~~~~Sven Larson~~

My recent articles about the depth of the European crisis paint a depressing picture of life in the Old World. I should perhaps apologize for this, but the problem is that I see no other future for Europe than the one I am painting.

From a global perspective this means that one of the three largest economies in the world is sinking into a permanent state of recession and depressed demand. Superficially, this is not good news for the rest of the world whose trade with Europe will be negatively affected. However, other parts of the world will continue to grow and prosper: once the imploding Obama administration is over the United States will return to its long-term path of Capitalism, free enterprise and growth; China, Japan and South Korea will continue to form a powerful economic hub in East Asia; and once the political turmoil in countries like Thailand and Malaysia is gone, South-East Asia will once again become a growth hub.

It is good to keep this in mind, because there are some corners of the world outside of Europe where things look pretty depressive right now. One of them is South Africa, which is wrestling with both a political crisis and an economic recession. I have written about the political crisis on several occasions – here is one example – and there is no doubt that South Africa needs an entirely new and freedom-oriented government to replace ANC’s arrogant, corrupted and in many ways incompetent apparatchiks.

A political change would hopefully benefit the economy as well. And there is a lot to do on that front, as Ron Derby with the Business Day explains:

Thursday’s economic data showed evidence of a sluggish manufacturing and mining sector, which is going to make the next meeting of the [Central Bank's] policy committee much more interesting. In March, manufacturing production fell 2.5% month on month, compared with a revised decrease of 3.6% the previous month. It was well below market expectations that it would remain flat. After two months of recovery, mining output fell 3.5% year on year.

And the reason is in part the…

European struggles to emerge from a recession

However, there is also a number of domestic factors, such as uncertainty about taxes, problems with corruption etc. On top of that, the ANC government seems to be intervening where it should not and remaining passive where it should be active:

In the absence of government intervention to boost the economy — we are still waiting for infrastructure spend to start — markets and economists have taken a keen interest in just what the central bank will do at its next meeting. And there’s quite a huge difference in opinion.

Before we get to that, let’s remember that interest rates in the United States and Europe are exceptionally low, and they have made no noticeable difference. The U.S. economy is growing moderately, definitely not at any exceptional rates, and that is for the most part due to comparatively low energy prices, comparatively moderate consumer-oriented taxes and, related to that, a fiscal policy that is not nearly as invasive as the austerity madness in Europe.

By contrast, Europe has done virtually everything wrong on the fiscal side, which is completely taking the edge of the European Central Bank’s extremely lax monetary policy.

The obvious conclusion is that the South Africans should not put too much of their confidence in their central bank. Fortunately, some observers are coming to that conclusion. Ron Derby and the Business Day again:

Last week I was of the view that the Reserve Bank may as well cut the repo rate by 50 basis points to boost confidence levels — taking similar action as the European Central Bank, even though our inflationary environments could not be more different. Now I know that a cut wouldn’t necessarily boost South Africa’s growth overnight, because at 5% our borrowing costs are already at multi-decade lows.

The South African inflation rate is persistently above five percent, flirting at times with six percent. It is a bit of a mystery given how poorly the economy is performing, though a topic that would need a longer analysis than this blog can offer.

Back to Ron Derby, who recognizes the bigger problems that South Africa’s economy is facing:

For me, a cut is not a solution to the growth question, but rather a boost to morale. Stanlib chief economist Kevin Lings says the impediments to higher economic growth are largely unrelated to interest rates and, ideally, it is these impediments which should be urgently addressed. I guess the first step along this path is to reach agreement on a plan and at this stage I’ll take any economic plan made by the government, business and unions. That’s going to take some time, but while we wait for the stars to be perfectly aligned, the economy needs an injection of confidence to halt the steady decline.

We can only wish the South Africans good luck in their pursuit of a better plan. So long as the ANC stays in power it is unlikely that any reforms will take place. They are too focused on pushing a socialist agenda.

Once the ANC is replaced, however, South Africa has great potential. A solution to the inflation mystery together with stability in the tax system and in the protection of property rights can come a long way. Stronger law enforcement in general and an end to corruption can also do a lot.

Beyond that, the country needs a healthy dose of economic freedom. But that is a story for another day.