Nine steps to exit low-growth
An inclusive economic strategy needs leadership, a vision, a plan – and buy-in from everyone
What would be the principal elements of an economic strategy that would substantially transform livelihoods and household opportunities in South Africa?
A policy framework that encourages effort from all South Africans and is open to global and domestic capital, expertise, enterprise and cooperation is more likely to succeed than a closed or conflict-based strategy. But this requires broad agreement and trust between parties who recognise their shared interest in a co-operative outcome.
A clear imperative is that the unbalanced infrastructure and market structures of apartheid should be addressed. This has several large and compelling implications. One is that far greater impetus is needed in urban development, including housing investment, more densified cities, transport integration and commercial renewal.
A second imperative is that productivity and wages should be improved, which is partly why openness and global linkages are important. A third is that job creation must be accelerated, especially for young work seekers. A fourth is that social services — schooling, healthcare, social security and welfare services — must be improved.
The context is an economy caught in a “low-growth trap” brought on by worsening commodity prices and trade conditions after the 2008 recession and a subsequent deterioration in investor confidence. Political and policy uncertainty, institutional weaknesses and unresolved regulatory conflicts have contributed to the low-growth environment.
The circumstances call for a heterodox mix of policy initiatives, to improve investment and growth and to broaden opportunities and employment. Economic activity has to be boosted without raising the public debt-to-GDP ratio beyond current projections..
Broadening credit extension
Financial deepening, the diversification of enterprise funding and real growth in private sector credit extension are enabling conditions for investment and economic growth. Public sector borrowing has grown rapidly over the past decade, but private sector investment and borrowing have been sluggish.
A more accommodating financial environment can assist in creating conditions for a more buoyant recovery. Global financial easing has kept interest rates low since the recession, but this has facilitated financial recapitalisation and disintermediation rather than easier access to trade or investment credit.
As interest rates rise over the period ahead, it is important that offsetting measures be adopted to ensure that credit conditions improve. Stronger growth in public and private sector financing cannot be expected to arise spontaneously in the presence of regulatory uncertainty or pessimism about growth prospects.
Concerted efforts are needed to construct a more favourable financial environment. A high-level accord or understanding between the finance ministry, the South African Reserve Bank and the heads of the major banks to support stronger growth in development financing and credit extension would be a useful starting point.
Although development finance institutions have a complementary role to play in this, to mitigate risk in municipal finance and the housing “gap market”, for example, the private financial sector has far greater resources and must be the main player.
A competitive exchange rate
Export-oriented manufacturing, tourism and trade in services are important growth drivers, but they cannot thrive if the exchange rate is highly volatile and overvalued. The present policy stance on the exchange rate is confused — it appears to assume that because a weak rand cannot be defended in the presence of adverse sentiment, it is also impossible to counter unwanted rand strength. It is, of course, impossible to “stabilise” the rand in real terms, but it doesn’t follow that its value should be left entirely to the vicissitudes of the market.
For a time, there was agreement between the treasury and the Reserve Bank to “lean against the wind” with foreign exchange purchases when market trends and global currency movements led to an unwarranted strengthening of the rand. This contributed to a substantial rise in official reserves until about 2010.
But there is no longer a shared understanding of the associated security holdings and sterilisation costs, and so the required forex market interventions have fallen away.
In the absence of a more active exchange rate policy, industrial development and trade rely too heavily on protectionist measures. And in the absence of better co-ordinated trade and investment policies, the current account of the balance of payments remains a drag on growth and a continuing drain on national wealth.
As with accommodative monetary and financial sector policies, a bias in favour of a weaker rand is a helpful element in creating an environment for growth, investment and job creation, but it is no silver bullet. Nonetheless, the present impasse between the treasury and the Reserve Bank on sterilising forex market interventions needs to be resolved.
Fiscal consolidation
Fiscal consolidation has three broad aspects: expenditure management and revenue strengthening, debt containment, and restructuring of state assets. Government expenditure must be kept in check while debt continues to rise as a share of GDP and the scope for raising the overall tax burden is limited.
These are not circumstances in which substantial medium-term shifts in the structure of expenditure are possible — moderation and effective spending controls are needed everywhere. But it is helpful to focus on the dominant long-term expenditure challenges that should be resolved if the fiscal space is to not remain constrained indefinitely.
Challenges to be addressed include:
• Road Accident Fund claims, which, despite the substantial increase in the Road Accident Fund levy, continue to accrue an annual deficit of some R30-billion;
• Government personnel expenditure, including the size and structure of the public service;
• Strengthening of infrastructure investment within an affordable and sustainable fiscal envelope that switches expenditure from remuneration, goods and services to infrastructure; and
• Rationalising overlapping and fragmented government departments.
South Africa’s revenue base has been strengthened considerably since the 1990s, mainly with better tax administration and the broadening of the tax base. There will be further opportunities for revenue enhancement ahead, although increases in the tax burden should be balanced against the need to encourage investment and retain wealth and capital domiciled in the country.
User charges and fees are an important supplement to tax revenue — and assist in managing the consumption of scarce resources.
Appropriate pricing of water services is important for cost recovery purposes and to ensure that access to water is fair and sustainable.
Carbon pricing and environmental charges are likely to play an increasing role. But the main revenue policy issues will continue to be the progressiveness of personal income tax and its allowances, the structure of company tax, and maintaining a broad value-added and indirect tax base.
Against the backdrop of the modernisation of tax administration, consideration now should be given to improving the horizontal fairness of income tax, for example by phasing in allowances for dependants that are revenue-neutral.
South Africa’s fiscal consolidation path is aimed at stabilising the debtto-GDP ratio at about 50%. Overall public sector debt is considerably higher, and is rising mainly because of Eskom’s borrowing requirement for its build programme. Eskom and Transnet are at some risk of future financial difficulties associated with rising debt, particularly if economic growth remains sluggish.
Shift the economic landscape
Cities are the engine rooms of modernisation and technology change. They are the co-ordinating hubs of trade, markets and enterprise development. Apartheid was in part about retarding and distorting the patterns of urban development, and so urban investment, consolidation and neighbourhood improvements are especially important for transformation and inclusive growth.
Improved city planning, accelerated investment in water and electricity networks and transport systems, enhanced education and training institutions, and better coordination between civic and business leaders are key aspects of the urban development challenge.
The principal cities are well placed to step up investment and infrastructure maintenance, because they are not overly indebted. However, in some cases financial and revenue management weaknesses need to be addressed.
Cities need to be able to invest for the long term and improve their maintenance of infrastructure without creating a greater burden on the national fiscus. This means municipal revenue sources need to be strengthened and private investment must be mobilised more effectively.
Investment in housing
Alongside economic and community investment in cities, a substantial increase in housing investment is needed. There is an ongoing role for government-sponsored housing schemes and upgrading of informal settlements, but greater emphasis must be given to private investment in housing stock as part of urban densification initiatives and to contribute to affordable, improved residential neighbourhoods.
Investment in housing not only meets the growing need for shelter and living space, but also generates employment and business opportunities with a comparatively low leakage of spending on imports. Over time, it will yield secondary benefits in improved education and health outcomes and informal and smallscale enterprise opportunities.
House ownership is the largest and most enduring vehicle for the accumulation of family wealth.
A new initiative is needed in which the government partners with the banking sector in expanding investment in new and improved housing stock, supported with a limited fiscal subsidy or guarantee plan and aligned with municipal densification and transport integration plans.
Modernise network industries
Power, transport, water and communications are network industries in which public regulation and licensing are necessary, but there are many possible blends of public and private ownership of infrastructure and services. South Africa has historically relied on state-owned, integrated utilities to maintain these infrastructure networks and secure the supply of network services.
But this approach leaves little scope for diversification and modernisation associated with technology change, and relies heavily on public debt raised against the assurance of a regulated price together with limits on market competition.
The impasse between Eskom and the energy department on independent power producers (IPPs) has damaging consequences for South Africa’s reputation in the investment and infrastructure markets. There might well be a need for a new approach to agreeing on the future project pipeline ahead of the IPP procurement process, but the current set of projects needs to be signed off to restore investor confidence.
Continued rounds of IPP investments, in renewable energy and the envisaged coal and gas projects, are not just about meeting medium-term power requirements at agreed prices. They are also about creating a market in which power can be contracted at competitive prices beyond the initial term of the IPP projects.
One possible route would be for Eskom to retain its system operations, purchasing and transmission responsibilities and selling or partially disposing of its generating plants.
In this way network control and co-ordination remain in public hands, where they belong as a “natu-
A weaker rand is a helpful element in creating an environment for growth, investment and job creation