Economic research consolidation: Developing a blueprint for the South African economy




Copyright © 2022 Inclusive Society Institute 50 Long Street Cape Town, 8000 South Africa 235-515 NPO All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means without the permission in writing from the Inclusive Society Institute 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 2022 Author: Mariaan Webb Editor: Daryl Swanepoel


Contents


Abbreviations & acronyms


Introduction


Main themes

  • Policy, regulation and legislation

  • Government action

  • Collaboration between government and private sector

  • Seizing opportunities

  • Energy crisis

Other considerations

  • Comparative research

  • Historical analysis

  • Counterfactual scenario

Interventions for economic modelling

  • Efficient bureaucracy

  • Energy crisis

  • Government coordination crisis

  • Transport and logistics

  • Private-sector deregulation

  • Confirmation of property ownership through secure title

  • Private-sector collaboration

  • Downside risks

Macroeconomic considerations


Conclusion


References


Annexure A: Economic growth constraints per sector


Annexure B: Interventions for fostering economic growth per sector


Abbreviations & acronyms


GDP gross domestic product

GFC global financial crisis

ISI Inclusive Society Institute

PPP public–private partnership

REIPPPP Renewable Energy Independent Power Producer Procurement Programme

SMME small and medium-sized and micro enterprise

SoE State-owned enterprise


Introduction


In recent years South Africa has performed poorly on several important economic measures, including unemployment and inequality. With the world’s highest unemployment rate and most unequal society, the country is in dire need of accelerated and more inclusive growth.


After consistent economic growth in the decade leading up to 2007, South Africa’s progress slowed dramatically after the global financial crisis (GFC) of 2008/9. In the years immediately following the GFC, the gross domestic product (GDP) growth rate has hovered between 2% and 3% and, from 2014 onwards, stagnated at about 1% before reaching an historic 6.4% contraction in the pandemic-hit year of 2020 (World Bank, 2022). The sustained period of low economic growth is reflected in rising unemployment and poverty. The most recent data indicates that unemployment rose to a record of 35.30% in the fourth quarter of 2021. Using the expanded definition, unemployment is at 46.20% (Stats SA, 2022).


Unless South Africa achieves faster and more inclusive economic growth, the country’s goals of eliminating poverty and reducing inequality and unemployment, will remain unachieved.


The Inclusive Society Institute (ISI) has embarked on a comprehensive economic research project that will culminate in a blueprint for rebooting South Africa’s economy. The first phase of the three-phase study delved into international experiences of economies that were in dire straits but managed to turn themselves around. The second phase included a series of dialogues with various sectoral stakeholders and policymakers to gain a sectoral understanding of the policies that must be corrected and to find new initiatives to shift the economy onto a higher growth trajectory. The sectors covered include agriculture, construction, energy, mining, financial, foreign investment, hospitality, information communication and technology, manufacturing, and retail.


The ISI’s research entered a consolidation phase in March 2022, bringing together several industry experts to identify the themes that require public policy interventions, as well as the priority structural reforms that should be introduced to revive the South African economy. This document is the outcome of the first consolidation exercise and identifies the main themes, interventions and policy changes that should be considered as well as the key interventions that should be included in a formal economic modelling exercise.


The final report will highlight key findings of the economic modelling exercise with the aim of projecting the potential impact of policy adjustments and structural reforms over the short, medium and long term. The blueprint will be shared with government departments, including the National Treasury, and will be presented to political parties, public policy institutions and public bodies, such as Parliament and Parliamentary Committees.


Main themes


This section identifies the main themes that must form part of the final blueprint. These themes were identified in the research thus far, including the sectoral discussions and during the consolidation exercise.


Policy, regulation and legislation


Government can resolve several constraints to economic growth by assessing the true economic impact of many of its policies, regulations and legislation. Simplifying policies and reducing layers of regulatory red tape will go a long way in promoting sectoral growth. Removing administrative barriers will free up funds and human capital that could be applied elsewhere to drive growth. Further, government should measure the outcomes of certain pieces of legislation and transformation policies against their intended goals and, where necessary, use the results to amend or abolish regulations that are not achieving their aims. In some instances measures to compensate for market failures will be required. These policies and regulations should, however, be crafted with great caution.


A review of the economic impact of policies, regulations and legislation will assist in resolving:

  • policy uncertainty

  • outdated policies

  • prohibitive transformation policies

  • excessive regulations

  • the high cost of doing business

  • onerous labour laws

  • insufficient competition

  • tenders and procurement issues

  • environment unsustainability

The reduction of red tape should be prioritised in:

  • transport subsidies

  • independent electricity investments by firms

  • reducing the cost of doing business

  • labour market reforms

  • re-evaluating transformation policies

  • creating a responsible investment environment

  • reviewing the tender process

  • creating policies that bolster competition

  • incentivising localisation

Government action


To stimulate economic growth, it is imperative for government to improve its capacity and effectiveness if it is to honour its role in the social compact. Crucial to this is appointing skilled staff to the relevant positions in all spheres of government as the State seeks to regain its strength. These appointments must result in a marked improvement in service delivery, most notably water supply and logistical infrastructure. Overhauling the education system should be a matter of urgency. South Africa cannot create enduring economic growth using outdated skills and knowledge. Strengthening law enforcement is another crucial step. Corruption and crime reduce investor confidence and drain the fiscus and must, therefore, be dealt with decisively. Ineffectual State-owned entities (SoEs) are also a drain on finances. Those that cannot be saved and not required for national strategic interest, must be severed. This will free up money to spend elsewhere in support of proven growth strategies.


Improved government capacity will assist in resolving:

  • the failure to implement policies and/or strategies

  • inadequate infrastructure

  • failing service delivery

  • poor global benchmarking

  • weak government institutions

  • slow vaccination roll-out

  • the skills deficit

Improved State capacity should be prioritised in:

  • strengthening leadership

  • curbing crime and corruption

  • strengthening local government

  • establishing an e-government administration

  • developing smaller, more-focused, projects

  • cleaning up SoEs

  • securing electricity supply

  • improved project management and infrastructure investment

  • developing necessary skills

Collaboration between government and private sector


The state of South Africa’s public finances requires government to mobilise extensive private participation if it hopes to pull the economy from the doldrums. At the same time, business requires government’s support if it is to capitalise on new generation technologies and opportunities. Steps must be taken by government and the private sector to repair the trust deficit following a fraught number of years, owing to, among other things, corruption and State capture.


Mutually beneficial arrangements and public–private partnerships (PPPs) can be devised to resolve pressing economic issues. Furthermore, it will bode well for the private sector to have amicable relations with the public and surrounding communities, as this will contribute to better buy-in from communities and boost the success rate of large-scale projects.


Collaboration between government and the private sector must be improved to:

  • access funds more easily

  • rebuild the trust deficit between the public and the private sector

  • address exchange rate volatility

  • increase digital technology access

  • reject environmentally unsustainable projects

  • tackle poverty and unemployment

  • address the skills deficit

Improved government and private-sector relations should be prioritised in:

  • access to finance

  • skills transfer and development

  • reducing unemployment

  • creating PPPs

  • rebuilding trust between government and the private sector

  • driving new technology investment and productivity


Seizing opportunities


The South African economy risks falling behind many of its peers. Government and business must better take advantage of new opportunities that arise. The global economy is searching for partners that can keep up with the fast pace of technological, environmental, political and social changes happening worldwide. The upside of globalisation means South Africa can capitalise on these opportunities while using them to uplift local communities. By intertwining expertise and strategies, the private sector together with the State can be a driving force in positioning the country as a strong African economy, a gateway to Africa, a geopolitical force not to be overlooked by investors.


Improving the seizure of opportunities will assist in:

  • expediting technology commercialisation

  • overcoming the lag in innovation

The seizing of opportunities should be prioritised in:

  • pursuing green initiatives

  • developing a green hydrogen economy and green hydrogen exports

  • enhancing competitive strengths

  • creating a geopolitical alternative

  • strengthening intercontinental trade

  • promoting new mining activities

  • rebuilding mining exploration, especially for energy metals

  • transforming special economic zones

  • revitalising rural economies and strengthening rural security and infrastructure

  • further boostinig agricultural technology and agricultural exports


Energy crisis


The crisis in the electricity sector is considered to be at the heart of South Africa’s economic malaise and unless resolved with urgency, it is unlikely that economic interventions will succeed. The country must organise itself better to take advantage of low-carbon investment opportunities and collectively rally behind the adoption of renewable energy, which is a modular solution that can be implemented more rapidly and more cheaply than alternatives.


There is pent up demand for investment in renewable energy, but regulatory barriers must be removed. While there is a shift to solar and wind electricity generation, State-owned power utility Eskom will continue to supply a large part of the country’s electricity. Eskom’s unsustainable debt needs to be resolved so that it can raise financing for investment in transmission and distribution infrastructure. At the same time, government must clearly signal the building of a new energy system that is reliable, greener and advances the country to its carbon neutrality goals.


Resolving the energy crisis will assist in addressing:

  • the high cost of doing business

  • inadequate infrastructure

  • failing service delivery

  • environmental unsustainability

  • weak government institutions

  • excessive regulations

Interventions to resolve the energy crisis should be prioritised in:

  • dealing with Eskom’s debt problems

  • ensuring a predictable price path

  • removing regulatory barriers to private energy investment

  • enhancing private-sector involvement

  • sharpening the focus on sustainable developments

  • developing more technical skills and capabilities


Other considerations


  • This section summarises some of the points that were made by industry experts during the consolidation exercise.

Comparative research


A question was raised about the findings from the ISI-led research, compared with similar research undertaken by government and other research institutions regarding the structural reforms that are required. The point was made that the National Treasury modelled the economic impact of structural reforms and that it is included in the Budget documents. However, it was pointed out that at the time when the Treasury modelled the impact of reforms on the network industries on growth, its focus was only on improving Eskom’s energy availability factor. It is felt that this model is outdated, as much of the electricity infrastructure development is happening outside Eskom.


Historical analysis


A suggestion was made that the blueprint should include an historical analysis of the periods of strong growth and employment creation that South Africa enjoyed since 1994. The factors behind the growth success must be considered, including the policies that were pursued, the strength of the network infrastructure, and the periods of booming commodities markets. South Africa recorded its fastest growth rates since the 1960s from 2004 to 2007, with real GDP growth averaging 5.20% a year (Industrial Development Corporation, 2013).


Counterfactual scenario


It was suggested that the report provide for a counterfactual scenario, which sketches the South Africa that could possibly be. For instance, to show where South Africa could have been today, had it taken a different path ten years ago. This could prime policymakers to be more open to suggestions that are put forward.


An alternative to a counterfactual scenario could be to reflect and build on what is working. Some examples include the shift in the energy space towards new technology and an energy transition, or the policy shifts around freight logistics group Transnet and private-sector participation in rail and terminal operators. Rather than dwelling on the problem statement too much, the report could lift out “pockets of success” and consider whether they could be built upon to have a greater impact.


Interventions for economic modelling


This section focuses on suggested interventions and policy changes that should be considered for economic modelling. Modelling will quantify the impact of the suggested interventions on the economy.


Efficient bureaucracy


Efficient bureaucracy should be modelled. For instance, what the implications would be if South Africa cut red tape and adhered to regulatory approval timelines that are of an acceptable international standard.


Energy crisis


The roadmap must deal with the energy crisis in a focused manner. Specific energy-related actions with specific outcomes must be identified and modelled, such as the impact of the 100 MW reform that will boost private investment in electricity generation; the impact of the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP) bid windows (as well the negative impact of delays on the REIPPPP), the impact of resolving Eskom’s unsustainable debt and allowing for it to return to capital markets to fund its investments.


Government coordination crisis


In addition to the electricity supply crisis, there is a crisis of government coordination, or lack thereof. Although difficult to model, because it touches across so many aspects, it is one of the key reasons behind the lack of implementation in the public sector.


Transport and logistics


A model for transport and logistics must be pursued, considering the debilitating impact that failures in this regard are having on the economy. For instance, economic modelling could determine the value in terms of GDP growth and trade benefits.


Private-sector deregulation


The implications of deregulating the private sector, and specifically small, medium-sized and micro enterprises (SMMEs), must be modelled, with the examples of South Korea and New Zealand to be drawn on. The deregulation of SMMEs should not have a major cost implication for government, but could get the economy moving while other issues of electricity and infrastructure are being addressed.


Confirmation of property ownership through secure title


Security of title deeds for those occupying properties could be pursued. A model has already been developed that shows that giving people ownership of the properties that they occupy has a positive impact on their finances, on investment and on economic development.


Private-sector collaboration


Although difficult to model, the report should consider the implications of a positive mode of collaboration between government and the private sector.


Downside risks


The ‘downside risk’ posed by the disintegrating social fabric, lawlessness and the dysfunctional and ineffective criminal justice system must be considered and modelled.


Macroeconomic considerations


To achieve the objectives of the final blueprint, fiscal concerns must be balanced with inclusive growth.


Balancing fiscal concerns with inclusive growth

Source: Minsat, 2020


The National Treasury presented two debt scenarios in the June 2020 Supplementary Budget. In the passive scenario, which is not deemed a viable option for South Africa and was presented for illustrative purposes only, debt will spiral upwards, exceeding 100% of GDP from 2022. The possibility that government will not be able to repay its debt leads to higher debt-servicing costs. This redirects money that could be spent on health, education, and other policy priorities to local and overseas bondholders (National Treasury, 2020).


In the active scenario, government stabilises debt through a combination of reforms and measures to boost economic growth, increase revenue collection and lower expenditure. The deficit would be reduced significantly starting in 2021 and the debt level would start decreasing from a peak of 87% of GDP in 2023 (National Treasury, 2020).


The Organisation for Economic Cooperation and Development has proposed a progressive consolidation scenario where government does not pursue highly constrictive fiscal policy and the reduction of the deficit happens over a longer period. In this scenario, the debt level will stabilise by 2028. This progressive consolidation scenario is based on a deficit reduction of 1% a year of GDP and 2% GDP growth from 2025 (Minsat, 2021).


Although there are differing views about the approach to debt reduction, taking a longer-term approach to fiscal consolidation could free up capital for investment in economic infrastructure that would be beneficial to economic growth.


Pension funds must also be encouraged to invest in infrastructure, following amendments to Regulation 28 of the Pension Fund Act. However, this will require confidence in the ability of the State to be able to prioritise and prepare proper economic plans around bankable infrastructure projects.


Conclusion


The consensus from the panel participating in the ISI’s consolidation exercise is that the sectoral deliberations have arrived at good insights, but that the research must be further refined to make it more precise and specific in identifying key interventions to lift the pace of inclusive growth. The ISI’s final report must not dwell on the problem statement too much and should instead focus on ‘what’ needs to be done and ‘how’. It must avoid being ‘another list of good intentions’.


The blueprint must offer an economically coherent approach – based on clear cause and effect, and on an appreciation of the positive impact on growth of improved efficiencies and capabilities of the State, capital, labour and new technologies. Rather than being purely theoretical, the blueprint must provide practical and immediate action steps for implementation. It is understood that not every issue can be tackled at once, thus, the blueprint should prioritise interventions, not only in terms of capacity, but also in terms of financial ability, taking into account the fiscal constraints facing South Africa.


References


Eskom. 2022. Weekly system status: Week 10, March 13, 2022. [Online]. Available at: https://www.eskom.co.za/eskom-divisions/tx/system-adequacyreports/[accessed March 31, 2022].


Industrial Development Corporation. 2013. The South African economy: An overview of key trends since 1994, December 2013. [Online]. Available at: https://www.idc.co.za/wp-content/uploads/2018/11/IDC-RI-publication-Overview-of-key-trends-in-SA-economy-since-1994.pdf [accessed March 31, 2022].


Minsat, A, 2021. Reinvigorating South Africa’s Economy: Key Considerations, Inclusive Society Institute panel discussion. April 14, 2021. Organisation for Economic Cooperation and Development.


National Treasury. 2021. Budget Review 2021, February 24, 2021. [Online]. Available at http://www.treasury.gov.za/documents/National%20Budget/2021/review/FullBR.pdf [accessed May 10, 2021].


Statistics South Africa. 2022. Quarterly Labour Force Survey – Q4: 2021, March 29, 2022. [Online]. Available at: http://www.statssa.gov.za/publications/P0211/Media%20release%20QLFS%20Q4%202021.pdf [accessed March 31, 2022].


World Bank. 2022. GDP growth (annual percentage) – South Africa, 2022. [Online]. Available at: https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?end=2020&locations=ZA&start=2003 [accessed March 31, 2022].


Annexure A:


Economic growth constraints per sector



Annexure B:


Interventions for fostering economic growth per sector



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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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