South Africa at a Fork in the Road

The second article in a two-part series looks at the impact of Covid on South African development policy choices, and proposes a new business-government bargain as an alternative to guaranteed failure

22 July 2020 ·   8 min read

South Africa at a Fork in the Road


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South Africa is at fork in the road when it comes to making the right policy choices — and implementing them.

The economy had already entered a technical recession prior to the Covid-19 pandemic, recording growth of -0.5% in the fourth quarter of 2019 and -0.1% in the first quarter of 2020.

The unemployment rate — narrowly defined — breached the 30% mark in the first quarter before the effects of Covid were registered. According to a study by the Coronavirus Rapid Mobile Survey, some three million lost their jobs between February and April as a result of Covid-19, a number that, while disputed, would suggest that unemployment could surge through half the working population by the broader definition, including those discouraged from seeking work.

There is thus no disguising the trouble that South Africa was in before the crisis. This has been simply accelerated by Covid. Consequently the country is on the cusp of a breakdown: fiscally (with a projected 15-20% deficit, and 80% debt/GDP ratio), socially (with perhaps another 3 million unemployed, bringing the number of jobless to half the population), and in growth terms (falling from its paltry record of 1% for a decade, to as little as -8% in 2020).

It can choose a reform path, which seeks to boldly address its low-growth policy failings and structural constraints. This will be tougher politically than economically.

Or it is can choose the familiar populist path of doubling-down on the state, of increased spending and of attempts to increase state 'capacity' for 'delivery'.

The reform path will be hard. It demands a frank and unflattering assessment of the growth and development record over the last quarter of a century of rule by the African National Congress and its allies and requires the abandonment of some of the economic policy shibboleths which appear to have attained sacred status in liberation mythology.

The statist path will initially be easier, as it's the road on which South Africa has been taking, particularly under President Jacob Zuma, and it offers the dispensing of patronage to the faithful and may even offer some early wins from easy cash, but will end in disaster, a messy, tragic variant of Venezuela or Zimbabwe. The length of the journey is debatable, but the destination is not in doubt.

This road to penury is attractive because ideologues can stay true to their rhetorical path, and when things go wrong, they can blame 'enemy agents' and a hostile world for failure rather than the policies they have pursued.

The belief that the economic laws of nature can be rewritten in the face of mountains of evidence to the contrary all over the world and throughout history is powerful as it is false.

The incentive to default to radical statism is, moreover, strengthened because of the effects of the Covid-19 pandemic which require the state to play a leading role in civic and economic affairs to help constrain the spread of the virus.

This larger role for the state during a time of crisis has awarded politicians more power. They decide when and how people can go outdoors, what they must wear on their faces and whether or not they may return to work. In response to the crisis, they are taking control of things which, in normal times, would fall outside of the ambit of the state.

The trouble is the leap of logic which argues that what is good for fighting the pandemic is good for the economy, leading to the questioning of the last 30 years of globalisation. Prior business models, no matter how successful, public and private, are now up for debate.

At another level, popular support globally for trade and migration has apparently fallen, the seeds being planted before the crisis by growing mercantilism and a language of self-sufficiency, autonomy, independence and sovereignty. Beyond that, there are all manner of debates, not least about the efficacy of lockdowns, and exactly how these should be eased in an increasingly smart and topical fashion.

There can be no gainsaying that the crisis changes things. It will disrupt labour markets, continue to push up levels of indebtedness and limit state manoeuvrability, accelerate digitization at the expense of some jobs, and maintain unprecedented peacetime fiscal deficits. The crisis is also likely to be easier for advanced economies which have the scope to ramp up spending because they possess the monetary tools. The challenges are amplified in emerging markets which lack such tools. As tempting as it is to borrow, someone will have to pay this money back, here or abroad, this generation or the next.

There is greater consensus, it seems on the proposed tenets of the post-Covid economy: ideally, greener, more equal and with a rapidly digitising workforce. But this is usually a view from a privileged standpoint.

The question for those in the private and public sector fearing a populist path and its inevitably calamitous socio-economic and authoritarian outcome, is how to build an offramp from the Covid crisis to a higher growth economy that will absorb the growing pool of unemployed.

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Despite innumerable plans and attempts at public-private dialogue from growth initiatives to rah-rah investments summits and leadership fora, these have not delivered. Celebrationism — the view that a positive outlook will change reality — is no substitute for substance. The statistics of growth, employment and (actual, not promised) investment are the key metrics, not the frequency of meetings and their attendance.

A lesson from Zimbabwe, among others, is that just when you have seemingly hit rock-bottom, things can always get worse. And in South Africa, things are now about to get much worse. According to the latest numbers released by the Reserve Bank show the first quarter — prior to the Covid-19 crisis - saw the outflow of over R96 billion from bonds and shares. Foreigners, showing decreasing confidence in the local economy sold bonds worth R74,4 billion and equities worth R23,1 billion.

Given that South Africa's economy has been strangled by (sometimes necessary, sometimes excessive) Covid-19 regulations, it is likely that this fall in confidence will accelerate for the second quarter when the lockdown began in earnest between April and June.

Policy Rich, Implementation Poor?

South Africa has never been short of economic policy documents and prioritised plans. It is policy rich, but implementation poor. True to form, in the wake of the shock economic forecasts mentioned above, both the ruling ANC and business and a clutch of individuals have issued economic recovery plans which claim to have the answer to the country's economic travails.

This new round of papers shares common themes — an acceptance that the economy must be fundamentally restructured, a belief that a large infrastructure programme will stimulate the economy and a view that government and the private sector must work together.

But the devil is in the detail and when it comes to how these themes should play out, there is a sharp divergence of views. As ever, South Africa's economy's greatest enemy is itself — the entrenched patterns of decades of doing things the wrong way which are hard to change.

The ANC's document, issued by its Economic Transformation Committee with the title Reconstruction, Growth And Transformation: Building A New, Inclusive Economy sees the state growing in reach and micromanaging the economy. It cuts an isolationist path, calling for import substitution and local beneficiation of minerals, even proposing that state departments account for how much of their spending goes on local products.

The ANC believes that the pandemic has given government the upper hand in what it describes as 'the contested relationship between the public and private sectors'.

'The COVID-19 pandemic has reinforced the legitimacy of public investment in health care. It has legitimized a greater and more active role of the state in guiding the economy. It has forced a rethink on public services that are now seen as a necessary investment rather than a liability. Central banks are increasingly being called upon to assume a more active and direct role in supporting the real economy.'

And it has strengthened the party's interventionist instincts. 'To achieve significant job creation multipliers, the emphasis will be on localisation, including maximising the use of South African materials and construction companies as well as labour-intensive methods,' the ANC argues.

Business For SA's document, A New Inclusive Economic Future for South Africa: Delivering an Accelerated Economic Recovery Strategy, strikes a different course, envisaging an expanded role for the private sector.

It argues that it is time for 'a committed leadership willing to make difficult, though sometimes unpalatable choices focussed on appropriate policies, which enable investment and thus inclusive growth.'

It goes on: 'Enabling economic growth at the required level and attracting domestic and foreign investors, requires new thinking on policy development and implementation by government. In particular, these must focus on the ease of doing business (currently ranked 84th out of 190, from 35th in 2008, in the World Bank's Ease of Doing Business index), education, sustainable economic transformation, and innovation and entrepreneurship to improve the nations' overall competitiveness (currently ranked 60th out of 141 globally by the WEF).'

Clearly a more interventionist state is not going to improve 'the ease of doing business', so there is a gulf between these two positions that ought not to be swept under the carpet in the desperate search for a way out of the crisis.

A New Transactional Approach

The failure of previous plans, however well-sequenced and prioritised, has led some to believe that the ANC will never make the tough choices necessary to pull the country out of its steepening economic dive. Instead the political consequence of inevitable economic failure is, by this argument, the only means whereby the ANC will change.

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South Africa's greatest adversary remains itself. The government's failure to assess the failure of its policies and admit error and thus to view the current situation as a problem only and not a crisis has brought us to this point. Hence the rhetorical doubling-down on the state. This is compounded by a pathological unwillingness to make tough choices and insufficient ability to manage complexity.

At the same time, even though business may be an increasingly trusted interlocutor in the face of government failure, it has so far been unwilling to use its economic leverage in this national interest, reflecting its diffuse nature. Instead, business may have made it easier for government by donating and supporting causes softening the blow of poor policy choices and weak delivery systems.

Attractive though it might be to allocate blame and sit on the sidelines, neither business nor government can afford this approach as the country enters its worst-ever economic crisis.

In fact, business and government face a similar challenge in trying to engineer a new path that will lead to recovery and jobs. Business has to convince sceptical shareholders that they will not only get their money back, but that they will make a profit. And government has to convince its sceptical Alliance shareholders that the country needs to drop the posturing and reset its economic trajectory to attract the capital needed to grow.

We know that growth is not only too low, but that it is a function of investment, and that of a combination of opportunity and business confidence. We also know that the state is not an efficient mechanism for delivery, and public capital is anyway insufficient to achieve the rates of employment and growth necessary.

There is little point in moaning about 'investment strikes' in referring to the R1 trillion that once sat on the balance sheets of South African companies. More important, is understanding what has to occur to get this money — new capex, not tops up to existing investment — to be spent in the country, creating wealth.

Much has to be done and led by government in terms of policy and the machinery of state. It should fundamentally do so by asking whether this action will help of hinder in creating employment.

What is needed is a new compact between government and business which should move beyond the tired old culture of blame and name-calling. A compact can be the incentive for the tough choices necessary, a positive alternative to waiting around for the disincentive of failure.

Such a compact would have to be based on give-and-take and an agreement to undertake concrete actions which move the economy and the nation forward.

Some of these agreements could be catalytic. Government could agree to speedily implement the opening up of spectrum and business could commit to investing in free wifi.

Government could allow graduates with Masters degrees in all disciplines and Bachelors degrees in computer science entry into the country business could undertake to establish coding schools in the major cities and unlock investment in tech and innovation.

Government could agree to free up urban land and business could agree to invest in housing in public-private partnerships that could alter apartheid spatial planning.

Government could introduce labour market flexibility for youth entrants and business could undertake to increase hiring in labour absorbing industries.

Other measures could address inequality and fiscal challenges. Business could undertake to cap executive remuneration and government could agree to a similar salary cap in the public sector.

But perhaps the greatest compact that is needed is around how government and business could spark growth and generate jobs by accelerating the maintenance and installation of new infrastructure. A new model for public-private partnerships that introduces professional management and capital into large projects could relieve government of some of the borrowing it might otherwise have to undertake to fund infrastructure.

A new narrative is needed which makes freedom from poverty the joint responsibility of government and business, working in partnership and leveraging the pool of skills and capital which lies dormant because of distrust. The ideologues on either side will cry foul, but they should not be allowed to determine policy from the sidelines. It's time to cut a proper deal to grow the economy.

This is the second of the two part series based on the discussion paper 'South Africa's Greatest Economic Adversary ... Itself - Finding Common Ground for Growth'. The first part 'Ten Years of Change in Three Months' can be read here.