Copyright © 2021
Inclusive Society Institute
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DISCLAIMER
Views expressed in this report do not necessarily represent the views of the Inclusive Society Institute or those of their respective Board or Council members. All records and findings included in this report, originate from
a panel discussion on developing a new economic blueprint for South Africa,
which took place in March 2021
Author: Mariaan Webb, Creamer Media Writer
Edited by: Daryl Swanepoel
Contents
Abbreviations & acronyms
Introduction
Identifying weaknesses
Policy uncertainty
Broad-based black economic empowerment
Education
Fiscal crisis
Incompetence and corruption limiting State capacity
Institutional weakness
Labour and skills
Lack of competition
Interventions for fostering growth
Conclusion
References
Abbreviations & acronyms
AfCFTA African Continental Free Trade Area
BBBEE broad-based black economic empowerment
ISI Inclusive Society Institute
IMF International Monetary Fund
IPP independent power producer
MP Member of Parliament
NDP National Development Plan
OECD Organisation for Economic Cooperation and Development
PGM platinum-group metals
SABC South African Broadcasting Corporation
SEZ special economic zone
SoE State-owned enterprise
Stats SA Statistics South Africa
UN United Nations
Introduction
This report is a summary of themes from discussions held by the Inclusive Society Institute (ISI) with the financial sector on the reasons behind South Africa’s depressed growth performance, but more importantly to gather innovative thought and a new perspective for placing the country on a path of sustainable and inclusive growth.
The dialogue forms part of the ISI’s comprehensive research to develop a new growth-centred economic blueprint for South Africa, assessing the current performance of the National Development Plan (NDP) and presenting fresh ideas.
The first phase of the research involved studying previously distressed economies that have turned themselves around within a short space of time, with a focus on Japan, South Korea, and Germany.
The second phase delves into South Africa’s policies, highlighting strengths, weaknesses, and interventions that could catapult the sluggish economy onto a higher growth path. Owing to the impact of the Covid-19 pandemic, South Africa’s economy contracted by 7% in 2020 (Stats SA, 2021a). This severe contraction is estimated to have pushed about two-million people into poverty, as defined by those living below the poverty line for upper-middle income countries of $5.50 a day (World Bank, 2021). It is projected that the economy’s annual growth will be 3.10% in 2021 and 2% in 2022 (IMF, 2021).
The ISI believes South Africa requires at least 4% to 5% economic growth to effectively begin to reduce the country’s entrenched high levels of unemployment, inequality, and poverty.
Participants, both local and international contributors, were asked to identify the weaknesses in South Africa’s economic policies and to offer ideas about where the country’s focus and priorities should be.
Identifying weaknesses
South Africa has severe and deep-seated structural weaknesses. The unemployment
rate has risen to 32.50% (narrow definition) in the fourth quarter of 2020 – the highest
in at least 13 years (Stats SA, 2021b). Per capita growth has been declining since its peak of 2014 to a level last seen in 2005 (Stats SA, 2021c). South Africa is also one of the
most unequal countries in the world, reporting a per capita expenditure Gini coefficient of
0.65 in 2015. The top 10% of the population spend nearly eight times more than the bottom
40% (Stats SA, 2020).
The Covid-19 pandemic exacerbated existing shortcomings, exposing the economy’s major weaknesses, including, among others, stagnant growth, inequality, rising national debt
and severe electricity challenges.
Despite substantial social spending, government outcomes remain poor – whether that be
in education, health, or social grants. Several participants mentioned South Africa’s unsustainable debt situation, which will require higher growth to address it. More foreign investment will be needed for economic growth and to restore fiscal soundness.
Observations were made about policy formulation, implementation and communication
across different sectors, such as improving education outcomes, dealing with land reform,
and restructuring State-owned enterprises, including power utility Eskom.
The country is also only just beginning to address a decade of State capture, run-down and
repurposed State capacity, and related institutional weaknesses.
Policy uncertainty
Policy certainty is critical to driving investment in any economy. South Africa is ultimately competing for global investment, but uncertainty is undermining its drive to attract investors and thereby its prospects for growth. Concerns have been raised about policy certainty in
energy, mining, and land reform. Investors are uncertain that laws will not change, and this makes the investment climate uncompetitive.
Policy implementation paralysis, especially related to the NDP, policy communication and
policy discord are hampering progress.
The NDP, which serves as an overarching policy blueprint for the country and aims to eradicate poverty, inequality, and unemployment by 2030, was effectively shelved under the previous administration. While widely regarded as a well-written document, the NDP is considered too broad and the time in which reform is expected too long. Although strong in certain areas, particularly its broad economic plan, the NDP lacks specifics when it comes to certain sectors, for example financial services. It acknowledges the need for financial inclusion and refers to access to capital, but lacks substance on how this should be implemented. Targets are also no longer attainable and need to be recalibrated.
Some other emerging economies have had substantial success with development plans
that have a shorter timeframe than the long-term planning period of the NDP. Malaysia,
for instance, practices a system of centralised economic development planning with
five-yearly development plans (OECD, 2016). Policy plans should also be supported by
effective participation of citizenship (OECD, 2017). The NDP has been ineffective in communicating its plans to the public and does not encourage a system of accountability.
In the past ten years, various sector-focused policies have also been developed and launched with much fanfare, but a few years down the line, not much has happened. One example is Eskom – despite government hiring financial adviser Lazard in 2018 to draft a plan to shore up the struggling utility’s balance sheet, it remains a real risk to the sovereign (Reuters, 2018).
This begs the question: Why should an investor, without an emotional attachment to South Africa, believe what the South African government is saying about implementing what they
set out to do?
A failure to conduct economic-impact studies when a new policy is drafted or considered for implementation is seen as a negative. For example, the National Health Insurance Bill, which proposes a fund to achieve universal health care coverage, has been published without an accompanying financing paper (ISI, 2020). On the other hand, where policies have succeeded, they are not necessarily deployed more widely or scaled up.
Broad-based black economic empowerment
The broad-based black economic-empowerment (BBBEE) policy, which aims to increase
the participation of black people in the management, ownership, and control of South
Africa’s economy, is seen by many as a disincentive to foreign investors. Although investors express support for the BBBEE objectives, there is frustration with the way the policy has
been implemented and with the codes through which compliance is measured. A study,
funded by the European Union, has found that the policy, primarily effected through the
BBBEE Codes of Good Practice, has become “convoluted and complex, often frustrating businesses rather than encouraging transformative practices”. The frustrations experienced in implementing BBBEE range from “too many ambiguous and often-changing rules (making reference to the Codes that have undergone multiple changes in recent years), to trying
to stay focused on business imperatives while attending to the intricacies of BBBEE compliance” (Samaai-Abader, 2020).
In its current form, the policy has become an additional cost to industry and has also resulted
in rent-seeking rather than productive business activity. There is a view that black economic empowerment has made a few politically connected people exceptionally wealthy while failing to improve income distribution for the majority of South Africans.
Education
Education is one of the biggest problems in South Africa. Beset by infrastructure shortcomings, overcrowded classrooms, a lack of teacher capacity and relatively poor learning outcomes, which are exacerbated by systemic inequalities, the education system does not equip young people with the right skills to enter the labour market.
After initial improvements in learning outcomes – notably between 2003 and 2011 – gains
have plateaued, as evidenced by the country’s performance in international assessments
(Spaull, 2019). South Africa, for instance, underperforms in the Progress in International
Reading Literacy Study and the Trends in International Mathematics and Science Study.
Failure to deal decisively with education challenges will consign future generations to
poverty and perpetuate the legacy of Apartheid (Spaull, 2019). A more skilled workforce
will require improvements in the education system.
Fiscal crisis
At the heart of South Africa’s economic woes is a fiscal crisis, with the country on the edge of a proverbial fiscal cliff. South Africa’s fiscal cliff is the point where government expenditure on social grants, compensation to civil servants and interest on government debt exceeds total government revenue (Rossouw & Joubert, 2020). Having increased too rapidly in recent years, these items now practically account for almost all government revenue.
Public-service compensation absorbed 47% of revenue in 2020/21, while debt-service costs – the fastest-rising item of government spending – consumed 19.20% of tax revenue. (National Treasury, 2021). Reducing the proportion of the Budget spent on salaries and debt-servicing will enable government to focus on priorities such as healthcare, education, and service delivery.
With a diminishing base of 7.10-million individual taxpayers, of which less than 307 912
earn more than R1-million a year (National Treasury, 2020), personal income tax is only
enough to fund about 80% of the civil servant bill and debt serving.
Incompetence and corruption limiting State capacity
The political environment is not conducive to growing the economy. Political leadership in
a number of government positions lacks competency. This is highlighted by the use of consultants and outsourcing rather than the building of capable and competent State machinery. If there were a conducive political environment, incompetent government employees would leave their positions to make way for those who can do the job. Evidence emerging from the Zondo Commission of Inquiry into Allegations of State Capture points to a serious lack of competence and a high incidence of corruption at State institutions and State-owned enterprises (SoEs), including at Transnet, Eskom, Denel, the South African Broadcasting Corporation (SABC) and law enforcement agencies (Zondo Commission, 2021a).
Institutional weakness
Political risk is rising globally, particularly since the onset of the Covid-19 pandemic.
Dealing with political risk in an emerging market requires strong institutions, many of which have been significantly eroded in South Africa in the past decade. For example, failure to insulate the SABC from vested political interests has left the public broadcaster in a crippled state, hobbled by financial bankruptcy and dependent on government bailouts (Ndlovu, M, 2019).
Institutional weakness and cadre deployment enabled State capture to flourish. Had certain checks and balances been in place, many problems related to State capture may have been avoided (Zondo Commission, 2021b).
There is also concern that Parliament acts as nothing more than a rubberstamp for what comes from the executive – another example of how institutional weakness affects the country’s ability to perform. Parliament’s oversight failures have been laid bare at the Zondo Commission of Inquiry, with testimonies of how administrative proceedings were used to sidestep oversight. Former African National Congress Member of Parliament (MP) Zukiswa Rantho testified in early 2021 about MPs being more loyal to the ruling party than doing what is right (TimesLive, 2021).
Labour and skills
South Africa has a fairly sophisticated formal sector, but suffers from extensive
unemployment. Only 16. 40-million out of a labour force of 23.10-million have managed to find employment. The 6.70-million-strong cohort of unemployed people is compounded by a
further 2.90-million who have given up looking for a job and 12.70-million who are not economically active (Stats SA, 2021).
Exacerbating unemployment is a mismatch between labour demand and supply, with the
labour force retaining a large number of low and unskilled people. A nonalignment between
the skills that graduates are being equipped with and those which are required by the economy is contributing to the unemployment crisis. South Africa has been suffering from a chronic shortage of skills for many years, notably in the engineering and information and communication technology fields, but government has only recently moved to plug the skills gap through importing skilled labour. Although the move to assist foreign workers with critical skills to gain work permits is welcomed, concerns have been raised about how long it took government to reach this point.
Lack of competition
The economy is bedevilled by high concentration, little competition, and anticompetitive behaviour. One participant mentioned that South Africa is a country of fives: Five big banks,
five big retailers and five big construction companies.
Big players have been accused of questionable collaboration. Collusion, for instance, has occurred in the construction, banking and telecommunication industries. The Competition Commission in 2013 fined 15 construction firms a collective R1. 46-billion for collusive
tendering (Engineering News, 2013) and in 2017 referred cases of collusion against several international banks for alleged price fixing and market allocation (Engineering News, 2017).
A lack of competition holds back innovation, keeps prices high, and denies many people access to services and opportunities to start businesses.
Interventions for fostering growth
Several sectors were identified as ripe for potential policy improvements, ranging from power utility Eskom and independent power producers, to SoEs, skills development and beneficiation of platinum-group metals (PGMs) and other minerals. Alleviating small business regulatory compliance, improving the ease of doing business, rethinking BBBEE and acknowledging the cost of crime were also mentioned.
Conclusion
South Africa needs to celebrate its successes and seek to replicate these in other areas.
Some of its successes include a vibrant democracy, a free media and free expression, an independent judiciary, a constitutionally protected South African Reserve Bank and the way inflation is contained with sound monetary policy. The turnaround of the South African
Revenue Service since the State capture period is also worth nothing, allowing for improved
tax collections efforts.
Another positive is the country’s demographic dividend, although opportunities may be
somewhat limited by South Africa’s already having had its urban transition. Projected to 2030, South Africa could benefit from a major demographic dividend, as the proportion of working people in the total population increases. Although it should also be noted that too sharp a population growth rate without the necessary concomitant growth in GDP can result in too
many people looking for jobs, which can be a risk to the economy and fiscus. The bigger pool
of possible employment seekers could, however, create opportunities for new businesses.
There is also potential for increased trade with the rest of the continent through the
African Continental Free Trade Area (AfCFTA), which creates a single continental market
for goods and services in Africa. AfCFTA is the world’s biggest free trade area, measured
by the number of countries participating. The pact connects 1.30-billion people across
55 countries (World Bank, 2020).
AfCFTA is considered a game-changer for the continent. It will help reduce trading challenges, such as different regulations from one African country to another. By facilitating the movement of goods and services among African countries, AfCFTA will create opportunities to accelerate intra-Africa trade, grow local businesses, create jobs, and increase infrastructure development on the continent (Williams, 2019).
It has been noted that, although the Ramaphosa administration is taking measures to redress policy implementation paralysis, progress is slow. To get the economy on a sustainable growth trajectory, policy uncertainty and implementation paralysis must be addressed. Strengthening institutions is also critical going forward.
Linking the NDP to an active citizenship will also be of benefit to the country. Getting
people involved in every level of society – from rural area to towns and cities, nationwide – will assist in addressing accountability failures and set the stage for sustained and inclusive economic growth.
Although South Africa is facing serious challenges there are opportunities to rejuvenate the economy and hope prevails.
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This report has been published by the Inclusive Society Institute
The Inclusive Society Institute (ISI) is an autonomous and independent institution that functions independently from any other entity. It is founded for the purpose of supporting and further deepening multi-party democracy. The ISI’s work is motivated by its desire to achieve non-racialism, non-sexism, social justice and cohesion, economic development and equality in South Africa, through a value system that embodies the social and national democratic principles associated with a developmental state. It recognises that a well-functioning democracy requires well-functioning political formations that are suitably equipped and capacitated. It further acknowledges that South Africa is inextricably linked to the ever transforming and interdependent global world, which necessitates international and multilateral cooperation. As such, the ISI also seeks to achieve its ideals at a global level through cooperation with like-minded parties and organs of civil society who share its basic values. In South Africa, ISI’s ideological positioning is aligned with that of the current ruling party and others in broader society with similar ideals.
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