Macroeconomic Policy Options for a Savings Constrained Economy: The Case of South Africa

Abstract

Abstract The extensive diagnostic studies and policy recommendations that exist for South Africa typically focus on microeconomic constraints to growth. Higher potential growth certainly requires structural reforms to boost productivity growth. But these will also be more effective if macroeconomic policy no longer impedes the needed relative price adjustments and consequential factor allocations to achieve higher productivity. We assess the performance of macroeconomic policy over the last 10 years. Our conclusion is that a different policy mix could have generated higher growth outcomes and provided the fiscal space to respond to the current Covid-19 crisis more effectively. In the post–global financial crisis era, fiscal resources were wasted in trying to stimulate in the face of a structural decline in economic growth. Restoring South Africa’s growth requires a comprehensive change in economic policy to target fiscal consolidation, shift the composition of expenditure to investment and human capital creation and permanently embed lower inflation. Macroprudential policy should better support long-term private sector investment. And, the country urgently needs an ambitious and rapidly implemented structural reform agenda that targets higher productivity growth.