What we need to get South Africa back to 7% growth

The Institute for Race Relations (IRR) has published a new policy document looking at the economic steps that South Africa can take in response to the coronavirus pandemic.

Implementing the proposals would incur little cost while offering the prospect of South Africa’s achieving growth levels of 7% by the end of the decade, the group said.

“The idea underlying all the elements of this plan is that what South Africa needs, more than anything else, is economic growth,” said IRR chief of staff, John Endres.

“Growth offers the only way to get people working and allow them to lift themselves out of poverty.”

Endres said that this could be easily achieved by focusing on four key objectives:

  • Attracting direct investment;
  • Maintaining and expanding infrastructure;
  • Creating a climate favourable to job creation;
  • Implementing a programme of widespread economic empowerment instead of elite enrichment.

While there is likely to be consensus on the above measures, Endres said that the IRR has three additional conditions which it believes are indispensable for the four policy proposals to work.

These include:

  • A firm commitment to property rights, implying abandoning plans such as expropriation without compensation, prescribed assets and the monopolistic nationalisation of the healthcare system;
  • An end to race-based policies, including Black Economic Empowerment and affirmative action, and their replacement with meritocratic and race-neutral policies like Economic Empowerment for the Disadvantaged (EED);
  • Wide-ranging liberalisation of the labour market that removes barriers to entry for young and low-skilled individuals especially.

“In contrast to plans published by the government and other civil society organisations in recent months and years, most of the measures suggested in this paper can be implemented at no or very little cost,” said Endres.

“In essence, they entail removing impediments to economic activity and following the principle of subsidiarity: putting decision-making power closer to where those decisions have an impact ideally, in the hands of individuals.”

The IRR further outlined its four main proposals below.

Attract direct investment to get the growth rate up

The IRR said that this can be done in the following ways:

  • Safeguard property rights – Though the property rights of investors have generally been well respected since 1994, they are now coming under increasing threat. This is a major part of the reason South Africa is battling to attract sufficient capital investment;
  • Create an effective state and a competitive investment climate – Attracting direct investment and increasing the returns on it requires a major uptick in the country’s international competitiveness. Among the obstacles needing to be overcome are inadequate infrastructure an inefficient government bureaucracy rigid labour laws and damaging strikes ever-shifting BEE requirements excessive red tape and sharply rising input costs (made worse in recent years by the rand’s decline);
  • Create an entrepreneur-friendly economic climate – Increased capital investment must be accompanied by the growth of new small and medium enterprises (SMEs). Future job creation will generally take place, not only through large corporations employing great numbers of people but also through a plethora of SMEs seeking to supply a vast range of goods and services to both domestic and external markets.

Maintain and expand infrastructure

The IRR said that various models can be used, including:

  • The build-own-operate (BOO) model, in which a private provider builds new infrastructure (such as a water desalination plant) and operates it in return for user fees which a competitive bid process and private sector efficiencies help to keep reasonably low;
  • The build-own-transfer (BOT) model, in which the private sector takes on the construction task, so helping to avoid delays and cost overruns, and then transfers the new plant, railway line, port upgrade or other infrastructure to the state at an agreed price;
  • The ‘affermage’ or lease agreement, in which the public sector retains ownership of the relevant infrastructure, but transfers responsibility for day-to-day operations to the private sector in return for agreed fees payable against stipulated performance criteria;
  • A more limited management contract, often used in small towns in Africa, where responsibility for operations, billing, and collections is transferred to private companies, while the costs of service are kept affordable through public funding for capital development.

Generate more jobs and draw more people into the labour market

The IRR said that this should include:

  • Providing a sensible labour regulatory environment, including an end to the national minimum wage and the easing of restrictions around retrenchments;
  • Increasing demand for unskilled labour. This can be done by reviving and reinvigorating the three sectors that have long employed large numbers of unskilled people: agriculture, mining and tourism. All are also tradeable sectors with major capacity to generate export earnings.

Broaden and speed up economic participation

The IRR said that South Africa’s black economic empowerment (BEE) and employment equity policies are by far the most ambitious and far-reaching affirmative action programmes in the world.

However, the group said that changes should be implemented to make sure that they are more effective.

“Some people criticise them for harming the economic prospects of whites, but there is little evidence of this. At the same time, most people assume that these policies are effective in helping the poor and that they enjoy broad support.

“These assumptions are no less flawed, as IRR opinion surveys have shown.”

The group suggested an alternative policy of ‘EED’ or ‘Economic Empowerment for the Disadvantaged’.

“EED selects its beneficiaries on a socio-economic basis, as does the social grant system. It also puts its emphasis on the inputs needed to empower the poor, rather than on meeting racial targets.

“It thus recognises and rewards business for expanding opportunities through direct investment, job creation, contributing to tax revenues and export earnings, topping up venture capital funds, appointing staff on a ‘wide’ definition of merit (which takes account of disadvantage), and entering into effective public-private partnerships to improve education, healthcare, and housing and to maintain and expand economic infrastructure.”

Read: South Africans are leading experts at reinventing the wheel: business leaders

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What we need to get South Africa back to 7% growth