Cambridge University faculty of economics professor Gabriel Palma offered a somewhat depressing reality check regarding the state of the South African economy during the inaugural ‘Economic Policy Dialogue’, which took place at the University of the Witwatersrand Business School last week under the aegis of the Department of Trade and Industry.
Palma, a Chilean national who has taught econometrics, macro- economics and development and economic history at the esteemed academic institution since 1981, questioned how South Africa’s current account had deteriorated during a period when commodity prices had been trading well above historical levels – the current account being the sum of earnings on exports, less payments for imports; earnings on foreign investments, less payments made to foreign investors; and cash transfers.
Should the country’s 2011 current account deficit of 3% of gross domestic product (GDP) be adjusted to the terms of trade prevailing ahead of the strong increase in commodity prices, which began their ascent in 2003, Palma estimated, the current account deficit would have been 9% of GDP last year.
“Basically, you have more than adjusted to that price bonanza,” he noted, while cautioning that this placed South Africa “in a vulnerable position”, notwithstanding his expectation that commodity prices were likely to remain relatively robust for some time.
“The important point here is that commodity prices can easily come down . . . and when it happens, it can happen very quickly. If you are saddled with that kind of current account position, the domestic adjustment could be rather brutal,” he said, describing the position as a “bit of a time bomb”.
Moreover, South Africa’s export performance over the last ten years had been “disappointing”, having initially recovered in the period 1994 to 2000.
In 2011, South Africa’s export performance was below that of 2000, with the “surprisingly” poor performance of the mining sector largely to blame. “Other commodity producing countries have had mining sectors that have been performing at much better levels.”
South Africa had, thus, relied on capital inflows to “sort out the problem”.
“But as everybody knows, capital accounts are particularly erratic and particularly unpredictable and often move for reasons that have very little to do with the country itself.”
To remedy the situation, South Africa should not count on commodity prices remaining high “forever”. But it should, never- theless, focus on improving export competitiveness, especially in the mining environment.
South Africa should also “aim for an economic structure that is not so vulnerable to portfolio flows and to deindustrialisation”.
To transition the South Africa economy to a position where it could be more resilient against negative external shocks was easier said than done – especially when considering the strong vested interests associated with the current structure.
Nevertheless, Palma’s poignant input is both important and timely, albeit somewhat difficult to swallow.