President Cyril Ramaphosa frequently talks about the need for structural economic reform in his State of the Nation addresses and elsewhere. But what our government wants falls well short of anything that could be described as reform in the conventional sense.
Economic reform usually refers to a process of deregulation that involves pushing back the role of the state in the economy and allowing markets greater freedom. As a matter of expediency to help resolve the electricity crisis and the management of ports, the ANC is allowing the private sector a greater role. However, there is no talk of privatisation or allowing firm bargaining to set wages at levels at which more jobs stand a chance of being created.
To create jobs, the government has set up ‘make-work’ schemes. It wants to rid the country of private medicine, and all health care to fall under a National Health Insurance scheme. It wants to protect local industry, particularly black-owned, from foreign competition with the mandatory local manufacture, “localisation”, of a range of products. It likes industry “masterplans” based on its deals with big business.
The government speaks of turning around network industries like electricity, water, transport and telecommunications, and allocating additional broadband spectrum. A paper on this was issued by the Treasury nearly four years ago, yet power cuts were at an all-time high last year, and rail lines and water supply infrastructure are fast deteriorating. Additional broadband, an easy reform which would lead to improved quality and lower cost for consumers, has not even been allocated.
The country’s sluggish growth rate and an unemployment rate that is approaching 50 percent are sufficient to make the case for deep reform.
The case for reform is that it is has boosted growth and has allowed billions to emerge from poverty across the world. In China, the reforms of the mid-1970s, including unleashing private enterprises, generated a phenomenally high growth rate that brought hundreds of millions out of poverty. In the former Soviet Union and Eastern Europe, the end of the cold war resulted in the dismantling of the state-controlled economy which was close to collapse, and this brought about considerable prosperity. In India, the dismantling of the “License Raj” in the early 1990s has made it a lot easier for business to operate. This has brought about substantial economic benefits.
The ANC reforms after 1994 did not go far enough to dismantle a highly controlled and restricted economy built up under apartheid. Soon after coming to power, the ANC scrapped agricultural subsidies and the control boards, which controlled prices and output for many farm products. They also slashed tariffs on many imports, benefiting consumers. Telkom was partially privatised. But the state enterprises and the system of wage determination remained, the state grew, and regulations multiplied.
Required are three big reforms, and multiple ones in other areas. The big three are: first, scrapping the labour laws to allow greater job creation, second, measures to ensure a reliable power supply, and third, liquidating and privatising state-owned enterprises.
The three big reforms would help in dealing with the fourth, that of reducing the budget deficit and pushing up growth. Fifth is an end to cadre deployment and black economic empowerment. Sixth is turning around the police.
One of the impediments to job creation is the wage-setting mechanism which dominates South African industry. Industrial sector bargaining councils dominated by large companies and unions agree on wage rates. These, in most cases, are then applied to the entire industry, including small companies. With their larger market shares and higher margins, bigger companies are in a better position to pay these higher wage scales. Allowing firm-level pay bargaining would at least give hope that more appropriate wage structures under which many more could be hired might emerge.
South Africa could then, at least, have a chance of benefiting from an expanding workforce. Improving the education system and vocational training would also help new entrants find work. But above all firms have to be convinced that it makes sense to invest and take on labour.
The country’s unreliable and expensive electricity supply calls for urgent action as it is constraining growth and job creation. Power supply cuts are worsening by the year. Eskom receives continuous bailouts to operate, which are essentially grants to support uncontrolled procurement and staff costs.
Under a reform introduced last year, private operators are now allowed to produce up to 100MW per plant. It is unclear why this arbitrary limit is placed on private operators, particularly when new capacity is urgently needed. Allowing a far larger private role would help the transition to a greater role for renewables, at no cost to the state. The coal-fired fleet of power stations should be sold or leased to ensure these are, at least, under improved management.
Most of the state-owned enterprises have been run into the ground by the ANC. Denel, the defence company was, at times last year, in arrears in paying some of its staff. The SABC has been in financial difficulties, and trains no longer run on sections of the rail network. Without a functioning transport system, our exports and growth will be constrained. The solution is to liquidate those state-owned enterprises that are beyond rescue and privatise the remainder, while allowing new entrants to come in and provide greater capacity and competition.
Privatisations and liquidations of state-owned enterprises would mean no more bailouts and drags on growth from these entities. That could help ease the budget deficit and reduce debt. The scale of the budget deficit and rapid growth of debt could yet lead to the markets massively dumping our bonds, leading to a financial crisis. The widening budget deficit and debt burden must ultimately put the mounting payment of social grants at risk.
Ending cadre deployment, under which ANC members are “deployed” to plum positions in government has provided the avenue to state capture, incompetence, and overmanning. A modern functioning economy cannot be based on anything but merit.
Improving security and turning around the police force are key to providing a necessary, but not sufficient condition for growth, jobs and business confidence. The failure of the police to deal with the mass violence and looting in KwaZulu-Natal last year, the attacks on trucks on highways, and demands for payment from construction firms from criminal gangs should have acted as an alarm some time ago on the need for improved security.
Reforms in education and health care to ensure we get value for what is spent are also required. There is much else on the reform list, but implementing a critical few reforms could bring about changes in multiple areas.
There is little chance of these reforms being undertaken under the current government. And even if a coalition of some of the current parties in opposition were to take over the government, it would face immense pushback from entrenched interests. But ultimately, it will have to happen, either by way pre-emptive action or force of circumstances.