Radical education key to avoiding radical economic destruction

If economic transformation is to be realised, SA needs to keep the rating agencies on its side. It is also crucial to strengthen local development finance institutions and to revamp our failing education and training system, says Nicholas Biekpe.

IN SEPTEMBER, rating agency Moody’s warned that the proposed plans by SA’s government to implement ‘radical’ economic transformation could deter investors and rising poverty may curtail Treasury’s efforts to reduce fiscal deficits.

The agency said plans for land redistribution, preferential procurement, the Mining Charter and other forms of affirmative action could frighten off investors.

This poses a problem for government. Under pressure to transform a stagnating economy to include more black people, who largely remain on the economic fringes despite two decades of democratic rule, the government arguably cannot afford another ratings downgrade.

It is simple really. Credit ratings influence the cost of borrowing on government debt – the best possible rating on government debt, be it in local or foreign currency, allows government to pay at the lowest possible interest rate and achieve the longest possible maturity (period).

For government, state-owned entities and corporates, less spent on interest payments allows for more resources to be directed towards priority areas of government, including addressing inequality and supporting entrepreneurs.

How then is government going to pick a path through the competing demands to transform the economy, ‘radically’ or otherwise, and meaningfully improve the lives of more black people, without attracting another downgrade and frightening investors?

It goes without saying that the best approach and urgent priority would be to implement policies that are pro-growth and which can create wealth and employment, something which will please rating agencies and consequently attract more investors into the country. 

Additionally, creating a stable political and economic environment which allows entrepreneurs to grow and businesses to thrive and create jobs will make it possible to include more people in the mainstream economy.

How to avoid another downgrade

Speaking at a recent forum on the link between international ratings and economic transformation convened by the Development Finance Centre at the UCT Graduate School of Business, Mampho Modise, the chief director of strategy and risk management at National Treasury, said that for SA to avoid another ratings downgrade the spending ceiling announced in the 2017 budget has to be adhered to and no additional spending should be financed through debt.

Furthermore, said Modise, the 2017 budget tax revenue measures should be implemented and tax administration efficiency enhanced to achieve the estimated medium-term revenue target. Government should also ensure that the proposed budget on infrastructure to boost economic growth should be spent efficiently; the public-sector wage negotiation outcomes in 2018/19 are within the budgeted expenditure levels; and reforms relating to state-owned companies, labour markets, improving policy certainty and economic growth are fast-tracked.

Revamping the country’s Development Finance Institutions (DFIs) will also be crucial in terms of creating a more inclusive economy. National and international DFIs are specialised development banks or subsidiaries set up to support private sector development in developing countries.

They generally occupy the space between public aid and private investment, and mainly focus on developing countries and regions where access to private sector funding is inadequate. In essence, DFIs are meant to invest in areas where commercial investors or banks would be reluctant to venture.

Some of the major international DFIs investing in Africa include the World Bank’s International Finance Corporation and the European Investment Bank. There are also several African DFIs, the largest of which is the African Development Bank, and several regional institutions such as Development Bank of Southern Africa (DBSA).

But the problem is that most DFIs have, to a large extent, morphed into commercial banks, failing to cater for under-serviced communities. The World Bank has previously noted that the financial system performs a crucial function as an instrument for stabilisation and growth.

The key role of the financial system in the growth process has driven many governments to establish DFIs that, at least on paper, promote the national development agenda. However, in the practical sense most of these institutions have not always delivered.

Small Enterprise Finance Agency chief executive Thakani Makhuvha, who also spoke at the DEFIC forum, said SMME development seemed not to be a core focus for many DFIs. Sefa was, subsequently, established to provide access to finance in an efficient and sustainable manner to local small enterprises.

But local DFIs must play a key role in mobilising resources for underserved segments of the economy, including entrepreneurs and smallholder farmers. From this perspective, they should be complementing international financial institutions and commercial banks.

With serious constraints on public finance both in Africa and in donor countries, DFIs could assume a prominent role in terms of financing development and supporting South Africa’s push to create a much more inclusive economy.

Lastly, transforming the economy goes beyond good fiscal management and making sure that financial resources are available for the underserviced segment. Investing in education and training is also vital. DFIs should be involved in the training of people to run businesses or to become entrepreneurs. 

Before ‘radical’ economic transformation, government would do well to tweak its focus to look first at radical training and education. There is no way that economic transformation can be achieved without revamping the education and training system. SA’s education spending is one of the highest per capita in the world, yet the results are among the worst. Education and training should be the first step to economic transformation.

This might not score as many points from the political soapbox, but it is a more solid route towards an inclusive and prosperous future for all South Africans.

By contrast, policies that spook investors and the markets, or which fail to capacitate DFIs, and don’t strengthen the education system will in all likelihood lead to radical economic destruction. 

  • Nicholas Biekpe is professor of Development Finance & Econometrics & Director of the Development Finance Centre at the UCT Graduate School of Business.

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