Over the past two decades, various African National Congress (ANC) governments in South Africa have sought to redistribute income to the poor and vulnerable. They have also sought to stimulate rapid economic growth.
While the regime made progress in its redistribution efforts, its economic growth record was dismal. For example, the National Development Plan, whose first draft was released in August 2012, aimed to move the country onto a higher annual growth trajectory of 5%. That's not happening. Over the past decade, growth has averaged less than 2% per year.
Even before the COVID-19 pandemic began in the first quarter of this year, the economy was in a technical recession (defined as two consecutive quarters of negative growth). Since then, the situation has worsened. GDP in the second quarter of 2020 shrank by 16.4% compared to the same period last year, or by 51% on an annualized basis. The annual rate assumes that the second quarter's growth rate is repeated for the remaining two quarters.
If an economy is not growing rapidly, it cannot create enough jobs to absorb more young people entering the labor market each year. As the economy steadily worsened, so did the unemployment rate. One out of three people who are willing and able to work do not have a job.
The health and economic shock caused by the pandemic has made a bad economic situation even worse. Given the economic challenges, we must revive the economy in a way that benefits all South Africans. That can only be achieved through a shared growth strategy that seeks to address the many economic challenges facing this country.
Most economists, policymakers, and international financial institutions agree that monetary policy directed by central banks and fiscal policy coordinated by government treasuries are necessary but insufficient to increase economic growth rates. Increasing the level of economic growth requires changes in the economic structure.
This is because the South African economy faces serious structural challenges. These are partly historical, resulting from years of marginalization and exploitation of the majority. Unfortunately, they have not been reformed.
heritage
A number of legacies from bygone eras are still holding back the economy.
One is that a small number of companies continue to dominate in various sectors such as banking, finance, retail, telecommunications, and transportation. Even a mundane industry like bread making is characterized by a small number of powerful companies.
Domination by a few companies stifles entrepreneurship. This is because dominant firms raise barriers to entry.
Another inherited issue is the role of state-owned enterprises. Huge resources have been spent on them. However, most people can barely survive without continued financial support from the state. The debt of state-owned enterprises is increasing faster than their assets. And over the past five years, these companies have averaged -2% annual return on equity. This means that the investment in the company is not profitable.
The challenges facing these institutions have historical precedent. But their plight has worsened in recent years.
Labor market regulations are not supporting strong growth. Reforms that allow companies to set appropriate wages for labor-intensive activities are urgently needed.
To address these issues, we need to change our economic structure. However, structural reforms are painful because they create losers and winners and take time to produce results. And they cannot be addressed by monetary or fiscal policy.
The motivations for reform are often hotly debated. For example, how does an economy with a significant proportion of low-skilled people provide sufficient incentives for labor-intensive industries to thrive? The discrepancy between the real minimum wage and employment is instructive. Minimum wage laws are important to protect the interests of workers, but they must be written in a way that provides exemptions for labor-intensive industries.
Part of the reason labor market reforms have stalled over the years is fierce opposition on the part of workers.
Reforms have already been proposed by National Treasury, the ANC's Economic Transformation Committee and Business Unity South Africa.
All have similarities. However, issues such as labor market reform, industrial concentration, weak state capacity, and management of state-owned enterprises need to be addressed and dealt with appropriately.
Additionally, all three fail to identify many structural constraints that need to be addressed.
Additional constraints
The first is the role played by professional accrediting bodies, such as those in the medical field. Most of them are not designed to help new graduates participate in the economy as independent service providers.
Some of these institutions operate like medieval guilds, with cumbersome accreditation and accreditation processes that make it nearly impossible for newly graduated professionals to set up shop. These processes need to be streamlined to make them more inclusive without compromising professional standards.
Another area where there is scope for structural reform is the financial sector. For example, the Reserve Bank should reform regulations to facilitate the expansion of the mobile money economy to promote financial inclusion. An improved legal environment will allow the agent-based mobile money transfer industry to flourish. And financial reform will help lower barriers to entry into financial markets.
Finally, the country's procurement policies need an overhaul. The current system encourages rent-seeking. Recent fraud related to COVID-19 procurement proves this.
Policies need to be revised to encourage local production. For example, national and sub-national institutions must source goods and services directly from traditionally disadvantaged producers, bypassing intermediaries. And public authorities must learn from successful retailers who have built up expertise in sourcing goods and services directly from many producers.
Additionally, government agencies must be prepared to provide suppliers with resources and training to increase productivity and income. A good example can be found in the agribusiness industry. There, growers provide raw materials to agricultural enterprises that lack adequate production capacity for the raw materials.
As far as structural reforms are concerned, the government's work is limited. But other stakeholders, such as specialized institutions and the Reserve Bank, also have a role to play. Together, they can deliver sustainable economic growth that creates jobs, alleviates poverty and reduces inequality.