There will be no easy recovery from the economic catastrophe the governing African National Congress (ANC) has inflicted on South Africa through destructive policies, maladministration, burgeoning corruption – and one of the world’s most prolonged and unnecessarily stringent Covid-19 lockdowns.
The metrics are grim. GDP shrank by an annualised 51% in the second quarter, the worst quarterly collapse on record, and is likely to decline by more than 10% over the year. Public debt is set to rise from R3.97 trillion (82% of GDP) this financial year to R4.83 trillion (86% of GDP) by 2022/23, according to the Treasury’s supplementary budget review in June 2020.
With tax revenues sharply down, the budget deficit this year is projected to reach some R760bn or close on 16% of GDP. Public service wages will absorb 51c in every tax rand collected and debt repayments another 21c. Over time – and particularly as the debt burden rises – this will make it increasingly difficult for the government to sustain all other spending, including that on social grants.
Before the lockdown began, the unemployment rate stood at 30.1% in the first quarter of 2020. This is high by global standards and much worse than the equivalent rates in Brazil (12.9%), Russia (6.2%), India (11.0%), and China (5.7%). Youth joblessness was even worse, standing at 59% on the official definition and at 70% on the expanded one that includes people no longer actively seeking work.
This high jobless rate is also undermining the sustainability of social grants. In 2001, before the major roll-out of grants began, there were 313 employed people for every 100 receiving social grants. In 2019, by contrast, there were only 89 people with jobs for every 100 people to whom social grants were paid.
Worse still, the Covid lockdown could trigger the loss of some 3 million jobs this year and raise the unemployment rate to around 40%. This will make for an even greater imbalance between the number of people contributing to tax revenues and the number drawing down on them.
Miniscule
Many commentators seem to assume that the International Monetary Fund (IMF) will in time step into the breach by granting South Africa a very large loan, provided it agrees to cut spending and embark on growth-enhancing structural reform. But under the IMF’s normal funding rules, South Africa would be able to access only around R80bn a year for three years. This is miniscule compared to its mounting borrowing requirements.
Even if the IMF agreed to relax its normal rules – as it has for Greece, Iceland, Portugal, and Ethiopia, for instance – South Africa is unlikely to be able to access more than R850bn under a multi-year conditional programme, according to Peter Attard Montalto of the Intellidex consultancy. This too is simply not enough.
All of which means that no easy fixes can be found. And that the country needs a single-minded focus on the three key reforms that would help the most in triggering meaningful economic recovery.
First, we must safeguard property rights to attract and sustain direct investment, especially from abroad. This means, in particular, that we must abandon expropriation without compensation (EWC) in both the pending constitutional amendment bill and the Expropriation Bill of 2019; terminate the National Health Insurance (NHI) proposal aimed at the effective nationalisation of all private healthcare; jettison any notion of compelling pension funds to invest in flawed state infrastructure programmes and failing state-owned enterprises (SOEs); and put an end to the ‘land grabs’ or escalating land invasions that President Cyril Ramaphosa has long pledged would never be allowed.
Encourage job creation
Second, we must reform labour legislation to encourage job creation and increase demand for unskilled labour. Employers must therefore be allowed to dismiss or retrench under agreed notice provisions in contracts of employment. National minimum wages which price the unskilled and inexperienced out of the labour market must be repealed. Instead, the private sector must be permitted to mirror what the government does and pay unskilled workers at rates similar to those under the Expanded Public Works Programme (EPWP).
Third, we must replace current race-based black economic empowerment (BEE) rules with a non-racial empowerment strategy which encourages investment, growth, and employment – and which benefits the poor rather than the relative elite.
The Democratic Alliance (DA) has been pilloried by many commentators for embracing a non-racial approach to economic inclusion at its policy conference last weekend. Yet this is what the Constitution in fact demands through its emphasis on ‘non-racialism’ as one of its founding values.
In addition, experience around the world shows that any system of affirmative action which is based on race or ethnicity, rather than on socio-economic disadvantage, inevitably overlooks the poorest and benefits the people from the favoured group with the best skills and/or political connections.
In South Africa, thus, it is not the millions of unemployed black ‘outsiders’ who benefit from BEE. Rather, it is the tens of thousands of black ‘insiders’ – most of them deployed ANC cadres or their relatives – who have gained the most from BEE deals valued at an estimated R1 trillion; from scores of well-paid management posts in the public service, SOEs, and the private sector; and from the inflated pricing and defective delivery that taints up to 50% of the state’s annual R800bn procurement budget.
Not because they are poor
To put it bluntly, so long as the current race-based system remains in place, it is ANC leaders such as Ace Magashule and Nomvula Mokonyane, along with their sons and daughters, who will continue to benefit from BEE – not because they are poor, but because they are black.
In South Africa, moreover, the outsider/insider problem afflicting any race-based system of affirmative action has been compounded by the mounting costs of ever-escalating BEE requirements. In the public sector, BEE rules have long undermined efficiency and promoted tender fraud. In the private sector, they are deterring investment, curtailing growth, and compounding the unemployment crisis. Which means the poor and marginalised are not only barred from BEE benefits but also actively harmed by BEE’s bad consequences.
BEE must therefore be replaced by a new and more effective empowerment strategy, which the IRR calls ‘Economic Empowerment for the Disadvantaged’ or ‘EED’. This would repeal all current BEE rules and give business EED points, on a revised scorecard, for making direct investments; sustaining and creating jobs; adding to tax revenues, export earnings, and innovation; appointing staff on a wide definition of merit (that takes account of disadvantage); and helping to improve such essentials as education, healthcare and housing.
In addition, EED would reach down to the grassroots by providing low-income families (almost all of whom would be black) with tax-funded vouchers for schooling, housing, and healthcare. In the education context, for example, much of the current budget would be divided among low-income pupils and distributed to their parents in the form of vouchers exchangeable solely for schooling. Parents so empowered would be able both to choose their children’s schools and to hold those schools accountable. Schools competing for their custom would also have powerful incentives to keep standards up and fees down.
Truly empower the poor
Unlike BEE, these vouchers would truly empower the poor – as ordinary South Africans seem well aware. In December 2018, 93% of black respondents in an IRR field survey (up from 86% in 2016) supported the idea of school vouchers. Black support for healthcare vouchers came in at 91% (up from 83% in 2016), while support for housing vouchers was strong as well, at 83% in both years. In addition, 85% of black respondents (up from 74% in 2016) said these vouchers would be more effective than BEE in helping them to get ahead.
These three key reforms are not, of course, the only ones required – as the IRR has set out in its succinct Growth & Recovery: A strategy to #GetSAWorking, released last month. They would, however, have a particularly powerful impact in restoring business confidence, encouraging renewed investment, and rekindling hope in a better future.
These reforms could also be implemented at little or no cost. Most would simply require the rolling back of damaging rules, both present and proposed. The voucher system intrinsic to EED would also not cost more, as the vouchers would be funded by redirecting current budgets.
By contrast, the recovery plans put forward by the ANC and Business for South Africa (B4SA) require that we spend our way out of trouble through a massive state-directed infrastructure programme likely to be tainted by corruption, cost overruns, and delivery delays. Yet ordinary South Africans should not be made to carry the burden of recovery in the form of higher taxes, higher inflation, or outright dispossession.
The ANC is, of course, likely to resist these three reforms. But growing public anger and the #VoetsekANC movement will in time force its hand. Its electoral support has long been shrinking – so much so that the 10 million people who voted for the ANC in the 2019 election were far outweighed by the 20 million eligible voters who preferred to stay away from the polls.
The ANC is running out of road and will have to reform if it wants to retain its hold on power.
[Picture: enriquelopezgarre from Pixabay]
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