Lessons for SA from Greece

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Greece has overnight become an example of what can go wrong.

All of a sudden a new benchmark has entered the global picture. Greece has overnight become an example of what can go wrong. It may be a useful mirror.

South Africa runs little danger of being another Greece, right? Our national debt isn't 115% of GDP (ours at the low point a year ago was only 23%, one-fifth of Greece's). Our budget deficit this past year was 7.3% of GDP (only just over half Greece's 13%). And our tax collection today is the most efficient part of government, hardly the story one hears about Greece.

But these aren't the only benchmarks to use when assessing us or considering our long-term sustainability.

By all accounts, Greece has had a grand time since it joined the European monetary union and gaining its Euro currency in 2001, since then drawing large regional EU subsidies, running up a lot of government debt, overspending while undertaxing and generally running an inefficient public sector.

In contrast, Germany was a lot more serious about its affairs, painfully containing wage costs, cutting real unit labour costs while boosting productivity and running a relatively efficient public sector which allowed it to boosts its exports in a highly competitive global arena.

Back to Africa where suddenly a few other things besides healthy national finances come into view.

We should look for institutional renewal, underpinning our long term growth. Various dimensions come to mind.

We should improve our trade competitiveness. Instead, our electricity problems are heavily undermining the economic structure we have, boosting operating costs while for a period probably starving access to more electricity while supply shortages are being suffered.

We should be focusing on adding better trained and more skilled people to the labour force, which our poorly performing education system is steadfastly severely hampering.

We should be improving the quality of our people, which our national health system doesn't seem to be doing, with the average life expectancy rapidly falling back towards pre-industrial standards.

We clearly are not doing certain things well, for why would we otherwise suffer such a high sustained outflow of skilled emigrants (invariably young, highly trained and/or very skilled and a great boon to any recipient country) at a time we have a dearth of such abilities?

Also, when it comes to nominal wage costs, we seem to be sharing the Italian and Greek profiles rather than the German one, in that unit labour cost growth remains high, productivity gains limited and much dependent on a steady Rand depreciation to maintain trade competitiveness (with the Rand exchange rate not within our control and at times due to global conditions seriously overvalued).

So Greece should be useful to us, as a wakeup call. Our state finances may not be as bad, and we are not suffering the rigid policy corset offered by the European Union (specifically one-size-fits-all interest rates, a common currency probably by now far too strongly valued for Greek purposes and shortly to be added a very strict fiscal regime imposed in potentially draconian ways).

But we do incur the penalty of a commodity producer periodically having its currency favoured to the point of overvaluation, undermining its industry (so-called Dutch disease after what happened to the Dutch post-1960 once enormous natural gas finds started favouring them).

And public sector and labour market wise, we suffer from deep efficiency shortcomings and market rigidities which undermine our growth potential relative to more vigorous country competitors.

Also, our policymakers apparently wish to turn the clock back, wanting to opt for increased import-substitution as a key to faster growth and job creation, and offering examples such as Brasil and (South) Korea.

In a limited fashion, linked to very large long-term infrastructure efforts this may have merit. We used to have a much larger capacity for local content on this score but this was essentially lost three decades ago once the public sector abruptly started to cut back on its infrastructure expansion.

Resurrecting such capabilities may indeed be profitable to a limited degree in specific instances, provided we don't start generalizing too broadly from this limited base. Unlike Brazil or Korea, we don't have rapidly developing large domestic markets allowing us genuine economies of scale and globally competitive industrial prices.

Our ‘efficient' stage of industrial development benefiting from import substitution as we exploited our underdeveloped domestic market is half a century ago, for anyone wanting to read up Prof Du Plessis's writings in the 1960s. Thereafter we haven't really been able to gain any more domestic efficiency gains from such approaches.

Indeed, the real danger is that we lose efficiency if import substitution were to be pushed too far into inappropriate corners of our industrial structure.

We also seem convinced that we can redistribute ourselves out of poverty, at least in the short term, as the fiscal budget very actively tries to compensate for our growth failure and failure to rapidly absorb the available labour force into productive employment. That, too, isn't sustainable.

Knowing that and acknowledging it isn't enough, for the larger population is steadily becoming used to receiving yet more redistributed income and benefits. Restraining this condition and the mentality it creates becomes that much more difficult over time.

Cees Bruggemans is Chief Economist of First National Bank. Register for his free e-mail articles on www.fnb.co.za/economics