Gigaba to take “tough, unpopular choices” to grow economy

By: Devin Griffiths

A summary of South Africa’s newest finance minister and the challenges he will face to lead a struggling economy.

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South Africa’s newest Finance Minister, Malusi Gigaba

The economy of South Africa has been on thin ice over the recent years, and if changes aren’t made soon this whole country may find itself in deep water. This article talks about Malusi Gigaba and the challenges ahead of him as South Africa’s newest finance minister. Gigaba replaced Pravin Gordhan who was not seeing eye to eye with South African President Jacob Zuma on the country’s financial plans. Gordhan was the finance minister from 2009-2014 and returned in late 2015 after the back-to-back firing of the finance ministers who had replaced him. Though Gordhan did not have the economy flourishing, he was able to keep it stable and he strengthened the rand (South Africa’s dollar) 20% upon his return in 2015. He planned to uplift the economy by cutting government spending and raising taxes on certain products to bring in more revenue. He also had the support of many investors and big businesses in the country that believed firing him could lead to market chaos. The rand has already dropped more than 5% since he was fired, and big investment firms like Old Mutual are seeing their shares decrease. The rand is currently .075 of the U.S. dollar. Zuma’s decision to fire Gordhan didn’t go well with many citizens either, including members of the ANC (African National Congress), which is his political party that has reigned throughout South Africa since the 90s. Citizens are suffering due to the failing economy and protests have broken out throughout the country over lack of services. Farmers have also been hit with the worse drought in over a century, which doesn’t help this country’s economic situation either. Many have said they will do what they can to make sure Zuma is no longer president in the near future.

South Africa’s economy is struggling so much that it is on the verge of reaching junk status from national agencies. Junk status is the low point for credit rating and would mean South Africa could be at high risk of losing its bonding privileges and therefore increasing its debt. The Citi World Government Bond Index has already said it would no longer support South Africa if it reached junk status. The fall in global commodity prices hasn’t helped either. The article also states that economic growth has also slowed to 0.3% in 2016 from a previous 1.3% in 2015. We can use the Rule of 72 to give us a perspective of just how slow this country’s growth rate is. This method estimates how many years it would take a country’s GDP per capita to double, given it’s current growth rate. It divides the number 72 by the growth rate. In South Africa’s case, it would take 240 years for income to double (72/0.3=240). Economic growth is determined by a multitude of factors from policies and market conditions to national resources. There are many different ways to go about increasing economic growth. The Harrod-Domar Model is an economic model that states economic growth depends upon saving and capital output:

Y = s/v-&

Y represents the growth rate, s represents savings, v represents capital output and & represents depreciation. Increasing savings while holding capital output steady can increase growth, or decreasing capital output while holding savings steady. Another way is to increase savings by more than you increase output. This is one example of many growth models. Below you can see a table provided by the World Data Bank that shows you the economic growth of South Africa over the past decade.

Year GDP growth (annual %)
2007 5.360474053
2008 3.191043888
2009 -1.538089135
2010 3.039734625
2011 3.284197135
2012 2.213258978
2013 2.330342259
2014 1.628871543
2015 1.264651378

Gigaba will be taking over financial minister of a country that is failing in almost every economic aspect. South Africa is also suffering from extreme economic inequality. Below is a table provided by the World Data Bank that shows you the income shares of each income group during the past decade.

Income Share % 2008 2011
Income share held by third 20% 8.05 7.97
Income share held by fourth 20% 15.79 15.9
Income share held by highest 20% 68.68 68.94
Income share held by second 20% 4.87 4.71
Income share held by lowest 20% 2.6 2.47

South Africa has one of the most unequal distributions of wealth in the world. The table of income shares shows that the top 20% own 68% of the wealth. These top 20% also own close to 100% in the country’s economic assets. To understand just how unequal the distribution of wealth in this country is, we can measure the Kuznets Ratio:

share of income owned by the poorest X% / share of income owned by the richest Y%

In this case we would divide South Africa’s poorest 20% by its wealthiest 20%. From the table, we would divide 68.94 by 2.47 = 27.91. This number is very high, and is triple the most recent Kuznet Ratio of the United States.The margin of wealth is so wide that a middle class technically does not exist. Even more inequality exists racially, as the white population owns the majority of the wealth, which is shocking considering that the white population make up only 8% of the country. A method that can decrease inequality is known as the Principle of Transfers. If wealth or resources are removed from the rich and given to the poor, inequality will go down. Unfortunately, increasing everyone’s wealth will not change inequality at all, which is known as Scale Independence. Capitalism is often criticized as a system where the rich continue to get richer while the poor consistently suffer. Wealth is often passed down from generation to generation. South Africa is a country that saw its first democratic government in 1994, evolving from that of an Apartheid system before hand. So it may not be that shocking to see the majority of the wealth in the hands of whites, considering that whites were historically always in power in South Africa up until the last two decades. Many citizens have continued to voice the issue of economic inequality to the government, and it is something Gigaba must try to change.

The road ahead of Gigaba will not be an easy one, which is something he definitely has realized. He knows he will have to make tough decisions and implement changes along the way, which will not always be supported by the citizens. As for now, he intends to stick to the financial plans laid out by Gordhan in February, which include seeking up to $2 billion in foreign aid for the next couple of years. He also maintains that he will work to redistribute wealth as well as shifting majority of it to blacks. There are many different models and formulas that can be used as guides to help decrease the problems in this struggling economy, so Gigaba will have a lot evaluate. He seems to be confident in his position, and hopefully his work will positively impact the economy of South Africa in the near future.

References

Cotterill, Joseph. “Fitch cuts South Africa’s credit rating to junk.” Subscribe to read. N.p.,      7 Apr. 2017. Web. 18 Apr. 2017.

Mullen, Jethro, and Alanna Petroff. “South African rand plummets after Finance Minister Pravin Gordhan is fired.” CNNMoney. Cable News Network, 1 Apr. 2017. Web. 18 Apr. 2017.

Orthofer Economics PhD Candidate, Stellenbosch University, Anna. “South Africa needs   to fix its dangerously wide wealth gap.” The Conversation. N.p., 6 Oct. 2016. Web. 18 Apr. 2017.

“South Africa’s economy ‘in crisis'” BBC News. BBC, 24 Feb. 2016. Web. 18 Apr. 2017.

1 thought on “Gigaba to take “tough, unpopular choices” to grow economy”

  1. Over the past year, university students have led major protests demanding free tertiary education. South Africa faces big challenges in stabilizing the economy while also providing services to its population and the political turmoil has certainly made that all the more difficult!

    Like

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