How can South Africa become richer and more prosperous? And if we get a new government next year how could they achieve it?

It is worth drilling down into some specific things the Multi-Party Charter (MPC) can do if they manage to win outright next year that would help not only South Africa to become more resilient but also lead to higher growth and more job creation. Some of these suggestions I have made before in other articles but I believe it is still useful to see them as part of a broader tapestry of policy decisions which would work together rather than a disparate approach.

Mandated Tax Exempt Savings for under 30s

Taking a cue from Poland, where people under 26 who earn under 22 500 USD per annum are not taxed, I believe the country would benefit deeply from a mandated and tax-exempt savings scheme for formal sector workers under 30. The scheme would work similarly to a tax-free savings account in the sense that a person can choose what underlying investments are in the savings account or choose pre-selected ones and that would be linked to the PAYE system so that the specific amount of money (let’s say R3 000 per month, for argument’s sake) would be redirected towards these individual savings accounts rather than income taxes.

Countries with higher rates of domestic savings have higher rates of economic growth because capital accumulation creates greater opportunities for investment and production and therefore the productivity of a country. The United Nations Conference on Trade and Development in 2004 noted:

“….. main factor in increasing in-country capital is the increase of savings and that, in that regard, developing countries should prioritize programs that promote domestic savings, in order for capital to be invested towards the most productive practices.”

In other words, a higher national savings ratio is more likely to also encourage foreign investment into the country and this then leads to faster economic growth and therefore more job creation. Households and therefore the economy will also be more resilient when shocks do inevitably come, something that we should’ve learnt from pandemic times. There are necessary corollaries that must come with this that will address the shortfall of income tax revenue and also policies that will buttress this approach as well.

Cutting the Size of Government

There needs to be honesty from the MPC about (drastically) cutting the size of government because much of the bloated size of government has very little to do with what is constitutionally mandated and more to do with patronage. Getting the ANC out of government without challenging the systems and mechanics that have made their rule so insidious and destructive for the country is a fool’s errand in much the same way the public was promised getting rid of former President Jacob Zuma would change things without getting rid of the apparatus of the ruling party which made his destructive actions possible.

As Martin Van Staden of the Free Market Foundation notes: 

“The most logical place to start would be to get rid of any Cabinet portfolio and Cabinet department that cannot be traced directly back to a constitutional provision… The text of the Constitution only mandates the existence of the Cabinet portfolios of President, Deputy President, Finance, Cooperative Governance, Justice, Defence, and Police, but additional portfolios are required by necessary implication. Those that are not required explicitly or implicitly are simply discretionary – and South Africa has too many of these discretionary portfolios, costing the taxpayer millions.”

Van Staden then goes on to suggest that the 30-member cabinet can be constitutionally and responsibly reduced to 10 bureaucracies and other ones such as Basic and Higher Education and Health and so on could be devolved (which fits in with the MPC’s stated goals of devolution) to provincial and local governments.

In essence what this is about is the more efficient use of both private capital and government finances which will yield far more investment in the economy and faster growth and job creation. It is also about the government becoming more localized (devolved) and therefore closer to the people and more accountable. 

Labour Market Deregulation

It is firstly important to note that if the employment rate in South Africa was equal to that of the OECD average or even the average across the best emerging market performers, the country’s GDP per capita would be 50 to 60% higher than it currently is.

As University of Cape Town (UCT) Economics professor Nicoli Nattrass notes in a November 2018 article titled Labour Market Reform is needed for Inclusive Growth

“South Africa’s extremely high unemployment rate means that inclusive development is impossible without more labour-intensive growth. When nearly two adults in five are unemployed the expansion of jobs, even at relatively low wages, reduces poverty and inequality. This is all the more urgent when large proportions of the adult population have not completed secondary schooling and are unlikely to be absorbed in skill-intensive activities. We need, therefore, for labour-intensive firms to create jobs as quickly as possible. This requires a more supportive industrial policy, a more flexible minimum wage regime, and a targeted effort to attract foreign investment by firms and people with experience in labour-intensive activities. Export promotion is also essential because the small size of the domestic market means that substantial job creation would require competing in the larger international market.

In other words South Africa has to (initially and currently) have industrial policy that more accurately reflects the labour market bequeathed to the country by a poorly performing education system (another thing which requires urgent addressing). More than half the adult population have not completed secondary schooling and are therefore unlikely to be absorbed into skill intensive industries which our industrial policy currently favours. 

As Natrass and Professor Jeremy Seekings (also of UCT) show, the talking point of lower-wage, labour-intensive firms threatening higher-wage, higher-productivity firms is a false one and will not trigger a so-called race to the bottom in terms of wages.

Both types of firms can co-exist targeting different segments of the market while using different technologies; perhaps this can be best typified by the difference between high-end fashion like Maxhosa and cheaper options which are bought by cross-border shoppers in the Johannesburg CBD.

The views of the writer are not necessarily the views of the Daily Friend or the IRR

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Sindile Vabaza is an avid writer and an aspiring economist.