The 15-year strategy that tanked South Africa
Independent think tank, the Centre for Development and Enterprise (CDE), says that South Africa is suffering the consequences of what it calls a 15-year ‘anti-growth strategy’ that has been doggedly followed by the government.
The CDE – which is an independent policy analysis and advocacy organisation – has published a new report arguing that the slow economic growth and the general decline of almost everything in the country over the last 15 years can be attributed to “bad policy choices, a catastrophic decline in government performance and a devastating lack of leadership”.
Ann Bernstein, executive director of CDE, said that despite rhetoric to the contrary, the South African government does not have a growth strategy. “If anything, it has an anti-growth strategy,” she said.
“South Africa has leaders who say they want growth, and there are a lot of government policy documents that describe how important growth is. However, at no stage has the country’s political leadership made a decisive choice to prioritise growth or put in place the components of sound policy and good governance essential to an effective growth strategy,” she said.
Bernstein said that the accumulated effect of each poor policy and each example of government failure far exceeds the already-large sum of its parts and has led to a collapse in even the most basic of services.
“We have a state that is increasingly a brake on growth and unable to deliver on its most basic functions, presiding over deteriorating infrastructure and rapidly rising levels of indebtedness. It is a state in which the corrupt thrive at the expense of good managers, and where the lives of whistle-blowers are increasingly at risk,” she said.
In its report, the CDE identified ten main ways in which the government has wrecked South Africa’s growth prospects:
1. Poor policy and bad governance at Eskom
Inadequate energy supply is South Africa’s most critical constraint on growth.
South Africa’s energy crisis is well-tread by now, and its impact is well-documented – crushing the economy and placing households, businesses and individuals under immense pressure.
“Inadequate energy supply is South Africa’s most critical constraint on growth because we do not have enough generating capacity to keep the economy running to its existing capacity, much less to supply even more users,” the CDE said.
“The key to this malaise is a policy choice that, until recently, ensured that Eskom enjoyed as close as was humanly possible to a monopoly position in the generation of electricity, even as global experience made it abundantly clear that the generation of electricity is much more efficient and reliable if there are multiple providers competing with each other.”
The group said that the government’s long-term failure to create a market for generating electricity has meant South Africa relies almost exclusively on Eskom for its power.
“Indeed, that was, in many ways, the point of the policy: proponents of the ‘developmental state’ believed – and, astonishingly, purport to still believe – that a state-owned power company was essential for development.”
The CDE echoed what many energy experts have already argued: Eskom’s state-supported monopoly and the collapse of governance through corruption and incompetence at the utility have had catastrophic implications for the whole country.
2. Fiscal policy
Finance minister, Enoch Godongwana
While the government has stated commitments to spending restraint and debt stabilisation – these have been violated in practice, the CDE said.
Whether in the form of excessive wage increases for the public sector or unfunded commitments to free higher education and expansion of social grants, the government simply cannot put a lid on spending.
“As a result, public debt has increased nearly eight-fold from around R630 billion in 2007 to nearly R4.7 trillion in 2023. This has led to a steep rise in debt service costs, which absorb a rapidly rising share of tax revenues and diverts them from more productive uses,” the group said.
It is hard to say how much of the deterioration in South Africa’s public finances is about poor policy and how much a result of bad governance, it noted.
On the one hand, the emergence of the gap between tax revenues and public spending is the result of deliberate policy choices – like higher than inflation increases in salaries for public servants for 12 years.
On the other hand, the fact that these decisions were made, generally in face of explicit warnings from the National Treasury about their unaffordability or about the need to choose between different policy priorities, suggests a wilful blindness to the consequences of unsustainable fiscal policies, the CDE said.
3. Corruption
Chief justice, Raymond Zondo
The Zondo Commission found that the state paid over R57 billion on corruption-tainted contracts to entities associated with the Guptas.
“Unfortunately, the extent that corruption has moderated under Cyril Ramaphosa is an open question. What is certain is that corruption and cadre deployment continues to take place, with a real risk of state capture 2.0 emerging in the future,” the CDE said.
The group said that past corruption, current corruption and the risk of future corruption are enormously important drivers of South Africa’s declining economic potential and of the increasing costs of doing business.
The impact is felt through a number of channels, with the most important being:
- The direct loss of resources that might be used to fund development and service delivery as funds are siphoned out of organisations, government departments and municipalities.
- A reduction in the quantity and quality of goods and services provided by the state, many of which are also procured at higher cost because tenders did not go to the lowest-cost bidder.
- The appointment of leaders who are simply incapable of leading or running the institutions for which they are responsible.
- The imposition of increasingly onerous rules to govern public procurement and auditing – generally introduced after the horse has bolted – that make it harder for competent managers to do their work and delays the procurement of essential goods and services.
- A reduction in the legitimacy and credibility of government affects tax morality, which, in turn, reduces tax revenues, increasing the government’s borrowing requirement while also raising the cost of collecting taxes.
The CDE said that the high-profile of government-linked corruption in South Africa has opened a Pandora’s Box, diminishing trust in the state from all sectors – domestic and international.
4. Crime and stability
Police minister, Bheki Cele
South Africans only need to look at the most recent crime stats from the South African Police Service to see how the country’s criminal justice system has become less effective over the past decade.
While acknowledging that it is difficult to find stats to confirm this, the CDE noted that murder – the category of crime best reported and recorded – has risen by almost 60%. Stats SA and other surveys show that trust in policing is low, and that citizens simply don’t feel safe.
International perceptions are the same, with South Africa constantly ranking among the worst in the world for perceptions on safety and security.
“Poverty, unemployment and inequality are all important drivers of crime rates, and it would be unrealistic to think that a country with our socio-economic profile would have low levels of crime. It is, nevertheless, also true that South Africa’s justice system – policing , prosecution and imprisonment – has become less effective,” the CDE said.
“The events of July 2021 have exposed the fragility of public order in South Africa, with huge implications for levels of confidence and investment, especially since no ringleaders have been brought to book.”
5. Logistics and Transnet
Poor logistics systems mean higher costs for customers, inconvenience and a brake on South Africa’s exports.
As with Eskom, Transnet’s monopoly on port management and railway infrastructure explains why its services have declined and costs have risen, the CDE said, to the detriment of South African businesses, consumers and the economy as a whole.
The group said there are many indicators of the deterioration of South Africa’s freight and wider logistics systems:
- Freight volumes moved by Transnet Freight Rail have fallen every year since 2018, falling from nearly 220 million tons to 175 million. In a high fixed cost business, this translates directly into reduced profits or increased losses.
- The infrequency and unreliability of trains hauling mining ores to Richards Bay is estimated to be costing the South African economy over R100 billion a year in foregone exports, with the effects falling heavily on the mining and forestry sectors.
- Freight lines – especially the critical line that connects Gauteng to Durban – are so unreliable as to force businesses to truck goods to and from ports. Apart from the enormous damage this does to the roads, this is expensive, carbon-intensive and dangerous both to other motorists, and, in light of the rise of apparently xenophobic attacks, to drivers.
- Ports are slow and expensive, with South Africa’s container ports all being rated in the bottom 10 positions in a recent World Bank estimate of the efficiency of nearly 400 ports across the world, a result of the long delays outside ports waiting for quay space, the slow pace at which loading and unloading takes place, and the high costs of the services provided by the terminal operators.
6. Mining
Mineral resources and energy minister, Gwede Mantashe
Mining revenue is stagnating because of uncertainty about the future trajectory of tax policy, the level and rigidity of wages, and an empowerment model that has increased investment risk.
Licensing delays have resulted in a slowdown in investment projects, while mismanagement of the sector overall has meant that South Africa is an increasingly undesirable destination for mining companies seeking to expand their output, the CDE said.
Examples of poor policy abound, but include:
- An empowerment model that, because of the uncertainties about whether the government is committed to the principle of once-empowered-always-empowered, has resulted in much more investment risk than necessary, resulting, inevitably, in lower levels of investment;
- Uncertainty about the future trajectory of tax policy in the industry – especially the level of corporate taxes, royalties and carbon taxes, particularly in light of the Minerals and Petroleum Resources Development Bill – has added further risks and costs to corporate planning frameworks and investment prospects;
- The level of industry wages, combined with the rigidity and universality with which these wages are applied to all mines irrespective of their productivity and the quality of their ore bodies, means that some mines (or shafts) have become commercially unviable.
7. Decaying public infrastructure
Echoing reports from engineering bodies, the CDE said South Africa’s infrastructure is in a terrible state.
“There has been severe underinvestment in passenger rail, wastewater systems, roads, water infrastructure and state facilities such as schools, police stations, courtrooms, Home Affairs’ offices and hospitals,” it said.
The group said that a key commonality underlying all of these trends is the government’s cadre deployment strategy.
“This has seen the appointment of wholly unsuitable people into key organisations mandated to provide and maintain infrastructure while also saddling them with an unconstitutional conflict of interest: it is impossible to serve the interests of the ANC and fulfil one’s fiduciary duties to the public organisations they head,” it said.
The state has been racking up new lows in almost every aspect of infrastructure – from crumbling roads, stolen railway lines, deteriorating water works, and collapsing power stations – the list of problems is long and varied, and the cost to course-correct runs into the hundreds of billions of rands.
The CDE said that the deterioration extends beyond physical infrastructure and runs into the government’s systems.
“As anyone who has stood in a queue to renew a driving license or apply for a passport knows, the phrase ‘system offline’ has become something of a national proverb, and it reflects the reality that, despite billions spent on it the state’s IT infrastructure, its systems represent another source of inefficiency because they are mainly old, slow and unreliable.
“They have also been the subject of numerous cyberattacks, including, reportedly, ransomware attacks on the Department of Justice, International Relations and Transnet.”
8. Local government
Reflecting the recent findings from the Auditor General of South Africa, the CDE said it is also apparent that local governments are a complete mess.
Only 41 of SA’s 257 municipalities received clean audits in 2020/21, while the Department of Cooperative Government and Traditional Affairs declared that 64 were “dysfunctional”.
With respect to economic growth, one of the key effects of the declining quality of local infrastructure has been to raise the costs of doing business.
Sygnia founder Magda Wierzyka recently lamented the collapse of local governments – which she said are the backbone of the country – and argued that their failure shows that South Africa has already become a failed state.
“All of this has had profound effects on residents’ quality of life, particularly those who are least able to protect themselves from the impact of poor service delivery,” the CDE said.
9. BBBEE and localisation
Employment and labour minister, Thulas Nxesi
Two government policies aimed at economic transformation – broad-based black economic empowerment and industrialisation-through-localisation – have inhibited growth, the CDE said.
“Products designated for local procurement are generally more expensive or of a lower quality relative to possible imports – which is why local products are not chosen on their own merits – while BBBEE has raised the costs of doing business and introduced new uncertainties that affect investment plans,” it said.
Instead of taking a step back and reviewing its policies, the government has instead decided to double down on them and take them into potentially even more destructive territory.
New laws signed by president Cyril Ramaphosa in April now give the minister of employment and labour far-reaching powers to dictate to various sectors how the racial makeup of their industries should look.
The new laws are not going unchallenged, with legal experts pointing out several administrative issues with the laws and business groups uniting to take them on – even in court – but the signing of the laws shows a distinct move by the government to get even more aggressive with BEE in the country.
“Nobody disputes the desirability of the goals of BBBEE policies: it is self-evidently true that the distribution of participation and ownership in a post-apartheid economy has to be representative of the population,” the CDE said.
However, the laws have made doing business onerous and costly, and future investment uncertain. “The effect these policies have on expectations (is massive), especially since the policies seem to be in a perpetual flux of revision and restatement.”
10. Lack of leadership
President Cyril Ramaphosa
Falling to the bottom of the pile – but by no means the least impactful – the CDE says that leadership has simply failed.
“A country with as many crises as ours needs solutions. But no feasible solutions will emerge or be implemented without exceptional leadership,” it said.
“That has not emerged in South Africa, where President Ramaphosa, for all his eloquence, has presided over a Cabinet full of mediocrities who are either incapable or unwilling to address the challenges they face in their portfolios.”
The CDE said the president has governed by establishing well-intended-but-ineffectual committees while leaving in place ministers who bend and break every prescript of the ministerial handbook and who openly question his agenda.
“He has signally failed to articulate a compelling analysis of the state of the country and the causes of decay, much less developed a plausible strategy for addressing it. Instead he has promised to build smart cities and ride the wave of the fourth industrial revolution in a country where the vast majority of learners cannot read for meaning or do long division,” it said.
“The lack of presidential leadership is one of the reasons why South Africa is in a hole and why that hole is deepening.”
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