How to restore South Africa’s economy
South Africa has witnessed rapid socioeconomic changes during the post-Apartheid era, but three measures are needed to restore social stability and economic confidence
South African President Cyril Ramaphosa led his ruling African National Congress (ANC) party to a comfortable victory in the country’s parliamentary election earlier this month. But engineering the economic recovery that South Africa needs is likely to be much harder.
True, the country’s banks withstood the stresses of the 2008-2009 recession, and the Reserve Bank of South Africa has kept inflation within or near a 3-6% target range for the past 20 years. But a decade of stagnating incomes, rising unemployment, and serial revelations of business wrongdoing and official corruption has fuelled widespread public discontent. Little wonder, then, that the share of the vote for both the ANC and its main rival, the opposition Democratic Alliance (DA), fell amid a marked decline in turnout and rising support for left- and right-wing nationalist parties.
Moreover, the new ANC-led government will have little room to provide fiscal stimulus. Government debt is rising as a share of GDP, the country’s credit ratings are under critical scrutiny, and huge shortfalls in the balance sheets of state-owned enterprises are straining public finances.
The government’s growth plan must therefore go beyond ANC party ideology and narrow orthodoxies. It must emphasize private-sector investment, together with consistent and credible policy reforms, and also aim to redistribute income. And agreement on such a plan’s key elements among a broad range of political leaders and other stakeholders will be crucial to success.
A government-funded research program on employment and inclusive growth, managed by the University of Cape Town’s Southern Africa Labour and Development Research Unit, recently outlined several possible priorities. The central idea, according to Ravi Kanbur of Cornell University, is a “grand bargain” that balances short-term job creation and growth against deeper long-term structural reforms.
Urban infrastructure investment and city development should be immediate priorities, because research suggests that these are an important source of upward mobility and rising living standards. Improving basic infrastructure and services will require a mix of public and private financing, as well as improved cost recovery for urban services. But with an ANC-led national government, and three of South Africa’s major cities under DA or coalition rule, political gamesmanship could stall progress.
Accelerating investment in housing is also vital. Government-sponsored housing schemes and upgrading of informal settlements should continue, but the main growth potential lies in easing barriers to private housing investment and co-financed development. Urban housing, land ownership, and associated small-business growth are important avenues for improving family wealth distribution and living standards. These require joint initiatives by government, municipal authorities, financial institutions, and developers.
With South Africa’s unemployment rate currently above 25%, the government must make job creation central to its industrial and urban-development policies. Agriculture, tourism, repair and maintenance services, and more labour-intensive manufacturing all have growth potential. But, as Jim O’Neill and Raghuram Rajan have recently argued, investments in geographic areas and community development are more likely to generate lasting productivity and enterprise gains than narrowly targeted sectoral support.
The new government should also consider regulatory changes and enabling measures to support informal employment and small business growth, and should reinforce competition policy to counter incumbents’ market power. Ramaphosa himself, meanwhile, has rightly endorsed a business-led “youth employment service” initiative: this needs to be expanded rapidly as a public-private partnership.
While addressing these immediate priorities, the new government must also push ahead with reforms aimed at strengthening the economy in the longer term. Three measures stand out.
First, South Africa’s biggest challenge is restoring its vertically integrated electricity monopoly, Eskom, to financial health. Long delays in restructuring the energy sector, overstaffing, cost overruns, technical misspecifications in building new coal-fired power plants, and systemic governance failures have brought the state-owned utility close to bankruptcy. Large-scale refinancing must be negotiated, together with an enterprise reorganization that brings competition and market incentives into the power generation sector. Electricity tariffs must rise, and weaknesses in municipal revenue collection need to be addressed.
The restructuring that is required will be complex, costly, and contentious. But, if successful, it will go a long way toward restoring confidence in South Africa’s government and economic prospects.
Second, the incoming government plans to phase in social-insurance reforms aimed at providing comprehensive income security and universal health coverage. These changes include shifts in the balance between private savings and medical insurance arrangements, and mandatory funding of statutory benefits. They also involve substantial changes in the way fiscal redistribution works. South Africa would move from “on-budget” funding of means-tested income support for the poor and public provision of health services for the uninsured to separately funded universal programs of income protection and access to health care.
These long-term reforms are needed to reinforce solidarity and reduce inequality, and to complement urbanization and modernization. But the institution-building required is formidable, and the sequencing of reforms needs careful consideration.
Finally, the new government needs to revitalize education, training, and skills development. Much of what must be done is well understood. Basic reading skills need to be taught properly in the early years, school management must be improved, and the sectorally-organized, levy-based training system should be replaced by skills academies accountable to local business chambers and employers. Centrally-driven standards and curricula are needed, along with greater decentralization of management to foster accountability and adaptation to local needs.
Ramaphosa has a long economic reform agenda and a public impatient for results. His recent discussion to revive an expert policy coordination unit in the president’s office is an encouraging sign. But he will need both skill and statesmanship to overcome the corruption and bureaucratic inertia holding back South Africa’s economy.
Andrew Donaldson, a former deputy director-general of South Africa’s National Treasury, is currently senior research associate at the Southern Africa Labour and Development Research Unit, University of Cape Town.
Copyright: Project Syndicate, 2019. www.project-syndicate.org
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23 May 2019