Reaction to National Treasury's economic discussion paper is reminiscent of the reaction to the National Development Plan in 2012. But this time around the economy is going belly up - its time for the ideologues to get out of the way, writes Thabi Leoka.
The reaction to the National Treasury's economic policy paper reminds me of the reaction to the National Development Plan (NDP) which was launched in December 2012. After national consultation with labour, civil society, business and government, the then Minister in the Presidency and custodian of the NDP, Trevor Manuel, presented the document at the 53rd National Conference of the ANC in Mangaung. The document was lauded and some even commented that it was the most supported document after the Constitution. Investors, both foreign and local, saw it as the panacea to South Africa's economic problems. After all, both China and India were on their 12th Five Year Plan which led to these economies growing at a pace of about 8% to 10%.
A few months later, in 2013, the 444-page document was seemingly not palatable to many. Criticism of the NDP revealed that when Manuel presented the grand plan to achieving economic prosperity at Mangaung, only a handful had bothered reading it. It was predominantly criticised by those who felt that it didn’t represent their own ideals, never mind it being a plan for the country, and not ideologues.
Fast forward to 2019 and South Africa finds itself barely growing over 1%, real GDP per capital is lower and so is productivity growth. The unemployment rate has reached 29% and inequality has increased. As the Treasury's economic paper notes, South Africa's economic trajectory is unsustainable and government should urgently implement a series of reforms that can boost economic growth in the short-term, while creating conditions for sustainable long-term growth.
Treasury views growth as central to unlocking a variety of problems. For instance, low growth limits the counter-cyclicality of fiscal and tax policy, which could otherwise be deployed as an additional measure to boost growth aggregate demand. Low growth also impedes on a countries ability to implement critical growth-enhancing interventions, such as a productive infrastructure or quality and skills training. But the paper also notes that a growth-oriented strategy in pursuit of economic transformation and inclusive growth should not stand in the way of a globally competitive economy.
In the short-term, immediate reform needs to focus on the low hanging fruits. Policy and political uncertainty over the years has led to the loss of confidence by both domestic and foreign investors. In the first eight months of 2019, South Africa has seen outflows of about R63bn in bonds and equities. As a country that relies on foreign savings, this is an alarming trend. Cliched but true, the easiest way of stimulating an economy is through investor confidence. But as we have experienced, investor confidence wanes when there's no follow-up in reforms that will lead to real economic growth.
Not enough has been done to foster and grow small, micro and medium enterprises. These should be the drivers of innovation and economic growth, however, small, micro and medium enterprises face challenges such as lack of funding, government regulation and access to markets. The big oligopolies have also increased barriers to entry. The paper identifies numerous agencies, as well as sector-specific programmes dedicated to supporting small business development. It also mentions recent measures such as tax incentives and a simplified tax regime for small businesses and the amendment of the Preferential Procurement Policy Framework Act, which will introduce a points-scoring system to support SMMEs.
Unbundling of Eskom urgent
Another low hanging fruit is the release of spectrum. Out of 17 African countries, South Africa has the fourth most expensive broadband costs. One gigabyte costs $14.10 in South Africa compared with $2.10 in Cameroon. The release of spectrum will reduce broadband costs and bring efficiencies in the ICT sector. It will also increase productivity by enabling users to conduct businesses, search for jobs, attend online educational classes and conduct research, and purchase products.
The unbundling of Eskom needs to be treated with expediency. President Cyril Ramaphosa announced that Eskom would be unbundled at the beginning of this year, but then retracted that statement after Cosatu and other unions complained about the inevitable job losses that would come with the unbundling. Eskom's current business model is unsustainable and the reliance on fossil fuels will soon be archaic as the world moves towards green economies.
Furthermore, large dominant electricity producers have restructured to cope with technological changes, such as the rise of smart meters, micro-grids, self-generation and small modular power plants. As the paper notes, the old model of a vertically integrated, state-owned monopoly has been challenged and new institutional models have been explored with different levels of unbundling, competition, and public and private ownership. The current model will continue to be a drag on the economy and the fiscus, and prices are likely to increase.
Tackling education is more of a medium-term outcome, as there are no quick solutions. Basic education needs to be overhauled because the return on investment is poor. South Africans have long complained about the quality of education as a foundational problem to economic growth.
According to research conducted by the University of Pretoria, eight out of 10 Grade 4 pupils cannot read at an appropriate level. In Chile and England, the number is 13% and 3%, respectively.
Educational outcomes are poor in South Africa, even compared to other less well-resourced countries in the region, leading to inter-generational inequality and inhibiting inclusive growth and competitiveness. Of the 1 155 629 pupils who started Grade 1 in 2006, only 34.7% obtained a matric pass in 2017, which is a basic requirement for job seekers. There are several socio-economic factors that force children to leave school before achieving a matric pass, such as poverty, the prevalence of child-headed households, drugs or alcohol addiction and teen pregnancies.
A comprehensive approach is required to tackling these socio-economic challenges. The Treasury paper puts an emphasis on improving educational outcomes throughout the educational lifecycle and importantly, the educational systems must be better aligned to labour market needs. It is therefore important for the private sector to play an active role in directing the type of education and skills a learner requires.
The National Treasury's economic policy paper, often incorrectly referred to as Tito Mboweni's plan, is not a plan, but an economic strategy document that succinctly puts together a few but necessary ideas that could turn the economy around. It does not seek to replace the National Development Plan, which itself needs to be updated. It identifies a few low-hanging fruits, which, if unpicked, will fall and rot.
The document is a discussion document, open to the public for review and comments. I'm not sure why this particular paper has been met with such contention. Treasury staff, much like elsewhere in the world, have for years produced papers on the economy. These research papers can be found on the National Treasury’s website.
The paper has already been described as "chaotic and incoherent". The economy is on its belly, we cannot afford to have ideologues stand in the way of great ideas.
- Dr. Thabi Leoka is an economist and member of the board of Corruption Watch.
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