An Economic Agenda for South Africa’s Next Government
Since the 2008-2009 recession ended a period of strong gains in investment, employment, and revenue, South Africa's economy has stagnated, held back by leadership failures and plummeting confidence. So what must the next government do to restore growth and ensure social progress in Africa’s lagging economic powerhouse?
CAPE TOWN – Almost two decades after Nelson Mandela was thwarted in his efforts to name Cyril Ramaphosa as his successor, African National Congress party members have now elected him as their leader. Of course, Ramaphosa is not yet president of South Africa. But expectations are already high that economic policy will take a new direction under his guidance. So what will a Ramaphosa presidency have to do to restore growth and ensure social progress in Africa’s lagging economic powerhouse?
The Year Ahead 2018
The world’s leading thinkers and policymakers examine what’s come apart in the past year, and anticipate what will define the year ahead.
Since the 2008-2009 recession, South Africa’s economy has stagnated, held back by leadership failures and plummeting confidence. Unemployment has increased to 27.7%, the highest rate in 13 years. GDP growth will amount to 0.7% this year, and stood at just 0.3% in 2016. Public debt is rising, and real household income per capita has flatlined. Inequality remains extreme, and social discontent is high.
The necessary commitment to coherent policies remains elusive, despite publication of a National Development Plan in 2011. Collaboration between business and government leaders to strengthen key reforms and forestall credit rating downgrades floundered when finance minister Pravin Gordhan was sacked from President Jacob Zuma’s cabinet in March.
The worsening economic outlook has given rise to divergent prognoses. Some insist that the hatches must be battened down: fiscal consolidation, curtailment of union power, deregulation of markets. Others call for radical transformation: state-led industrialization, free tertiary education, land redistribution without compensation.
In the past, despite South Africa’s strident political discourse, strong leadership and stakeholder engagement enabled social partners to find common ground. Today, however, the debate about reform is shallow and polarized, amid revelations of large-scale corruption and fraud in both the public and private sectors. The resulting erosion of trust is jeopardizing already-complex nation-building and economic-recovery projects.
In seeking to restore political and social cohesion, the new ANC leadership will not only have to reinforce ethical principles in public service. Achieving inclusive growth while avoiding self-defeating fiscal deterioration will require hard economic choices. Accelerated development requires a heterodox policy mix and substantial shifts in the balance between state and markets.
Creating a more employment-intensive economy remains a primary objective. Persistently high unemployment signals inefficiency in mobilizing human resources. It is also an obvious barrier to reducing poverty and inequality.
South Africa will introduce a statutory minimum wage next year, which will help to protect many vulnerable workers, and could lead to simpler and fairer outcomes than the current thicket of collective-bargaining agreements and sectoral determinations. But, as the high-level panel chaired by former President Kgalema Motlanthe has recently argued, complementary measures are needed to support employment of young people and other vulnerable job seekers.
The existing subsidy for young workers, which operates as a temporary tax incentive to employers, should be extended to all low-wage employees in registered employment. Originally proposed by Professor Sam Bowles of the University of Massachusetts to South Africa’s labor market commission 20 years ago, this remains the most compelling market-based option for addressing apartheid’s structural legacy of unemployment.
Moreover, locally managed public works and community-based employment programs should be expanded, subject to the minimum wage and basic work standards. Household income support should run on twin tracks: cash transfers, already well-established, and basic employment assurance, which lags well behind needs.
Active labor market interventions and the envisaged public employment services should be structured as public-private partnerships, building on the demonstrated success of established independent initiatives. Similarly, planning, oversight, and financing of technical and vocational education require effective collaboration among business groups, the national government, and municipalities.
Beyond these institutional reforms, South Africa needs more rapid investment in cities, urban infrastructure and housing. Urbanization is a powerful determinant of productivity growth and improved livelihoods. South Africa’s cities are still racially fragmented and spatially inefficient. Too many people still live in informal settlements, often far from available work opportunities.
The revenue systems needed to invest in better housing, modern transport, communication networks, industrial hubs, and enterprise development require strengthening, but they are not dysfunctional. South Africa’s cities are creditworthy. They have excellent universities and capable financial institutions. Bolder urban plans, more inclusive development strategies, and more streamlined business processes would catalyze investment and strengthen self-sustaining growth dynamics.
Expanded opportunities in urban housing markets are imperative, but access to rural land and livelihoods are also important. The Motlanthe high-level panel’s proposals include strengthening land administration systems in informal settlements and traditional council areas, and facilitation of the subdivision of agricultural land. South Africa’s agriculture sector could expand employment and contribute to food security by strengthening partnerships between established commercial operators and emerging farmers.
The energy sector and air and rail transport are still dominated by state-owned near-monopolies, whose balance sheets are in trouble amid rapidly rising costs. Competition and private ownership would relieve the state balance sheet of a large and troubling contingent liability.
More rapid progress in regional economic cooperation, across the public and private sectors, is another imperative – one that would benefit both South Africa and its neighbors. There are growing financial, trade, and migration links among southern African countries, as well as shared water, transport, electricity, and communication networks. And yet the region suffers from a dearth of infrastructure co-investment projects, weak collaboration in trade promotion, and slow-moving cooperation in financial and tax arrangements. Reform of the Southern African Customs Union is long overdue.
But perhaps the toughest test facing the ANC’s new leadership will be to reverse the creeping dirigisme that the country has faced in recent years, while steering bold reform. For too long, both private investment and critical state programs have been impeded by misdirected bureaucratic efforts to promote black economic interests, and public management regulations that are impenetrable and impractical.
Of course, black socioeconomic advancement is central to more rapid and broad-based development. And rigorous rules and audit procedures are required for honest and transparent financial management. But South Africa needs instruments that facilitate activity and incentives that reward productivity, not barriers to investment or initiative. If the ANC’s new leadership opens up economic opportunity, while putting an end to self-serving deal-making, confidence and growth will return.