South Africa has failed to deliver on its growth potential as a direct consequence of its failure to attract sufficient investment. The first parts of this series aimed to show that South Africa’s failure results from the state of its economic enablers, which is in large measure a consequence of the choices that the country’s authorities have been made.
This can be turned around. South Africa has a significant bundle of underexploited opportunities, which, if properly leveraged, could be invaluable in driving a growth agenda.
South Africa remains Africa’s most sophisticated economy. Its financial and corporate sectors are well developed, and fairly well managed. It has enormous mineral wealth, and a long-standing mining economy. While accounting for a small share of its overall GDP, its agricultural sector remains productive and resilient. Its manufacturing sector is sizeable, though struggling to remain globally competitive.
Cultural factors, such as the widespread use of English, and long-established relations with markets in Europe and America (and increasingly in Asia), make it a simpler environment for foreign businesspeople to operate in than some of its peers. Its institutions – although often abused – have remained functional. Despite enormous socio-economic stress, its democracy has endured, and its legal system is respected.
South Africa exists in a potentially high-growth continent. While Africa suffers from a litany of its own problems and shortcomings, there are enormous opportunities for South African firms, which a properly actualised African Continental Free Trade Area would unlock.
Moreover, South Africa is at a demographic point where its labour force comprises some two thirds of the population. This means its dependency ratio – the economically productive in relation to those out of the workforce – is ideally situated for accelerated economic growth. That is, if the workforce can be put into employment.
Changing the mindset
Encouraging investment at the outset demands recognising the failings of the approach adopted thus far. As was apparent from the forgoing parts of this discussion, South Africa’s authorities have attempted to structure reality around their ideational precepts; in policy terms, the emphasis has been politically driven demands and incentives, even as the foundations of the economy have failed. It cannot be emphasised strongly enough that ultimately no policy or subsidy or act of persuasion can compensate for the hard enablers of economic activity.
The starting point, then, is to recognise that investors and entrepreneurs have agency. The decision to sink their capital and efforts into any jurisdiction hinges on whether the conditions for making profitable investments are created.
The actions of governments can be influential, but primarily though often it is an influence that takes place with little direct appreciation: governance is reflected in whether or not the streets are safe, the water supply reliable and the roads are maintained. Indeed, when the quality of governance becomes a talking point, it is invariably because it is lacking.
Fixing the state
Regardless of any ideological predisposition, a country like South Africa needs a functioning state. This demands a commitment to three broad principles for policy and government action.
The first is realism: what can reasonably be achieved at any time with the extant advantages and challenges. The second is a focus on outcomes: policy and action must be geared to achieving particular, defined goals. Together, these two principles demand clear-eyed prioritisation. Not everything is possible (nor indeed desirable) and it is critical to decide where the greatest benefits are to be had, where resources are to be committed, and how different policy options will fit together.
The third principle is merit. South Africa’s governance environment has been strained by what the National Planning Commission termed a “rejection of meritocracy”. The overt politicisation of the public service, as well as a drive for demographic representativity as an overriding (official) priority have undermined this and contributed to widespread incapacity. Where merit – skills, qualifications, experience, and so on – is relegated to a secondary place in governance thinking, efficacy will invariably suffer, and pathologies will be enabled, sometimes unwittingly, sometimes deliberately.
A state committed to fostering an environment conducive to investment is one that would provide stable, predictable governance, and be able reliably to provide the foundations of societal activity. This is particularly the case at local government level, which is where responsibility for the management of most day-to-day interactions between citizens and the state resides.
As the IRR has argued in a recent paper on public service reform, this requires changing the manner in which the public service is run, both in its organisational conception and in its general management. These would include an enhanced role for the Public Service Commission, dispensing with demographic considerations in recruitment and promotion, requiring managers to lead and maintain discipline among their subordinates, and ultimately developing a distinct, non-partisan organisational culture.
This is of course a long-term project, but quick wins are possible – if only by signalling that changes are afoot – provided they are politically supported. Amendments to the Public Service Act, removing political discretion in the appointment of public servants, and vesting appointment powers in the PSC would be a good place to start.
Foundations
The two foundational enablers of economic activity – safety and security, and infrastructure – are in some ways South Africa’s most important incumbrances. Each arises from profound governance failings and will take time and concerted effort to deal with.
In the security field, the country suffers from deficient professionalism in its policing and prosecutorial (and to an extent, its judicial) processes, as well as its correctional systems. Perhaps more than anything, rewards for criminal activity are not countered by the risk of suffering their consequences. There is cold rationality at work here.
The solution to this is complex and will require changes to institutional staffing and management – similar to what is set out regarding the public service, above. One innovation would be decentralised police management, to link policing more closely with the communities that individual stations serve. Recruitment and career progression must reflect a steadfast commitment to merit. And rooting our corruption in the security systems must be a priority: nothing undermines security more fatally than compromised agencies meant to ensure it.
Specifically, better investigative and forensic capabilities, as well as dedicated teams for investigating and prosecuting organised crime would be needed to deal with the growing hold of organised crime.
Infrastructure needs funds. Substantial sums could be found in using the existing resources better. This can be supplemented by borrowing and issuing bonds. But increased input from the private sector is critical: in the rehabilitation, maintenance and operation of existing assets, as well as the construction of new ones.
There is a long history of resistance to this, although recently the government has begun to see the imperative of doing so. The rollout of solar power is an example of what is possible in this regard. And, given the need for infrastructural investment, capital should be welcome from abroad.
Of course, sorting out the infrastructure will be impossible if projects intended to do this are also attempting to deal with subsidiary issues. Using road building or the refurbishment of power stations to advance race-based empowerment will likely open the door to extraction – a good part of what produced the crisis in the first place.
Importantly, successfully tackling infrastructure will rest on effective law enforcement. The plundering and vandalism of the country’s infrastructure, in all its forms, calls for proper protection of its assets, and combatting the syndicates that profit from undermining it.
With some progress to show on these issues, key hindrances to investment would be removed, or at least mitigated.
Human Capital
South Africa’s economy requires a level of expertise that it is struggling to meet. If it hopes to advance up the value chain and make a compelling argument for higher-end activities, it will need to up the skills of its workforce. The state of the education and training sector – which a forthcoming paper by Anthea Jeffery will address – is in a dire state, and simply not fit for purpose. This is despite reasonable levels of spending.
It is unlikely in the extreme that simply funnelling more resources into a failing system will be of much effect, at least not if issues relating to professionalism and leadership are resolved.
Getting this right demands taking on aggressive entrenched interests, particularly, the South African Democratic Teachers’ Union, which has effectively taken charge of large parts of the country’s education landscape and contested most efforts at accountability or to improve the standards of schooling.
The IRR has proposed expanding choice in education through a voucher system. This would enable families to choose better performing options for their children and offer a way out of dysfunctional schools. Teaching would not be able to function as a sort of sheltered employment, but a competitive one where outcomes are measured and valued.
This will not be an easy process, nor one with quick wins, but it is one that could in principle be achieved without significantly greater outlays: it would function on the basis of redirecting existing resources, rather than requiring more.
Training for workplace skills, meanwhile, needs a new approach – or rather, perhaps, to revitalise an old one. Greater use of vocational and technical training at school level is one approach; the use of a greatly expanded apprenticeship system is another. At a minimum, it is the private sector that should take the lead here. As Brian Pottinger commented in The Mbeki Legacy, the academics and bureaucrats have had their chance and failed at it.
Regulations
A highly regulated environment need not be a barrier to investment, provided the regulations serve a rational purpose – one that enhances growth – and provided that it is competently overseen. It’s hard to make this case for South Africa, especially considering the extent of economic exclusion.
South Africa needs to conduct a thorough review of its regulatory environment, and sheer demands on business down to what is necessary to protect clear and legitimate public interests. Environmental protection is a reasonable ground (as long as it can be properly and expeditiously enforced), but there is a strong case to be made against a raft of labour and “empowerment” regulation.
Business activity in South Africa is weighed down by agreements negotiated between large firms, organised labour, and the government. This is invariably to the exclusion – and to the detriment of the interests – of those not party to such bargaining: unemployed people, the unskilled, small businesses, and so on. This system needs to be abolished, either limited strictly to those who actively participate in it, or who choose to be covered by it, or replaced by the principle of free association and competition.
“Empowerment demands”, likewise, perhaps benefit a small cadre of people – not infrequently those with political cache rather that business acumen – while adding to the costs and complexity of doing business. The new Public Procurement Act stands to ramp up the costs of state procurement, doubling down on the inefficiencies that have long plagued the economy – and effectively repudiating the lessons of the Zondo Commission, which noted that preferential procurement provided a veneer for the state capture project. As my colleague Gabriel Crouse argued, this could usher in State Capture 2.0.
Looking forward, South Africa should require an assessment of all legislation and significant regulations to probe their impact on growth and investment. While a variant of this exists (the so-called Socio-Economic Impact Assessment), these are often pro forma exercises intended to legitimate rather than to interrogate a proposal. If we are serious about growth, this needs to be done properly. It also speaks to need for capacity in the state: people able to apply their minds to the consequences of policy, rather than its political utility or its alignment to ideology.
Manipulating outcomes
The weight of policy debate around economic matters revolves, unsurprisingly, around specific government interventions intended (at least in theory) to drive particular outcomes. This essentially establishes the basis for the regulation just described. It is the terrain of development plans, industrial policy, charters, investment roadshows and the like.
Their operating assumption is that judicious application of state authority will serve as an economic accelerant. Not only can the state be a catalyst in pushing growth and development forward, but it can be decisive for the nature of that growth.
This idea been particularly beguiling to the ANC. For a party that was long committed to a statist economic path, the “developmental state” (in the pattern of the East Asian “tiger” economies) was an acceptable substitute after the failure of Soviet-style socialism.
The South African state has sought to make itself a centrepiece of economic and business choices – the mantra that “the state is back” has been profoundly appealing to the ANC and the government it heads. Industrial policy (the keystone of the “developmental state”) has been a useful tool in many economies. But it requires a deep understanding of the workings of an economy – engaging the proverbial “best and the brightest”.
The American sociologist Peter Evans in his seminal study of developmental states, Embedded Autonomy, discussed at length how properly capacitated states, whose officials are linked to the economic interests but independent of them, have been able to drive high-end developmental endeavours.
But, going back to the very foundational conditions for economic activity, the South African state has manifestly lacked the capacity to make much of a positive contribution: not only has it made choices with severely negative implications for South Africa’s investment attractiveness, but it has failed to exercise many of its basic tasks competently.
Hence, the scepticism that XA Advisors expressed about the possibilities of these initiatives (“sector prioritisation” and “picking winners”, which it collectively terms “Heartbreak Hotel”). The prospects of success in this sort of high-level stuff are implausible when a state is incapable of managing the basics. As stated previously, the net effect has been to create a confusing network of subsidies and preferences that have distorted the market badly.
Moreover, the South African state has become too beholden to vested interests to play an objective developmental role. The commitment to “empowerment” has meant that economic progress has been held hostage to the interests of a small community of politically connected businesspeople; alliances with trade unions has protected restrictive labour legislation, and also served to drive protectionism. Economic efficiencies and a competitive investment environment are compromised.
A productive industrial policy is only possible when it builds on solid foundations. Until these are in place, its potential for South Africa will be limited, and its outcomes often counterproductive. Steel tariffs, for example, have attempted to protect an uncompetitive domestic steel industry, to the detriment of local manufacturers for whom high-quality steel imports are a critical input.
With this in mind, there is a need to rethink industrial policy. Part of this is simply to step back and recognise that there is a fundamental difference between accepting that industrial policy can be a useful mechanism for growth and investment and believing that the South African state is in a position to do so. The interventions that have been introduced need to be reassessed, and scaled down, if not abandoned. In the short-term, independent expertise (possibly from abroad) could be contracted to help design a better approach.
For the moment, though, industrial policy keeps us interned in “Heartbreak Hotel”.
It is also worth noting that the ANC has compounded the suite of failures illustrated in this analysis by repeatedly threatening a turn to destructive policy positions: obvious examples of this being the “debate” around nationalisation of South Africa’s mining industry and latterly the introduction of Expropriation without Compensation to drive land reform.
These have been advanced within a narrative of “radicalism” and framed as initiatives of redress. In practical terms, they have served only to unsettle the policy environment, and to suggest its imminent deterioration. In this, as we at the IRR have argued before, the ANC managed to aggravate policy uncertainty (which it conceded was a disincentive to investment) sufficiently to make planning difficult, while introducing enough prospective certainty that future policy would be bad. These constituted not only heartbreak for South Africa, but self-inflicted damage to the country.
The “best” road to catch up to “the rest”
South Africa has long aspired to play a central role in the developing world. Without a growing economy, its claims to be able to do so are implausible; indeed, its economic failures have already undermined its global standing, as businesspeople and diplomats have sought alternative partners within the developing world and in Africa specifically.
If this is to be turned around, it will be done by enhancing the investment environment, making South Africa an inherently attractive destination, on a par with its peers.
The objective – as analyst Peter Attard Montalto has put it – needs to be enhanced confidence in the country and a flood of investment under its own steam to take advantage of it. Investment would come in where returns are to be made, rather than where an official mindset might conceive them to be most advantageous. It would be a far cry from the current approach, with its emphasis on appeals to the greater good and a “trust us” motif to the business community.
Immediate emphasis is needed on fortifying the foundations of the stagnant economy. Getting the basics working efficiently is absolutely non-negotiable; this will also take time to achieve. But even a demonstration that these matters are seriously and credibly being addressed could speaks confidence in the country’s future and its attractiveness for investment.
This needs to be paired with the reorientation of South Africa’s administrative apparatus to govern effectively, as well as its education and health services to provide the services they are mandated to – and which are critical to fostering a competitive workforce. There are islands of excellence that can be encouraged and nurtured, but the grandiose visions that so exercise the official mind are beyond current capacities and must be abandoned.
Needless to say, millenarian policy prescriptions like EWC are disastrous and should not be entertained. Whatever satisfaction ideologues may find in these ideas comes at a steep price for all of us.
All of this comes down to understanding things in an appropriate order of priority: what must be done and what might be done; what is possible within available capabilities, and what is implausible. A failure to do so has inflicted great damage on South Africa.
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