with you to do the right thing!

 

Musa Mdunge

holds a BA Honours Degree in International Studies, majoring in Economics and Politics.he is a member of the Golden Key Honour Society. In 2015 he was awarded the prestigious Mandela Rhodes Scholarship. He is currently enrolled at Monash University, South Africa, reading for a MPhil specializing in International Studies. He writes in his personal capacity.

RAMAPHOSA’S INVESTMENT DRIVE: A POUR DOWN MIRACLE OR TRICKLE DOWN ECONOMICS AT WORK?