Will South Africa reform and what would a reform agenda entail?

Frans Cronjé | May 19, 2019
Getting out of the quagmire is going to need much more than appointing a smaller Cabinet and supporting the Zondo Commission – hard reforms that overcome ideological blind spots are now essential.

The ‘mandate-threshold’ idea got a lot of traction ahead of the election. The idea held that unless Mr Ramaphosa was able to secure a strong electoral mandate for the African National Congress (ANC) he would not have the party backing necessary to proceed with structural reform. He now has his mandate. But, as deeply entrenched as the ‘mandate-threshold’ argument became, few of its proponents set out the reforms that should follow if South Africa is to stage an economic recovery. If they did, they might have been more circumspect in their expectations.

At best, when many analysts and commentators talk about reform they deliver woolly ideas such as ‘combating corruption’, ‘creating jobs’, ‘delivering policy certainty’ or ‘staging an economic recovery’. But what are the actual reforms needed for these results to be achieved? 

It is useful to start by considering what needs to be overcome:

  • South Africa’s rate of growth departed from the global trajectory in 2012 and will this year average only 20% of emerging market norms.
  • South Africa’s official unemployment rate is roughly three times higher than the global norm.
  • Government debt-to-GDP levels have doubled over a decade to an all-time high point.
  • The budget deficit is a multiple of the economic growth rate.
  • The tax-to-GDP ratio is at an all-time high point.
  • Less than 1/10 children will get a good a matric pass.
  • Less than 1/10 South Africans over the age of 20 has a university qualification in an economy where the structure of GDP has for decades evolved away from primary and secondary industries.
  • Labour market regulations are rated as hostile and constraining.
  • In private, it is commonly conceded that race-based empowerment policy raises costs and reduces South Africa’s economic competitiveness. 
  • While the investment community is good at expressing favourable platitudes, in private, threats to property rights are flagged as a primary obstacle to investment.        

It’s a daunting list of obstacles. Collectively, the economics is stacking up to look like that which the ANC inherited after decades of National Party misrule. The ideology that informs government policy is pickled in the aspic of outdated socialist dogma. Getting out of this quagmire is going to require a lot more than appointing a smaller Cabinet and supporting the work of the Zondo Commission. Actual hard reforms that overcome ideological blind spots are necessary.

What might these reforms be?

In our estimation there are four:

The first is absolute certainty on property rights. We have in our possession a document that purports to be a proposed amendment to Section 25 of the Constitution. It is poorly worded, confused in places, and attempts to carry off an impossible contradiction between securing property rights on the one hand and opening the way to expropriation without compensation on the other. If it is any indication of what the new administration is going to try to pull off, the reform process will be stillborn. There has to be no doubt that fixed investments in South Africa are safe from seizure by the State. To say, as Mr Ramaphosa again recently has, that investors have nothing to fear from expropriation without compensation is essentially to admit defeat before the reform process has even begun.  

The second is to deregulate the labour market and price poor people into jobs. With South Africa’s rates of economic exclusion and poor school outcomes, the country does not have the luxury to pontificate about concepts such as ‘decent work’ and ‘high minimum wages’. Whole passages of the Labour Relations Act and Basic Conditions of Employment Act will need to be repealed in conjunction with a political message that low-wage labour is a good thing: it offers a person the chance at the education they missed out on in South Africa’s school system, the opportunity to earn some income to buttress their welfare income, and the opportunity to earn the experience with which they might fight their way up the earnings ladder.  We are well schooled in the arguments around protecting vulnerable workers and the like. But the hard reality is that South Africa has a choice between rigid labour market protections and absorbing poor people into jobs. 

The third is to rework empowerment policy. Replace the current racial premise of the policy – that you are disadvantaged because you are black – with a new premise, that you are disadvantaged because you are poor and unemployed. It is good and right to help people who are disadvantaged, particularly given our history, and it is necessary to have effective policies that will do so. But South Africa is failing at empowerment because the premise underpinning the policy, that race is an accurate proxy for disadvantage, no longer holds true. 

The fourth is to shrink the State. South Africa needs a small, effective government that employs private-sector expertise to rebuild the economy. Decisions on schooling, healthcare and policing should as far as possible be left in the hands of ordinary people. Charter and contract schools, into which the IRR has invested a lot of research expertise, stronger community police forums with the power to hire and fire station commanders, and hospital boards with strong community representation are necessary conditions for a South African recovery.

What do we mean by ‘recovery', because this, too, is seldom spelled out?   

To qualify, the reform introduced would have to put South Africa firmly on a trajectory to replicate the average rates of economic growth and employment of emerging markets. That would mean an economic growth rate of around 5% and an unemployment rate of below 10%. 

Is this feasible? 

Of course it is. The ingredients underpinning every successful emerging market are well understood – it is no secret what makes an emerging market a success. South Africa’s human resource expertise is among the best in the world and South African firms among the most enterprising. Public opinion is far more moderate than the mainstream media lets on and there is very little actual demand for populist policy. The ANC and Mr Ramaphosa now have the mandate, power and opportunity to introduce all the reforms set out above. The next few months will reveal whether they are inclined to do so.  

 

Frans Cronje is the CEO of the IRR

 

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