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R aymond Parsons is a prominent South African economist, who has divided his working life between organised business and academia.

He studied economics at the universities of Cape Town, Oxford and Copenhagen before joining organised commerce and industry as an economist, eventually becoming the first director-general of the then newly formed South African Chamber of Business (SACOB) in 1990.

He has served on various official bodies over the years, including such institutions as the Board of Directors of the South African Reserve Bank, the National Economic Development and Labour Council (NEDLAC), and the Council of Nelson Mandela Metropolitan University (NMMU).

Raymond Parsons is currently a professor in the Faculty of Economic and Management Sciences at North West University. He is also a parttime special policy adviser to Business Unity South Africa (BUSA), having been the Deputy CEO of that organisation until 2012. This is his fifth book on the South African economy.

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ZUMANOMICS REVISITED The Road from Mangaung to 2030 Raymond Parsons

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Zumanomics Revisited

First published by Jacana Media (Pty) Ltd in 2013 10 Orange Street Sunnyside Auckland Park 2092 South Africa +2711 628 3200 www.jacana.co.za © Raymond Parsons, 2013 All rights reserved.

This title has been subject to an academic peer review process.

ISBN 978-1-4314-0791-0 also available as an ebook d-PDF 978-1-4314-0792-7 e-PUB 978-1-4314-0793-4 mobi 978-1-4314-0794-1 Cover design by publicide Set in Stempel Garamond 10/14.5pt Job no. 002044

iv See a complete list of Jacana titles at www.jacana.co.za

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Dedicated to former President Nelson Mandela (1994–1999), whose statemanship and leadership, embodying the values of reconciliation and nation-building, must remain beacons for everyone seeking to create a better life for all in South Africa

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Contents

Contents

Acknowledgements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix

List of abbreviations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi

Preface. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xiii 1

Global economic perspectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

2

The South African economy: Past and prospective . . . . . . . . . . . . . . . . . . . . . . 9

3

But why is South Africa here yet again? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

4 The National Development Plan: The ‘new normal’ for South Africa?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 5

Addressing the ‘tale of five deficits’. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

A. The social deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

B. The fiscal deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

C. The trade deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

D. The delivery deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93

E. The trust deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .105

6 Implementing the National Development Plan: Risks and opportunities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 7

The mixed economy and business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131

8

The National Development Plan and President Zuma’s place in history. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157

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Conclusion: Can South Africa prove the sceptics wrong?. . . . . . . . . . 165

References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175 Index. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .179

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Acknowledgements

Acknowledgements

At the outset a book of this nature on SA owes much to a large number of people, not least of all those who contributed to the original Zumanomics in 2009, and to making that publication such a worthy predecessor to this book. I also acknowledge the excellent opportunities I have had over the years of drawing inspiration from a wide range of sources – academia, business, labour, the public sector, overseas experts, the Reserve Bank, NEDLAC, financial journalists, NGOs as well as other practising economists in the private sector whom it has been my good fortune to know.

More specifically, I have had valuable assistance in this instance from Waldo Krugell, Professor of Economics in the Faculty of Commerce and Business Management at North West University (NWU), who gave valuable input on certain sections of the book. Also Professor Wilma Viviers, leader of the TRADE (Trade and Development) research entity, together with Ali Parry, a trade consultant, and Danielle le Clus, the research assistant in TRADE, at NWU, made a substantial contribution to the work on the trade aspects. I owe them a deep debt of gratitude for helping me to meet my deadlines, as well as providing support and encouragement in finalising the project.

I also want to thank Professor Stan du Plessis, Keith Lockwood, Dennis Dykes and several others who all interrupted busy schedules to peruse particular chapters and provide useful comments. To Professor Tommy du Plessis at NWU and Professor Elsabe Loots, now at the University of Pretoria, goes my appreciation for their general support in making the writing of this book possible by appointing me to my current post at NWU and in following the book’s progress with interest.

To ‘JC’ Potgieter, who acted as research assistant and ‘scribe’ during extensive drafting and redrafting, also go my grateful thanks. Together with equally strong support from Sue Klomp, he helped to steer me through the successive drafts with great patience and dexterity. I much ix

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appreciate the extent to which they were willing to ‘walk the extra mile’ to help get the task done.

Finally, to the team at Jacana Media, under the leadership of Bridget Impey and Ester Levinrad, my thanks for taking the project on board and bringing it to finality. Russell Martin in particular, as always, did a sterling job in editing an often dry text. We must never underestimate the vast technical work that goes into the production of a book before it finally reaches readers.

I would welcome feedback and comments on what is outlined here.

Although one hopes to make fewer mistakes on a subject and terrain so frequently traversed in SA, I expect to update the thinking in Zumanomics Revisited at some future stage, as we learn yet more about the political economy of SA over the next few years.

It remains only to emphasise the usual caveat that I alone remain responsible for what now appears in print. The views expressed are personal and do not represent those of any institution or organisation with which I may be associated.

Raymond Parsons Faculty of Economic and Management Sciences North West University Potchefstroom Business School July 2013

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A b b r e v i at i o n s

Abbreviations

AGOA African Growth and Opportunity Act ANC African National Congress ASGISA

Accelerated and Shared Growth Initiative for South Africa

BEE

Black Economic Empowerment

BLSA

Business Leadership South Africa

BRIC Brazil, Russia, India and China BRICS Brazil, Russia, India, China and South Africa BUSA

Business Unity South Africa

COMESA Common Market for Eastern and Southern Africa CPI

Consumer Price Index

CSI

Corporate Social Investment

DSM Decision Support Model DTI Department of Trade and Industry EAC East African Community EFTA European Free Trade Association EPA Economic Partnership Agreement EU European Union FDI Foreign Direct Investment FTA Free Trade Agreement GCI

Global Competitiveness Index

GDP Gross Domestic Product GEAR

Growth, Employment and Redistribution

GEIS General Export Incentive Scheme HIV/Aids Human Immunodeficiency Virus/Acquired Immunodeficiency Syndrome IDZ Industrial Development Zone IMF International Monetary Fund IPAP Industrial Policy Action Plan xi

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ITAC International Trade Administration Commission ITC International Trade Centre ITRISA International Trade Institute of Southern Africa Mercosur Southern Common Market MPC

Monetary Policy Committee

MTBPS

Medium Term Budget Policy Statement

NDP National Development Plan NEDLAC

National Economic Development and Labour Council

NEDP National Exporter Development Programme NGP New Growth Path NIPF National Industrial Policy Framework NPC

National Planning Commission

OECD

Organisation for Economic Co-operation and Development

PICC

Presidential Infrastructure Coordinating Commission

PPP

Public–Private Sector Partnership

PTA Preferential Trade Agreement RIA

Regulatory Impact Assessment

SA South Africa SACU Southern African Customs Union SADC Southern African Development Community SALGA

South Africa Local Government Authority

SARB

South African Reserve Bank

SEDA Small Enterprise Development Agency SEZ Special Economic Zones SMMEs

Small, Medium and Micro-sized Enterprises

SOE

State-Owned Enterprises

TDCA Trade, Development and Cooperation Agreement TFTA Tripartite Free Trade Area TPSF

Trade Policy and Strategy Framework

UK

United Kingdom

US United States US$ United States Dollar WEF

World Economic Forum

WTO World Trade Organisation xii

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P r e f ac e

Preface

The potential for economic growth and development is better than in many decades. But let us be brutally frank.

Despite the welcome rate of growth, very few jobs have been created. In fact, against the backdrop of new entrants into the job market, there has been a shrinkage of opportunities.

If we do not act together in the public and private sectors to develop and implement such a strategic vision, the danger is that even the modest growth we have attained will peter out in a matter of a few years, as increasing unemployment and accelerating poverty bear down on our society.

We need a national vision to lift us out of this quagmire.

W ho said this? President Jacob Z uma? Minister of Planning Trevor Manuel? ANC Deputy President Cyril Ramaphosa? No. It was President Nelson Mandela at the opening of Parliament on 9 February 1996. The message that Nelson Mandela gave us then transcends time, place and culture and is still relevant today. We still need to develop a sense of identity, economic aspiration and national purpose on the way ahead for SA and this theme keeps recurring.

Zumanomics: Which Way to Shared Prosperity? Challenges for a New Government was published in March 2009, over four years ago. It was a curtain-raiser to the 2009 election and the election to the highest political office of Jacob Zuma. Developments both globally and domestically since then suggest that simply a revised edition of that book would not be appropriate. It is better to leave the original book unaltered and personally refocus on the selected dimensions that the flow of events makes necessary, together with some reflections on the present and future situation. This is therefore a different assessment of where South Africa now stands, based on new research material available.

As indicated above, when the original Zumanomics was published xiii

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in March 2009 it was timed to precede the election in April that year and to anticipate some of the issues that would be important to an ANC government likely to be led by Jacob Zuma. Zumanomics sought to come to grips with the socio-economic agenda that SA should be contemplating in 2009 and beyond. A range of 11 essays by senior economic and political analysts outlined the socio-economic and social realities that would confront a Zuma government at the time and offered 70 key findings and recommendations as to how they could best be managed.

The basic approach of Zumanomics then was to highlight the agenda that needed to be considered if SA was to find the road to shared prosperity. If we revisit the essays in the original Zumanomics, we will see that several of the lines of thinking in the book have been subsequently captured in both the New Growth Path (NGP 2010) and the National Development Plan (NDP 2012).

The expectation was already there that, as the global economic outlook deteriorated, so the focus would increasingly have to be on the structural impediments in addressing unemployment, poverty and inequality in SA. In addition, as the global situation deteriorated, it was argued, so the margin for error in domestic policy would also shrink, despite SA’s previous achievements.

We will now need to reassess: • t he SA economy as it is – and where it stands in the global economy; • where the risks and economic opportunities are now, or may in future present themselves, both externally and internally; • just how we have positioned ourselves, and should perhaps consider repositioning ourselves, given the options available, such as through the NDP. This book is very much what it purports to be – a subsequent independent assessment to the previous analysis in 2009. The previous work was a collective effort; this is an individual one. Although the views on policy expressed here inevitably owe much to other sources of inspiration, they are ultimately derived from my analysis and theory of the economic system, and my view of the kind of political and economic system in which South Africans should live. And they are largely built around the current prospects for the latest NDP, not because the plan represents the final word on everything, but because it may be SA’s last opportunity to xiv

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arrest the drift into what would be a ‘low growth trap’ for the economy.

It is not a shibboleth but provides an essential framework for taking the right decisions about where SA would like to be by 2030.

Nonetheless, it might be said, ‘Why bother?’ The original Zumanomics assessed SA’s weaknesses and strengths in detail and is still relevant. We now have the NDP. Why not leave it at that? Partly because economics usually has to rely on uncontrolled experience and it is often difficult to get acceptance for generalisations which are amply justified by analysis of available evidence. It renders the weeding out of unsuccessful hypotheses slow and difficult – they are seldom downed for good and are always cropping up. We should now be able to put them to rest for the time being.

In addition, economies are always on the move; they never ‘arrive’.

We need a fresh look at the situation. We are also now in a new phase between the ANC elective conference in Mangaung in December 2012 and the expected elections next year. With all plans there remains the risk of slippage, especially with an election pending. Despite the reiteration of official commitments to the NDP, there remains an air of ambivalence about some of its aspects and it needs to develop much more traction.

If implementation is perceived to falter, critics will multiply – of which there is already evidence. SA has reached a fork in the road to the goal of ‘shared prosperity’.

There are still tough decisions ahead if SA wants to do better after the 2014 election. The political and economic landscape presents a vulnerable picture. How is it that SA could in 2010 have gained universal praise for its highly successful hosting of the Soccer World Cup, yet by 2012 received a negative survey in The Economist, which said that ‘SA is sliding downhill while much of the rest of the continent is clawing its way up’. Several red lights are indeed now flashing. And they are exposing our ‘soft spots’, making it imperative that we take remedial steps. There is also widespread pessimism in many circles. We no longer seem to have sufficient confidence in the future to be satisfied with the present. A Roman poet in about AD 65 was criticised by friends for going to the Colosseum and watching barbarous sports. He replied that he deplored the scene as much as anyone could, but had to watch. ‘After all,’ he said, ‘these are my times and I must know them.’

So should we be despondent? Can SA reform? An eighteenth-century British author published a collection of predictions that constantly xv

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suggested that Britain was on the brink of disaster then, though the jeremiads of the time did not foretell the great British industrial revolution which was at hand. Describing his tract as ‘an antidote to despondency’, Sir John Sinclair catalogued the various assertions that the United Kingdom was in a serious state of decline at the time and concluded: ‘Even ablest men may entertain ill-founded and groundless apprehensions respecting the political strength and financial resources of the nation … Nothing but the grossest mismanagement … can possibly effect the ruin of so powerful an empire, inhabited by a race of people distinguished for strength, for courage, and for ability.’

After the lapse of a few centuries, and allowing for different circumstances, these words can nonetheless still convey a relevant message to SA today. The extent to which we are able to address several of the challenges SA faces lies largely in our hands and it would require the ‘grossest mismanagement’ for us to fail. This book therefore seeks to consolidate as well as expand several of the present remedies, both old and new, that are available to SA. It may be said that some of the proposals in this book could be controversial and may also be outside practical politics. Economic thinking can be radical without being entirely new. If, indeed, public opinion were an unalterable factor, it would be a waste of time to have a public debate.

This book is therefore addressed as much to a professional audience as to that larger assembly of informed onlookers and participants for whose attention and favour applied economists like to contend. There is a subtle mutual interaction between intellectual opinion, public opinion and the course of events over time.

Both the publication of the New Growth Path in 2010 and that of the subsequent, more holistic National Development Plan in 2012 have demonstrated how new elements can enter into the public arena of discussion and action. The NDP has the potential to be a significant game-changer in SA. It is to assist in moving these matters forward as rapidly as possible that this book is dedicated. ‘Planning without action is futile, action without planning is fatal,’ is an old business mantra.

The outcome of the ANC’s elective conference in Mangaung in December 2012 was also significant from both a political and policy point of view. Jacob Zuma emerged from the conference in an almost unassailable political position, while the acceptance of the NDP gave xvi

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him the mandate and roadmap he needed at the policy level. The question now is how these two elements will fuse in order to implement the NDP and better governance, backed by the necessary political will. The following chapters hope to unpack some of the issues that are involved in these prospects, including an assessment of President Zuma’s eventual political legacy.

Whilst recognising the vital importance of ‘bottom-up’ action and an active citizenry, we also need to address the ‘big picture’ within which NDP implementation should take place. The interaction of ‘bottom-up’ and ‘top-down’ processes is rather like the blades of a pair of scissors; it is difficult to know at any one moment which one is doing the cutting.

What we know is that there needs to be a symbiosis between the two approaches if optimal outcomes are to be achieved. Both are indispensable in the years ahead if NDP implementation is to succeed.

The approach was well captured in the Dinokeng scenarios, released in 2010 by a team of experts, where they referred to three possibilities for SA: • ‘walk alone’; • ‘walk behind’; • ‘walk together’.

The NDP has now developed the third option as the route to 2030 and thus we should examine why it should become a central, perhaps the central, issue in the SA economy, from both an internal and external point of view. The NDP has become an essential bridge between the present and the future in SA. At the same time, the very scale of the NDP makes it impossible to do justice to all its facets here. It is a 500-page document. Inevitably, some dimensions will be assessed more than once; others not at all. In addition, it will be seen that chapters begin with quotations. It should not be assumed that I necessarily agree with all of them; they should rather sometimes be seen as provocations, as something to be critically interrogated.

As readers peruse the book, those who are ‘statistics wary’ or ‘jargon averse’ can safely skip those sections and move on to the various conclusions. Nonetheless, hopefully enough will be covered to assist interested readers in understanding the broad direction in which the NDP believes SA should go over the next few years. xvii

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Global economic perspectives

1 Global economic perspectives

And the Banker, inspired with a courage so new It was matter of general remark, Rushed madly ahead and lost to their view In his zeal to discover the Snark.

But while he was seeking with thimbles and care, A Bandersnatch swiftly drew nigh And grabbed at the Banker, who shrieked in despair, For he knew it was useless to fly.

He offered large discount – he offered a cheque (Drawn ‘to bearer’) for seven-pounds-ten: But the Bandersnatch merely extended its neck And grabbed at the Banker again.

Without rest or pause – while those fruminous jaws Went savagely snapping around – He skipped and he hopped, and he floundered and flopped, Till fainting he fell to the ground.

The Bandersnatch fled as the others appeared Led on by that fear-stricken yell: And the Bellman remarked ‘It is just as I feared!’

And solemnly tolled on his bell.

He was black in the face, and they scarcely could trace

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The least likeness to what he had been: While so great was his fright that his waistcoat turned white – A wonderful thing to be seen!

To the horror of all who were present that day, He uprose in full evening dress, And with senseless grimaces endeavoured to day What his tongue could no longer express.

Down he sank in a chair – ran his hands through his hair – And chanted in mimsiest tones Words whose utter inanity proved his insanity, While he rattled a couple of bones.

‘Leave him here to his fate – it is getting so late!’

The Bellman exclaimed in a fright.

‘We have lost half the day. Any further delay, And we shan’t catch a Snark before night!’

– ‘T he Banker’ s Fate’, The Hunting of the S nark , Lewis Carroll We begin by reviewing some of the elements arising from the recent developments in the global economy. If we look back over the past few years we will see that, when we examine the global economy, it has become more than a cyclical phenomenon. The tectonic plates have shifted dramatically since 2008 and even now we are not yet certain when or where they will finally settle.

What was clear for a start was that: • The financial crisis of 2008 was likely to be the most traumatic global economic event since the Great Depression in the early 1930s.

• There would be ‘after-shocks’, the nature of which at that stage was uncertain but has subsequently become apparent in the Eurozone.

• So-called ‘decoupling’ between developed and developing countries would be severely tested.

• In any case the impact of the 2008 crisis would take several years to play itself out.

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Global economic perspectives

• A s a small open economy SA would not escape the effects of the global recession.

• Unlike the 1930 Great Depression the global response to economic contraction since 2008 has been unprecedented in terms of monetary and fiscal accommodation.

• T he notion of countercyclical fiscal and monetary measures was also accepted in SA and has been implemented since 2009.

The SA economy nonetheless still took a knock. In 2009 gross domestic product (GDP) growth reversed itself from 2.5% in the previous year to –1.7%, with nearly a million jobs being lost quite rapidly. Technically, SA went into a brief recession. Compared with some other countries, whose percentage of unemployed almost doubled in a short period, SA’s overall unemployment rate rose only slightly. But this is more a reflection of the extent to which we had come to live with an unacceptably high official unemployment rate of about 25%, rather than that SA escaped very lightly in terms of job losses.

Since the economic crisis of 2008 the global economy has not yet recovered its momentum. Just when we thought the world was successfully pulling out of its recent recession, there were new challenges.

The European Union (EU) has been in trouble, and for once the word ‘crisis’ was not an exaggeration but a description. The eurozone crisis did not create the sovereign debt crisis; it merely exposed it. The dramatic and far-reaching impact of the financial crisis of 2008 has been playing out since then and will probably indeed register in history as the most significant economic event since the 1930s.

To disentangle the events and the explanations that have sprung from recent global developments is therefore a huge task and we can only briefly do justice to them here, as we grapple with the continuing challenges of national economies that are still performing below par, in some cases well below par. At the international level, we should nonetheless note the following broad perspectives on what has happened globally in the past few years.

Firstly, ‘the market’ as such did not fail: one part of one sector did, with serious contagious consequences. ‘Financial capitalism’ was the weak link in the chain. The way sub-prime debt was securitised, spliced and sold on with no underlying risk or value was wrong, irresponsible 3

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and damaging. Executives of large publicly owned banks were strongly incentivised to ‘maximise shareholder value’ in ways that gave excessive personal gain. There is understandable anger about what has happened.

Everyone has become frustrated with financial globalisation but it is easier to point out the flaws in the system than to correct them. While the recent crisis has highlighted the need for better rules, agreement on many regulatory issues has proved elusive. The right question remains: ‘What kind of financial regulation works best?’ There is no single obvious global answer, but it is being addressed nationally.

Secondly, governments also failed. Regulations and state institutions such as Fannie Mae and Freddie Mac in the US contributed to a highly vulnerable situation. Debt became too cheap. Low-income households were encouraged to place large, leveraged, unhedged and unidirectional bets on the United States (US) housing market. The responsibility for the crisis therefore needs to be shared. There is enough blame to go around at several levels to explain the systemic failures both in 2008 and also the subsequent sovereign debt crisis in the eurozone.

Thirdly, the failure was also one of intellectual understanding, both by existing regulators and by many economists, especially in the US. It may be argued that the so-called ‘experts’ should have seen it coming, but the fact remains that they did not. Private sector models of risk management were clearly defective. The few warning voices were ignored and the power to intervene, which already existed among regulators, was not used timeously or wisely. Indeed, over-complex regulation in some areas may also have contributed to the crisis. Academic economists are now revisiting standard macroeconomic models with a view to possible modifications to capture new realities.

Fourthly, while financial innovation is often good for liquidity and economic activity, that is not the whole story. The dangers in innovation lie in possible unintended consequences, especially in regard to the underpricing of risk. We saw this with the toxic derivatives which Warren Buffett, generally considered one of the world’s most successful investors, described as ‘financial weapons of mass destruction’. Yet as the former US Federal Reserve chairman Alan Greenspan and others have warned, creativity and innovation in finance should not be completely neutralised, as these risks remain an essential ingredient of progress in the larger economy.

Fifthly, the consequences of what goes wrong in the global economy 4

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are magnified by its highly interconnected and interdependent nature.

The impact is then multiplied through the markets and investors by that intangible – but profoundly powerful – factor called ‘confidence’.

Internationalism has indeed given rise to the ‘global village’ and its interdependence. Globalisation has brought great benefits but we cannot overlook the costs. It has created social and political tensions between winners and losers.

Finally, we must recall that economic history reminds us that the recent financial crisis is merely a severe example of the panics and crashes that have happened before. In his 1978 classic study of ‘bubbles’ – Manias, Panics and Crashes – Professor Charles Kindleberger described ‘the cycle of manias and antics results from the procyclical changes in supply of credit’ as overoptimistic corporates and consumers assumed more debt during booms, only for banks to abruptly cease lending in the ‘busts’. Lenders and borrowers have regularly in history overestimated borrowers’ ability to repay debts. When the realities become clear, banks wobble and confidence in the financial system declines.

Economic catastrophes – financial panics, hyperinflation, debt overload, depressions, and social conflicts – separately or together, have always generated crises of confidence. Yet as painful as they usually are, they have not come close to wiping out the cumulative gains in average living standards the world over. Recent decades have seen hundreds of millions of people globally lift themselves out of poverty. Global GDP has grown fivefold since 1950, so more people have access to more things than ever before. The driving force behind the reduction in world-wide poverty in recent decades has been economic growth. All of this is both a consequence and cause of globalisation.

These grand-scale shifts nonetheless present new challenges, not all of which the world appears presently able to handle successfully, especially financial integration. Policymakers also need to ensure that the benefits of global economic integration are shared sufficiently widely so as to maintain support for open trade and to limit protectionism. The human costs of change and progress are indeed too often easily overlooked in this process.

Not that global economic cooperation occurs on the scale it should do, given the changing balance of power in the world economy. ‘Economic globalisation has outpaced political globalisation,’ says the NDP. 5

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This is relevant to regional influence in global institutions such as the International Monetary Fund (IMF), World Bank and the World Trade Organisation (WTO), as pressure on the ‘rules of the game’ mount. The emergence of Brazil, Russia, India, China and South Africa (BRICS) as a serious international player is seen by many observers as one key effort to develop more ‘countervailing power’ in the global economy.

In emphasising the relevance of the BRICS countries to global developments such as the future of the global monetary system, Jim O’Neill (2001) says: ‘These issues affect the entire world and the BRICS deserve fitting representation at the major international councils. To achieve this they cannot just wait for the current incumbents to make way or invite them in. They need to seize the influence their size demands’.

Whatever the eventual outcome, it cannot be ‘business as usual’, and globally the system is undoubtedly facing a future with a difference. We have hopefully learned at least some lessons. The ‘rules of the game’ are being adapted where possible to facilitate greater stability and equity. In the long run the big challenge is to make the opportunities of globalism all the more apparent, its dangers less threatening. The structural shifts in the global economy and the opportunities available remain vulnerable to a range of systemic risks. Financial globalisation, especially the accumulation of large cross-border liabilities, may eventually require a corresponding globalisation of governance, including international deposit insurance.

The McKinsey Global Institute released an authoritative study in 2013 showing just how ‘balkanised’ the global financial system has become since 2008. The rate at which cross-border capital flows are growing annually is 1.9%, compared with nearly 8% before the financial crisis. Most of the pullback reflects eurozone debt crisis. Some analysts such as Professor Paul Krugman and even the IMF say that less financial globalisation may be a good thing, given the turbulence of the past few years. But we need to understand that financial ‘balkanisation’ also comes with its own possible drawbacks – especially for emerging markets dependent on capital inflows, and which could be at risk if financial ‘protectionism’ is carried too far.

From a business cycle perspective, the combined monetary boost in recent years in key economies has been a powerful elixir for global investor confidence. Aggressive monetary expansion in big economies 6

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Global economic perspectives

like the US has until now been good for the rest of the world economy, not bad. It has also helped to finance SA’s balance of payments, given the shifting global patterns of risk perceptions. Global inflation seems to be well anchored at present, though policy adjustments will nonetheless become necessary in due course as the world economy slowly recovers and ‘normality’ is restored. Cheap money in the developed world will eventually come to an end.

There has rightly been on-going concern about recurring negative developments in the European Union (EU). Not only because Europe is about one quarter of the global economy, but also because the EU is perhaps the world’s most benign example of globalisation. On the tests of the free movement of goods, people and capital, the EU has still largely done well on the first two, but as previously indicated the movement of capital has suffered severely in the wake of persistent sovereign debt and banking stresses. Nonetheless, a bird’s-eye view of the world economy as a whole suggests that, despite some regional setbacks, it is slowly but surely moving towards a new balance of global forces and eventual renewed prosperity. The IMF’s estimate of 4% growth in the global economy in 2014 remains unchanged at the time of writing.

The global experiences of the past few years have demonstrated that all countries have some cards to play in the face of adversity, and SA has been no exception. The eventual outcome will depend on how well individual countries are able to respond and their degree of resilience in doing so. How they are seen to be managing their short-term and longterm challenges will be an important ‘confidence’ factor, and this is also true of SA. In assessing where the emphasis must now fall in deciding future policy in SA, it is necessary to distinguish clearly between the factors in the global economy over which a country like SA has little or no control and the factors over which the country does have control, such as its domestic policies. As a small open economy, SA remains highly dependent on global economic trends, yet it must nonetheless develop the flexibility and adaptability needed to address new opportunities and risks, as the international and African economic landscape changes.

Both the African economic outlook and SA’s role therein are also at a crossroad and we need to assess the opportunities afresh. SA’s contribution to sub-Saharan Africa’s GDP has declined from 50% in 1994 to 30% in 7

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2012, with the IMF forecasting that SA’s share of sub-Saharan African growth will fall to about 25% by 2018. While SA should be pleased that Africa is growing more rapidly and closing the per capita income gap with SA, it means that SA’s economic significance in the region is shrinking.

Yet the economic and business prospects for Africa have never seemed better, as evidenced by the recent World Economic Forum (WEF) on Africa held in Cape Town.

A strong sense of hope and opportunity now prevails therefore about Africa as a whole. In 2012 sub-Saharan Africa was the second fastestgrowing region of the world today, trailing only developing Asia, with output growth of 5% on average. Average GDP growth for the continent is about 6%, but as The Economist in a positive survey of 2 March 2013 says, ‘only if Africans raise their ambitions still further will they reach their full potential. The challenges that remain are to build infrastructure, root out corruption and clear the tangle of government regulation that is still holding the continent back.’ As for SA there remains a message in the recent 2013 forecast by the African Development Bank of about 6.5% for economic growth in Africa if SA is excluded – but only 5.4% if SA is included. Why?

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2 The South African Economy: Past and prospective

Just as the motion of every body in the solar system affects and is affected by the motions of every other, so it is with the elements of the process of political economy. – Alfred M arshall It is common cause that SA faces serious socio-economic challenges.

Countless ‘diagnostics’ and programmes have confirmed it over several years. There is wide agreement in both the public and private sectors that the goals of our society include the achievement of sustainable economic growth (ideally to more than double the recent average growth rate of 2.5% p.a.) to generate new jobs and create rising living standards, as well as providing at least minimum levels of living conditions and opportunities for personal development for all members of society.

In short, growth rates high enough to successfully address the triple challenges of unemployment, poverty and inequality in SA. Policy choices are usually constrained, as in all economies, by available resources and technology, by developments in the world economy, and by the recent history and current levels of economic performance.

An assessment of policy options always needs to recognise both the interdependence of different policy instruments and the role of politics.

Policy decisions today have medium- and long-term effects, as well as short-term ones. This is especially relevant to roadmaps like the NGP (2010) and the NDP (2012).

This chapter sets out to evaluate the growth performance of the SA economy in recent years, to outline the policy choices and what the outlook promises.

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Growth performance In the wake of the East Asian crisis in 1999, the SA economy embarked on a record economic expansion, which according to the South African Reserve Bank (SARB) ended in November 2007. By the time it finished, it had lasted more than twice as long as any preceding period of economic expansion since World War II. It averaged 3.3% growth between 1999 and 2003, and 5.3% from then to 2008.

Minister of Finance Pravin Gordhan also reminded us in his budget vote in Parliament in 2013 that we should not forget that in the past 19 years SA has seen, for example: • a n economy that has grown by more than 80%; er capita income rise by 40% in real terms; • p • e mployment rise by over 3.5 million persons; • gross fixed investment as a proportion of GDP rise from 15% to an average of 20% over the past five years; • o ver 15 million persons receive social grants; • m ore than 3 million houses built; and • a ccess to electricity increase from 50% to over 80% of the population.

Of course, SA is now facing a much more challenging situation. As we assess SA’s present and future national ‘balance sheet’ in changed circumstances however, it remains useful to recall what has been achieved thus far in the ‘big picture’ in order to maintain a realistic grip on what kind of economic steersmanship is required. This also helps to identify what platforms exist to help launch the solutions that are now needed to address the new challenges that have arisen.

While SA has in recent years been dominant in almost everything in Africa, it has lately been slipping down the economic league tables. There are now prospects that Nigeria will soon overtake SA as the biggest economy in Africa. In 1995 SA accounted for almost half of sub-Saharan Africa’s GDP; today it can claim less than a third. Although the economy grew at a robust 5% in the four years up to 2008, the global crisis and power outages brought that to an end. SA has rarely managed 3% growth since then, making it one of the slowest-growing economies in Africa, and even low by global standards.

The challenge is not so much that other African countries are growing rapidly – this is inevitable and desirable given their low bases. What is 10

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9 000 8 000 7 000

US$

6 000 5 000 4 000 3 000 2 000 1 000 0 2007

2008

2009

2010

2011

2012

Year

Figure 2.1: GDP per capita at current prices (Source: SARB)

more important is that SA seems not to be taking sufficient advantage of the opportunities that a larger African market offers, hence jeopardising its gateway status and its trade linkages.

It is not all bad news, though. South Africa’s decline is only relative.

Despite having the continent’s fifth biggest population, it still has a sizeable economy. On a GDP per capita basis, SA has the 5th highest in Africa, after the Seychelles, Equatorial Guinea, Botswana and Mauritius.

Its infrastructure is by far the best in Africa. It has 80% of the continent’s rail network and is home to the region’s biggest stock exchange. It also has the biggest middle class, proportional to its population, of any African country.

An extended and successful economic upturn would have been even better if SA had been able to take full advantage of the large commodity boom which spanned the period 2000–2008. Several negative factors in SA’s global competitiveness position limited the country’s ability to maximise the gains from the world commodity boom in this period.

These still remain relevant and are referred to again later.

Yet resilience is not dynamism; survival is not the same as unlocking SA’s true potential. The fact that there have been so many ‘diagnostics’ and socio-economic programmes over several years is evidence of the strong belief that SA can – and should – do much better. There has been undeniable slippage in SA’s economic performance in recent years and a failure to unlock the country’s full growth and employment potential. As long as there was reasonably positive economic growth, there was some 11

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progress in the reduction of unemployment, poverty and inequality, up to the 2008 financial crisis. Subsequently, growth has been slower and several of the gains have been lost.

There is always argument about the precise unemployment numbers, but estimates from Statistics South Africa’s Labour Force Survey puts unemployment according to the broad definition at around 33.8% in early 2013. Using the ‘official’ narrow definition – that a person is economically active and has been searching for work – the unemployment rate is around 25%. We can dissect the changes in unemployment in terms of half percentage points up or down, or in terms of a few thousand jobs created or lost, but it hardly makes for sensible analysis.

The cyclical story is that, with the slow growth following the global financial crisis, we have lost jobs in the formal sector and overall unemployment has increased slightly. The structural story is more serious. SA has a persistently high level of unemployment and a large pool of discouraged workseekers, with the youth being affected disproportionately.

Recently Professor Frederick Fourie argued that the debate over the causes of and possible solutions to the unemployment problem should be viewed in three parts: Labour economists view the labour market as segmented – along • formal and informal lines, and between urban and rural places – and this creates barriers to entry.

• Development economists view unemployment from a poverty perspective: the poor are isolated and less likely to have social networks that can help them search for jobs.

• Macroeconomists see unemployment as the outcome of labour legislation making the labour market less flexible and as the result of a small supply of skilled workers.

Thus, to address unemployment will require economic growth and much more. Just waiting for growth of anywhere between 4% and 7%, to ‘lift all boats’ and reduce unemployment, is a dangerous hope. But jobs cannot be created without economic expansion. GDP growth in SA is nonetheless not very employment-intensive. Research shows that the employment coefficient (the ratio between the rate of growth in employment and the rate of growth of GDP) is around 0.5%.

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That means that only half of the economic growth rate translates into an employment growth rate. We want to maximise the number of jobs created at any given growth rate. Increasing economic growth and employment growth means that there are challenges in improving the quality of education, developing a more responsive labour market, addressing poverty and transforming the spatial economy. Despite progress to date in alleviating poverty, at least 20% of households continue to live in absolute poverty in SA. These elements form part of what we call South Africa’s ‘social deficit’ and will be addressed in different places throughout the remaining chapters.

A closer look at the drivers of growth There are many ways to evaluate the positive and negative points of SA’s growth performance, but we have chosen to borrow the elements of Jim O’Neill’s Growth Environment Score. In his book The Growth Map, O’Neill uses a number of macroeconomic and microeconomic variables to calculate a growth environment index score. The aim here is not to score, but to evaluate each element for the South African economy. The accompanying table shows the basic variables: Macroeconomic

Microeconomic

Investment spending

Life expectancy

Government deficit

Education

Inflation

Rule of law

External debt

Corruption

Degree of openness

Stability of government

Table 2.1: O’Neill’s growth environment index score Macro analysis Figure 2.2 shows gross fixed capital formation to GDP over the period 1960–2012. It is clear that investment increased from 14.7% of GDP in 2002 to a high point of 23.1% in 2008.

While it is true that in SA we do not save and invest enough, by 2008 we had an investment level much closer to and even higher than that of our developing country competitors: Brazil (17%), Malaysia (14%), 13

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2012 2010 2008 2006 2004 2002 2000 1998 1996 1994 1992 1990

1986

Year

1988

1984 1982 1980 1978 1976 1974 1972 1970 1968 1966 1964 1962

0%

5%

10%

15%

20%

25%

30%

35%

1960

GFCF to GDP

Figure 2.2: Investment to GDP (Source: SARB)

Mexico (22%), Thailand (22%) and Turkey (15%). Following the 2008 financial crisis, investment levels fell throughout the world, and this has now also become a serious challenge for SA. It may be worth mentioning that in 2012 about a third of SA’s gross 14

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100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2003

2008

2012

Year Economic infrastructure

Social infrastructure

Economic services

Private investment

Figure 2.3: The composition of investment (Source: SAIRR 2010/11 with updated data from SARB)

fixed capital formation was financed by foreign investment. In the absence of these inflows, SA’s ratio of gross capital formation to GDP would have been much lower. This also underlines the need to maintain an attractive and competitive environment for foreign investment, something which recent internal developments have tended to undermine.

To get an idea of the drivers of this growth in investment, Figure 2.3 shows a decomposition of investment by type. The private sector contributes the largest part of gross fixed capital investment, but the period 2003–2008 saw substantial increases in investment by the public sector, specifically by public corporations, in economic infrastructure.

A closer look at the growth rates shows that private sector investment increased at an average rate of 10.75% over the period 2003–2008.

Investment spending by general government only really picked up from 2006. The public corporations (Telkom, Eskom and Transnet) increased investment levels more than threefold over the period 2003–2010.

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The decline in investment levels after the financial crisis was greatest for the private sector. In the fourth quarter of 2012 the level of real private sector fixed investment was still 3% lower than the peak of the previous business cycle upswing in the third quarter of 2008. Although SA has been in a modest business upswing since the third quarter of 2009, private fixed investment has been a laggard in this scenario, compared with previous cycles. Fixed investment by general government and public corporations during this period has been much stronger. Although some commentators have sought to fix the blame on ‘corporate cash hoards’ estimated at about R600 billion, saying that corporate SA should be bolder to invest and not sit on cash reserves, there are more serious questions to be asked.

While not an unimportant phenomenon in the SA economy from several points of view, the level of corporate cash balances is not the main issue. It is a symptom, rather than a cause, of something more fundamental. Where are many business capex budgets now increasingly focused? For example, in 2012 SA invested in more new foreign direct investment (FDI) projects in Africa than any other country in the world, though not in terms of the amount of capital invested. What needs to be identified, and this will arise from time to time in subsequent chapters, is why private investment in SA is not performing more strongly and what can be done to speed it up. Warren Buffett once said that ‘only once the tide has gone out do you discover who has been swimming naked’.

However, these cyclical elements of investment performance may be less interesting than the structural changes that underlie them. Figure 2.4 shows the composition of total investment by type of economic activity in 2010.

The smaller shares of investment in agriculture, mining and manufacturing are clear, yet these sectors are often touted as the supposed drivers of growth and employment creation. Services seem to have been the major generator of jobs in SA in recent years. The relative decline of these sectors has many causes, but some are related to the policy environment, especially for people with lower skills who form part of the structurally unemployed.

For example, over the past five years SA, with some of the richest mineral deposits in the world, has fallen 27 places in the Canada-based Fraser Institute’s annual survey of mining-investment attractiveness – to 16

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Agriculture, forestry and fishing 2%

Community, social and personal services 15%

Mining and quarrying 12%

Manufacturing 14%

Finance etc.

18%

Electricity, gas and water 12%

Transport and communication 18%

Trade etc.

7%

Construction (contractors) 2%

Figure 2.4: Investment by sector (Source: SAIRR SA Survey 2010/2011)

64th out of 96 countries. Uncertainty over the ANC’s nationalisation policy was partly to blame. The increasing burden to the regulatory framework for various sectors of the economy – including delays in implementing needed infrastructural spending and rapid rises in infrastructural costs – is identified as an important contributor to a relatively poor economic performance.

Whereas the investment performance has had mixed implications for the growth environment, SA’s fiscal stance can be seen until recently as a model for many countries. The budget deficit as a percentage of GDP over several years created a good track record. Figure 2.5 shows the deficit to GDP ratio for the period 1994–2012.

Over time the deficit has seen stepwise reductions from the 1994 level, and there were even small primary surpluses in 2007 and 2008.

An expansionary fiscal policy following the financial crisis has led to increases in the deficit to GDP ratio since 2009, but plans to bring this under control were clearly put forward in the 2013/14 budget speech.

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2.0% 1.0% 0.0% -1.0% -2.0% -3.0% -4.0% -5.0%

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

-6.0%

Year

Figure 2.5: Budget deficit to GDP (Source: SARB)

The economic growth up to 2008 and improvements in tax collection

by SARS made it possible for a while for SA to ‘have our cake and eat it’. There were increases in government spending (specifically social spending and transfer payments) as well as some tax relief, within a framework of broad fiscal discipline. That the fiscal stance has contributed positively to the growth environment is clear, but there are serious questions concerning its future sustainability that we will deal with in Chapter 7.

When we look at inflation as an indicator of the growth environment, SA’s recent experience on the whole should also be added to the positive side of any analysis. Inflation targeting was introduced in 2000.

Consumer price index (CPI) inflation rates were relatively low and stable over most of the period. In 2006 inflation was 4.7%, in 2007 it was 7.1%, and then moved even higher in 2008. However, as the global recession was prolonged, upward pressure on prices eased and inflation fell back to within the target range of 3%–6% by 2010.

Since then, it has averaged about 5%, but with increasing cost pressures. All this still made for a relatively low and stable rate within the inflation target range, with fluctuations that would, until recently, not have a significant impact on consumption, savings and investment 18

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16 14 12

% CPI inflation

10 8 6 4 2 0 -2 -4 2007

2008

2009

2010

2011

Year South Africa

US

Germany

China

Japan

UK

2012

March 2013 India

Figure 2.6: CPI inflation rate comparison with major trading partners (Source: STATSA and www.inflation.eu)

decisions. In 2013 this outlook changed, with serious upside risks to inflation becoming dominant and impacting on consumer spending. This again demonstrates how cost inflation can have a deflationary impact on consumer demand.

There are both cyclical and structural influences at work here, and inflation and interest rates cannot be viewed in isolation. Part of the inflation spike of 2008 and 2009 had to do with global food price inflation, higher energy costs as well as abnormal increases in administered prices.

SA’s sensitivity to inflationary pressure also comes from low levels of competition in some sectors and/or anti-competitive practices.

A weak exchange rate poses an upside risk to food inflation, as prices of agriculture commodities such as meat and maize are based on 19

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Currencies against US$: Index 2 Jan 2007 = 100

140 130 120 110 100 90 80 70 60 2007

2008

2009

2010

2011

2012

2013

Year Rand

Australian $

Brazilian Real

Turkish Lira

Figure 2.7: Volatility of a selection of currencies against the US$ (Source: Nedbank)

international prices. Whatever is happening in respect of inflation and interest rates now is also related to the current account of the balance of payments and the exchange rate and, of course, eventually to SA’s global competitiveness. In this context the weaker rand undoubtedly helps to cushion the economy against other bad news. A sharp fall in the currency is not necessarily something to be welcomed for its own sake, but it nonetheless can offer a major ‘shock-absorber’ at a time when economic adjustments are required. It creates space for whatever new decisions are needed to recover lost ground, provided the time is well used.

2013 is also seeing the emergence of official statements and a global financial market view that the era of easy monetary policy in the US may soon be coming to an end, and this is beginning to influence vulnerable emerging market currencies like SA’s, apart from domestic factors.

During the course of the year a score of emerging market currencies has lost value against the dollar, especially the rand. Not only has the rand become a useful currency in which to take a position on emerging markets more widely, but the fact that SA’s large current account deficit has been financed by large capital inflows makes it particularly vulnerable at present. As 2013 unfolds it is not yet clear which balance of forces will prevail in deciding the future level and volatility of the rand, but the 20

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45%

Gross Debt as % of GDP

40% 35% 30% 25% 20% 15% 10% 5% 0% 2007

2008

2009

2010

2011

2012

2013 (Est)

Year

Figure 2.8: Government debt as % of GDP (Source: SARB & Budget Report 2013)

policy implications are clear. SA has time and space to adjust but they are not unlimited.

In this overall macro picture, external debt is a major ground for celebration. While a number of countries are experiencing some form of sovereign debt crisis, SA’s debt remains at a sustainable level. In 2011 the total government debt was 37.1% of GDP, and of the total debt 7.2% was foreign debt. State debt costs make up just over 9% of the main budget.

Key questions about the sustainability of the fiscal stance focus on issues such as the public sector wage bill and the size of welfare payments and will be dealt with in Chapter 7.

The final macroeconomic indicator of the growth environment is the degree of ‘openness’ of the economy. Since 1994 the SA economy has been opened up to trade and financial flows, and there is no doubt that SA can be deemed an ‘open’ economy. Once again, this needs to be qualified by recent trends towards selective protectionism in certain sectors. The value of exports of goods and services is approximately 27% of GDP. SA diplomats and the business community remain active in multilateral organisations and regional groupings. The 2013 BRICS summit in Durban attests to SA’s key role as part of the global South.

The openness of the SA economy relates to the growth environment through the deficit on the current account of the balance of payments.

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0% -1%

CA Deficit

-2% -3% -4% -5% -6% -7% -8% 2007

2008

2009

2010

2011

2012

Year

Figure 2.9: Current account surplus/deficit as % of GDP (Source: SARB)

The deficit is being financed by foreign financial flows into SA. The most recent figures suggest that in 2013 this deficit was now as high as about 6% of GDP. To finance this, SA needs more than R200bn per year, which is nearly four times the amount coming in from present portfolio inflows. In the long-run growth scenario, this therefore leaves South Africa vulnerable to developments in export markets and to the perceptions that foreign investors have of risk and return in South Africa.

Although the macro indicators have painted a relatively benign picture of the economic environment in recent years, there has been mounting evidence lately of recent deterioration due to both external and internal elements. On the macro environment, in fact, SA’s performance in the Global Competitiveness Index (GCI) declined from 43rd in 2010 to 69th in 2012. In 2013 there is increasing concern about the weakening outlook for the SA economy. Domestic growth prospects remain modest and macro-economic vulnerabilities are becoming more apparent. The more structural aspects of an uncertain investment environment, a propensity for inflation and a balance of payments constraint on growth are now much more worrying features, which will be discussed in more detail in Chapter 7.

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Micro analysis vs macro performance?

Life expectancy is an indicator with many different interpretations. It is typically used as a measure of how ‘developed’ a country is; in other words, whether it is wealthy enough for its people to grow old in comfort.

But what does that mean for growth prospects? It could imply a large internal market. It could mean a shrinking working-age population or retirees not spending their income.

In SA, life expectancy is not high. Statistics South Africa puts it at an average of 57 years (note that the GCI puts it at 51.6 years!). That may, however, tell us more about the development challenges that SA faces (and about the HIV/Aids pandemic) than it tells us about growth potential. We must also consider the possibility of a ‘demographic dividend’. More than 25% of the SA population is younger than 15. Educating and employing that labour offers SA both a challenge and an opportunity.

To say that education is a challenge is understating the case in South Africa. Education experts are rather using the term ‘crisis in education’, accepting that instances such as the Limpopo textbook scandal and 2012 matric results have raised serious questions about the quality of education.

Only looking at the basic numbers can be misleading, however. The matric pass rate was 79.3% in 2012, some 10 percentage points higher than in 2008. This sounds like a significant improvement, but on closer inspection we find that fewer than half of those who enrolled in Grade 10 in 2008 went on to pass matric in 2010. Only a third of those passes were good enough for the learners to gain university admission for a bachelor’s degree.

There are also questions about the quality of the students that do pass. To pass, students need 40% in three subjects, including their home language, and 30% in another three subjects. It is technically possible to receive a National Senior Certificate through scoring an average of 35%.

Statistics show that those who have not completed secondary education and those with matric account for 81% of the unemployed. The rising levels of youth unemployment are dealt with later. In the GCI, SA is ranked 133rd out of 148 in terms of quality of education and 138th for the quality of maths and science education. There is simply no linear relationship between education and the world of work.

The responsiveness and efficiency of the labour market is not one of the variables that O’Neill considers for the growth environment, but 23

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for SA it is a key structural challenge. Formal employment in South Africa is typically skilled and costly. Labour unrest, strikes and violence have had a significant impact on the mining and agricultural sectors in 2012/13. In the GCI, SA is ranked in the 138th position out of 148 in terms of cooperation in labour–employer relations and flexibility in wage determination. We are 139th in terms of hiring and firing practices and 130th for pay and productivity.

The final three indicators – rule of law, corruption and the stability of government – are often regarded together as measures of governance.

They are about government’s ability to create conditions that support the functioning of the market in this respect. On some of these fronts SA does reasonably well, and on others there is clearly room for improvement.

In terms of the GCI (2012), South Africa came top in sub-Saharan Africa and 52nd out of 144 in the world. A breakdown of the GCI shows that SA performs quite well in terms of property rights, individual property protection and the efficiency of the legal framework in settling disputes. Current efforts by government to clarify property rights in relation to both the mining and agricultural sectors need to be finalised to promote greater certainty. SA puts in a top-10 performance in the strength of auditing and reporting standards, the efficacy of corporate boards, investor protection and the protection of minority shareholders’ interests. For the soundness of its auditing standards and regulation of its securities exchanges, it is second to none. In a survey of corporate governance in 44 emerging countries by UBS, a Swiss bank, it came second, just after South Korea.

SA scores much lower for other indicators of the quality of institutions. In the GCI we are ranked 48th out of 142 when it comes to irregular payments of bribes. The burden of government regulation finds us at 112th on the list, and favouritism in decisions of government officials finds us at number 114 in the ranking. For business costs of crime and violence SA is ranked 136th out of 142. These are only aggregate numbers. For many the perception is that corruption is becoming endemic. SA has to some extent begun to create oligarchs in the Russian mould, says UBS. Corruption has permeated many areas of public life in SA and it is thus no surprise that SA scores badly here by international standards.

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On the issue of political stability there is no question of the government being overthrown, the country enjoys democratic institutions even if they work imperfectly, and the constitution embodies the rule of law and civil liberties. Yet we have to address the fact that there is an emerging debate as to whether SA is becoming a ‘failed state’ because of persistent declines in certain key global indices of governance and delivery. It will surface from time to time in subsequent chapters.

Overall, the micro indicators therefore paint a much more negative picture of the growth environment. Despite progress on several fronts, failures in education, an inefficient labour market, corruption and weak institutions are structural issues that have a detrimental impact on the growth environment. It could well be argued that, in terms of O’Neill’s growth environment scores, the micro factors are what tip the scales against SA. ‘Macroeconomically’, says economist Cees Bruggemans, ‘via fiscal and monetary policy, we certainly are still mostly well-behaved in terms of the disciplines observed.’

To recapitulate in a nutshell: • Aside from a few short windfall-driven episodes, SA has remained a modest 3.0% to 3.5% growth performer. It has not yet discovered within itself the magic to transform towards 5%, 7% or even higher average growth performances, as some other leading emerging economies have done.

• A nd thus after a short, speculatively-driven consumption boom during 2005–2007 and a short sharp recession in 2009, we now find ourselves constrained in a 2½% to 3% growth trajectory, with a significant loss of growth drivers and focused purpose.

• Most analysts believe SA’s long-run growth performance under present constraints could not exceed 3.5% at best, based on previous studies of the SA economy.

It is true that economic growth is ‘not a remedy for all evils, an end to all distress’. But if it is truly inclusive, it helps to reach other goals and makes more things possible. Growth makes redistribution more feasible. Transformation and economic growth are interdependent.

Social tensions are likely to be aggravated in an economy in which economic opportunities are perceived to be a zero-sum game; that is, ‘you win, I lose’.

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Policy, productivity and competitiveness If SA is to recover from its current disappointing economic performance and begin a new phase of higher economic growth and job creation, it is critical that all South Africans recognise the need for key structural changes. This is the message projected by the NGP and to an even greater extent by the NDP. These challenges face employees, business enterprises and government at all levels. As the NDP emphasises, structural change will require serious commitments all round if the NDP’s vision for 2030 is to be realised. Structural reform in SA creates an environment for more profitable investment and productivity improvements.

As we move through subsequent chapters, the one single factor that permeates all economic activity, whether in the public or the private sectors, is the importance of productivity. Productivity growth, together with a higher rate or utilisation of available labour and capital resources, represents the principal way of achieving sustained economic growth and many of the good things associated with it. ‘Growth that adds volume without improving productivity is fat … Growth that diminishes productivity is cancer,’ once said the management guru Peter Drucker.

As a ‘middle-income’ country, SA has to compete with countries above it and below it. This requires that the economy must continuously evolve in scope as well as in size. To support the goals of the NGP, the NDP and the Industrial Policy Action Plan (IPAP), SA will need to expand its exports of globally competitive, higher value-added products. The achievement of productivity growth therefore remains a nationwide task involving both the public and private sectors in their decision-making.

Our search for a new economic roadmap is thus ultimately to ensure that the SA economy will function better; in other words, that the productive performance of the economy will be enhanced. This, in turn, should lead to an improvement in overall economic living standards for all.

We need to remind ourselves that the World Economic Forum (WEF) has defined competitiveness as the set of institutions, policies and factors that determines the level of productivity of a country. The level of productivity, in turn, sets the sustainable level of prosperity that can be earned by an economy. A more competitive economy is therefore one that is likely to grow faster in the medium to long term. This is important for both developed and developing economies, as well as in deciding on levels of tariff protection and other interventions.

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What is important to note in recent Global Competitiveness reports is that, while SA has dropped in rank over time, its performance has remained relatively stable, and the decline mainly reflects improvements in other competing countries. This nonetheless greatly matters, because we want SA to become a leading investment destination for growth and employment in the years ahead. SA cannot afford to lag behind its peers in emerging markets in terms of competitiveness as it seeks to attract foreign investment. Although we often enjoy more than our fair share of portfolio and short-term investment – hence the impact on the rand – SA is not yet attracting enough FDI for growth purposes.

The recent Global Competitiveness reports are wake-up calls to SA about what needs to be done if the domestic economy is to be a catalyst for international competitiveness (see Figure 5.6 in Chapter 5 regarding the ‘trade deficit’). It injects greater urgency into our search for solutions.

There is no single policy ‘mix’ that ensures success. In any case, policy cannot operate on productivity itself but must operate on the factors that determine productivity. As we implement the NDP, we must therefore remain conscious of the extent to which long-term shared prosperity in SA ultimately depends on productivity gains at various levels.

Now you may say: ‘But is there consensus among various stakeholders about productivity? Don’t some stakeholders – such as labour – see productivity as a threat and a reduction in job opportunities?’ Global experience indicates that it is possible to build consensus around productivity, if it is managed properly and the benefits are shared.

Even those who are hostile to the ‘capitalist’ system are proproductivity: • ‘The notion of productivity has no fatherland or any political colour; it is the only notion accepted by both Marxist and liberal economic theories’ (French economist Jean Fourastié).

• ‘Productivity of labour is the most important, the principal thing for the victory of the new social system. Capitalism created productivity for labour unknown under serfdom. … Capitalism can be utterly vanquished … by the fact that socialism creates a new and much higher productivity of labour’ (V.I. Lenin).

So, hopefully, there could be common ground here. The best productivity performance is achieved where full cooperation exists between the participating stakeholders – the management team and 27

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the workers, the organisation and its suppliers, the organisation and its clients, or the government and private sector. Our collective bargaining system should be more vigorously used to embed productive outcomes and support a better economic performance through productivity accords.

Although there is a dark cloud at present over SA’s economic prospects in 2013, the country is not without potential remedies. To retain perspective we should recall that the economic malaise with which many South Africans perceive the nation is grappling at present is not without precedent in earlier times. The eminent historian De Kiewiet in 1946 wrote of South Africa progressing ‘through economic windfalls and political disaster’. When due allowance is made for differences of scale, we find remarkable parallels with what worries many South Africans today: unemployment, poverty, unfavourable exchange rates, taxation and competitiveness have troubled and perplexed past generations no less than our own. Nor has the general attitude towards these problems apparently undergone any conspicuous change. Every ‘economic blizzard’ that afflicts the country seems to invite the risk of generating what might be called ‘economic defeatism’.

It is therefore worth remembering that throughout the course of SA’s economic development runs a never-ceasing stream of complaints that industry is declining, that SA’s foreign trade is shrinking, that the country is being drained of its resources by the excess of imports over exports, that the people can no longer support the burden of taxation, that poverty and unemployment are increasing, that the nation is on the brink of irreparable ruin. Many of these things at times may be true, but the relevant issue is what decisions and actions were taken to avoid a ‘worstcase’ scenario. This is where effective leadership becomes necessary. To merely accept fatalistically the gloomiest predictions for SA’s future is therefore likely to become a self-fulfilling prophecy.

The bad news needs to be tempered with more faith in our capacity to identify and tackle the problems that confront us in ways that unlock new opportunities. If we believe SA is poised on the crest of new opportunities, then we must demonstrate that we are able to exploit them.

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Forecasts 2010

2011

2012

2013

2014

2015

GDP growth %

3.1

3.5

2.5

2.0

2.3

3.5

Current account as a % of GDP

-2.8

-3.4

-6.1

-6.2

-6.3

-6.0

Unemployment

24.9

24.9

25.1

25.0

24.0

23.0

Inflation (CPI, average)

4.3

5.0

5.7

5.6

5.5

5.4

Gross loan debt %

32.8

36.2

39.9

41.8

43.2

43.9

• GDP growth below existing long-term average growth potential of 3.5% • Below NDP goal of 5.4% average GDP growth

© www.CartoonStock.com

Table 2.2: Selected economic forecasts for SA

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3 But why is South Africa here yet again?

One cannot govern with buts.

– Charles de Gaulle The focus of the NDP on what needs to be done now to strengthen SA’s economic performance is not new – we have been here many times since 1994. Right from the outset it was realised that a strong economy was necessary to support the expectations of the new democracy and in this context SA’s economic performance was seen to be disappointing and inadequate. This disappointment has been reflected in the countless diagnostics and socio-economic programmes designed to boost economic growth and transformation in SA since 1994.

These include: • Reconstruction and Development Programme (1994); • Growth for All (1996); • Growth, Employment and Redistribution Strategy (1996); • Jobs Summit (1998); • Growth and Development Summit (2003); • Accelerated Shared Growth Initiative for SA (2005); • ‘Harvard’ Economists’ Study (2007); • OECD Annual Country Reports; • Various IMF and World Bank Reports on SA; • The Dinokeng Scenarios (2010); • New Growth Path (2010); • National Development Plan (2012); • Presidential Task Team on the economy (2013).

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The list is almost endless. SA has not lacked for public debate about its economic performance. Yet the period abounds with projects and disappointments. Why have we not been able to achieve an economy that is bigger, better and stronger by now? Why do we keep falling short of our potential? Why are we here yet again? Each time SA preaches the ‘high road’ but is perceived to deliver only the ‘low road’, the challenges become more formidable and frustration builds.

One serious flaw in many of the previous well-intentioned approaches to growth and development in SA in the past was to completely underestimate – or only pay lip service to – the extent to which what was required from the public sector would exceed its capacity to cope with even its basic functions. This failure to perform adequately at various levels, such as infrastructural development, in turn has obstructed the efficient operation of the private sector. Thus the seeds of a ‘vicious circle’ were sown and recriminations have abounded as to where the fault lies.

But we will return to these aspects later.

The attempts to restructure and implement changes to the economy along certain lines also ran into headwinds from particular groupings.

The political analyst Professor Steven Friedman and others have reminded us that a successful reformer is one who is able to steer and bring policy change to fruition in a consistent way despite opposition from economic actors, interest groups and political forces whose interests or worldviews may be threatened by it. Yet a set of policies that may seem inept or incoherent to many analysts may nonetheless serve the political economy purpose of holding together a governing coalition.

While it would be wrong to simply assume that ‘good economics always makes good politics’, where this is not the case the signals should be clearer and not inconsistent. Such uncertainty can be more detrimental to new business projects, or even to continued operations, than the certainty of bad news.

Policy and political economy One question to be addressed now is the possible role of the ANC– COSATU–SACP political alliance in the unfolding scenario. Let us recall that most participants in the new democracy in 1994 were in government for the first time. We should not underestimate the huge challenges and historical imbalances which faced a new democratic 32

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government. Building an inclusive society is not an overnight matter, and against the background of apartheid it has been a massive challenge.

Running a country like SA is a formidable task. We must also understand the practical and historical factors that gave rise to the formation of the ANC–COSATU–SACP Alliance. It served a rational political purpose in its time and could be seen as having underpinned political stability.

Originally there were serious discussions within COSATU leading up to its formation in 1985 as to its trade union role, as opposed to its political activities, in furthering the interests of workers. In the circumstances of the time it made sense then to unite against the apartheid system. As new policy tensions have repeatedly surfaced to strain the Alliance, a quarter of a century later the debate could well be reopened on the balance between the trade union dimensions and the political dimensions of a leading worker organisation like COSATU. Where do its real interests presently lie to promote worker interests?

That said, what has been the role of the ANC–COSATU–SACP Alliance in reforming SA and boosting growth? At the policy level it is plausible to argue that the policy weaknesses experienced have been aggravated in SA by the fact that ideally, if left to itself, the ANC may have been more ‘centrist’ on economic policy than its political allies have permitted it to be from time-to-time. The persistent ‘tug-of-war’ in the ANC–COSATU–SACP Alliance over economic policy in recent years has generated increasing uncertainty and confusion. There has simply been an overload of mixed and negative signals around development challenges.

If we look back over the past 19 years, there appear to have been an increasing emerging pattern consisting of: • ambivalence of policy signals; • U-turns in policy; • imbalances in policy decisions; • preoccupation with macro policy at the expense of micro policy; • poor coherence in policy; • weak coordination in policy; • undue stresses in social dialogue processes; • excessive regulatory framework; • persistent distrust of the private sector.

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The cost of this cumulative pattern has gradually risen and increasingly set a limit on SA’s pace of economic development. Of course, these policy weaknesses are not unique to South Africa. A perusal of the annual GCI trends should disabuse even the casual reader. Nor must we ever assume that the shortest distance between two points in policymaking is a straight line – it never is. In a world of ‘real politics’ there are always compromises to be struck and ‘trade-offs’ to be made. The question must be whether the right balance has been struck and whether, if one of the ‘social partners’ is formally in a political alliance, the outcomes can be truly balanced. Have the ambiguity in policy and the inner contradictions now become destructive?

Ranging from labour policy to possible nationalisation, the extent to which policy signals in recent years became ambivalent or negative over time contributed to a policy environment which has inhibited private fixed investment from reaching the levels that SA needs. A vital element for sustained economic growth is the need for balance and coherence in economic policies. A favourable business investment environment needs knowledge of how the general strategy of official policies will unfold in the years ahead.

The debate in SA is too often captive to economic ideologies that get in the way of pragmatic solutions, whether it is on issues like a youth wage subsidy or threats of nationalisation. Being locked indefinitely into a political alliance has often made sensible developmental decisions difficult to implement. The track record of tensions over economic policy in the ANC–COSATU–SACP Alliance reminds us of the Duke of Wellington’s complaint that having enemies is nothing like having allies!

Political analyst Stephen Grootes says that ‘any serious conversation about politics has several questions that keep returning. One is how long the Alliance between the ANC, COSATU and the SACP will survive. The short, snappy answer to the question is when the interests of COSATU’s members are sufficiently divergent from those of the ANC.’ Trade unions like COSATU, FEDUSA and others are important political and economic forces, but their future, like that of business, will depend on their ability to adjust their organisations, strategies and goals to a changing environment, especially in collective bargaining. Business, too, needs to ask itself whether it could play its cards more skilfully in managing the new realities.

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No one thinks that economics can be isolated from politics. The interplay of political and economic factors in SA has been so intricate and involved that it becomes difficult to unravel the tangled web of cause and effect, each impinging upon the other in an unbroken sequence. In SA the GDP is not only the gross domestic product, but also the gross domestic politics! They are two sides of the same coin. We see this again now in the political arguments emerging around the NDP. Yet it is clear that a government must be able ultimately to implement and enforce what it has eventually decided to do in ways that create certainty and predictability, in the interests of the country as a whole. By taking a long view, a government is better equipped to measure the real importance of present constraints, and to implement solutions that are in harmony with the basic factors of inclusive growth and development.

After nearly 20 years of democracy in SA, there are several lessons to be absorbed if the country is to be more successful in future.

We must conceive of our economy as a living organism that grows and functions by unceasing adaptation to an ever-changing environment. To cope with this in the future our aim should be to preserve what is best in our present economic system – ‘the spirit of enterprise’ – and to fuse it with the team spirit, so that overweening self-interest can be restrained by concern for the bigger picture and a commitment to collaborative effort. Armed with these initial thoughts, we can now turn to the advent of the NDP. Can it create a ‘new normal’ for SA?

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© Brandan Reynolds, Business Day, 25 January 2013

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‘The essential problem is that the talk and the action differ.’

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4 The National Development Plan: The ‘new normal’ for South Africa?

In the fast-growing economies, policymakers understood that successful development entails a decade-long commitment, and a fundamental bargain between the present and the future.

Even at very high growth rates of 7%–10% it takes decades for a country to make the leap from low to relative high incomes …

This bargain will only be accepted if the country’s policymakers communicate a credible vision of the future and a strategy for getting there. They must be trusted as stewards of the economy and their promises of future rewards must be believed.

– The Growth R eport: Strategies for Sustained Growth and Development (SSGD), M ay 2008 T he NDP is a significant piece of independent research offering a vision and roadmap for South Africa’s future. It gives a comprehensive and accurate diagnosis of our challenges and constraints and does so in a frank and open way. In endorsing the NDP, President Jacob Zuma has emphasised that this is not a plan for government but a plan for all the people of South Africa. In that sense the NDP can significantly influence the future economic and business environment in this country.

The previous Growth Report in 2008 also emphasised that ‘high growth requires committed, credible and capable government … the high growth economies typically built their prosperity on sturdy political foundations. Their policymakers understood that growth does not just happen. It must be consciously chosen as an overarching goal by a country’s leadership.’ This is the overall message that the NDP wants to convey.

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20 000 18 000

GDP per capita in US$

16 000 14 000 12 000 10 000 8 000 6 000 4 000 2 000 0 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 Year GDP per capita @ 3.3% GDP growth rate

GDP per capita @ 6% GDP growth rate

GDP per capita @ 10% GDP growth rate

Figure 4.1: Possible scenarios for SA GDP per capita based on 3.3%, 6% and 10% per annum GDP growth rates at constant prices (Based on SARB data)

The NDP therefore presents a broad roadmap for South Africa; an overriding, long-term document that extends beyond the electoral and short-term business cycle to form the framework of future policy creation. We must hope that the plan will eventually come to underpin all future economic and social planning and regulations, providing the golden thread that undergirds the battle to address the challenges of poverty, inequality and unemployment. In implementing the NDP it will be necessary to strike a balance between conflicting advantages, disadvantages and risks of different courses of action involving value judgements, considerations of economic analysis, as well as assessing political and administrative possibilities.

Speaking in Parliament on 22 February 2013, President Jacob Zuma clarified the role of the NDP, and how it would relate to other economic policies, saying it would trump all other government plans. ‘Our crosscutting strategies such as the New Growth Path, the departmental strategic plans, annual performance plans and municipal integrated development 38

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plans will fall under the umbrella of the National Development Plan,’ he said. While each department and all other spheres of government were expected to implement those aspects of the plan that affected their portfolios, a concise national implementation plan would be ready in July. ‘The framework will be precise and clear in identifying indicators and targets to be achieved in the period 2014 to 2019,’ he said.

What is the NDP’s vision? The NDP’s glimpse of the economic future for SA by 2030 looks like this: • T he unemployment rate should fall from 27% in 2011 to 14% by 2020 and to 6% by 2030. This requires an additional 11 million jobs. Total employment should rise from 13 million to 24 million.

• T he proportion of adults working should increase from 41% to 61%.

• T he proportion of adults working in rural areas should rise from 29% to 40%.

• T he labour force participation rate should rise from 54% to 65%.

• GDP should increase by 2.7 times in real terms, requiring average annual GDP growth of 5.4% over the period.

• GDP per capita should increase from about R50 000 per person in 2010 to R110 000 per person in 2030 in constant prices.

• T he proportion of income earned by the bottom 40% should rise from 6% today to 10% in 2030.

• Exports (as measured in volume terms) should grow by 6% a year to 2030, with non-traditional exports growing by 10% a year.

• T he savings rate should rise from 15% to 25%.

• T he level of gross fixed capital formation should rise from 17% to 30%.

• T he level of public sector gross fixed capital formation should reach 10% of GDP by 2030.

• Public employment programmes should reach 1 million by 2015 and 2 million people by 2030.

The success of this approach is premised by the NDP on the following: • the active efforts and participation of all South Africans in their own development; • redressing the injustices of the past effectively; • faster economic growth and higher investment and employment; • rising standards of education, a healthy population and effective social protection; 39

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• • • •

s trengthening the links between economic and social strategies; a n effective and capable government; c ollaboration between the private and public sectors; l eadership from all sectors in society.

The NDP contains much detail and many recommendations on particular issues. Within this detail, a few interrelated priorities are more important than others, and can be taken as central themes. They are: • T oo few people work. he standard of education for most black students is of poor quality.

• T • Infrastructure is poorly located, under-maintained and insufficient to foster higher economic growth.

• S patial patterns exclude the poor from fronts of development. he economy is overly and unsustainably resource-intensive.

• T • A widespread disease burden is compounded by a failing public health system.

• P ublic services are uneven and often of poor quality.

• C orruption is widespread.

• S A remains a divided society.

The NDP argues that the apex priority issues on this list are unemployment, the quality of education and state capacity. If the implementation of what the NDP proposes is to be successful, then it is important that it be increasingly regarded as the ‘new normal’ for the way things will be done in SA. Only in this manner can the situation be changed for the better and real improvements be seen to emerge over time.

It will also be a challenge to maintain a sensible balance between the need for further debate and urgent implementation. As Chapter 3 shows, SA has addressed these issues ad nauseam over the past 19 years. The NDP must therefore not become some pleasant ‘intellectual exercise’ so beloved of some analysts and other ‘forum-hoppers’, who believe that by running a seminar they are running a country. Academic input and new ideas are essential to improve implementation, but we must not be sidetracked into theoretical or ideological byways at the expense of effective decision-making. We need to move beyond sitting at endless conferences. SA does not need another ‘economic CODESA’. It needs implementation of what has been decided. Endless debate cannot be 40

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a substitute for good governance and leadership in facing up to tough decisions and difficult ‘trade-offs’, whether in the public or private sectors.

Indeed, there is also a trade-off to be made between interminable debate and effective implementation. ‘Some words’, the novelist Jean Rhys once wrote, ‘have a long thin neck that you would like to strangle.’

For those who have long been involved in policymaking in SA, the words ‘summit’, ‘workshop’ and ‘seminar’ often elicit spasms of what might be called ‘lexicide’. ‘Summitry’ often expands in direct proportion to the failure to take and implement decisions. Frustration occurs when these processes become part of the problem, instead of the solution.

Participation and effectiveness need to be balanced. We need instead to encourage institutions and mechanisms that, however much talk is put into the one end, will grind out the decisions and implement them at the other end.

Procrastination in decision-making and implementation is, of course, not unique to governance in SA, although it has assumed a highly acute form here lately. These experiences have been replicated elsewhere and at an international level. President Bill Clinton asserted a few years ago that he would have liked to go up in a hot air balloon fuelled by all the discussions at international summits. ‘Hey, we could stay up there for days,’ he said.

One amusing early example from SA’s own political history was the Smuts government about 70 years ago towards the end of World War II. Bureaucracy was seen to be rife then and there was a strong perception that the Smuts government ‘solved’ any new problem by creating another committee or commission. Does the following exchange sound familiar?

This interaction took place in Parliament in 1945.

Lawrence (Cabinet Minister): … in January 1943, again when honourable members opposite were much more absorbed in outside matters, the Right Honourable Prime Minister appointed a Social Security Committee.

Louw (Member of Parliament): What happened to it?

Lawrence: It was appointed to investigate and report on the existing social services in the Union and to recommend a social security scheme for the future, having regard to the productive capacity of the Union and 41

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other factors. This committee reported towards the end of 1943.

Louw: And its report was referred to another committee?

Lawrence: At any rate it was immediately referred to another committee … that report, which was produced by the Social Security Committee, was then submitted to the Planning Committee for its comments.

Louw: What happened to that report?

General Kemp (Member of Parliament): Another committee!

Lawrence: The Planning Committee produced its comments, and these two reports, the report of the Social Security Committee and of the Planning Committee, were then submitted to …

Louw: Another committee!!

Lawrence: No, not another committee, but to Parliament, and Parliament in its wisdom decided to send it to a Select Committee.

An Hon Member: Another committee!!!

The basic lesson is that countries differ considerably in the quality of their policy structures and the cost to the economy of the burden caused by the accumulation through time of policy mistakes, misjudgements or lack of implementation. Perhaps the most important task of rigorous analysis is to help reduce this cost when it is large, and at the very least to keep it from growing when it is small. Hence the importance of historical analogy and empirical evidence, to see what relevant lessons can be gleaned.

After nearly 20 years of democracy in SA it is time to prioritise and decide – and successfully manage the economic and political consequences of whatever judgement calls are made. Leadership has both to manage complex situations and to judge them. From an investor’s point of view, even a weak policy in more or less the right direction is preferable to prolonged uncertainty and endless bickering. At least decisions can be taken on the best available knowledge. The data are always imperfect.

Nevertheless, having equipped ourselves with the relevant knowledge and data, we must use these imperfect data as best we may in the public or private sectors, and take the plunge, and judge.

Good policymaking also acknowledges the reality of trade-offs in arriving at balanced decisions, and the NDP is no exception. Already in the NGP some key trade-offs that also resonate in the NDP were emphasised, including: 42

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• b etween present consumption and future growth, since that requires higher investment and saving in the present; • between the needs of different industries for infrastructure, skills and other interventions; • between policies that promise high benefits but also entail substantial risks, and policies that are less transformative and dynamic but are also less likely to have unintended consequences; • between a competitive currency that supports growth in production, employment and exports and a stronger rand that makes imports of capital and consumer goods cheaper; and • between the present costs and future benefits of a green economy.

What also needs to be accepted is that sustained rapid growth is a cumulative, self-reinforcing process, of which the hardest part is the beginning. That is why a few quick early successes under the aegis of the NDP are necessary. What matters initially are those small, low-risk gains that add up and do not disappoint. It is necessary to create momentum and traction. Once the initial threshold is crossed, growth itself reinforces the higher savings, investment, structural change and high productivity growth upon which it depends in order to create a ‘virtuous cycle’. As one prominent economist has put it, ‘result becomes cause and cause becomes result’.

To raise rates of savings and investment on a sustained basis to the ambitious targets outlined for 2030 will require: • macroeconomic stability, including low inflation; • recognising that capital formation needs an act of investment as well as a capacity to save; • augmenting domestic savings with capital from abroad in the process of getting higher growth going; • acknowledging that inadequate FDI may increase reliance on foreign debt, which would make the economy more vulnerable in unfavourable economic circumstances.

It is inevitable that, if the NDP is to be successfully implemented, higher economic growth and associated structural change will generate political and social tensions. This can be managed through effective leadership, provided there is broad acceptance in SA society of the primacy of 43

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Average growth of 5.4% by 2030

State capacity Global competitiveness

Reduce corruption

Increase employment from 13 million to 24 million

Reduce carbon emissions per unit of power by one-third

Gross fixed investment from 17% to 30%

Gini coefficient falls from 0.69 to 0.6

Increase share of Raise per capita national income income from R50 000 of bottom 40% from to R120 000 6% to 10%

Figure 4.2: Some illustrative goals of the NDP (Source: author’s calculations)

growth in the hierarchy of national objectives and that its benefits will be progressively shared. The NDP’s emphasis on ‘active citizenry’ participation creates a built-in self-correcting process, provided that the framework is consistently implemented and a high degree of social cohesion can be gradually developed around its main goals.

This, of course, does involve certain consequences for the way our political system operates, electoral reform, the degree of accountability that exists, and the need to strengthen local government in ways that promote responsiveness to citizens’ needs. These remedies lie firmly in the realm of political scientists and constitutional lawyers and are an essential element in implementing the ‘right’ solutions for SA based on accountability, representation and participation.

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5 Addressing the ‘tale of five deficits’

All government, indeed every human benefit and enjoyment, every virtue, and every prudent act, is founded on compromise and barter. We balance inconveniences; we give and take – we remit some rights that we may enjoy others … man acts from motives relative to his interests; and not on metaphysical speculations.

– Edmund Burke In assessing the framework of what needs to be achieved in SA it is helpful to reclassify the challenges facing the NDP as five key ‘deficits’ that need to be addressed: • the social deficit • the fiscal deficit • the trade deficit • the delivery deficit • the trust deficit The intersection between these five dimensions represents a kaleidoscope of factors which pertain to the framework of the NDP and aspects of its implementation. It is to a closer inspection of each one that we now turn in the subsequent pages.

A. The social deficit The one deficit to which the least attention will be given here is the social deficit, not because it is not the most important challenge but because it is the most obvious one. The issues of unemployment, poverty and 45

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Household quintile Characteristics

1

2

3

4

5 (Top 20%)

4.7

3.5

3.1

2.7

2.5

Estimated % of household income earned from employment

28%

40%

58%

72%

74%

Estimated % of household income from transfers

60%

51%

30%

13%

3%

Estimated average monthly income per household – June 2012

R811

R2 282

R4 417

R9 479

R41 062

Implied average monthly income per household member – June 2012

R171

R659

R1 406

R3 488

R16 448

Estimated average number of people per household

(bottom 20%)

Table 5.1: Household quintiles (Source: Keith Lockwood & Associates)

inequality clearly define it, and these have been at the top of SA’s agenda for several years. It is the dominant theme in public debate, it is what the NDP and related programmes are all about, and it permeates this book.

To dwell on this will mean unnecessary duplication. There is no need to elaborate further on what constitutes the social deficit in SA; we should rather see how the handling of the other four ‘deficits’ can help to solve it.

The more successful we can be in addressing the fiscal, trade, delivery and trust deficits, the better SA’s chances of reducing the social deficit in the years ahead. The amount of data dealing with the social deficit – ranging from the Gini coefficient to a spectrum of research studies and economic data – confirms what the ‘unfinished business’ is on SA’s national agenda. The task now is to see how the frameworks and policies available can best be deployed and implemented to ensure that over time these concerns can be successfully addressed in a sensible way. In this way it is also possible to shift the focus from known diagnostics to effective prescriptions. Addressing the social deficit thus represents the goal, while the other four elements constitute the means.

International studies confirm that growth alone does not guarantee less poverty. One estimate by Martin Ravallon, of the World Bank, suggests that about two-thirds of the fall in global poverty was due to growth, and about a third came from greater equality. The country that has had the greatest success since 1980 in reducing poverty has

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been China, accounting for about three-quarters of the world’s decline in poverty over the past three decades. China has experienced a large increase in income inequality, but even more growth.

As we unpack the various dimensions for SA, we should remind ourselves of the insights gained from a Centre for Development and Enterprise Round Table in 2010, which succinctly summarised 10 key implications for policy dealing with poverty and inequality. They were: • T he depth of poverty is a major challenge; Poverty cannot be reduced without high and sustained rates of • economic growth; • Inequality in SA cannot be ignored; • Reducing poverty and dealing with inequality are not the same thing; • T he SA state is already highly redistributive, more than most other developing countries; • States are often not very good at redistributing income; • Too many policies have actually deepened inequality; • If we are to reduce poverty and inequality, we have to improve education and training systems; • Improving the education system will not reduce inequality in the short term; • More rapid and more job-intensive growth is SA’s best strategy for dealing with mass poverty.

It would be fair to say that these insights resonate with much of what the NDP reflects in its framework.

B. The fiscal deficit As what the NDP is proposing has not yet been properly costed, where does fiscal sustainability fit into the picture? In a mixed economy like SA’s the large role played by government as a taxer, spender and major debtor will, especially in today’s world, in itself influence growth and economic performance. The size of the government’s budgetary operations inevitably makes it an important influence on the rate of economic growth, through the influence of the government’s surplus or deficit on the supply of saving available to the economy. Further, increasing public debt, while often necessary as a short-term countercyclical policy, 47

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and unless it also creates a corresponding stock of real capital, tends ultimately to reduce the desire to save. It is generally accepted that the level of domestic savings in SA is too low.

If the financing of government therefore creates an excessive burden of taxation in whatever form, and thus renders the marginal private return to investment significantly lower than the marginal social return, it makes the rate of saving and investment lower than it would be if savers received the full social return on their investment. There is, therefore, on strictly economic grounds at the macro level, a prima facie case for the government to enhance economic growth by ultimately budgeting for a primary surplus, and ensuring that the saving is translated into investment by encouraging an appropriately easy monetary policy and other investment-friendly policies. This would broadly be the kind of policy mix that would be favoured by those concerned with the burden of debt finance on future generations and by others who wish to promote economic growth.

That said, given SA’s particular socio-economic challenges as well as recent global economic shocks, the National Treasury has had a margin of flexibility to enlarge the fiscal deficit in this period, drawing on a small surplus originally. Yet it is surely right for them to now want to steadily wind down and consolidate SA’s deficit before borrowing to about 3% of GDP by 2015. Ultimately the macro balance between saving and investment in SA remains important to sustainable growth and employment over the long term, not to speak of retaining the confidence of the capital markets. We are now in a world in which sovereign debt ratings and fiscal trends feature prominently on the policy dashboard and inevitably have become vital factors in economic steersmanship. The issues of savings and investment therefore understandably also feature in the NDP’s diagnosis.

If we go back, the brief history of fiscal policy since 1994 is often told as an unmitigated ‘success story’. Sound fiscal policy and positive economic growth indeed made it possible for a time to reduce tax rates, yet simultaneously to still earn more revenue and increase social spending.

The budget deficit, debt interest charges and public debt were gradually brought under control after 1994. By the time of the global financial crisis in 2008, government was in a position to raise spending and debt in a sensible manner, against the background of a small budget surplus.

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60 55

% of GDP

50 45 40 35 30

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

20

2000

25

Year South Africa

Average of peer economies*

* A verage of Argentina, Brazil, Bulgaria, Chile, Colombia, India, Indonesia, Kenya, Latvia, Lithuania, Malaysia, Mexico, Morocco, Peru, Poland, Russia, Thailand, Turkey and Uruguay

Figure 5.1: SA’s gross debt-to-GDP ratio compared with peer economies, 2000–2016 (Source: 2013 National Treasury Budget Review, Fiscal Policy Document (Data from the International Monetary Fund, National Treasury, South African data is for fiscal years))

Yet, by 2012 ratings agencies lowered SA’s sovereign debt rating. Fitch argued: ‘Economic growth performance and prospects have deteriorated, affecting the public finances and exacerbating social and political tensions.’ Moody’s reasons for the downgrade can be explained in three key points: • Unemployment and inequality increased socio-economic pressure in SA and this jeopardised the ability to manage economic growth and increase competitiveness.

• Since the 2008 crisis government debt had increased, but there was uncertainty about future revenue prospects and the sustainability of low interest rates.

• T here were serious infrastructure gaps, labour costs were rising, and there were concerns about the future political stability of the country.

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Rating Agency Score Date

Moody’s

Standard and Poor’s

Fitch

1995

Baa3

BB+

BB

1996

Baa3

BB+

BB

1997

Baa3

BB+

BB

1998

Baa3

BB+

BB

1999

Baa3

BB+

BB

2000

Baa3

BBB-

BB+ / BBB-

2001

Baa2

BBB-

BBB-

2002

Baa2

BBB-

BBB-

2003

Baa2

BBB

BBB

2004

Baa2

BBB

BBB

2005

Baa1

BBB+

BBB+

2006

Baa1

BBB+

BBB+

2007

Baa1

BBB+

BBB+

2008

Baa1

BBB+

BBB+

2009

A3

BBB+

BBB+

2010

A3

BBB+

BBB+

2011

A3

BBB+

BBB+

2012

Baa1

BBB

BBB+

2013

Baa1

BBB

BBB

Table 5.2: Changes in SA’s global credit rating (Source: National Treasury, Historical and Current Ratings)

The rating agencies believed that the combination of these factors could eventually affect the ability of SA to repay its sovereign debt, and hence opted for the ratings downgrade.

In the 2013/14 budget the Minister of Finance again consolidated the fiscal stance and outlined plans to reduce debt levels and rebalance spending towards investment. What are the chances of maintaining fiscal sustainability on the present economic trajectory?

The good work that has been done in recent years by the National Treasury is not always adequately recognised. We should also note in passing that the degree of transparency in SA’s fiscal presentations 50

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and reviews has received international recognition. Originally the budget deficit was about 7.3% of GDP in 1992/93 and public debt was increasing at an alarming rate. The debt-to-GDP ratio increased from under 30% in the late 1980s to almost 50% in 1995/96. Interest payments on debt reached a peak of 21% of spending in 1998/99. During this time the GEAR (Growth, Employment and Redistribution) strategy was launched with a strong emphasis on fiscal discipline. From 1996/97 to 2000/01 real growth in public spending was about 1% per year and it declined as a percentage of GDP from about 28% to approximately 25%. As the deficit fell, this also eased pressure on inflation and interest rates.

Good years followed the Asian financial crisis, and over the period 2003–2008 the economy grew at an average rate of over 4.5%. During this period there was room for cutting tax rates, while economic growth and more efficient tax collection contributed to an increase in public revenue. At the same time government was able to increase non-interest public spending, specifically on social security and education. Spending increased from around 20% of GDP in 2000/01 to 25% in 2008/09. In 2006/07 and 2007/08, there was a primary budget surplus. Public debt had declined to 22% of GDP. At an aggregate level SA’s public finances initially weathered the 2008 financial crisis well. Government found room to manoeuvre as the budget balance moved from a small surplus to a deficit of 5.5% of GDP in 2009/10. Current plans in the 2013/14 budget are once again to consolidate the fiscal stance, rebalance spending and reduce the deficit in the period ahead. So are the ratings agencies’ concerns unfounded? Are there any new weaknesses in the fiscal stance and structural position of the budget? To put these questions into perspective, we should consider the nature of the deficit.

It is necessary to focus on the cyclical and structural components of the deficit. The cyclical deficit is related to the business cycle; for example, a slowdown in economic growth means that there is a difference between the actual GDP and the potential or forecasted GDP for the budget period. Slower growth translates into less economic activity to tax. This reduces the tax income, and if spending remains unchanged or increases, this widens the deficit. It is estimated that less than half of the present deficit is explained by the shortfall of actual GDP relative to the potential 51

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6% Budget balance / GDP

4% 2% 0% -2% -4% -6% -8% -10% -12%

-3%

-2%

-1%

0%

1%

2%

3%

Actual GDP vs Potential GDP (output gap)

Figure 5.2: Fiscal budget balance and output gap as % of GDP (Source: SA National Budget 2013)

GDP on which the budget forecasts were made. This is the cyclical component of the total budget deficit.

More than half of the present fiscal deficit reflects the structural budget stance. Structural deficits are more persistent and reflect government spending that exceeds the long-term trend in tax revenue.

The structural deficit is derived by adjusting the budget figures for the business cycle. In a recent analysis, Wynnona Steyn of SARS employed two approaches. One way is to plot tax revenue to GDP along with the budget expenditure to GDP. For South Africa there is a clear cyclical pattern in revenue and widening of the deficit. Another way is to plot the deficit as a percentage of GDP against the ‘output gap’. Countercyclical policy implies a positive relationship between the ratio of deficit to GDP and the ‘output gap’.

The simple regression line predicts the budget deficit to GDP for a given ‘output gap’. The square shows the actual values in 2012, and it is clear that for the current ‘output gap’, the deficit-to-GDP ratio should be smaller. Thus, given the cyclical state of the economy, the budget deficit is quite large. The structural component of the deficit is also significant.

Next we have to ask: what is the nature of the spending that exceeds the long-term trend in tax revenue? A breakdown of spending shows that the items that experienced increases in the years since the 2008 financial 52

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2007/08

2011/12

Personnel

31.2%

33.3%

Goods and services

13.7%

14.1%

9.3%

8.3%

Municipalities

6.9%

8.0%

Departmental agencies and accounts

9.4%

8.1%

Universities and technikons

2.1%

2.1%

Foreign governments and organisations

0.2%

0.2%

Public corporations and private enterprises

4.3%

3.0%

Non-profit institutions

2.1%

2.2%

Households

16.4%

16.0%

Total current

95.5%

95.2%

Total capital

4.2%

4.3%

Contingency and other

0.2%

0.5%

100.0%

100.0%

Interest and rent on land Transfers and subsidies to:

TOTAL CONSOLIDATED EXPENDITURE

Table 5.3: Major spending components as a proportion of total spending (Source: SAIRR SA Survey 2010/2011)

crisis are mainly of a social nature. Spending on health, education and social protection show small but steady increases in their share of total spending.

This raises two questions: how sustainable is the current fiscal stance, and, if it is not, how realistic are government’s plans for fiscal discipline?

On sustainability, the first point to look at is the ‘mix’ of current and capital spending. The table (5.3) of major spending components shows only a small change between the spending components from 2007/08 to 2011/12. However, the one category that shows a clear increase is spending on personnel. On the whole, there is a very small shift from current to capital spending. Capital spending as a percentage of total spending increased from 4.2% to 4.3%. Current spending seems to decline slightly, but that is due to a reallocation to the contingency reserve and other spending. Spending on personnel increased from 31.2% of total spending to 33.3%.

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Category Old age pension

Number in 2012/13

Total spending in 2012/13 (Rm)

Annual cost per item (R)

Monthly cost per item (R)

2 700 000

39 323.1

14 564.10

1 213.70

703

12.9

18 349.90

1 529.20

1 200 000

17 159.4

15 690.30

1 330.00

Foster care grant

671 307

5 951.8

8 866.30

738.80

Care dependant

133 915

1 856.9

13 866.30

1 155.50

11 300 000

38 237.3

3 383.80

282.00

Grant-in-aid

71 134

188.1

2 644.30

220.40

Social relief

n.a.

165.3

n.a.

n.a.

16 077 059

104 887.8

6 524.10

543.70

War veterans Disability grant

Child support

Total

Table 5.4: Social assistance: total number and spending per programme (Source: SA Journal of Humanities)

A second point to look at is the sustainability of social assistance transfers. In a recent analysis, Joubert and Rossouw looked at the spending per programme and weighed that up against the personal income-tax payers in the country. They compiled Table 5.4 from the estimates of national expenditure.

Thus, around 16.1 million South Africans receive some kind of social assistance from government, at a cost of R104.8 billion per year. When this is analysed as a cost per item, the war veterans’ grant is the most expensive and the ‘grant-in-aid’ the most affordable. The greatest number of citizens are supported by the child support grant and the largest amount of money goes toward the old age pensions.

In the next step of the analysis Joubert and Rossouw compared the growth in the number of taxpayers with the increases in social assistance payments. This is presented in Table 5.5.

They concluded that the increase in the number of recipients as well as the increase in the cost of the transfers does present a worrying picture.

While there is no doubt that social assistance has had a necessary and favourable impact on poverty in South Africa, whether government will be able to escalate such spending in the years ahead is a moot point, as SA appears to be approaching the limits of affordability.

It has been strongly argued that government could further enhance the impact of the current grants by making some of them conditional, 54

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Year

Number of personal income tax payers (million)

% (j:j)

Cost of social assistance (Rm)

% (j:j)

Number of grants (million)

% (j:j)

2008

5.2

–

70 715.9

–

13.1

–

2009

5.5

6.5

79 259.7

12.1

13.8

5.5

2010

5.9

6.9

87 492.9

10.4

14.6

6.1

2011

6.1

2.2

97 103.2

11.0

15.6

6.4

2012

6.2

2.1

104 887.2

8.0

16.1

3.2

Avg

5.8

4.4

87 891.9

10.4

14.6

5.3

Table 5.5: Comparison between personal income-tax contributors and social assistance (Source: SA Journal of Humanities)

as in Brazil. If SA was serious about investing in human capital it would make school attendance a condition for child grants, i.e. for children of school-going age. Moreover, for small children attendance at health clinics should be conditional. However, conditionality would increase the cost of administration of the grants. The alternative is for government to say that it has gone as far as it can in the campaign against poverty by using social transfers. The next step would be to create more sustainable employment opportunities (and taxpayers), as well as faster economic growth. As to how realistic the government’s plans for fiscal discipline are, the management challenge in public finances is about control over government expenditure. The overall impression is that government experiences great difficulty in controlling its expenditure, a challenge not confined to SA. What is also a concern is the wastage in the public sector through budget ‘overshooting’ and unauthorised expenditure. Each year the Auditor-General complains and, clearly, serious remedial steps are required.

The most recent report by the Auditor-General highlighted a number of real problems: • Government institutions at provincial level have been ‘repeat offenders’.

Not one of the 26 government institutions that were examined in the Eastern Cape received a clean audit. In the Northern Cape 22 government institutions were examined and not one received a clean bill of health. In the North West only the provincial gambling board received a clean audit.

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• A t the national level there appears to be a lack of budget control. The Auditor-General found that more than a third of national departments ‘would have started 2012/13 with more than 10% of their budget effectively spent’. This limits their ability to do their work during the current financial year.

• Tender fraud is still a major problem. Nearly R600m in tenders were awarded to suppliers linked to employees of the relevant department.

In 75% of cases, the conflict of interest was never disclosed. ore tenders were found to have been unfairly allocated.

• M • Both irregular and wasteful expenditure increased greatly, compared to the previous year.

Overall, only 22% of the 536 entities examined received clean audits.

Audit opinions remained the same for most departments and institutions.

There were improvements at 62 entities, while 80 did worse than in the previous financial years. The cause of this poor performance is troubling and the Auditor-General’s report noted: ‘There appears to be no appreciable consequences for officials who fail to comply with laws and regulations to which departments and public entities are subject or for officials who fail to discharge their legislated duties.’ Regarding the instances where there have been improvements, it was said: ‘It is evident from this year’s results that audit outcomes only improved in areas where the leadership adopted a hands-on approach to addressing shortcomings in their respective portfolios.’

What this all basically means is that for any total of rands, or rather of economic resources, at the disposal of government, it is desirable that we should receive a maximum of useful public services. What is the same thing, each package of useful public services should be produced so as to use a minimum of scarce national sources. This is what efficiency means. The issue of efficiency is addressed further under the ‘delivery deficit’ later.

We also need to supplement and enrich our inputs on how choices should be made about public expenditure. One suggestion is that taxpayers should receive a questionnaire with their tax returns on which they could record their preferences. The outcome of such preferences is not meant to be binding. The local and state government system of referendum ‘propositions’ in parts of the US tends to yield simultaneous requests for 56

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higher spending and lower taxes! But to empower SA taxpayers to make a direct input on state spending could provide valuable insights for the National Treasury.

That said, even if spending was more efficient, the plans for consolidating the fiscal stance will require reductions in overall spending.

Over the period 2008/09 to 2012/13 expenditure grew on average by 12.4%, with the wage bill growing around 14% and grants about 18%.

To achieve the deficit reduction targets (given the revenue forecasts) will require that total expenditure increase by only 8.1% over the period 2013/14 to 2015/16.

Conceptually, any dangers in levels of public debt in relation to GDP therefore eventually depend as a whole on three factors: the outlook for economic growth, the present burden of taxation, and the amount of public debt in the hands of the banking system. At present our fiscal headline figures in SA look reasonable but vulnerable. SA is fortunate that it is still at a stage of talking about fiscal discipline, rather than buckling under fiscal austerity, as some other countries are having to do.

Nevertheless, without a much stronger sense of collective purpose about restraining state spending, the best that can be hoped for is some early resumption of the growth rate, say 3% annually, to support tax revenues, if the deficit is to remain under control.

As forecasts of economic growth for SA in 2013 are being steadily reduced in the light of the changing global and domestic circumstances, it is inevitable that there will be an impact on state finances and fiscal policy.

Looming fiscal shortfalls can appear a distant concern in the face of high unemployment and sluggish economic growth. The next opportunity of getting a bird’s-eye view of the extent to which fiscal trends and decisions will be affected will be the next Medium Term Budget Policy Statement (MTBPS) in October 2013. The MTBPS may have to show a ‘rolling adjustment’ to the weaker economic performance now being experienced in the SA economy. There may be scope to further switch spending within and between the departmental budgets in the next MTBPS. What comes through is that, while it is helpful to be able to stay within somewhat nebulous global ‘rules of thumb’ regarding a tolerable public debt burden for different categories of countries, what SA really needs is a radical and sustainable improvement to its flagging growth rate. The debate on public debt tolerances nevertheless surfaced again 57

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in 2013 when research by Harvard economists Carmen Reinhart and Ken Rogoff argued that high public debt suffocates growth, after public debt rises above about 90% of GDP. This was subsequently challenged on statistical and other grounds by economists from the University of Massachusetts at Amherst, saying that the assumption that high debt always equals low growth is not supported by the economic evidence. It may be that no single concept of a budget can do justice to the quantitative and qualitative aspects of fiscal policy.

All the same, whatever the precise guidelines being debated, no reputable economist gives a green light to unchecked spending by governments. It is better here, says one leading economist, to be ‘broadly right, than precisely wrong’. We acknowledge that there is a fundamental difference between day and night, even though the existence of a twilight zone makes it difficult to set a specific time that separates day from night.

It is the existence of twilight zones that makes it possible to allow a degree of flexibility in how governments consolidate excessive deficits and to decide on the policy mix that might best achieve that goal. This leaves some room for flexibility and interpretation, but, as suggested later, this may also require a more independent assessment.

Some analysts have queried whether, even allowing for theoretical and empirical disputes, developing countries must nonetheless continue to be held to a stricter guideline regarding ‘safe’ public debt levels, as has been the case in recent years, usually to around 60% of GDP. The fact remains that a line has to be drawn somewhere and the perception that the line may seem arbitrary does not mean that it is unimportant, or that it can be avoided. It seems wise to stay within limits which do not unnecessarily provoke negative reaction and which project a clear message of firm control over the government’s ‘chequebook’.

The National Treasury has now made certain commitments as to how it wants the fiscal scenario to unfold over the next couple of years. The extent to which these may have to be revisited in the light of a weaker growth outlook for 2013 and 2014 will no doubt become apparent in the next MTBPS. While new policy initiatives to regain fiscal balance are being implemented, relevant questions of timing and pace do matter.

If the government shows a serious commitment to raising long-term economic growth with supply-side reforms, it should be given time to cut deficits.

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Where there is a calibrated policy shift to enhanced supply-side restructuring, this should be combined with reasonably flexible fiscal timetables and increased investment. Policies cannot be solely directed at immediately winning over financial markets but need to strike a sensible balance. To the extent that fiscal discipline may eventually weigh on demand, it should be offset by policies that expand productive demand.

In the meantime, the weakest link in the NDP remains the lack of an overall financial framework within which the expenditure planned to support its recommendations needs to take place. It is clear that what the NDP envisages will have a major impact on state expenditure and, in the absence of such information in it, the financial parameters and costing will need to be definitively set out by the National Treasury in its annual budget and the MTBPS, bearing in mind what has been said earlier about successfully managing the fiscal deficit. The MTBPS in October 2013 should already be moving in this direction. This is an important part of being able to monitor the progress of the financial implications of initiatives outlined in the NDP and to ensure fiscal sustainability.

Business Leadership South Africa (BLSA) has suggested: ‘One avenue towards the achievement of certainty would be the creation of a body entirely independent of government to provide independent economic forecasts and assessments of whether the government is likely to meet its targets. Based on the Office for Budget Responsibility in the UK and the Congressional Budget Office in the US, this body would provide facts that could aid government in sustainably achieving its objectives by creating real, verifiable, objective measures to increase confidence in the targets set by government. Objective measures can help to ensure that global competitiveness and attractiveness is maintained so that the country can continue to attract and retain foreign investment.’ As a means to strengthen certainty and credibility in policy, there is a great deal of merit in the thrust of this proposal and it deserves serious consideration as we engage with the implementation of the NDP. It is not yet clear whether the recently established Parliamentary Budget Office will be able to play this role.

What recent global experience, therefore, essentially tells us is that we should not allow issues around fiscal policy to become subject to dogma but we should inject them with a degree of pragmatism and foresight.

Perhaps the lesson here lies in the response that Harold Wilson, when 59

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Labour Party Leader of the Opposition, once gave when asked what he would do in some economic crisis experienced at the time under a Conservative government: ‘I wouldn’t have got myself in this position in the first place!’ With SA’s debt-to-GDP ratio at about 40% we are well below, for example, Greece at over 150% or Italy at 125%. If we play our cards well, it is possible for SA to grow its way out of debt, and avoid the acute fiscal catastrophes that have befallen some other countries, by acting on warning signals sooner.

Tax reform: the bill falls due?

The issue of addressing a ‘fiscal deficit’ cannot be left without considering the vital question of taxation in relation to public finances. We may recall at the outset that Francis Bacon placed taxes as second only to religion on his list of ‘causes and motives of sedition’. Edmund Burke thought that ‘to tax and please, no more than to love and be wise, is not given to men’.

More practically, while it is not possible to weight so far ahead of time the factors that might lead to one decision or another on taxation later in SA, some brief observations may be in order at this stage.

This has to be assessed against a background in which, for reasons outlined earlier, fiscal ‘space’ has been shrinking. This means that – unless state spending can be further reduced – solutions may have to be sought in higher taxes, new taxes or more efficient tax collection. In a way the National Treasury is between ‘a rock and a hard place’ in seeking to reconcile these imperatives and understandably would like the revenue side to be interrogated afresh. The largest proportion of state revenue is generated from taxation. The way in which SA raises this revenue at different levels of government is crucial to the efficiency of the economy, to incentives to work, save, invest and take risks, and to the promotion of equity.

President Jacob Zuma announced in the State of the Nation address in February 2013 – and this was subsequently confirmed by the National Treasury – that a committee was being appointed to investigate the tax system or ‘new sources of tax income’ under the chairmanship of Judge Dennis Davis. The tax system was previously studied by the Katz Commission in the 1990s. As government has undertaken to steadily align its policies with the NDP, it is perhaps not surprising that a fresh look at taxation and revenue sources is appropriate under changing circumstances and given fiscal developments in recent years.

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Yet the immediate reaction in several circles was one of complete scepticism. The committee has been perceived simply and only as an exercise to find new sources of revenue, ‘to pluck the greatest number of feathers from the goose with the least amount of hissing’, and not a serious attempt to interrogate the tax burden and tax administration that currently exist. This is regrettable, since this response challenges the integrity of those who will be participating in the inquiry. We must hope that the cynicism will abate and that the committee will be able to draw on the best advice available. But the reaction could also be seen as a symptom of the extent to which trust has deteriorated between taxpayers and tax-gatherers, which in turn is linked to negative perceptions about government spending. The ‘trust deficit’ will be dealt with later.

In July 2013, as this book was being finalised, Finance Minister Pravin Gordhan announced the team of experts who will undertake this investigation under the chairmanship of Judge Davis. It is clear that this will be an in-depth and independent review. It appears to cover all the key developments that affect taxation and its impact on the SA economy.

It is likely that the team will submit interim reports within the 18–24 months the chairman believes the full investigation will take to complete.

While it is easy to list ideal principles for evaluating tax systems and identifying tax reform proposals – such as fairness, efficiency and simplicity – how to implement them in practice is a universal challenge, not confined to SA. The committee will nonetheless have to test its work against a broad conceptual framework of clear principles to provide guidance for its eventual recommendations and give them credibility.

The committee could well also assist in clarifying the difference between ‘normal taxes’, ‘stealth taxes’ and ‘user-charges’, as negative perceptions in the minds of citizens and taxpayers have often stood in the way of sensible public debate around these separate but often interdependent financing mechanisms.

‘The criticisms we make of fiscal policy in SA,’ says Professor Brian Kantor, ‘should be based on these practical considerations – are taxes too high or too low for the benefit of the economy and of the poor, dependent as they and we are on the size of the tax base and the economy from which taxes are drawn – not the degrees of fairness that are a matter of opinion.’ He goes on to say that in his view ‘the discouraging growth performance and outlook for SA makes the case for lower tax rates and 61

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A James Gillray caricature on the English budget of 1806, “A Great Stream from a Petty Fountain; or John Bull swamped in the Flood of new Taxes; Cormorants Fishing in the Stream”.

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Type of tax

1984/85ab

1994/95ab

2010/11bc

2011/12bc

Direct taxes Persons and individuals

32.5%

39.6%

33.9%

34.1%

Companies

23.8%

11.9%

19.7%

19.4%

Secondary tax on companies

–

1.1%

2.5%

2.4%

Tax on retirement funds

–

–

–

–

0.0%d

0.1%

0.0%d

0.0%d

0.4%

0.1%

0.1%

0.1%

–

–

1.3%

1.2%

1.3%

1.0%

0.5%

0.4%

58.1%

53.9%

57.9%

57.8%

Donation tax Estate duty/ inheritance tax Skills development levy Other Subtotal: direct taxes

Indirect taxes Value added tax/ general sales tax

24.6%

25.8%

27.0%

27.1%

Excise duties

8.1%

5.1%

3.7%

3.7%

Fuel levy

1.0%

7.4%

5.1%

5.0%

–

–

0.8%

0.9%

Customs duties and import surcharges

5.5%

4.8%

3.9%

4.0%

Securities transfer tax

0.1%

0.4%

0.4%

0.4%

Transfer duties

1.2%

1.2%

0.8%

0.7%

Stamp duties and fees

1.0%

0.8%

0.0%d

0.0%d

Other

0.2%

0.6%

0.3%

0.4%

41.9%

46.1%

42.1%

42.2%

100.0%

100.0%

100.0%

100.0%

Electricity levy

Subtotal: indirect taxes TOTAL TAX REVENUE

Table 5.6: Composition of national tax revenue, selected years, 1984/5–2011/12 (Source: SAIRR SA Survey 2010/2011)

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1994/95

2004/05

2009/10

2010/11

Personal income tax (PIT)

9.0%

7.7%

8.5%

8.3%

Corporate income tax (CIT)

2.4%

4.9%

5.6%

4.9%

Secondary tax on companies (STC)

0.3%

0.5%

0.6%

0.6%

Value added tax (VAT)

5.9%

6.8%

6.1%

6.7%

Fuel levy

1.7%

1.3%

1.2%

1.3%

Customs

1.1%

0.9%

0.8%

1.0%

Other

2.5%

2.4%

1.8%

1.8%

22.9%

24.5%

24.5%

24.5%

Total tax revenue

Table 5.7: Tax revenue by main source as a proportion of GDP (Source: SAIRR SA Survey 2010/2011)

Spending and Taxing: South Africa’s Reform Options ?

Government spending ?

Tax revenues/tax ratio to GDP

Figure 5.4: Spending and taxing: SA’s reform options

a smaller share of the gross domestic product taken by government a powerful one’. (Business Day, 12 April 2013) All that can be said at this stage, pending further outcomes, is that taxation is, above all, ultimately a political matter. There is no simple technocratic solution to the dilemmas of tax reform. What taxes are to be levied, on whom and at what rates are among the most important issues any government has to face. The significance and scale of the task 64

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that has been given to the committee to tackle tax reform should not be underestimated. Key stakeholders should be ready to make serious inputs to assist Judge Davis and his colleagues.

Taxation has had this role throughout history because of its great capacity to arouse discontent and distort the normal order of economic life. Tax policy has certain characteristics that make it especially likely to be seen as creating political problems and as a means of resolving problems. The capacity to handle taxation questions wisely has always been one of the primary tests of good government, and it therefore makes sense to precede any possible changes in the system in SA with a proper and credible investigation.

Public opinion is also important because public support for the tax system is necessary for its effective functioning. One of the main goals of a politically rational tax policy must be to pursue it in such a way that support for the tax system is maintained. That is why the Davis inquiry must be seen to be a credible one. Indeed, there is more than this at stake, because public hostility may well have consequences for public attitudes towards official authority more generally. A tax system which is to work, which is to strengthen rather than weaken the stability of government, must be a system that is adjusted to the concerns of the public as they come to bear on tax matters and aligned with the overarching goals of the NDP. That also means looking at the tax burden as a whole, not just at the national level.

The appointment of the Davis committee creates an opportunity for improved analyses of the socio-economic effects of different tax options, which will happen if there is more policy-oriented research. How taxes are raised and spent becomes the nexus here, as is the balance between direct and indirect taxation. While a strengthened capacity for analysis of the tax system will not be sufficient condition for the committee’s work, it will probably be a necessary one. Beyond this, a return to the basic norms of a sound taxation system that encourages habitual acceptance of the obligation of compliance should be an overarching goal for the committee. Sensible tax reform could raise revenue if well designed.

The committee will have to sift through the inputs which it will no doubt rightly seek from interested parties who have strong views on the tax system and it will need to assess how much tax reform can be achieved in the time available. Tax reform groups and tax theorists 65

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will make valuable submissions which, while having merit, may not necessarily address the range of objectives that are needed to inform tax policy decisions. Ideally, in taxation policy this means crafting a strategy which – as far as possible in the uncertainties of the real world – leads to an economically efficient and simple tax system with socially acceptable notions of equity, which embodies the minimum distortion of taxpayers’ behaviour, and which is politically sensible.

Monetary policy Although monetary policy does not, as currently applied, constitute a ‘deficit’ in terms of the categorisation used here, its relationship to fiscal policy and the business cycle is well established, and therefore something needs to be included on it under this section. It has also been the subject of some controversy in SA and it would leave a gap not to address it.

Since 2008 the monetary and fiscal policy responses to the economic recession have been on an unprecedented scale. This was unlike the reaction to the 1930s Great Depression, when the US Federal Reserve failed to divert the worst, when in fact the institution had been established to avoid what actually happened. Many economists and economic historians have concluded that mistakes in policy by the Federal Reserve, which led to a severe contraction in money supply at the time, precipitated or at least aggravated the crisis. Instead, this time around central banks in major economies, led by the US, have since 2008 implemented substantial accommodative policies which have resulted in low nominal interest rates in many economies, backed up in some cases by ‘quantitative easing’.

SA, which has been pursuing a policy of flexible inflation targeting since 2000, has also seen a period of lower interest rates since the economic shocks of 2008. Though the Reserve Bank (SARB) had to take into account a much higher rate of inflation here than in SA’s major trading partners – as well as the need to attract short-term capital inflows – in deciding on its more accommodative stance, it increasingly reacted to the worsening business cycle. Hence interest rates were steadily reduced and have been kept at a relatively low level for some time. The SARB is likely to keep them there for the time being as it regularly reassesses the balance of risks in the economic outlook.

However, it is important to understand the limits of monetary policy in an emerging market like SA where structural factors have come to play 66

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such a major role in determining economic growth and employment. There is not much more monetary policy can do to address structural problems in the economy. The growth and employment drivers lie elsewhere.

Monetary stability is a necessary condition, but not a sufficient one, for dealing with them. Hence the focus that many analysts and policymakers have placed on socio-economic programmes in recent years to address the structural challenges that hamper SA’s economic performance, rather than looking for solutions in monetary policy.

There have, of course, been criticisms of the SARB’s role in policy and attacks on its operational independence, but these still seem to be based on ill-informed positions. Conventional economic thinking accepts that relative price stability is an essential goal of macroeconomic policy as a prerequisite for sustained economic and employment growth over the longer term, and that maintaining low inflation is also a pro-poor policy.

Needy people are vulnerable to the erosion of their incomes through price rises, have little in the way of savings, and if employed their essential source of finance is the wage they receive in currency. They are the large, vulnerable group who are unable to protect themselves effectively against inflation, which then also impacts on the extended family, upon which so much of the economy depends as a social support system.

The SARB therefore has the constitutional task of maintaining price stability through an inflation-targeting framework to achieve an explicit inflation goal of between 3% and 6%. Inflation targeting is but one mechanism available to a country wanting to promote an antiinflation stance. The target is set by government, after consultation with the SARB, and the SARB is responsible for achieving it. According to the OECD, SA’s existing band is among the highest internationally. The SARB has, even so, always interpreted its mandate flexibly, especially in recent times, even though inflation has been pushing the upper limit of the target.

A distorting factor in the inflation outlook in SA has been for some time the role of ‘administered prices’, i.e. those set by government parastatals and monopolies and influenced by taxes and regulations.

SARB statements have for some years frequently drawn attention to the difficulties caused by administered prices for the inflation outlook, especially sharp rises in electricity tariffs. Although there has been evidence in 2013 of greater moderation in some decisions on administered 67

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Current & capital account: % of GDP

Reserves: % of GDP

15

45 40

10

35 30

5

25 20

0

15 10

-5

5 -10

0 00

01

02

03

Current account (LHS)

04

05

06

07

Capital account – incl. error (LHS)

08

09

10

11

12

Accumulative net reserves (RHS)

Figure 5.5: Current and capital account as % of GDP (Source: Nedbank)

prices, such as electricity charges and port tariffs, the damage has already been done to consumer spending and the costs of doing business in SA. According to a 2012 survey by the Department of Trade and Industry (DTI), higher electricity costs have become a threatening ‘tipping point’ in 13 sectors of the economy.

It could be argued that, at stages, interest rates under both governors Tito Mboweni and Gill Marcus would have had to be higher, had it not been for the fact that the negative impact of administrative prices was accommodated by the SARB. Alternatively, that interest rates could have been cut quicker and further since 2008 if the risks of uncontrolled administered price ‘shocks’ did not have to be weighed. Delivery targets and inflation targets are difficult to reconcile in many countries, but in SA less competition in many areas of infrastructural development is a complicating factor. More competition and participation by the private sector, especially in the utilities, infrastructure and transport, are needed, but these lie outside the mandate of the SARB and need to be addressed elsewhere.

On exchange rate policy SA’s exchange rate regime is basically one of a ‘dirty float’, with partial exchange control on residents only. Although 68

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there has been pressure from time to time for the SARB to intervene to influence the level of the currency, especially when it is perceived to be ‘overvalued’, there is limited room for the SARB to change the situation.

The bank has more room when the rand is overvalued and has used it in the past. The rand is simply too big a market for the SARB to influence significantly. As a small, open economy with low domestic savings and relatively high financing needs, SA cannot fully offset large capital inflows.

The monetary authorities can at best ‘lean against the wind’ at times by strengthening the foreign exchange reserves or through the further liberalisation of exchange control as circumstances permit. The volatility of the rand is a much greater vulnerability for SA, than the SARB’s limited capacity to change the direction of the currency at any one time.

It should be noted that in the past few years, following the recent global crisis, reinforced by subsequent developments in the eurozone, central banks around the world, including the SARB, are increasingly pursuing ‘macro prudential policies’. This means that central banks are expected to focus on financial stability – at the level of individual financial firms and the sector as a whole – as well as price stability. Price stability does not guarantee financial stability in a world of possible financial turbulence. There are indeed such things as asset ‘bubbles’. The SARB has been identified as the primary authority for the prevention of financial crises and the bank is adapting its strategies and structures accordingly. It is still an open question whether these developments will compromise the bank’s autonomy, as some analysts fear.

In recent years the SARB has built up a good track record for transparency and communication. It has enhanced its credibility. Although some changes were made to its governance structure a few years ago, these were done to technically neutralise certain difficulties arising from recalcitrant private shareholders, rather than to undermine its autonomy. It is perceived to enjoy operational independence and the target range remains unchanged for the present. The role of the bank appears to be intact and it still seems to enjoy political support, having survived two ANC political conferences at Polokwane and Mangaung. Through its regular Monetary Policy Committee (MPC) meetings, its other communication channels and its research, the SARB seeks to base its decisions on the best available information about economic trends here and abroad.

Of course, monetary policy, whether in SA or elsewhere, must be 69

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carried out continuously and cannot always wait for the accumulation of research findings. The skill in policymaking lies in making the best judgement call on limited information. This is particularly so if an expanded role in financial stability is added to the agenda of central banks. The burden of proof for a central bank cannot be absolute certainty. Mistakes may sometimes occur. There will always be a need for unverified hypotheses, as well as unfounded beliefs, hopes and opinions – all these are inevitably part and parcel of our subject. Monetary policy cannot be a mechanistic action. Even today the classic phrase ‘the art of central banking’ still has a resonant ring.

What about price stability and democracy? More questions here, some perhaps rhetorical, others requiring answers. Why should central banks be entrusted with monetary policy in a democratic society – the ‘democratic deficit?’ Who elects the governor of a central bank? Can an anti-inflation or price stability policy stance be successful only if public opinion supports it? Do we take prevailing opinions as given data? Is the main aim of monetary policy to give citizens what they want? Public opinion once believed that Hans Christian Andersen’s Emperor wore a fine suit, though not without mischievous persuasion.

This suggests that we should abandon Plato’s question ‘Who shall rule us?’ and focus instead on Karl Popper’s question ‘How can we stop our rulers from ruining us?’ In this context of ‘checks and balances’ there is an established case for arguing that certain institutions and values – like the rule of law and basic rights – should now lie beyond the tyranny of temporary majorities. Does a high degree of central bank autonomy not now also fall into this category? Have we not accumulated a sufficient degree of economic consensus that this is universally desirable, at least in principle? Those questions may indeed be largely rhetorical in the context of present-day thinking and the 1996 Constitution alike.

This is therefore not the place to revisit the old arguments about the desirability of whether central banks should enjoy autonomy, as their concerns now need to range far beyond price stability. The fact that various parliaments around the world have given central banks their own legislation and objectives does imply that they want them somehow to transcend the preoccupations of the government of the day. To this must now be added their enhanced role regarding prudential issues. Several central banks have gone through a historical cycle of ‘independence’, 70

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then a lack of it, and eventually restored autonomy. Perhaps we can now regard their basic role as settled for the time being and deserving to be recognised as such. It exists.

If so, it is plausible to argue that central bank autonomy needs appropriate protection, like a judicial system, provided there is transparency and accountability. In SA in fact it stands on a par with the constitutional protection afforded to the Auditor-General, the Public Protector and the judiciary, all as set out in the relevant clauses of the Constitution. Entrenching or recognising the special status of central banks can help countries to avoid repeating economic policy mistakes that time and experience have shown usually bring highly damaging consequences to their economies.

The extent to which the SARB has been able to provide policy stability and advice at times when SA is in the international spotlight in a negative way should be appreciated, especially in the recent past.

While there is always scope for incremental changes and improvements in monetary policy and the way the SARB communicates its role, most South Africans have confidence in the role being played by the bank. In an uncertain world it is a valuable national asset.

Perceptions are important, both domestically and abroad, about the conduct of monetary policy in SA. The SARB must retain its prestige and must continue to have real power, otherwise it will not enjoy prestige.

C. The trade deficit Tackling South Africa’s trade deficit: opportunity knocks or slow boat to China?

SA’s trade relations with the outside world, like its investment relations, are crucial to its successful growth and development. If SA is to pay its way in the world, exports need to grow. The NDP’s target is for exports (as measured in volume terms) to grow by 6% per year, with non-traditional exports growing by 10% per year. Although the section that follows is detailed, such analysis serves to emphasise why SA needs to focus on strengthening its economic relations with the outside world.

As we contemplate the effects of structural changes in the global 71

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economy on the SA economy, these effects will depend very much on how our economy is able to adjust to the competition from other countries by progressively raising the quality of its own applied technology and human skills, and shifting from industries in which it is losing comparative advantage to those in which it is acquiring new comparative advantages.

It is against this challenge that recent and current efforts to improve SA’s competitiveness need to be tested.

South Africa’s declining share of global trade South Africa has long battled to improve its export performance. Even before the onset of the global financial crisis, the annual growth rate in the volume of goods and services exported averaged only 3.9% (2000– 2007). This is why, even with high commodity prices, SA registered increasingly severe current account deficits during this period (Edwards & Lawrence, 2012). Now, in the post-2008 crisis period, the country is having to contend with weak demand in its traditional export markets of the United States, Europe and Japan, and a general risk aversion among global investors. This is playing out in worrying balance of payment statistics, including ongoing trade deficits, and an economy heaving under the weight of a weak business climate. SA’s export growth rate has averaged only 2% since 2008 (ITC, 2013), and there is little relief in sight. Shifting global alliances also have the potential to dislodge SA from its largely self-professed role as the gateway to the rest of Africa, which could leave the country a minor player in an increasingly fast-paced and aggressive international trading game.

Statistics going back some years show that SA has made little headway in terms of its contribution to global exports and imports. Figure 5.6 shows that in the period 2003–2012, South Africa’s share of global merchandise exports and service exports remained relatively unchanged, hovering between 0.48% and 0.47%, and between 0.44% and 0.34%, respectively. The figure offers a similarly disappointing picture of SA’s share of global merchandise imports and service imports during that period. Although South Africa produces about 40% of Africa’s industrial output, it has only about 0.5% of world trade.

SA also remains stubbornly dependent on commodity exports, which deliver variable returns given the mercurial nature of international commodity markets. Even so, SA failed to capitalise fully on the 72

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0.7 0.6 0.5 0.4 0.3 0.2 0.1 0

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Year Merchandise imports

Merchandise exports

Service imports

Service exports

Figure 5.6: SA’s share of global merchandise and service exports and imports (Source: UNCTADstat 2013a and UNCTADstat 2013b)

commodity boom a decade ago because of inadequate infrastructure and other bottlenecks. But SA needs to diversify. The mining industry, for example, accounts for two-thirds of the country’s export earnings, with 14 of the country’s top 20 exports in 2011 being drawn from the minerals category (ITRISA, 2013). The dangers of having such an undiversified export mix have become increasingly obvious in the wake of the tragic 2012 Marikana shootings and sustained unrest in the mining industry.

As economist Cees Bruggemans remarked: ‘When mining becomes a battleground, it blows a hole in our balance of payments, and dangerously increases our dependency on strong capital inflows.’

Not that having an impressive arsenal of raw materials is necessarily a bad thing – it is SA’s general incapacity to beneficiate these raw materials that is the problem. For example, it is a travesty that SA produces some 25% of all raw materials used in global jewellery production but contributes less than 1% to the world’s manufactured jewellery market (ITRISA, 2013). There is no getting away from the fact that SA exports far too few value-added manufactured goods, relying heavily on imported capital equipment and consumer goods, from technology-laden products like cellphones and iPads to branded fashion accessories for the increasingly status-hungry local market. Another problem is that SA’s tangible exports (even those showing a strong value-added component) tend to be carbon73

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2001

Ores, slag and ash

2002

2003

Mineral fuels, oils, distillation products, etc

2004

2006

Vehicles other than railway, tramway

2005 Year Iron and steel

2007

2008

Machinery, nuclear reactors, boilers, etc

2009

Figure 5.7: SA’s main merchandise exports as percentage of total SA exports (Source: ITRISA, 2013)

Pearls, precious stones, metals, coins, etc

0

5

10

15

20

25

2011

Edible fruits, nuts, peel of citrus fruit, melons

2010

Aluminium and articles thereof

2012

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intensive, with about 40% of the country’s total carbon emissions derived from the export of non-ferrous metals, iron and steel, motor vehicles, machinery and equipment, and basic chemicals (ITRISA, 2013). As the more industrialised countries become increasingly concerned about climate change and the impact of a large ‘carbon footprint’, SA may have to face the prospect of higher costs to ensure that its exports comply with climate-friendly legislation in foreign markets.

The need for SA to be more competitive has been on the government’s economic and trade policy agendas for years, and has long also been a concern to business and labour leaders. As outlined in chapter 2, competitiveness is a composite of many interlocking elements, but it broadly refers to the ability of a country to realise its potential at an international level through strong governance, high educational standards, innovative and efficient production, streamlined physical and service-related infrastructure, and a robust work ethic. Sadly, SA is on a downward path in the competitiveness rankings, according to the compilers of the World Economic Forum’s GCI. South Africa dropped from 35th place on the Index in 2002 (ahead of Brazil, Russia, Turkey and Indonesia), to 52nd place in 2012 (behind Brazil, Turkey and Indonesia, and just ahead of India) (World Economic Forum, 2013).

As outlined in Chapter 2, what is particularly disturbing, when drilling down into how the annual rankings are determined, is that the country is losing ground when it comes to micro factors such as educational standards, the performance of the health sector, the effectiveness of the police force in maintaining law and order, the business costs of crime and violence, and the responsiveness of the labour market – all of which deal a serious blow to continuing efforts to build a viable trade- and investment-friendly economy.

The picture painted is a painful reminder of the extent to which SA is losing ground in the global trading arena. As previously emphasised, SA should not allow itself to be overwhelmed by uncontrollable global events or the perennial challenges at home. Given the nature of the country’s economic challenges, the government, business and labour together need to take tough, decisive action where international trade policy and performance are concerned, repositioning the country both as a regional power and as an example to other emerging economies that are having to navigate across difficult terrain to overcome their developmental 75

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challenges. How SA’s trade patterns have evolved over the years, and how the country should be tackling the opportunities unfolding before it, will be explored in the remainder of this chapter.

South Africa’s evolving trade policy When the ANC came to power in 1994, trade policy became a key component of the new government’s economic reform strategy and quest to be reintegrated into the world economy after many years of isolation.

In stark contrast to the previous administration’s policy of import substitution, which served to stimulate local industry by regulating imports through tariff protection, the new ANC government embraced an outward orientation to trade. Bilateral and regional alliances (both old and new) were nurtured, and a bold trade liberalisation strategy was implemented. This was evidenced, inter alia, in the elimination of quotas and most import surcharges; the replacement of most formulae, specific and mixed tariffs with ad valorem duties; the discontinuation of the GEIS (General Export Incentive Scheme), which offered direct subsidies to exporters; the phasing out of a substantial number of tariff lines; and the negotiation of new bilateral agreements with the European Union and the Southern African Development Community.

SA eagerly joined the WTO in 1995, and for a time the government was happy to expound on the benefits of a less restricted domestic market.

The Trade Minister at the time, Trevor Manuel, was firmly of the view that exposing SA to greater economic opportunities and competition would help to recalibrate the economy, stimulating high-potential sectors while sending warnings to less productive ones.

This did not mean that SA would not also join forces over the years, together with other developing countries, to mobilise opposition to the discrimination practised by areas such as the EU through large subsidies and substantial tariffs against the agricultural exports of many emerging economies. Africa in particular is still badly punished by tariffs, and this is a case that must continue to be strongly pushed at the WTO and elsewhere. It remains a blot on the ideal of a ‘rules-based’ approach to international trade and is also against the spirit of opening up trade to allow developing economies to get better access to markets in the interests of growth and poverty reduction. Not only for the sake of SA but also as the world prepares to revise the Millennium Development Goals due 76

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to expire in 2015, expanding trade opportunities must feature strongly in the next phase of global poverty reduction. Despite the frustrations of the WTO and the Doha Round, it would seem that smaller nations still have a vested interest in supporting a rules-driven multilateral trading system.

Domestically, despite the many worthy arguments in support of tariff reductions, the adjustment costs of SA’s trade liberalisation initiative began to be felt by the late 1990s, with many companies struggling to cope with the avalanche of foreign products competing with local offerings.

Certain industry sectors, such as clothing and textiles, were particularly hard hit, and company closures and job losses became the order of the day. Questions began to be asked about the wisdom of pursuing such an ambitious trade liberalisation agenda, particularly as it was adding to SA’s unemployment challenges. The socio-political implications of a less restricted trading environment were, and have remained, a source of much debate in this country.

During the 2000s, the SA government modified its position on trade reform, pulling back on tariff reductions and putting the country’s domestic development challenges in the spotlight, particularly the need to create more sustainable jobs. The government has increasingly espoused the idea that selective tariff protection has an important role to play in giving vulnerable or strategically important sectors (which is code for those that employ large numbers of people) a leg-up in their efforts to become more competitive. Once highly vocal in multilateral circles – especially in agitating for a better deal for the developing world – SA has, like many other countries, grown frustrated with the lack of progress in the WTO’s Doha Round. Consequently, it has adopted a more regional and bilateral stance in its trade deliberations. Africa is a logical target for greater expansion and integration efforts, but the other members of the BRICS group (Brazil, Russia, India and China) also present rich opportunities as trading partners and sources of investment.

SA’s trade policy is currently a component of the country’s broader industrial strategy. Some see this as a ‘demotion’ – in other words, it is not getting the attention it deserves as the key to a healthy current account balance and a major driver of economic growth. Others take a more pragmatic view, insisting that the country’s international fortunes are inextricably linked to its domestic realities, and that trade policy needs to take its cue from industrial policy, if coherent strategies and realistic 77

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outcomes are to be achieved. Given the sustained recent slump since the global financial crisis, particularly in the developed world, many countries have simply lost the appetite for trade liberalisation and are looking for industry-based solutions to lift their economies out of the doldrums.

Today the NDP is the government’s main economic beacon to which industrial and trade policy should be aligned. The NGP is hence complementary to the NDP. Both documents aim to guide government departments and businesses in their quest to achieve an inclusive, innovative and productive society, although there are some ideological differences between the two. The NDP has job creation as a core component, and subscribes to the idea of the state playing a developmental and transformative role.

It also emphasises the need for greater efficiency and accountability within government. Export growth and greater competitiveness are two of the cornerstones of the NDP, along with the recognition that other emerging economies (including the rest of the BRICS grouping) are a valuable source of export and FDI opportunities for South Africa. The NGP, in turn, emphasises the role of the state in bringing about muchneeded development in SA, and asserts that economic and trade policies should be designed to boost economic growth while also supporting labour-absorbing manufacturing. Furthermore, it states that SA should be focusing on the BRICS countries and regional partners for international trade and investment opportunities, and selecting foreign markets on the basis of SA’s ability to supply such markets competitively and sustainably.

While there is clearly an overlap in the trade-related aspirations of the NDP and NGP, the latter’s more interventionist stance is obvious.

The National Industrial Policy Framework (NIPF) sets out the government’s approach to industrialisation in South Africa. Notable features include the importance of producing value-added goods and services (and moving away from a reliance on traditional commodities), building a knowledge economy, and enhancing the country’s productive capacity, especially among previously disadvantaged and marginalised communities. Key ingredients in this process include innovation, education and skills development, a sector-specific focus, and a trade policy framework that supports greater inroads being made into the African continent and South–South collaboration.

Linked to the NIPF is the Industrial Policy Action Plan (IPAP), which 78

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identifies priority sectors for industrialisation, and outlines associated actions and success factors. The selective use of tariffs is a key component in this process. A major theme of IPAP is the need for SA to diversify its export mix and focus on value-added manufactured and service exports that can help to address unemployment and poverty head on.

While IPAP is the DTI’s primary reference document, the Trade Policy and Strategy Framework (TPSF), released in 2010, is intended to support the objectives of SA’s industrial policy, outlining the country’s trade initiatives at multilateral, regional and bilateral levels, and proposing various tariff adjustments to augment trade.

IPAP has attracted criticism because it is seen in some quarters as being too interventionist. Some critics say it is tantamount to ‘picking winners’, or as one leading economic analyst has put it, ‘the losers choosing the government’! However, the DTI has countered this by saying that the revitalisation of the economy (particularly the value-added manufacturing sector) is dependent on government implementing a ‘high impact industrial policy’. The DTI has further stressed that a great deal of local and foreign investment would not have taken place had it not been for the support and incentives provided by government. According to the Minister of Trade and Industry, Dr Rob Davies, ‘we have an existing manufacturing industry which we cannot afford to allow to go down the tube. If we did, we would be losing jobs.’ What must be avoided is heavyhanded interventionism in which the costs outweigh the benefits.

Trade policy, however well crafted and aligned to industrial policy, cannot provide all the answers to the questions of how to diversify the export mix, achieve greater market access, and withstand competitive pressures. Much depends on whether an overall conducive environment can be created for business, including having ready access to information and other forms of assistance that will smooth the way for international expansion. A country’s trade policy will also have little value if it is not communicated by knowledgeable and committed people who can help to make the intended outcomes a reality.

The changing world order and the impact on SA’s trade efforts SA’s trade policy and associated initiatives need to be viewed against a fast-changing global trade environment. One of the most noteworthy phenomena since the start of the new millennium has been the shift in 79

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600% 500% 400% 300% 200% 100% 0% -100% -200% 2006

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Figure 5.8: SA vs BRIC trade (exports plus imports) growth (Source: Edwards & Lawrence, 2012; ITC, 2013)

the locus of global growth, and the expansion in trade and investment from the developed countries to the emerging economies. Fast-growing developing economies are doing more trade with each other, thus making them more resilient than before to shocks from the developed world. The performance of the BRIC grouping (now BRICS) has been particularly impressive. In 2000, the BRIC countries accounted for 7.2% of world exports; but by 2011, this share had risen to 17% (Edwards & Lawrence, 2012; ITC, 2013).

Figure 5.8 offers an interesting comparison between SA’s international trade growth and that of the other BRICS countries during the period 2006–2012.

The growth in the large emerging economies has been heavily dependent on industry-intensive production, which calls for large volumes of commodities and high energy usage. For example, China has contributed a third of global growth over the last few years but has accounted for nearly 60% of the increased demand for metals and other primary commodities.

The significant rise in the price of commodities from 2000 to 2007 can largely be attributed to strong demand from China. Although commodity prices sustained a heavy blow during the financial crisis, prices have recovered again to some extent. Furthermore, the intensity of emerging economies’ industrialisation processes and relentless urbanisation should continue to spur strong demand for commodities for the foreseeable future.

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However, everyone is watching Asia’s changing international trade and domestic growth patterns. As the advanced countries of the world continue to stagnate, Asian countries are set to shift their focus away from high-intensity manufacturing for these markets to production geared towards supplying their own, and other emerging markets’, growing middle classes. In the case of Asia’s leading actor, China, rising expenditure in consumption-oriented activities is expected to drive up the demand for health and education services, agricultural output, and processed food and beverages, and reduce the demand for machinery and equipment, and mining-intensive commodities such as base metals and minerals. This will have implications for traditional suppliers of such commodities, like SA. The reorientation of the Chinese economy towards greater consumption will also affect commodity prices and investors’ decisions as to where to locate their manufacturing facilities.

It is anticipated that the general trend towards less restricted trade will remain a hallmark of the multilateral trading system, but regional and bilateral trade agreements will continue to proliferate. With the growing strength of the emerging economies, which are often the mouthpiece for the developing world as a whole, the WTO is becoming less and less of a stronghold for the advanced economies. Developing countries are feeling less compelled to make (at times costly) concessions to secure greater market access. At this stage there appears to be little light at the end of the Doha tunnel. But a new spirit of rapprochement between the developed and developing country camps, and agreement on a less complex agenda – perhaps more likely now that the WTO’s new head is from the developing world – could move the process along.

Of particular relevance to SA is Africa’s growth in recent years, triggered by the commodity boom in the period leading up to the 2008 financial crisis. The continent has also become an appealing destination for FDI geared towards mineral extraction and supporting infrastructural development. Although Africa’s growth trajectory is heavily dependent on commodity prices, economic and business reforms in several key markets should be the stimulus to ongoing growth, even if commodity prices flatten. Rising wages in China could lead to more assembly operations being moved to Africa, provided that productivity and transport-related hurdles can be addressed.

At present, SA’s exports to sub-Saharan Africa constitute approximately 81

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20% of the country’s total merchandise exports (excluding gold). The regional import breakdown derived from this figure is interesting – for example, 50% of Zimbabwe’s total imports, 41% of Mozambique’s total imports, and between 20% and 30% of the total imports of Zambia, Malawi and the Democratic Republic of Congo, respectively, come from SA. SA is also the destination for 28% of Zimbabwe’s exports, and between 6% and 10% of the exports of Malawi, Zambia, Botswana and Namibia, respectively (Edwards & Lawrence, 2012). Although SA’s services trade is not formally measured, there is plenty of evidence that SA is very active in other countries in the region in the retail, construction, telecommunications, financial and tourism sectors. Since many countries in sub-Saharan Africa have strong trade ties with Asia, SA is well placed to leverage these connections as well.

Of course, these trends might not follow a steady course and unexpected deviations could occur, potentially adding to the risks already envisaged.

Unpacking SA’s approach to unfolding trade opportunities An overriding consideration in the implementation of SA’s trade policy should be diversification, i.e. exploiting more trade opportunities in a global as well as a regional or bilateral context, and promoting a wider range of exports (commodities, manufactured goods and services). The NGP states that SA’s trade policy should concentrate on ‘identifying opportunities for exports in external markets and using trade agreements and facilitiation to achieve this’. Furthermore, the Trade Policy and Strategy Framework (TPSF) emphasises the importance of stronger trade integration with other developing countries.

Africa In the African context, SACU (Southern African Customs Union), SADC (Southern African Development Community) and the proposed Tripartite Free Trade Area (TFTA) are all major export markets for SA’s manufactured goods and services. Africa’s proximity makes it a logical target for SA exporters, and serves to strengthen SA’s reputation as a gateway to other parts of the continent. Africa also holds many strategic advantages in that stronger African integration helps more African exporters to compete in global markets and generate funds (including 82

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attracting investment) for industrial expansion – an arena in which SA can play an important role. South Africa needs to leverage its locational advantage in the regional economy.

Not only can SA provide equipment, inputs and industrial expertise in this regard but it can deliver financial, logistical and other services that help to facilitate trade. Yet arriving at the right integration formula poses a number of challenges. For example, achieving coherence between SA’s and other Sub-Saharan African countries’ industrial policies is a complex undertaking, considering the countries’ vastly different economic challenges and priorities. Few are prepared to surrender national sovereignty in the broader interests of a harmonised regional trade platform.

SA’s identity in global trading circles is being shaped by the fact that the government’s preferred vehicle for trade cooperation is the preferential trade agreement (PTA), rather than the more comprehensive free trade agreement (FTA). PTAs can be regarded as ‘partial trade agreements’ which have strategic significance but allow countries the policy space to pursue national (e.g. industrial) objectives where deemed necessary. As such, they may fall short in their ability to deliver the hoped-for levels of market access, because the tariff reduction formula is linked to reductions that have already been granted to other countries.

Other than the SACU–EFTA FTA, which was signed in 2006, SA has not been actively looking to conclude FTA deals since the global trend in this regard gained momentum after 2000. SACU signed a PTA with the group of South American countries in Mercosur in 2008 but analysts regard this as a ‘limited focus agreement’ which is ultimately unlikely to generate a meaningful increase in SACU exports to the Mercosur bloc. A similar agreement is in the pipeline between SACU and India, but early signs are that the negotiations could prove to be difficult and the potential benefits questionable. It appears that these PTAs may be motivated more by their political value than by economic reasons. Unless it shifts its focus to negotiating comprehensive trade agreements that are on a par with those signed by other developing countries, SA could remain at a competitive disadvantage in the foreign markets in question.

The proposed Tripartite FTA being negotiated between SADC, COMESA (Common Market for Eastern and Southern Africa) and the EAC (East African Community) has the potential to bring SA tangible 83

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benefits and provide access to the continent’s investment opportunities.

But attempting to harmonise disparate rules of origin and industrial policies is likely to make the negotiations extremely protracted. Perhaps, though, the process could provide the impetus for the overhaul of the SADC rules of origin, which have effectively become a trade barrier owing to their complexity and protectionist undertones. SA should also use the opportunity to formulate a clear strategy for promoting and exporting services to the rest of the continent, where there is enormous untapped potential. It would be a great shame if SA allowed its potential leadership role in Africa to be usurped by China or other large emerging powers with a more accommodating approach to trade negotiations and regional development.

Europe and the United States Although SA is increasingly turning its attention to Asia and is consolidating its position in Africa through various regional initiatives, the country’s relationships with Europe and the United States remain very important. In 2011, Europe absorbed 28.5% of SA’s exports (with equal weight being given to manufactured goods and mining products) and supplied 33% of SA’s imports (ITRISA, 2013). Europe remains the largest single market for SA’s manufactured exports and is also an important source of investment for the country.

SA’s trade with the EU takes place within the context of the Trade, Development and Cooperation Agreement (TDCA), which came fully into force in 2004 after several years of difficult negotiations. The TDCA is the most significant bilateral agreement that SA has ever negotiated, and comprises a free trade agreement covering duty-free provisions for SA and European exports to each other’s markets, and a comprehensive development assistance package. Yet an analysis of the trade performance between SA and the EU shows that in general the EU is becoming relatively less important to SA as a trading partner, both as an export destination and as a source of imports.

This is not really surprising given the shifting dynamics in global trade relations and – more recently – Europe’s stagnant growth in the wake of the lingering eurozone crisis. Although the proposed SACU–EU Economic Partnership Agreement (EPA) has been mired in controversy and a final deal has not been hammered out, SA cannot afford to hold 84

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out indefinitely in this regard. Doing so will have dire consequences for countries like Botswana and Namibia as they have no back-up agreement like the TDCA and would therefore effectively lose their market access into the EU. SA’s trade with the United States does not seriously rival its trade with Europe, but the US remains an important export destination (particularly for motor vehicles and components) and source of value-added goods.

The African Growth and Opportunity Act (AGOA) has been a strong contributing factor in SA’s strong export performance to the US over the past decade, but trade with the US is now declining in the face of weaker demand in that country and with SA slowly shifting its sights to Asia.

While the visit of US President Barack Obama to SA in mid-2013 had a wider economic agenda, it also gave an opportunity to discuss the future dynamics around AGOA at the highest level, bearing in mind that the legislation is due to lapse soon.

BRICS A huge potential opportunity area for SA is BRICS, the alliance between SA and four other leading emerging powers: Brazil, Russia, India and China. BRICS’s growing influence in the global economy warrants special attention. In 2011, the BRICS countries accounted for 25% of global GDP, 30% of global land area, and 45% of the world’s population (Dube, 2013). Despite the post-financial crisis slowdown in the world, which has been particularly pronounced in the West, the BRICS’s share of global trade increased from 10% in 2008 to 16% in 2012; and intra-BRICS trade grew from US$28 billion in 2002 to an estimated U$310 billion in 2012 (Dube, 2013). While China, India and Brazil were already becoming forces to be reckoned with before the financial crisis engulfed the world, the grouping has certainly been given a shot in the arm by the tepid economic conditions prevailing in developed countries in recent years. However, whether BRICS will mainly confer political clout on its members or will become an authentic vehicle for intra-group trade and investment remains to be seen.

The BRICS countries have very different economic interests and it will take some time before they are able to arrive at a coordinated agenda – just as it took the G7 decades to agree on its guiding principles and modus operandi. Intra-member competition is prevalent in BRICS, 85

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with concerns about challenging China being a key element in the other members’ foreign policy. In addition, the BRICS members do not have longstanding regional links or private sector ties to bind them.

SA’s share of total BRICS trade grew from 10% in 2005 to 18% in 2012. The year 2012 also saw SA’s trade with fellow BRICS countries grow by 12% over 2011 (BUANEWS SA, 2013), although this is partly explained by a corresponding decline in SA’s trade with its traditional markets, the US, Europe and Japan. The DTI has conceded that the majority of SA’s exports to other BRICS member countries, notably China and India, are still raw materials rather than value-added goods.

There is intense competition among the four large BRICS members for Africa’s commodities, which helps to explain why SA was invited to join the grouping despite having weaker economic credentials. Led

by China, BRICS’s trade with Africa has grown tenfold since 2002, with the 2012 total trade figure estimated to be US$340 billion (Dube, 2013). Africa is also a popular destination for BRICS FDI, which is channelled, inter alia, into infrastructural development initiatives and industrial development zones in a bid to integrate the continent into global supply chains.

It needs to be borne in mind that the figures reported here are the combined results of bilateral trade initiatives, as BRICS is not a formal economic bloc. However, the proposed BRICS Development Bank could go some way towards engendering a collective spirit among the members, and provide an alternative source of finance to the West-controlled IMF and World Bank. It may, however, take some time to come to fruition.

Many questions have been raised about the value of BRICS membership to SA, apart from boosting the country’s image in the international arena.

Rather than waiting to see how things unfold, SA should be formulating and steering a specific BRICS agenda that not only feeds SA’s domestic agenda, but also boosts regional development in Africa and furthers the economic interests of the countries of the South. This is not simply an exercise in altruism. Being too passive and allowing other BRICS members to take the lead in Africa will be a wasted opportunity for SA and could lead in the long run to the unfettered exploitation of the continent.

Yet SA’s historical connection to the rest of Africa does not automatically confer acceptability or popularity. SA’s leadership is often 86

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resented by a number of African countries that are making great strides in overhauling their economies and political ideologies, particularly those countries that are in the process of strengthening their ties with the other BRICS countries. SA needs to work on its diplomatic engagement style, if it is to win support for its own BRICS–Africa agenda. SA and the other BRICS members should also resist the temptation to use their alliance merely as a vehicle to counter the influence of the G7, IMF and other traditionally first world institutions. Pragmatism should be the overriding factor going forward, not ideology.

SA is often seen as adopting a ‘defensive’ stance in its trade negotiations, which the government justifies on the basis that it needs ample leeway to take unilateral decisions when domestic priorities warrant it. Unfortunately, this tends to give rise to an extremely complex tariff structure. Also, by keeping tariffs high for all those sectors that appear to be vulnerable, and with no clear phase-down schedule in sight, resources are allocated in a way that helps to reinforce the shortcomings in competitiveness of the sectors in question. While the surge in applications to ITAC for additional tariff protection is understandable, it is symptomatic of an underlying loss of competitiveness in several sectors of the SA economy.

Analysts suggest that SA’s overly cautious approach has quite a lot to do with the fact that the country’s manufactured exports cannot easily compete in and with other emerging and developed markets, particularly when the rand becomes ‘overvalued’. The preoccupation with the level of the rand, though explicable, diverts attention from two basic factors: that costs are rising too steeply in SA and that uncertainty is generated by the volatility of the currency.

From data compiled by The Economist, it has been hypothetically suggested that a 20% drop in the value of the rand would be enough to bring SA’s average labour costs into line with those of China. As China is planning double-digit increases in the average cost of labour over the next few years, many SA manufacturers could – if the rand remained reasonably steady at current levels to the US dollar – be competitive in export markets, even those where China has a traditional stronghold.

Increased exports would, however, put a strain on existing infrastructure, which is dependent on already stretched public finances. Furthermore, remaining competitive in terms of labour costs would call for a more 87

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efficient labour market and a serious moderation in wage increases – both political ‘hot potatoes’ in SA. Strengthening SA’s skills base would be essential for success in BRICS. One way of alleviating the problem would be to invest heavily in duty-free processing zones geared towards manufacturing for exports.

These should provide additional employment opportunities, i.e. ones that do not compete with the current market for jobs, and could spur more innovative and high quality exports given the concentrated nature of the zones’ facilities. Designated processing zones are, in fact, not new to SA. The DTI initiated an industrial development zone (IDZ) programme in 2000, and three IDZs (East London, Richards Bay and Coega near Port Elizabeth) are operational. While IDZs in this country have focused mainly on export industries and have reportedly created more than 30 000 jobs, their impact has not been as far-reaching as originally hoped.

Problems experienced to date include inadequate coordination among key government agencies and stakeholders, and weaknesses in the way investment has been targeted.

The DTI is now proposing the creation of Special Economic Zones (SEZs) that would build on the work of the IDZs, and stimulate greater industrialisation outside the main urban areas of Gauteng, Cape Town, Durban–Pietermaritzburg, East London and Port Elizabeth. The SEZs would focus on innovative and regional development, concentrating on areas such as light manufacturing, agro-processing and platinum beneficiation.

The Special Economic Zones Bill, which is now before Parliament, makes provision for a better funding model and better overall governance.

The IDZs would not be scrapped but would continue to exist as SEZs. Although it is gratifying to see a plan taking shape for more value-added production, it is not clear how the more elaborate SEZ initiative would be any more successful than its predecessor. It would seem that the private sector wants a stronger role in SEZs. What needs to be borne in mind, too, is that mineral beneficiation, in particular, is often very capital-intensive, limiting the scope for job creation among semi-skilled and unskilled workers. It also places heavy demands on energy resources and can be pollution-intensive. Furthermore, several of SA’s trading partners often react to higher levels of beneficiation in imported products by imposing higher tariffs in a bid to protect their own value-added industries.

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Role of the private sector For the country to become a significant player in the international trade arena, companies with foreign business interests or aspirations need to have knowledgeable and skilled employees, who are able to devise strategies for success and get down to the nitty-gritty of selling products to, or sourcing them from, other countries. One of the stumbling blocks to building a large corps of competent and confident exporters and importers in SA is that there are relatively few registered providers of education and training in the export–import field. Over the years, university undergraduate and postgraduate programmes have, with some exceptions, simply flirted with international trade topics – usually in a broad, strategic context, which is not enough to provide a meaningful grounding in the field.

Some private colleges offer import–export courses that lead to formal qualifications, but these generally do not exceed a year in length and are marketed alongside myriad other, generic courses. Specialist, tradefocused companies are a rare phenomenon. Although there are a number of established training outfits that offer short export–import courses and seminars for those looking to develop practical insights and skills and not a qualification, such entities are invariably small and limited in their geographical reach.

The private sector should be taking the lead in introducing more programmes aimed at preparing people for careers in international trade. However, increasingly onerous government regulations relating to compulsory registration and accreditation of providers and programmes have resulted in a loss of appetite in the industry for new or strengthened initiatives. In the absence of a fair-sized and accessible pool of international trade education and training specialists, many SA companies pick things up as they go along or, as some proudly claim, ‘we learn by doing’. Clearly, this approach is far from optimal, as bad habits are often perpetuated, with poor decision-making and errors only adding to the final cost of business operations.

One of the most crucial steps in export development is picking the right foreign markets. This can be a costly and complex exercise as so many variables come into play, and countries’ fortunes are in a constant state of motion. To this end, North West University in Potchefstroom has devised an ingenious tool to take the guesswork out of export market 89

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Middle Africa (14.12% of total African GDP per capita*) Cameroon Congo Democratic 1.36% Republic of the Congo Gabon Southern Africa (16% of total African GDP per capita*) Botswana 18.67% Namibia Swaziland Lesotho

28.98%

29.22%

21.85%

Eastern Africa (29.23% of total African GDP per capita*) Burundi Comoros Djibouti Kenya Madagascar Malawi Mauritius Mozambique Rwanda Seychelles Somalia Tanzania Uganda Zambia Zimbabwe

Figure 5.9: Regional distribution of export opportunities in Africa: share in total potential export value. (Source: GDP per capita data from World Bank 2011)

Western Africa (12.18% of total African GDP per capita*) Benin Cape Verde Côte d’Ivoire Gambia Ghana Guinea Liberia Mali Mauritania Niger Nigeria Senegal Togo

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selection, enabling businesses – across a wide range of industry sectors – to plan their export marketing activities with a high level of precision. The Decision Support Model (DSM) identifies realistic export opportunities for individual companies or whole industry sectors by extracting – using a powerful filtering system that processes large volumes of data – those product–market combinations that show the greatest potential for the company or industry in question.

The DSM can be used by experienced and aspirant exporters alike and is an invaluable aid in the initial, often expensive, stages of export market entry or expansion. It is also a strategic instrument for trade promotion organisations, e.g. the DTI, export councils and industry associations, to assist in focusing their export-promoting strategies for specific identified sectors or products. Figure 5.9 gives an example of SA’s export opportunities in Africa, in terms of potential export value.

Given the knowledge and skills deficiencies that permeate the export sector in this country, the DTI’s recently launched National Exporter Development Programme (NEDP) is particularly timeous. The NEDP is a multi-faceted initiative aimed at boosting exporter readiness through the identification of viable products and markets, as well as training, knowledge sharing and support. Small businesses are the primary target of the development programme, which takes its broad direction from the NDP, NGP, NIPF and TPSF. According to the DTI, ‘the programme aims to build on existing activities and capacities at the DTI, provincial economic development departments, provincial trade and investment agencies, the Small Enterprise Development Agency (SEDA), and other international and local stakeholders to ensure the delivery of key interventions to emerging and experienced exporters’. While its aims seem to tick all the right boxes, the NEDP is hopefully not so ambitious as to be unimplementable and ultimately a disappointment to those whom it is intended to inspire.

Conclusion Figure 5.10 indicates that, if SA reaches an export growth rate of 10% per year from 2013 to 2030, as is the aim stated in the NDP, and the world exports growth rate for the same period is taken as 5% (which is what the IMF World Economic Outlook suggests for 2013 to 2014), then SA’s share of world export could hypothetically more than double – from 91

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50 000 000 000 45 000 000 000 40 000 000 000 35 000 000 000 30 000 000 000 25 000 000 000 20 000 000 000 15 000 000 000 10 000 000 000 5 000 000 000 0

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Figure 5.10: SA export growth target at 10% per annum vs world export growth target at 5% per annum

0.51% in 2013 to 1.12% in 2030. Even if SA sets itself more modest export targets, to improve SA’s export performance along these lines presents a formidable challenge in a highly competitive world, and will require the maximum cooperation between government and the private sector.

Just as a country’s international trade performance is heavily dependent on the strength of the local economy, so trade policy cannot be divorced from economic policy and its many permutations, including industrial policy. Although trade policy in SA is articulated within the broader framework of industrial policy, it should not be without teeth.

On the contrary, it plays a crucial role in encouraging expansion into Africa and other high-potential markets; shaping bilateral, regional and multilateral relationships; and highlighting sensitive or high-priority areas that are deserving of incentives and other support measures.

Effective consultation with key stakeholders remains a vital ingredient of success.

But elaborate trade policy documents should not take precedence over the need to get the fundamentals ‘right’. Given SA’s convoluted trade history, the country is clearly still finding its way. Hopefully, the plethora of policy documents and conflicting views on how SA should be tackling its globalisation challenges will eventually converge – at least enough for the country to start seeing some long overdue improvements on the competitiveness, export expansion and sustainable development fronts.

The world economy remains a tough arena in which SA has to compete.

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sport, likewise in global trade and investment no country ever gives a game away!

D. The delivery deficit While the issues around delivery in SA still leave much to be desired and remain an essential part of the future national agenda, it is important to recapitulate what progress has been made since 1994. In 1994 the new government adopted the Reconstruction and Development Programme (RDP) as its main socio-economic framework and spelt out key pillars of delivery, including meeting basic needs and developing human resources.

The challenges facing education have been dealt with earlier. We have to be specific to describe the delivery successes and failures of the past and to determine to what extent there remains a ‘delivery deficit’ today.

This section will therefore broadly look at the macro level of economic infrastructure delivery, as well as the delivery of basic services at local level.

Economic infrastructure In addressing the issue of economic infrastructure in the short to medium term, the NDP has rightly focused on regulation, energy, water, transport, and information and communications technology. The NDP makes wide-ranging proposals on all these aspects, as it rightly sees an improved framework for both infrastructure and current infrastructural regulators as essential in order to put SA on a higher inclusive growth path. Under President Zuma’s government, infrastructure investment has risen high on the expenditure priority list and therefore needs fresh assessment.

In 2008 an international panel chaired by Ricardo Hausmann identified infrastructure as ‘a binding constraint to growth’ in SA. In Chapter 2 it was shown that investment spending by general government has increased substantially since 2006. The public corporations (Telkom, Eskom and Transnet) increased investment levels more than threefold over the period 2003–2010. These plans were retained during the financial crisis and in the 2013/14 budget there are budgeted and approved public sector projects to the value of R448 billion. In the 2013 State of the Nation address President Zuma also announced a Presidential Infrastructure Coordinating Commission (PICC) to drive the planning and implementation of major capital projects.

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The Budget Review provides a summary of the mega-projects under consideration for the period 2012–2020. The document stresses that not all of the R3.2 trillion worth of projects under consideration will be approved for implementation and that government will choose the most cost-effective projects with optimal long-term benefits.

A first interesting point to note is the phasing of the proposed projects. Currently, 328 programmes are ongoing, out of a total of 3 204.

This accounts for 10.2% of the total expenditure and includes multiple projects at different stages of development, such as universal access to electricity and the school building programme. Approximately 11.7% of the projects are already in the construction phase and another 6.1% are out on tender.

The fact that there is still a long way to go is evident in the numbers, which show that 33.8% of the projects are concepts, 8.4% are in a prefeasibility phase and for 20.4% feasibility studies are being done. The distribution of spending between different sectors is also interesting.

Approximately 60.7% of projects are related to electricity. Another 18.2% are related to transport. The majority of the ongoing projects are in transport (71), electricity (101), education (125) and health (31).

In a way this explains the modest successes mentioned in the 2012 State of the Nation address, styled as ‘Government’s year of delivery’. It mentions the bus rapid transport system in Johannesburg, Cape Town and Nelson Mandela Bay, as well as the Gautrain. Also, nine regional bulk water systems were constructed and the Department of Public Works completed infrastructure projects such as a forensic laboratory and upgrades to the Supreme Court of Appeal in Bloemfontein and a correctional facility in Kimberley. The 2013 State of the Nation address mentioned a number of ongoing and proposed projects, but few of them are near to completion. The Budget Review goes on to give a detailed breakdown of major projects, their projected costs and status. The bulk of these are in the hands of Eskom and the roads agency SANRAL. This story of good intentions and limited outcomes raises a number of questions about a ‘delivery deficit’. At the highest level it relates to the decision-making processes and the role of the PICC around the 18 Strategic Infrastructure Projects (SIPs). Who should be consulted during the roll-out of the National Infrastructure Plan? To what extent will the private sector be involved? Where can synergies be identified? What are the 94

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necessary conditions for success for an endeavour of this scale, especially on the financing side? There appears to be a singular lack of information about how the financing of planned infrastructure is to be organised and repaid. The extent to which the NDP’s approach to infrastructural development is embraced will be an important determinant of success.

The NDP rightly says that, in the long term, users must pay the bulk of the costs for economic infrastructure, with due protection for poor households. Most economists would support the principle of ‘user charges’ where appropriate in the context recommended by the NDP. But as the experience with e-tolling has demonstrated, this is now easier said than done. There are lessons to be learned from the Gauteng e-toll saga, not least of all that the question of ‘the user pays’ is not just a technical issue but needs to be handled in a broader socio-economic context. The way in which the Gauteng e-toll was implemented, given the fact that it is an urban toll, different from what most South Africans have previously known as toll roads, left much to be desired.

As a result of the opposition it has generated, the e-tolling process has, regrettably, simultaneously discredited the ‘user pays’ principle, public– private sector partnerships and foreign direct investment. To develop supportive attitudes towards the proposed extension of user charges in future will require that the ground be better prepared for decisions of this kind, supported by full information and effective consultation. It will also be necessary to drive a clear conceptual wedge between genuine ‘user charges’ and what much of the public and business often see as ‘stealth taxes’.

The NDP wants gross fixed capital formation to reach about 30% of GDP by 2030, with public sector investment reaching 10% of GDP, in order to have a sustained impact on growth, employment and household services. These are ambitious targets (see also Chapter 4). One of the lessons of the recent announcement of a delay in the completion of the Medupi power plant is that to successfully roll-out infrastructural development requires an assurance that the necessary project management expertise and related skills are available. It confirms that the structure and financing of infrastructural investment needs to be carefully planned with a view to raising the absorptive capacity of the economy and enhancing the productivity of investment as a whole, while not imposing undue strain on the balance of payments and on domestic prices.

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In view of the importance of state-owned enterprises (SOEs) in infrastructure development, it is therefore propitious that the Presidential Review on SOEs was released in May 2013. These recommendations will need to be evaluated to see to what extent they can succeed in repositioning and restructuring underperforming SOEs to make them function better.

The comment by Performance Monitoring and Evaluation Minister Collins Chabane in releasing the review that privatisation could be on the cards for some SOEs should be welcomed, as this will contribute towards a more realistic approach to streamlining the parastatal constituency of over 750 entities. It is therefore necessary to emphasise the importance evolving new business models for parastatals, including mobilising strategic minority shareholders and public–private sector partnerships.

The Presidential Review has also rightly advocated the need for rationalisation and consolidation of SOEs, which have developed in a somewhat haphazard way over the years.

The overarching test that should ultimately be applied in evaluating the recommendations of the Review is their consistency and coordination with the NDP. Minister Chabane has again emphasised that the NDP trumps all other policies and that official policies will be increasingly aligned with it. While some of the proposals made by the Presidential Panel may resonate with the NDP, others may well not, such as the funding of road infrastructure or the building of state capacity. We need strategic, rather than bureaucratic, solutions. What is important is to ensure that whatever decisions are ultimately taken about parastatals will be grounded in the fullest consultation with the private sector. In this way, it will prove possible to develop an agreed platform on which restructured SOEs must operate in future in order to add the maximum value to SA’s economic performance.

Basic services at local level And at the local level? Drawing on the 2011 National Census data 2007 Community Survey, as well as recent community surveys, the picture that emerges at national and provincial levels is to an extent an encouraging one, if the overall figures are unpacked. The results from analysis of the period 2007–2011 indicate that the mean access to basic services showed a marked improvement, but that the variation of access between places increased.

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Basic service

Census 2001

Community Survey 2007

Census 2011

Mean

Std dev

Mean

Std dev

Mean

Std dev

Piped water inside dwelling

24%

19.7

37%

24.7

51%

27.9

Use electricity for cooking

39%

22.0

57%

23.8

59%

24.0

Use electricity for heating

36%

20.8

47%

23.6

45%

22.2

Use electricity for lighting

63%

21.1

76%

18.7

77%

18.1

Flush toilet

50%

28.1

55%

32.3

57%

31.7

Refuse removal

43%

29.6

50%

33.6

62%

33.5

Table 5.8: Access to basic services in SA (Source: author’s calculations)

The findings of the 2007 Community Survey showed that 70% of households lived in formal dwellings, up from 65% in 1996 and 68% in 2001. The percentage of households with access to piped water increased from 84% in 2001 to 88% in 2007. The use of electricity as the main energy source for lighting increased from 57% in 1996 to 80% in 2007.

There were also substantial improvements in access to refuse removal and sanitation services.

By 2011 the proportion of households living in formal dwellings had increased to 77.6%. The percentage of households with access to piped water inside or outside the yard increased to 91.3%. The proportion of households that have flush toilets connected to the sewerage system increased to 57% in Census 2011 from 50% and 55% in Census 2001 and Community Survey 2007, respectively. In 2011 a greater proportion of households were using electricity for lighting and cooking and 62.1% had access to weekly refuse removal by the local authority.

However, this evidence of government’s successes in meeting basic needs is often presented only in the form of provincial and national aggregates, while much of the responsibility for meeting the development commitment actually lies at the local government level. It is at this level 97

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Refuse removal Flush toilet Use electricity for lighting Use electricity for heating Use electricity for cooking Piped water inside dwelling 0% Census 2011

10%

20%

30%

40%

50%

Community Survey 2007

60%

70%

80%

90%

Census 2001

Figure 5.11: Mean access to household basic services

that severe delivery challenges have arisen.

Figure 5.11 shows the percentage of households in a municipality that received services over the decade 2001–2011. It is therefore clear that improvements in average access are only a part of the story. There has also been a widening of the distribution of access to services across municipalities, and this lies at the heart of the delivery deficit. This may seem counterintuitive if we recall the extent to which anecdotal and other evidence of delivery failure has come to dominate the public debate. Data on improved basic service delivery have to be reconciled with news reports of crumbling local infrastructure, in particular local roads, water and sanitation infrastructure in several parts of the country.

If service delivery is apparently improving all the time, why is it that in a number of towns ratepayers’ groups have taken control of basic services?

About 30 ratepayers’ associations across SA have refused to pay rates and taxes.

The best indicator of delivery failure is the continuing and widespread protests over poor service delivery. Municipal IQ’s Hotspots Monitor tracks major service delivery protests and shows that the period since 2009 has been characterised by a significant increase in the number of delivery protests. Local government in the eyes of many has become an extended network of patronage and corruption.

Already in the State of Local Government in South Africa report, published in 2009, it was acknowledged that there is no link between 98

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200

173

150 100 50

10

2005

2006

2007

111

2009

2010

82

27

2

0 2004

32

34

107

2008

2011

2012

Year

Figure 5.12: Major service delivery protests by year (Source: Municipal IQ)

national indicators used to assess the comparative performance of municipalities and the planning of the powers and functions assigned to them. The current situation is such that the economic and human resource capacity challenges that face the majority of municipalities are overshadowing the more positive impact that a few effective municipalities may be having on the larger proportion of the population.

This raises two questions: which areas are forging ahead and which are falling behind, and what are the possible causes of the delivery deficit?

Figure 5.13 shows a plot of index values measuring average service delivery per municipality, using data from the 2007 Community Survey and 2011 Census. Dividing the scatter plot into four quadrants aids the interpretation. Local municipalities in quadrant 3 provided belowaverage access to basic services in 2007 and 2011. Local municipalities in quadrant 2 provided above-average access to basic services in 2007 and 2011. However, the places in quadrant 1 are of particular interest. These municipalities provided below-average access to basic services in 2007, but improved to provide above-average access in 2011.

It is possible to present more detailed profiles of each of the municipalities that provided below- or above-average access to basic services in 2007 and 2011. The various reports emphasise that municipalities face differing challenges depending on their location and environment, and this has resulted in uneven service delivery across the country. Thus, instead of detailed individual profiles, it may be of more general interest to examine the differences in the characteristics of those places that provided above- and below-average delivery and those that improved delivery.

Compared to those that were below average in 2007 and 2011, the 99

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2.00

Delivery Census11

1.00

.00

-1.00

-2.00

-3.00 -2.00

-1.00

.00

1.00

2.00

Delivery CS07

Figure 5.13: Plot of index values measuring average service delivery per municipality (Source: 2007 Community Survey and 2011 Census)

municipalities that were able to improve from below average to above average are characterised by a high level of GDP per capita, lower unemployment rates and fewer people in poverty. They are not marked by population density, but do have a substantially larger share of people in urban areas. Over the period 2007–2011 they experienced population growth: growth in the number of households as well as increased population density. Urban municipalities with higher population densities and greater GDP per capita are able to provide better access to services, while improved service delivery attracts people.

What role does the capacity to deliver services play? In earlier analysis of delivery over the period 2001–2007, Krugell and his co-authors found that when the ‘improvers’ were compared to the municipalities that had below-average service delivery index scores it seemed that they had, on average:

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• f ewer vacancies, less spending on capital goods as a proportion of the total budget; • more spending on goods and services in proportion to the total budget; and uch less reliance on grants income relative to rates income.

• m So what does this all say about the delivery deficit?

A first conclusion is that municipalities provide capital-intensive networked services. The very nature of the services means that improved delivery may require urbanisation and densification. However, the two main obstacles to accelerating basic services are the lack of infrastructure in rural areas and the increase of informal settlements in urban areas.

But municipalities lack the institutional and fiscal powers to confront these obstacles by themselves. Municipalities have been unable to respond effectively to the challenges of making plans for local economic development and fostering investment. Most municipalities, especially the poorer-performing ones, need simply to dedicate their energies to providing basic services and infrastructure.

A second conclusion concerns spatial differentiation. Different municipalities face different challenges reflecting socio-economic conditions and municipal competence. Analysis has shown that urban municipalities with higher population densities and greater GDP per capita are able to provide better access to services, while improved service delivery attracts people. ‘Improvers’ have, on average, fewer vacancies, more spending on goods and services in proportion to the total budget, and they relied much less on grants income relative to rates income. The application of policy, planning and the allocation of powers and functions between the different spheres of government will have to take note of the vast differences between municipal spaces across the country. Future efforts to improve delivery will only be effective if they are not based on the apparent current assumption that one size fits all.

A third conclusion is related to the quality of local institutions. Again, analysis has shown that municipalities that relied less on grants relative to rates income had greater success in improving delivery. Finance by means of own resources ensures that municipalities are directly accountable to local residents for the functions they perform and the services they provide. However, evidence shows that municipal revenue collection has 101

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begun to fall as greater reliance is placed on transfers as a revenue source.

In addition, municipalities continue to face capacity constraints in conceptualising and implementing developmental spending programmes.

A fourth conclusion is that local authorities and local business need to develop a much closer relationship and to encourage mutual support. The efforts currently being made by some business bodies to mobilise their local members need to be broadened and intensified to be more inclusive.

The spirit of ‘partnership’ needs to be localised more effectively among stakeholders.

The fact that the government has recently commissioned a progress report on the local government turnaround strategy, put in place in 2009 to focus on the 108 most distressed municipalities, must be welcomed.

This will need to assess what the latest position is regarding the degree of dysfunctionality at local government level, and a diagnosis of why perceptions of further deterioration still persist. Such data as are already available suggest that an urgent look does need to be taken at the highest level as to what further remedies are required to redress the local government situation, as this has become the Achilles’ heel of the delivery system. The latest Cabinet reshuffle in July 2013 does seem to reflect a greater concern about municipal delivery through the appointment of a new Minister to the local government portfolio.

Frequent reference has been made to the prevalence of corruption in SA, especially at local government level. We know that abuse of public office is nothing new in world history. ‘And thou shalt take no bribe,’ God tells the Israelites in Exodus, ‘for a bribe blindeth them that have sight, and perverteth the words of the righteous’. Corruption is a phenomenon that thrives on lack of information, weak competition and excessive regulation. In its acute form it is bad for economic growth.

There is always both a ‘corruptor’ and a ‘corruptee’. It leads to decisions made by bureaucrats on the basis of what is good for them, rather than what is good for the economy and the average citizen. In SA corruption is inimical to the interests of the poor, blunts the successful implementation of anti-poverty measures, generates mistrust and creates a great deal of the resentment which drives the delivery protests.

We must nevertheless not underestimate the challenges inherent in any efforts to reform the public sector at different levels and in making it a catalyst for promoting positive socio-economic change. Although the 102

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public sector at national, provincial and local levels must be business-like, it is not a business and it is necessary to understand the difference if we want to make a success of its necessary contribution to a better SA. We need relevant and appropriate strategies to strengthen delivery.

Some elements, such as accountability and efficiency, are shared with the private sector; some others, such as ‘profit and loss’, are not. Nonetheless, we need to also acknowledge that the forces driving global change have not just opened up new opportunities for delivering services but increased people’s expectations of what they want from those who serve them. It needs a transformation in how to deliver services to the public. How is it possible to successfully deliver cold drinks, beer and petrol to far-flung areas of SA but not school books to Limpopo? How do we get government to consistently pay its bills to small businesses within 30 days?

Drawing on recent economic theories of institutional economics and organisation, Professor Francis Fukuyama emphasises the universal challenges of attempting to better align agent incentives with the interests of principals in the public sector and identifies some reasons why this is difficult, such as: • t he goals are often unclear; • formal systems of monitoring and accountability entail high transaction costs or there is a lack of specificity in underlying activity; • a ll delegation involves a trade-off between efficiency and risk; • the same degree of delegation will not work in all settings and periods; and • public sector output is primarily services, where productivity is inherently hard to measure.

Nonetheless, there are examples elsewhere of world-class, highperformance public sectors that have addressed these barriers successfully and greatly improved their operational effectiveness by creating an appropriate framework of incentives and sanctions. The official intention to reform the public sector in SA, and to create a school of government by the end of 2013, must be welcomed as an important step in the right direction. The curriculum should include reaching out to the experiences of the private sector in defining its relationship with, and its expectations of, the public sector.

At both the political and bureaucratic levels there is considerable 103

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scope to upgrade performance in ways that serve both the general public and the business community more effectively than at present. The fact that there are existing examples of pockets of excellence in SA’s public sector shows that better outputs are possible and can be universalised if the political will and skills are there to create a more capable state. If present plans to reform the public sector in SA succeed, these could make a significant difference to the delivery scenario, especially if we can tap into other experiences.

In a key study of his efforts to improve public service delivery in the UK made at the request of former Prime Minister Tony Blair, Michael Barber lists the ten lessons learned and how to make early progress irreversible. They are: • A week may be a long time in politics but five years is unbelievably short.

• S ustained focus on a small number of priorities is essential.

• ‘ Flogging a system’ can no longer achieve goals: reform is the key.

• N othing is inevitable, as rising tides can be turned.

• T he numbers are important but not enough, as citizens have to see and feel the difference and expectations need to be managed.

• T he quality of leadership at every level is decisive.

• G ood system design and management underpin progress.

• Getting the second ‘step-change’ is difficult and requires precision and promoting best practice.

• Extraordinary discipline and persistence are required to defeat the cynics.

• Grinding out incremental change is a ‘noble cause’, but where progress is slow it is even more important for people to understand and support the strategy.

The broad conclusion to be drawn from other examples of public sector reform is that stubborn resistance and attention to detail are vastly underestimated in the literature on government and economic policy.

This emphasises the need for the closest monitoring and evaluation of the NDP implementation to enhance delivery.

It is not that SA has been without a focus on monitoring and evaluation mechanisms, which has been the task of the ministry of that name located in the Presidency since 2009. With the commitment to the 104

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NDP requiring steady alignment and implementation of policies in the period ahead, it will be necessary to review whether the existing setup is adequate for what is now needed in evaluating future outcomes.

If necessary, additional expertise should be mobilised to strengthen the oversight function or otherwise the task should be reassigned elsewhere.

We should understand that, if the growing discontent about delivery is not effectively addressed in the years ahead, SA could be heading for a whirlwind which would significantly change the political landscape.

E. The trust deficit The NDP has identified a lack of trust between government and the private sector as one of the factors explaining the difficulty of achieving greater policy coherence in SA. The NDP says that it is necessary to ‘improve trust between the public and private sectors, and ensure that private sectors are treated as partners in policy design and implementation, and that the private sector in turn responds to and facilitates the realisation of national objectives’.

The SA economy is indeed one in search of a new balance between its public and private sectors. The government says it wishes to involve the private sector to a greater extent. Even as the balance may shift, the stakes of public and private sectors alike in one another’s affairs run high. As has been argued earlier, the state depends upon a healthy private sector for its revenues, and for much of its ability to act effectively.

Businesspeople depend upon government for a wide range of basic services and for economic stabilisation. This interdependence makes any mutual suspicions or misunderstandings rather perilous for both sides. It often seems that, when government or business is highly critical of each other in public, it is because they have failed to be more candid in private.

The NDP also refers to the need for an ‘active citizenry’. A major weakness apparent in the body politic in SA, though not limited to this country, is that too many constituencies devote more time to the prosecution of their own narrow interests than to consideration of the broad national welfare. Each imagines that no harm will come of its own neglect of the broader interest – that it is the task of another group to do this or that. And so, as each separately entertains the same illusion, the common cause imperceptibly weakens. The trust factor plays an 105

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important role in reinforcing these tendencies and in undermining the broader view.

A low-trust society like SA in effect imposes a ‘tax’ on all forms of economic activity, apart from its potential threat to social stability in a worst-case scenario. We need more trust among major stakeholders in the economy, including an ‘active citizenry’, to help provide the ideas, commitment and leadership that will lift SA beyond current dogmas, tensions and disputes to realise a future shared vision.

What might be called a ‘trust deficit’ therefore often inhibits the capacity to adopt reform or change institutions for the better. Policy coherence and coordination at various levels will therefore hinge to a large extent on the degree to which the trust deficit can be reduced among the key stakeholders involved. This is not something which is merely ‘nice’ to do, but, as the NDP emphasises, is an imperative in building a climate of solidarity if SA is to get superior outcomes and better delivery. Building trust is closely associated with stronger economic performance.

For example, if a country is committed to a competitive economy it must also uphold and enforce the rules. There are still too many cases of collusive activity emanating from the private sector that also weaken trust. The pursuit of profit must take place within a broadly acceptable framework, or there will be the usual public backlash. On the other hand, government engagement with individual companies for goods and services needed by the public sector must be driven by the appropriate rules for tendering and procurement, and the playing field must be level and transparent. This has become increasingly complex over the past decade and needs urgent reform if the phenomenon of ‘tenderpreneurs’ is to be eliminated through strong anti-corruption measures. Corruption is corrosive of trust.

There should also be a simple and permanent belief that no matter how some stakeholders in SA scream and kick at each other, they must not ‘break up the home’. Stakeholders may sometimes dislike each other heartily, but SA cannot afford the luxury of acting on that dislike. Nor should opponents be demonised or degraded. The tone of public discourse remains important. There remain irreducible elements of a shared responsibility in SA, because a united and cohesive society is an essential prerequisite for peace and prosperity. This needs to be strengthened by what the NDP calls ‘social cohesion’, so that by 2030 South Africans 106

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will be more conscious of the things they have in common than of their differences.

The emphasis in the NDP on the need for an ‘active citizenry’ thus remains relevant to the question of building trust in SA society.

This includes the dominant role of national government. ‘Democratic centralism’ comes at a cost. As government distances itself from direct contact with the public, impersonal regulation replaces local discretion.

Individuals and groups, no longer empowered to judge priorities for themselves, trust others only in so far as they are scrupulously and manifestly fair.

Modern government – not only in SA but in many other countries – whatever its laudable purpose, appears to become more inefficient the more distant is from its patron, the voter and taxpayer, and its consumer, those same people. Such distances waste huge sums of money, even leaving aside the scourge of corruption. If we accept the concept of an ‘active citizenry’ for making a success of the NDP, this should mean ‘self-government’ properly so called, lying at the intermediate tier above family and neighbourhood – but well below that of the nation-state.

One useful practical example which could contribute to building trust is the recently formed Citizens Movement driven by a ‘citizens’ charter’, which is meant to promote good values, community work and philanthropy. The movement plans to inculcate a culture of civic activism and to get citizens to realise that they do not always have to depend on government for some services. This adds to the social solidarity and social capital that SA needs to strengthen from the bottom up, and helps citizens to have more control over their destiny.

An active citizenry must mean that we are willing and able to reverse the remorseless mania – not of big government as such – but of big, intrusive and incompetent government. Democracy must be based on tiers of autonomy and accountability, on people trusting people who trust other people, on a hierarchy of trusts. Working democracy, participating democracy, must be tiered to give effect to the efforts of an ‘active citizenry’ if it is to make a difference. It is what lies inside the quality of governance generally – culture, norms and initiative – that make the difference.

That is why the debate about what South Africans want out of the different levels of government, what to do to make it reflect a better 107

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division of responsibilities, and how to hold the public sector accountable, is extremely relevant. Many think-tanks, and the NDP itself, on some aspects, understandably devote much time to the rule of law, changes in the voting system, a better civil service, and so forth. These are all helpful and essential insights which need to be pursued.

Yet ultimately every recommendation seems to be a version of the same – how to better manage an ever more centralised state. An active citizenry must be capable and willing to challenge the state effectively from other sources of democratic legitimacy and political participation, whether at local or provincial level. ‘Self-government’ must become an active and accountable concept in SA society, especially at local government level.

Evaluating two recent US studies on reforming the public sector there, The Economist (20 April 2013) sums them up as saying that, although President Obama has done much to improve American government, ‘government needs to change as radically as it did in the earlier 20th century, when reformers replaced patronage and corruption with a measure of meritocracy. It needs to become a “platform” for services rather than a machine. It needs to engage citizens rather than treat them as subjects. But citizens need to change, too: becoming problem-solvers, not whingers; and volunteers, not supplicants.’ These comments can easily be translated into the language of the NDP. Role of social dialogue Where does broader ‘social dialogue’ fit into the picture? Against the aftermath of the Marikana tragedy in August 2012 and related developments, there has been a renewed focus on the structures of social dialogue and collective bargaining in SA. On all sides deep disappointment has been expressed that the institutions ostensibly designed to promote social dialogue – such as NEDLAC – appear to have failed us in these circumstances. What then was the genesis of NEDLAC, the National Economic Development and Labour Council?

NEDLAC was launched on 18 February 1995. High expectations and enthusiasm in many quarters surrounded the launch of this institution.

NEDLAC was to be a major instrument of post-conflict rehabilitation.

It was intended to inaugurate a new era of inclusive consensus-seeking and ultimately decision-making in the economic and social arenas. The enabling legislation formally spelt out NEDLAC’s task to pursue the 108

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goals of growth, equity and participation. As the legislation indicated, NEDLAC had a broad scope of activity covering all aspects of social and economic policy- and decision-making.

NEDLAC was, and remains, institutionally distinctive in several ways. It is the most representative policy body SA has ever had, since it includes government, labour, business and the ‘community’. NEDLAC requires mandated representatives – no one is there in their personal capacity. It is an agreement-making body and not merely an advisory one. Constituencies are held accountable for the consequences within their sphere of influence. Often social dialogue outcomes could result in policies being those that would secure agreement, rather than those that would achieve a given set of objectives efficiently.

And what was social dialogue intended to do? Institutionalised social dialogue was needed to help undo the damaging legacies of apartheid and address the challenges of economic performance, more especially with reference to growth, job creation and poverty. Pitched at its highest, NEDLAC was intended to provide the socio-economic dimension of the reconciliation and nation-building to which President Mandela was strongly committed. The main original participants in NEDLAC – prominently the ANC-driven government, business and labour – all had their reasons for engaging in the NEDLAC process. From their various perspectives they all hoped that, in one way or another, NEDLAC would help to keep the country ‘governable’, and maximise their own influence in the process.

Over the years, despite tensions and frustrations, NEDLAC has completed several hundred agreements on a wide range of economic and social policy issues and numerous reports and other activities have been finalised. It has also been involved in shaping SA’s policy responses to the shocks emanating from the global economy over the past few years. Yet why has it not been able to achieve a full-blown ‘social compact’ as now recommended by the NDP? Firstly, promotion of the valid reasons that prompted the creation of NEDLAC also made for excessive expectations as to what social dialogue could achieve in SA in the short term. Given the bitter legacy of apartheid, it was too optimistic to expect significant levels of trust to be established more or less overnight. The intense enthusiasm which had greeted the advent of democracy could not last as the real problems of governance crowded in. Social dialogue, as important as it is as a mechanism to 109

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manage change, can in a mere 19 years only do so much to repair decades and even centuries of mistrust and suspicion.

In addition, to have a social partner – COSATU – which is also a formal political ally with the ANC, has generated its own set of serious challenges from time to time. The most recent example is the decision of the parliamentary portfolio committee on labour earlier this year to vote against the amendments to SA’s labour law on strike ballots, picketing rules and labour brokers, despite the new rules having been accepted by NEDLAC. Apart from reopening the question of the exact relationship between Parliament and NEDLAC, serious economic and social consequences could flow from this decision, which clearly had political overtones.

Even if eventually some new compromise may be reached before the legislation is finalised, the experience remains strong evidence of the uncertainty and conflict which is constantly generated when the roles of ‘social partner’ and ‘political ally’ are conflated in public policy. To that extent, criticisms that NEDLAC is failing to achieve its goals are based on unrealistic hopes, or wishful thinking, about how SA can best respond to the challenges of transformation and globalisation.

Secondly, no institution, no matter how rich its history, may shirk the challenge of taking stock of its role in a changing environment. Both government and other participants in NEDLAC believe that, after nearly 20 years, the functioning of NEDLAC needs to be reviewed to assess its performance. Some serious institutional and operational challenges have developed and are being addressed, especially in the light of recent events on the labour relations front. For if function declines, so also do status and influence. Seen in this context social dialogue is a renewal resource.

A renewed vision of institutionalised social dialogue in SA is possible.

NEDLAC can be given a new ‘face’.

The fundamental challenge for SA in the post-Marikana era remains how to reconcile a dynamic economy and the liberating effects of individual freedom with the goals of an inclusive society, even at the cost of some disturbance to a few cherished ideological shibboleths. There is strong evidence from recent events that investment in social capital in SA is still lagging. Although social dialogue may have widened, the extent to which it has deepened is still clearly an open question. We need to rediscover what are the appropriate ‘rules of engagement’ for effective 110

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A d d r e s s i n g t h e ‘ ta l e o f f i v e d e f i c i t s ’

social dialogue and collective bargaining. While there are issues on which economic ideology and race will continue to divide South Africans, they can address common challenges in ways which do not force them to pay an even higher price for their divisions than they already have done.

Can social dialogue and greater investment in social capital make a quantifiable difference to SA’s economic performance? It is extremely difficult to link a specific institution or feature on the national landscape to a particular set of economic results. To the extent that certain institutions and processes like NEDLAC can promote social stability and reduce perceived country risk at a time when investor sentiment matters, they can make a very positive contribution. NEDLAC does not govern the country, but it can help to keep it governable. What is now required in addition to assist the implementation of the NDP is to build the degree of ‘consensual stability’ needed, among other things, to reduce uncertainty and raise expected returns on investment.

The NDP has proposed a ‘social compact’ marked by equity and inclusion, for which it says a number of conditions need to be in place. As is apparent, it is the absence of many of these requirements in SA that has so far hampered the maturing of social dialogue in general and the proper functioning of NEDLAC in particular. A successful social compact will require a much greater degree of convergence around aims and means than has been hitherto possible in SA. The NDP rightly concludes that this says a great deal about the history of the country and the lack of trust.

The quality of social dialogue therefore undoubtedly needs to be enhanced. Social dialogue should not just be about what various participants ‘demand’ of each other, but also how they can add value to the longer-run solutions of otherwise seemingly intractable situations.

Given the recent widespread experiences of wildcat and frequently violent strikes in SA, it therefore becomes essential to critically review institutions and behaviour in the labour market.

Nonetheless, trust goes further than being embodied in formal institutions, as important as they must be. Trust needs to be more visible in our way of life in intangible ways but with tangible outcomes. Nor can trust be created by a magic wand or because rhetoric claims it is a ‘good thing’.

Trust evolves and is renewed by people and groups working together to resolve problems and issues that it is in their common interest to do. They do so by exhibiting a genuine desire to compromise and find solutions without 111

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seeking to impose heavy ideological ‘baggage’ of whatever kind on others.

Thus can trust be slowly built, even if an overall social compact is not immediately possible. Accords could be negotiated on a sectoral level, such as in the troubled mining industry. The NGP already paved the way for ‘mini-accords’. It is clear from what has happened lately that more decisive intervention has been necessary to manage the wave of unrest in the mining industry through effective social dialogue. If the implementation of the NDP is to succeed, then the emphasis given by its authors to the importance of developing solidarity and consensusseeking is not misplaced. It develops from building confidence in joint ways of solving problems in a tolerant and ‘give-and-take’ mode.

Despite much lip service to social dialogue in SA there are still too many destructive attacks on certain stakeholders, which seem to reflect a visceral hostility to them. One of the major lessons of a mixed economy is that capital and labour need to coexist, which means they must get beyond caricatures and narrow self-interest, and seek to fundamentally understand each other better. They remain too important and too interdependent to do anything else. Power, shared accountability and responsibility require cooperative behaviour from all participants. There is indeed a time for robust and sharp debate, but there is an even greater potential for constructive cooperation on issues of common interest. This must be the mantra for the future. The breakdown of trust into unpredictable and negative behaviour turns too many processes into a game in which all lose.

The costs of failing to collaborate at strategic moments in SA are high and are well illustrated in the following concluding story.

A scorpion came to the edge of a river and asked a frog whether he would carry him to the other side, for which he would reward him. The frog hesitated and said he feared the scorpion would fatally sting him on the way over. The scorpion reassured the frog that it was in their mutual interest to cooperate and so the trip commenced. Halfway across, the scorpion did sting the frog. In his dying throes the frog gasped: ‘Why did you do that? Now we will both drown.’ ‘I couldn’t help it,’ replied the scorpion, ‘I just can’t change my nature.’

We in SA will simply need to change our fundamental attitudes to collective effort if we want to get better outcomes than the frog and the scorpion.

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6 Implementing the National Development Plan: Risks and opportunities

If you do not change direction, you may end up where you are headed.

– Lao Tzu A s emphasised at the outset, it is not possible to cover all the ground contained in the 500-page NDP document outlining a framework for growth and development in SA for the next 17 years. Some of the challenges to the NDP have been touched on in earlier chapters. In this chapter the salient topics that have been selected are continuity and change, the business of government, learning from others, capital formation, entrepreneurship, energy policy, climate change and the political scenario.

Inevitably some readers will be disappointed, but possibly what they are looking for may surface in other chapters. Realistically, a line has to be drawn somewhere in dealing with such a broad canvas.

Two threads of common thought that particularly resonate in the NDP are, firstly, addressing the ‘binding constraints’ on the economy and, secondly, the need for a multi-pronged approach to finding solutions to SA’s socio-economic challenges. These are general characteristics that permeate the NDP roadmap and offer a degree of continuity with what went before by tapping into existing projects and processes.

The NDP framework seeks to provide as much common ground as possible in finding solutions and builds on existing initiatives such as the New Growth Path (2010) and the Industrial Policy Plan (2011). It also establishes a link with the previous ASGISA (2005) and other reports such as that of the Commission on Growth and Development (2008).

This reinforces the need to clarify as soon as possible the relationship

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between the NDP, the NGP and industrial policy in ways that converge in a positive outcome for investor confidence.

We should therefore remind ourselves that, if the narrative of the NDP is also to be correctly sequenced, it should be informed by: • a ctions that unlock implementation of other proposals; • a vailability of resources; and • c apacity to implement.

We also need to ensure that, if important actions are to flow from the NDP, they must bear its imprimatur. If the impact of the NDP is to be maximised, right up front there is an important lesson to be learned from past endeavours. One of the serious failings of some of the earlier socioeconomic programmes outlined in Chapter 3 was that, when positive steps were sometimes taken in terms of such programmes, the action was often not ascribed to them. Ad hoc measures appeared subsequently from ministerial initiatives and elsewhere, seemingly as if conceived in a vacuum and not linked to the sponsoring overall programmes or related policies, hence losing focus and undermining sustainability.

There frequently appeared to be a reluctance on the part of implementers to admit the ‘parentage’ of what they were doing. If the subsequent action was thus not identified with the original initiative, or appropriately ‘branded’ as such, the result was that these overall plans were eventually not perceived to have had outcomes, or as having had any visible impact. This may have been another contributory factor to the surfeit of ‘plans’ in SA over the years. The NDP must avoid this risk if it is to retain credibility and promote sustainability up to 2030.

Change and continuity The NDP offers a clear-sighted vision of where SA should go and how it proposes we get there. Intellectually, the NDP exhibits three necessary qualities – perception, imagination and reason – in charting the road ahead to 2030. But that is only a part of the story. The NDP rightly sees change as necessary and that SA must evolve continuously by making its ethos one of ongoing and pragmatic reform. So far, so good.

Yet it may also be that, as part of the development of shared prosperity, SA requires a core of stability. In recent years change has in many ways 114

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been too rapid, too disorganised, for the public mind to fully digest and understand. If we are going to steadily align policies with the NDP in the period ahead, it is also an opportunity for consolidation and consultation.

For the past 20 years or so, the environment in SA has understandably been one of almost constant upheaval and transformation, not all of our own making.

If this had brought only success in its train, it could be welcomed as exciting and even inspiring. But the upheavals have been accompanied by many failures, reinforced by the almost constant success in recent years of other competing nations in the emerging market ‘club’, as increasingly reflected in various global socio-economic indices. We now need a deliberate programme on which to progressively build on our strengths and address our weaknesses.

If we align our actions with the NDP, we need to recognise that there comes a point when neither law nor political institutions, neither cultural nor social habits, can be respected if they are in a constant state of flux or change. There needs to be a degree of security if the private sector is to plan for the future, some measure of continuity, something certain to look forward to, even if there are some sacrifices to be made in the interim. There is no need always to chop and change everything. That is why the NDP builds on existing initiatives to a large extent in creating a new platform for the future. SA should, where appropriate, therefore improve the performance of current structures through simplification and rationalisation, stronger performance management and clearer remits. We need to walk a fine line between change and continuity.

Adapting governance If we want to do better in legislative and policy management in SA in future, we should recognise that the business of government is one thing, and that of legislating to change the country is another. One of the weaknesses in our political system has been the widespread assumption that the two things are the same. It has been assumed that the mere fact that a government has a majority in Parliament entitles it not only to form the government, and pass its budget but also to push through legislation of all kinds almost regardless of opposition and criticism, despite standing committee hearings. President Erdogan of Turkey once called democracy a train from which you get off once you reach the station!

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This approach is problematic for three important reasons: • the perception that government is not obliged to justify itself always in serious debate, though this may be changing now; • people forget that a government may have to act in the public interest even against its own election promises; and • a failure to disentangle the legitimate requirements of running government from the business of general legislation.

Several developments in SA offer potential hope. The first is the greater role of regulatory impact assessments (RIAs) in helping to sift out the real impact of new draft legislation and regulations. The second are the plans to strengthen the professional infrastructure of Parliament, which would give parliamentarians an independent source of expertise with which to assess and challenge draft legislation. The creation in 2013 of a fledgling Parliamentary Budget Office is an important step in the right direction.

The budget ‘votes’ in Parliament are also generating more meaningful debates. The third is a growing commitment to consult in advance more widely on policy matters, which the NDP also emphasises is necessary and to which the government needs to respond.

It will be necessary to see, as developments unfold, how the NDP goals will be translated into policy, line function ministry by line function ministry, in order to eliminate the inconsistencies that are still apparent.

Recent legislation such as the Business Licensing Bill, the Infrastructure Bill and the BEE Amendment Bill are the kinds of statutes that should be critically interrogated against the NDP framework. All departments need to be committed to the implementation of the NDP, which then needs to be geared to a presidential oversight of government delivery. In essence, the implementation of the NDP needs to be steadily concretised to achieve positive outcomes and build credibility.

Learning from others In assessing the risks and opportunities of the NDP it is helpful to refer to comparable experiences in other countries similar to SA as lessons to be absorbed. In 2010 Business Unity South Africa (BUSA) undertook research in this connection, which looked at five countries – Chile, Brazil, Poland, Malaysia and Ghana – to compare with SA. The countries were chosen for comparison because they have experienced an emerging 116

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economy, economic upheaval and large-scale social problems, yet they have still managed to achieve growth and some employment success.

Even then, what has developed in Brazil since 2010 is a good example of what occurs when the formula behind a country’s success is gradually abandoned over a period, as has apparently happened to a large extent under President Dilma Rousseff in the past few years. A profile of the present danger signals in the Brazilian economy could virtually be a carbon copy of SA’s current challenges, ranging from a sluggish economy to a balance of payments deficit, widespread social protests, and policy uncertainty. This uncertainty has largely contributed to a mediocre economic performance: since 2011 economic growth in Brazil has been lower, and inflation higher, than in most other South American countries.

As we therefore ponder some of the structural lessons that can be learned from these countries, they include those of not adhering to policies that have proven successful. Both the successes and failures of these countries can tell us something useful. Hence much of the research remains even more relevant to what we are trying to achieve with the implementation of SA’s NDP than they were before. These include: • A ll the countries in the sample strove for macroeconomic stability as a basis for growth, with Chile performed best on this aspect.

Comparable experience again confirmed, however, that high levels of macroeconomic stability and FDI do not necessarily lead to job creation and that special policies are needed for inclusive growth paths for countries similar to SA. It is a question of how to achieve both and make the difficult choices that engender more balanced outcomes.

• SA needs to pay high attention to a long-term vision and social formula needed to support growth and development. Given SA’s extremely high levels of inequality, it must avoid the temptations of suggesting ‘quickfix’ measures that will lead to disappointment and recrimination.

• SA could emulate the spirit of economic cooperation that is evidenced in the high levels of partnership and collaboration between government and business in Chile and Malaysia. Most of these countries had wellbranded long-term development strategies that took into account the complexities of their national societal development, as well as a rapidly changing global economic order.

• T he SA economy is largely service-driven, as in the case of Brazil, Chile and Poland, and requires major structural overhaul in order 117

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2.00 Germany

1.80

Japan

1.60 Argentina

1.40

1973

Costa Rica

1.00

0.40 0.20

Brazil

Tunisia

0.80 0.60

Chile

South Africa

1.20

Philippines Kenya

Korea, Rep

Thailand

Nigeria China India

0.00 0.00

0.50

1.50

1.00

2.00

2.50

2008

Figure 6.1: Middle-income traps (Gross National Income per capita as % of US income, log) (Source: World Bank)

to follow a manufacturing growth path, as in the case of Malaysia. It would also require unprecedented focus on seizing opportunities in the global manufacturing value chain, in which countries in the Far East have massive competitive advantages. The case studies of Chile and Malaysia indicate that technological innovation and labour upskilling are critical issues in any economy that is trying to move out of the ‘middle-income malaise’ of a growth path that has soaked up its resource of cheap labour to meet low-cost mass manufacturing opportunities.

• It is evident from the case studies that the state needs to play an extremely important but flexible role in the economy as a country moves through different stages of development and faces new challenges from the world economy. The state needs to focus on those things that only it can do (macroeconomic stability, long-term vision and economic cooperation, as mentioned above) and avoid the corruption and nepotism that follow when the state is both player and referee in major sectors of the economy. Although the nature of these partnerships varied in the case studies, an effective role for the state was nonetheless balanced with strong collaboration with business and a supportive labour force.

• T he lessons of incentivised poverty reduction from Brazil, Chile and Malaysia deserve special attention. SA’s grant-based poverty reduction strategies are promoting short-term and long-term dependence and 118

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low productivity and are placing major demands on a relatively small taxpaying population. Both President Jacob Zuma and Finance Minister Pravin Gordhan have expressed concern in this regard. SA cannot afford to further deepen the dependence of the majority of its population on grants that do not seek to change the behaviour of recipients. Creative, well-managed, household-specific programmes need to be designed that reduce both poverty and dependence in the long term, together with a radically revamped education system that provides a meaningful path of entry into an ever more sophisticated economy.

On the issue of dependency, there is an old story about Northern European geese that migrated thousands of miles each winter to a warm climate, returning each spring to the fields surrounding one small African village. The villagers loved these beautiful birds and looked forward to their return each year. One spring, owing to unseasonably cold weather, the ground was frozen and no food was visibly available for the wild geese. Anticipating their return, the townspeople scattered feed outdoors and built shelters for them. The intention was to help the geese to survive until spring-like weather appeared and the situation improved.

They were so delighted to see how readily the geese accepted their offering that they continued feeding them through the spring and the summer. However, when the autumn came, the wild geese did not fly north as they had done in the past. Instead, they had become so fat that their wings could no longer lift their heavy bodies off the ground. As the weather grew colder, they simply waddled off into the shelters which the villagers had constructed for them. And, so the yarn goes, they never flew again.

The moral of the story is that SA should rightly want to pursue growth and development policies that will gradually move people out of welfare and into work. It remains essential to aim at a more tightly targeted system of social security to assist those in genuine need, while in tandem growing an economy which creates the opportunities for those in unemployment and poverty eventually to join the workforce. In other words, the mantra that in the long run it is better to promote progress in a society by mainly building ladders, rather than just safety nets, is still a valid one. We must give youth hope and offer old age security.

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Capital formation One of the key targets postulated by the NDP is to see gross fixed investment at 30% of GDP by 2030. There is a useful message in this aspiration, as long as we keep it in perspective. There is the obvious question about the composition of the investment. Other factors and influences, such as institutions and political forces, the qualities and attitudes of the population, and the supply of complementary resources, are often equally important or even more important at times. Capital can be created in the process of development, just as much as development is a function of capital investment. The emphasis on the significance of capital formation as a pillar of growth nonetheless underscores the need to boost domestic savings and attract foreign direct investment.

We should recall that capital formation can be permanently successful only in a capital-conscious society, and this requirement, which is just as essential for the continued maintenance as for the original creation of capital, is encouraged by a wide diffusion of investment activity among individuals. Nothing matters as much as the quality of the people. The personal habits and characteristics linked to the use of capital, including ingenuity and foresightedness, give a deeper and more sustainable lease to a nation’s economic advance than, say, the rhetoric of nationalisation.

Whatever we may think of fixed investment as a fast breeder, it needs a supporting cast.

Encouragement of entrepreneurship and enterprise As we move into the implementation of the NDP, we must expect our decision-makers to acknowledge that there is a firm distinction between government policies that are perceived to be ‘business-friendly’ and those that are merely ‘business-tolerant’. This will call for an important mind-shift in the approach of bureaucrats and politicians in deciding on appropriate regulatory frameworks and being sensitive to the extent to which they help or hinder legitimate business. Early consultation with relevant stakeholders on proposed changes to policy and law goes a long way towards creating a business-friendly environment.

There is also a clear difference between being ‘pro-business’ and being ‘pro-market’. That is why SA has a competition policy. It is generally agreed that levels of economic concentration in the SA economy are still too high in some sectors. SA is committed to raising levels of competition 120

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in the economy and thus also to creating more opportunities for emerging business. Black economic empowerment must be seen to enlarge the supply of businesspeople in ways that strengthen markets through real transformation. The Regulatory Impact Assessment recently done by the DTI on the BEE amendment legislation recognised the importance of increasing competition and promoting a more open economy.

As the competition commission finalises its next five-year strategy it needs to respond to the calls for its implementation of competition policy to give more certainty and predictability to business. It must also take a common-sense view of the legitimate pooling of data by business sectors – the kind which promotes legitimate information sharing rather than encouraging collusion. This may require a protocol of some kind.

Remedial action must strengthen, and not weaken, the capacity of any particular economic sector to contribute to growth and employment.

The NDP accepts that entrepreneurial activity in the small business sector is what will generate maximum employment and anticipates that as much as 90% of future job creation will be driven by small, medium and micro-sized enterprises (SMMEs), especially in the services sector.

This puts the spotlight strongly on the needs of black business, including a light regulatory environment. Regulations in SA are seen as among the most burdensome of over 40 countries tracked by the OECD. Other SMME problems include high electricity costs, late payments from large customers such as the government and large corporates, and expensive employment processes. Where it is possible to simplify life for business, it can mean higher investment and productive efficiency in the private sector. In such cases, there will be, in consequence, a shift in microeconomic decision-making from the government bureaucracy to individual entrepreneurs, and this generally leads to increased private investment activity.

Insisting on the greater encouragement of entrepreneurship to support growth and employment in a country like SA is indeed necessary, especially if we acknowledge that by world standards the penetration of entrepreneurship into the population is quite low. Not everyone wants or is qualified to be in business – the economy is made up of many other estimable and essential occupations that contribute to the GDP – but the culture of entrepreneurship in SA could undoubtedly do with strengthening.

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At the same time the outbreak of xenophobia in SA will need to be addressed in its economic context, together with any other considerations.

At first glance the issues here appear to be generally the combination of an economy not growing rapidly enough to create enough business opportunities, criminality and recognisable xenophobia. We need to identify how big a role economic factors play in these events. DTI Minister Rob Davies has also raised the question of why foreign traders seem to be able to succeed in spite of the perceived obstacles to emerging and small business in SA. This all merits further research, but in the meantime we must concentrate on the overall picture to see how a more level playing field can be created for SMMEs based on what we now know.

Too many small businesses have a low survival rate and the number of SMMEs that foundered in recent years has been very high. More than 440 000 small businesses closed between 2006 and 2011. The fact is that only 2 out of 7 small businesses survive beyond their first year in SA, compared with a global average of 50%. Given the risks associated with starting a business, it is not surprising that many fail in the initial start-up period. The number of success stories of emerging businesses developing into fully fledged sustainable enterprises is still on the low side and we need to interrogate the obstacles. Access to finance and markets seems to be the main hurdle. The DTI’s initiative to establish 250 incubators by 2015 to help small businesses survive beyond their first year is a positive development. Also commendable is the valuable joint initiative by the DTI, the Department of Cooperative Governance and Traditional Affairs and the South African Local Government Association in 2013 to launch guidelines for the reduction of red tape in support of SMMEs; business should be identified with them.

Drawing on the prestigious Global Entrepreneurship Monitor (GEM) – in which SA has participated since 2001 under the auspices of the Centre for Innovation and Entrepreneurship at UCT – a regular up-to-date picture of entrepreneurship in this country is available and published annually. It evaluates the successes and failures of entrepreneurship in SA by international best practice and experience.

The highlights of its most recent in-depth assessment for 2012 include the message that by global standards SA needs to do much more to encourage entrepreneurship, especially among the youth. SA does not compare well for established business in the BRICS league 122

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Economy

Perceived opportunities

Perceived capabilities

Fear of failure

Entrepreneurial intentions

Entrepreneurship as a good career choice

High status to successful entrepreneurs

Media attention for entrepreneurship

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Brazil

52%

54%

31%

36%

89%

86%

86%

Russia

20%

24%

47%

2%

60%

63%

45%

India

N/A

N/A

N/A

N/A

N/A

N/A

N/A

China

32%

38%

36%

20%

72%

76%

80%

South Africa

35%

39%

31%

14%

74%

74%

73%

Table 6.1: Entrepreneurial perceptions, intentions and societal attitudes across the BRICS countries (Source: GEM Report 2012)

either, so clearly entrepreneurship is one area of policy that generally needs more incisive collective action from the public and private sectors alike. But it goes much further than removing technical obstacles to entrepreneurship.

There remains a strong propensity in recent debate in SA almost to deprecate success through moneymaking and to hold that the ‘rich’ are entirely responsible for whatever has gone wrong and make them feel guilty for enjoying the legitimate fruits of their efforts. We refer here, of course, to the genuine rewards of competitive initiatives in business, or where black economic empowerment has produced real winners, instead of ‘fronting’. Partly because of the global crisis, businesspeople all over the world are under scrutiny in ways they have not known for decades and bankers are favourite bogeymen. Yet we are still left to come to terms, whether in SA or abroad, with nourishing the ‘animal spirits’ needed as the mainspring of renewed prosperity and job creation.

We should create a climate in which efforts to promote wealth creation in SA by taking risks are seen by all aspirants as being desirable and worthy in the national interest, often, as one TV programme labels it, ‘against all odds’. The extent to which social norms encourage or allow actions leading to new business activities that can potentially increase personal wealth and income remains important. We want to give more people a stake in the economy to uphold and defend, in whatever group 123

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Country

Total early-stage entrepreneurial activity (TEA)

Total established business ownership rates

2006

2011

2012

2006

2011

2012

Brazil

11.60%

14.90%

15.00%

12.10%

12.20%

15.00%

Russia

4.80%

4.60%

4.00%

1.20%

2.80%

2.00%

India

10.40%

N/A

N/A

5.60%

N/A

N/A

China

16.20%

24.00%

13.00%

8.90%

12.70%

12.00%

South Africa

5.30%

9.10%

7.00%

1.70%

2.30%

2.00%

Table 6.2: Entrepreneurial activity and business ownership rates across the BRICS countries (Source: GEM Report 2012)

they find themselves. ‘So a key area for business concern is how to ensure that the private economy recognises wealth and rewards talent’, says Professor Steven Friedman.

This does not detract from the commitment of business in SA to walk that extra mile to help meet the country’s socio-economic challenges by continuing to be involved in national and local community matters, whether through corporate social investment or in other ways. Provided they can combine the legitimacy of moneymaking with altruism, should the servants of Mammon not also have ‘a place in the sun’?

Yet as Professor Anthony Butler lamented in Business Day (3 April 2013), ‘those who have entrepreneurial drive are meanwhile criticized for using incentives to make themselves work hard … Black businesspeople shoulder even more onerous duties. They are obliged to become rich in the national interest in order to create a “patriotic bourgeoisie”.’ Part of the antagonism to business may be because black economic empowerment is perceived in some circles as patronage rather than genuine transformation.

As entrepreneurship becomes more acceptable and is seen to be a positive employment choice by society, more people are prepared to move into business projects.

The fact that there are businesspeople and financiers who should rightly be criticised or prosecuted if they collude or defraud the system does not mean that business activity as a whole should be ethically deplored, any more than being in the public sector is in some way morally reprehensible because politicians or bureaucrats are sometimes found guilty of corruption.

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For the wise or more efficient entrepreneur, society should have a happier message: ‘You have transformed resources which we value at five rand into a product or service which we value at six rand; we want you to continue along these lines, and we want other businesspeople to do likewise. As an indication of our approval, and as an incentive to you and others, take this profit and enjoy it, and earn more if you can.’ Today’s competitive profits must be seen as creating tomorrow’s capital. We might add here that, although profit-making is often singled out for special condemnation, even professional persons do not pursue their vocation for the benefit of their health. Businesspeople and professionals alike seek out a gainful occupation, and in respect of motive there is no difference between fees, salaries, wages and profits.

The question of how the economic order broadly relates to the moral order is an old one which has been addressed by numerous authorities, and there has been a wide range of completely opposite views as to whether the spread of modern, technologically driven capitalism helps or hurts moral life. This debate around the ‘cultural contradictions of capitalism’ is a long-standing discussion, including the argument by the economist Joseph Schumpeter that capitalism tended to produce a class of elite over time that was hostile to the very forces that had made their lives possible, and that they would eventually seek to replace market economies with socialist ones. The sociologist Daniel Bell and others have also suggested that a cultural elite that stands in perpetual opposition to all middle-class values ends up destroying the productive basis of the market economy that makes its own existence possible. SA does not seem to be entirely immune from these phenomena.

The most realistic perspective probably came from the economist John Maynard Keynes, who said: ‘There are valuable human activities which require the motive of money making and environment of private wealth ownership for their full fruition. Moreover, dangerous human proclivities can be canalized into comparatively harmless channels by the existence of opportunities for money-making which, if they cannot be satisfied in this way, may find their outlet in cruelty, the reckless pursuit of personal power and authority, and other forms of selfaggrandizement. It is better that a man should tyrannize over his bank balance than over his fellow citizens.’

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Fukuyama more recently concluded that in all societies there seem to be two processes working in parallel: ‘In the political and economic sphere, history appears to be progressive and directional, and at the end of the twentieth century has culminated in liberal democracy as the only viable alternative for technologically advanced societies. In the social and moral spheres, however, history appears to be cyclical, with social order ebbing and flowing over the space of multiple generations. There is nothing that guarantees that there will be upturns in the cycle. Our only reason for hope is the very powerful innate human capacities for reconstituting social order. On the success of this process of reconstitution rests the upward direction of the arrow of History.’

Which will it be in SA’s case?

Energy policy The NDP addresses the question of the electricity-intensive nature of the SA economy and the need to balance supply security, affordability and climate change mitigation aspirations in the power sector. Specifically, it emphasises that SA must aim to have adequate supplies of electricity and liquid fuels to avoid disruptions to economic activity, transport and welfare. It also wants to see more competition in this field, such as independent power producers. On the question of nuclear power, the NDP raises questions not only about the scale of the financing of a nuclear fleet, but also about building the institutional and skills base for running such nuclear plants. It urges that all possible alternatives need to be explored, including the use of shale gas, which it says could provide reliable base-load and mid-merit power generation through combined cycle gas turbines. This will all presumably require to be on the agenda of the proposed interdepartmental process to be convened jointly by the National Planning Commission (NPC) and the Department of Energy to update integrated energy plans.

If SA wants to think ‘outside the box’ here, one additional area to explore is whether daylight saving or two time zones could help productivity and provide energy gains at peak periods. The theory behind daylight saving dates back to the end of the nineteenth century and was initially adopted by Germany during World War I. Other countries followed suit quickly and retained it after the war ended. SA temporarily introduced daylight saving during World War II to assist 126

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the war effort. Technical studies have also been done in the past to split SA into more than one time zone. If SA is divided into two time zones, the peak load experienced on the electricity networks could be reduced.

Although views on the benefits, or costs, of daylight saving or two time zones may be divided, it would seem at least worth investigating the pros and cons to see whether these measures could help to promote energy saving and other benefits in SA. A multidisciplinary task team could be set up to look at the evidence and make recommendations.

Climate change The NDP includes the conventional approach to concerns around global warming for SA in the years ahead. For SA to gradually move to an everlower carbon economy at a deliberate pace makes good policy sense and is in line with global efforts. Nevertheless, laudable attempts to promote environmental laws without proper cost–benefit assessment and effective consultation have had serious unintended consequences in several parts of the world, including SA. In seeking to make certain economic sectors ‘greener’, environmental rule-making has in some instances pushed them further into the red at a time of economic slackness, at the cost of growth and jobs. Unnecessary and multiple ‘red tape’ around environmental requirements have led to substantial delays in important investment projects in this country.

SA needs good policies to address the long-term challenge. We nevertheless need to retain a realistic grip on what is, and what is not, viable in renewables in SA, as we invest more resources into this important area. With the economic challenges currently facing the eurozone, several EU countries, such as Spain, have had to reconsider their virtually openended commitment to renewable energy. The recent failure to reform Europe’s carbon market will have an effect on climate change policies elsewhere. The NDP emphasises that SA needs to remain competitive both in the transition to and during a low-carbon future.

Recent evidence that carbon dioxide levels have risen globally but global temperatures have apparently not is indicative of the mixed evidence that exists. The Economist (20 June 2013) comments that ‘there is no way around the fact that this reprieve for the planet is bad news for proponents of policies, such as carbon taxes and emission treaties, meant to slow warming by moderating the release of greenhouse gases’.

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The forthcoming fifth assessment of the International Panel on Climate Change may also suggest that views on climate sensitivity are modifying.

It may emerge that climate sensitivity has been exaggerated in the past and that the science is still too uncertain to allow a single estimate of future temperature rises. If this is the case, it will have important implications for policy.

As SA debates the wisdom or otherwise of a carbon tax by 2015, we also need to recall that there is currently no international climate change agreement. So far the climate change negotiations have not yielded tangible evidence of when, and at what level, other countries will commit to carbon reduction in their economies. It does seem, however, that the Conference of the Parties negotiations are suggesting more concrete undertakings by 2020, which is a more realistic timeframe for SA. The need for caution is exemplified by what has gone wrong in Spain, when good intentions were translated into over-ambitious decisions on renewable energy, with serious economic consequences.

Perhaps the most important recommendation for SA therefore is the NDP’s proposal that the government create an independent Climate Change Centre, in partnership with academic and other appropriate institutions. There is already a danger that, as with the future of nuclear power in SA, the debate around decision-making on climate change is becoming heavily clogged by vested interests and specious arguments.

To ensure that SA takes the right decisions on climate change policy in the years ahead, given its other socio-economic priorities, an independent research-driven Climate Change Centre is indeed what is required. In other words, it is in SA’s best interests to constantly act on the best information available as to what the trade-offs are in dealing with climate change.

The political scenario, the media, and the NDP With the current advent of a general election campaign in SA, the credibility of the NDP is inevitably at stake. As previous noted, the emphasis placed by the NDP on cohesion and solidarity would be difficult to achieve even under ‘normal’ circumstances in SA, but with a pending election in 2014 things are inevitably going to be said and done that may be good for electioneering purposes, but bad for the solidarity which the NDP requires. The lapse in time between the acceptance of the 128

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NDP in 2012 and the election in 2014 could become a ‘credibility gap’ in decision-making.

As various political groups and parties gear up for the forthcoming elections, the degree of polarisation that is already emerging suggests that the NDP could become a casualty of the election campaign. Shortterm politics could trump long-term plans to strengthen the economy and tackle the structural challenges identified by the NDP. To say that commitment to the NDP could resume once the vagaries and distortions of electioneering are over is too optimistic, as the damage to credibility would be very high and would erode the basis for confidence in future policies. It would be one thing to sequence the implementation of the NDP between now and the election in a sensible political way, but it would be quite another to fight an election that undermines it, in the hope that all will be forgotten and forgiven.

Ideally, if a degree of consensus could emerge among the major political parties about the NDP, the roadmap to 2030 could be a source of strength and enthusiasm for the robust debate that lies ahead. Parties may even compete on the basis of which one believes it is most capable of implementing the basics of the NDP, as issues of growth, inflation, unemployment and related matters will clearly be high on the election agenda. A tough pitch for voter support in the next election on economic issues does not have to be an entirely ideological one or at the expense of SA’s long-term vision, but instead may even draw inspiration from it. It would then just be possible to reduce the risk of short-sighted opportunism which jeopardises the enduring factors of national prosperity in order to gain a temporary benefit.

It ultimately comes down to the quality of leadership all round and the willingness to take a longer view. The great strength of the NDP remains that it seeks to encourage the country to look beyond the shortterm electoral and business cycle and invest more in long-term planning.

The challenge to leadership is to use the NDP, rather than spurn it, to help inform the political debate around the forthcoming elections in ways which will promote value politics and a strong economy. The nature of the unfolding election campaign will therefore be an important determinant of the extent to which the good intentions of the NDP will survive.

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an election, there is a wide range of formidable implementation challenges to anticipate and resolve. Some will be real, some will be imagined, but most will be a combination of both. ‘If you chop wood’, one prominent businessperson has said, ‘you will get some splinters.’ Various chapters in this book outline both the obstacles and the opportunities arising out of the implementation of the NDP framework, but the consistent theme remains one of a vision for 2030 that needs to be constantly backed by political will.

Finally, in their recent magisterial study Why Nations Fail: The Origins of Power, Prosperity and Poverty, professors Daron Acemoglu and James Robinson also refer to a set of actors who can play a transformative role in the process of empowerment for citizens: the media. Empowerment of society at large is difficult to coordinate and maintain, they say, without widespread information about whether there are economic and political abuses by those in power, either in the public or private sectors.

Together with the new forms of media based on progress in information and communication technology – ranging from Web blogs to Twitter – a free media as a whole is an important actor in helping to channel the empowerment of a broad segment of society into sustainable socioeconomic and political reforms.

A reliable flow of information and analysis through the different levels of media should therefore be seen as an assumed, if unspoken, element for the success of the NDP, for the country to make good public choices about the future, and for markets to operate properly.

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7 The mixed economy and business

The ANC is not a socialist party. It has never pretended to be one, it has never said it was, and it is not trying to be. It will not become one by decree for the purpose of pleasing its ‘left’ critics.

– T habo Mbeki The most distinctive characteristic of the businessman – the thing that most sharply distinguishes him from the lawyer, college professor or, generally speaking, the civil servant – is his capacity for decision.

– John K enneth Galbraith The theoretical factors which determine wealth and its distribution are basically the same for North Korea as they are for Germany. It would be possible to write a book about economics which would be equally valid for ‘socialist’ and ‘capitalist’ countries, as well as for both developed and developing economies. But such a book would be rather abstract and boring. Many of the most interesting things in economics arise from the interaction of general economic forces with the institutions, organisations, cultures, history, ideas and habits of a particular country.

This is the challenge in the ‘political economy’ of development.

The most efficient and development-oriented societies of today are often tainted by corruption, failures of government and private rentseeking. So how does a country do better? How does an emerging economy make a breakthrough? The literature on growth economics and diagnostics is vast and global experience extensive. Only a handful of countries have successfully sustained high growth rates over long

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periods. Out of this data SA has sought to distil an overall plan adapted to its circumstances.

The technical definition of a mixed economy is elusive, but in practice it is to be found in almost all countries to a greater or lesser extent. Like the proverbial saying about an elephant – ‘hard to define but you know one when you see it’ – a mixed economy is simply the juxtaposition of the respective roles of government and the private sector in an economy provided by the respective shares of the public and private sectors in a country’s GDP. Even in 1776, Adam Smith, by allocating certain basic functions to governments such as law and order, defence, enforcing contacts and so forth, acknowledged the concept of a ‘mixed economy’.

Since then, of course, as the functions of government have expanded in accordance with Wagner’s law, where to draw the line has remained a permanent bone of contention in political and economic debate. Even in the current discourse, China’s future hinges around the issue of what kind of state is emerging there.

The mixed economy is therefore a recognised term for describing an economy in which both government institutions and markets are important in allocating and distributing resources. Economic policy determines the boundaries of the mixed economy; it is conditioned by the existing institutions of the public and private sectors, how they interact with each other, and where the thresholds should be located.

Mixed economies, whether in developed or developing countries, generate both advantages and disadvantages at any one time, depending on how efficient or inclusive their institutions are, on how the boundary between the public and private sectors shifts for technological or other reasons, and on how well policymakers use the tools at their disposal to respond to changing economic realities and public choices. This is where the controversies and uncertainties arise and this is why the NDP reminds us that it is necessary for SA to take a consistent view on what role it wants the state to play. Both under apartheid and in recent years the state has played an increasingly dominant role in the course of events. If we now take the existence of a mixed economy in SA as a given, then the big question remains what key measures can be implemented to make it work better than it has hitherto, given the opportunity created by the NDP.

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Unpacking the mixed economy SA therefore has a ‘mixed economy’, i.e. one with important sectors and services in national ownership, but most production is still in the hands of ‘private enterprise’, is organised on behalf of those who lend money capital, and is broadly run for profit. The excess of private power in such a system – and the SA economy remains heavily concentrated in some sectors – is held in check by the existence of a fair amount of competition, reinforced by key competition ‘watchdogs’ and regulators of one kind or another to help enforce the ‘rules’. Research done by the Competition Commission’s policy and research division indicates the extent to which cartels in SA can hamper competition and raise prices. Sensible intervention is therefore required from time to time to change business behaviour and promote competition. In a lighter vein the story is told of a sociologist who, while visiting a big mental institution, commented to the authorities on the small number of guardians that seemed safely able to take charge of such a large number of mentally unstable people. ‘How is it,’ he asked, ‘that it is safe for you to run this setup with such a small staff?’ ‘Oh,’ came the answer, ‘lunatics never combine.’

The NDP says that ‘the country also needs to clarify its mind, and develop a firm and consistent view on the issue of the role of the state in the economy’. Yet the NDP is pragmatic about what should be done.

Both the public and private sectors must do what they do best within a climate of trust and cooperation. The NDP sees the private sector as the key role-player in the economy, but also understands that SA does not have a clean sheet of paper on which to rewrite all policies de novo.

The alignment of policies will take time and skilful management, if our mixed economy is to send out more consistent and coherent policy signals in future.

The NDP puts great emphasis on considerably strengthening the capacity of the state, including ending the policy of political appointees, without the necessary skills, being absorbed in or deployed to the public sector. The NDP therefore promotes the concept of creating a ‘capable state’, rather than the popular notion of a ‘developmental state’, though implicitly recognising that the latter needs the former to succeed. Of course, there is not necessarily a conflict here, as SA does need a delivery state to achieve whatever are its overarching goals.

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Critics of the private enterprise system have a divided view about competition. Some think private enterprise is wrong because it is competitive – others that it is harmful because it is not competitive enough. It remains an old debate between those who consider that, whether it be competitive or monopolistic, private ownership of the means of production is morally indefensible and those who consider that there are practical arguments for another system of ownership. It is safe to say that political economy in the twentieth century was heavily shaped by controversies about the respective roles of the public and private sectors. And recent global developments have created an understandable gnawing and widespread unease about ‘market capitalism’ as a system.

But as suggested in Chapter 1, the weak link here has been financial capitalism, which is currently under the microscope and remedies are being sought. For the rest, what is the practical alternative to marketorientated economies as a whole?

One perspective that should be kept in mind is that excessive state intervention in businesses, in which ceaseless innovation and flexibility of resource are required, could become a danger to economic progress.

Although a public sector may employ many thousands of engineers and technicians, very few inventions of any importance will emanate from them. That is not their task. If government control had supplemented that of private enterprise a century ago in SA, there is good reason to believe that our methods of business now would be as effective as they were about 50 years ago, instead of being more at the cutting edge of technological developments as they are now. A government can print a good edition of Shakespeare’s works, but it could not get them written.

A strong case remains for private initiative as the engine of growth in a developing economy that wants to succeed. High quality companies in SA are a key source of strength for the economy.

At the ANC elective conference in Mangaung in December 2012, President Zuma referred more than once to SA as a ‘mixed economy’.

We often have to act within the system as it is. We may deplore some of the decisions that have been taken and regret that a government often has the excessive powers it has; we must try our best as experts to bring decision-makers to new insights; but as long as these interventions exist, it is often, but by no means always, better that they be exercised efficiently rather than inefficiently. In serious policymaking it is usually 134

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better to help get it right than to leave decision-makers to get it wrong.

The debate thus always is how to make a mixed economy work better and where to draw the line. In general, whatever may be the failures in particular countries, any absolute scepticism regarding the stability of all mixed economies has little basis in logic or history. As indicated previously, Adam Smith himself conceded that the state should maintain ‘certain public works’. A ‘mixed economy’ is in fact a practical approach in which the respective voices of the public and private sectors can be sensibly balanced, given a country’s needs. The Greek maxim of the golden mean offers us a rule of conduct shaped by the lessons of history.

The concern over state strength, which goes under a variety of headings, including ‘governance’, ‘state capacity’ or ‘institutional quality’, has been around for some time under different titles in development economics.

State strength, rather than state scope, is seen in most economic literature as more important for long-term growth. Hence, a capable state is indeed critical to realising SA’s vision for 2030.

One of the challenges of government intervention is the management of expectations. International evidence indicates that the risks of violence or instability are higher when citizens enjoy legal and social equality but do not have the income, job or housing they need. The irony that hurts is that the experience of social instability often suggests that when conditions get selectively better, citizens become more openly dissatisfied.

The disparity between their lot and that of others becomes more evident, especially in SA’s case. It is not entirely accidental that civil protest over delivery occurs after serious efforts by government to improve such delivery, but these are perceived to be unbalanced or ineffective. The 2011 National Census confirmed the extent of the progress that had been made on the socio-economic front, but much more needs to be done.

In his assessment of growth prospects for countries, Jim O’Neill (2011) reminds us of government as an obvious factor in a country’s ability to become more productive: ‘It is government that provides the appropriate framework and support system for growth as well as incentives. Nations whose leaders constantly struggle to cope with change or with the implementation of new and different ideas are typically those that have a poor productivity performance. Stability, credibility, the rule of law and the absence of corruption are also key to allowing economies to grow.’

So what more can be said of the role of government and business?

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More on the role of government and business The fact is that the need to compensate or assist less privileged persons in our society in matters of health or education does not necessarily mean that government should always run hospitals, monopolise health insurance or exercise total control over education. If government wishes to shift, quite rightly, the terms on which different groups in our society gain access to such ‘public goods’, there are other delivery mechanisms which can avoid the predictable wastage often associated with excessive government control of facilities.

We need to be creative in our thinking. The demarcation between the public and private sectors must be driven by new practical tools to promote delivery. It is often argued that the inadequacy of entrepreneurial talent in SA, compared with more developed countries, requires extensive government intervention in economic life. Yet, if the economy is short of entrepreneurial skills, why should a supply be available to the government?

Business should nonetheless recognise that if the government, in the spirit of the NDP, demonstrates greater willingness to mobilise the private sector more effectively, then business should respond accordingly.

As we saw earlier, the number of service delivery protests, according to STANLIB, has risen sharply over the past four years. In 2012 they were a record high of 173, compared with 27 in 2008. Over 75% involved violence. Most protesters were demanding better access to basic services, especially housing and water. This phenomenon clearly reflects the rising social tension in SA around the need for efficient delivery in what has already been allocated. Since there is evidence of the relative and sometimes complete incapacity of the government to manage and deliver services efficiently, we need to think constructively about how to improve the situation.

Some years ago, the British physician Max Gammon, after investigating the extensive system of socialised medicine in the UK, formulated what he called ‘the theory of bureaucratic displacement’. ‘In a bureaucratic system,’ he says, ‘increase in expenditure will be matched by a fall in production … such systems will act rather like “black holes” in the economic universe, simultaneously sucking in resources, and shrinking in terms of limited production.’ This could of course also be extended to other public sector fields such as education.

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to power in 1997, committed to public sector reform. The challenge was not only to contain the escalating costs of welfare services but also to improve their quality, which had deteriorated thanks to Gammon’s law. Britain had become a ‘tax-and-spend’ economy with worsening outcomes. The point of departure for reform in the UK, then, was to get business ideas into public service practice, so as to free up the front line of public services to be more efficient. This has had considerable success.

Nordic economies have also demonstrated that market mechanisms can be injected into public services to sharpen their performance.

Sweden has gone further than any other European country in embracing the purchaser–provider split; that is, in using government money to buy public services from whichever providers, public or private, offer the best combination of price and quality, says The Economist (18 May 2013). Private firms offer 20% of public hospital care and 30% of public primary care in Sweden. St Goran’s hospital in Stockholm is seen as an outstanding example of applying business principles to the public sector and getting the best of both worlds: being successfully run on the twin lean principles of ‘flow’ and ‘quality’. The private sector was brought in to assist when the hospital was threatened with closure a few years ago. It may be Spartan but it is apparently efficient. The hospital has been likened to ‘the medical equivalent of a budget airline’. It is beginning to alter the way in which Swedes receive public health care, and although the policy is in its early stages, allowing more private companies in the mix has demonstrated the advantage of giving taxpayers value for money.

‘Welcome to health care in post-ideological Sweden,’ comments the journal.

As SA seeks how to improve its educational system, especially basic education, and wishes to move towards a national health scheme, it needs to define a clear line between individual and state responsibility.

The purpose is not necessarily to ‘privatise’ but to make the system more responsive to citizens’ needs. For example, in the transport field, exploring the possibilities of granting concessions to the private sector to run railways lines could be considered. The lesson learned since the welfare state was introduced in the UK in the late 1940s is that driving ‘value for money’ through public services is not a question of being efficient rather than being just – it is just. What delivery protests in SA are telling us is that efficacy in social delivery is based on an expectation 137

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of both efficiency and justice. This has also been an important message in recent national budgets.

The reasons and explanations for the ‘activist’ role of the public sector in the SA economy and the expansion of that role are complex and are intertwined in various ways in SA’s history. At the conceptual level, the virtue of the NDP is that it avoids the ‘isms’ of capitalism, socialism and globalism – and opts instead for pragmatism. Based on this approach, it accepts that markets alone are not the answer and focuses strongly on the need for a ‘capable state’.

‘Any real world economy is riddled with market failures,’ says Professor Daron Acemoglu, ‘so a benevolent and omnipotent government could sensibly intervene quite often. But who has ever met a benevolent or omnipotent government? … modern economic growth, even under inclusive institutions, often creates deep inequalities and tilted playing fields … the modern regulatory and redistributive state can, within certain bounds, help to address these problems. But the success of such a project crucially depends on society having control over the state – not the other way around.’ We need therefore to ask how well the state can be expected to perform and be held accountable in SA, and how this can be changed or improved.

Although SA is not yet a first world nation, but aspires to be one, as we move ahead and assess state capacity in SA we need to ask the following basic questions as we implement the NDP: 1. Given SA’s stage of development and aspirations, is there a case for the government being involved at all in the provision of a particular programme or service? On what sources of market failure does this case rest, and can the benefits of government involvement be clearly shown to exceed the costs? Can the private sector, especially emerging black business, be more usefully deployed?

2. Where a positive case can be made for government involvement in the provision of a programme, project or service, can the existing or proposed method of involvement be justified? What capacity exists to undertake the task? Can it be improved? Who will be held accountable?

Are there better ways to achieve the same objectives at a lower cost to the economy and the taxpayer?

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that only intended beneficiaries are assisted? Can assistance be better targeted?

4. Is there a need for greater use of mechanisms like the RIA mechanism or partnership with the private sector?

The common thread which therefore runs through much of what we want for SA is the need to raise the quality of decision-making in policy wherever possible and take the right decisions sooner rather than later. We have seen that remedies require social and political institutions capable of mastering the challenges and undertaking solutions. These institutions may be weak or dysfunctional. Time marches on and the remedies never seem to catch up. What could assist?

Are there any tools to help, such as the RIA? Recent policy changes and discussions, especially around the introduction of e-tolling, again remind us of the importance of RIAs. RIAs have been around globally since the 1980s and technically in SA since 2007. An RIA is basically a tested and rigorous method for assessing the costs and benefits, in the broad sense, of official regulatory and policy proposals and has built up a good track record in several countries. We need to widen and deepen the role of RIAs in SA. They have so far only been used in a minimum of instances. If there is one cross-cutting mechanism that could strengthen the implementation of the NDP, it would be widespread use of RIAs. The past few years have testified to the enormous costs and widespread embarrassment caused by laws and regulations made in the absence of an in-depth impact assessment of their crafting. This should be a tipping point in favour of future RIAs. The biggest area of concern that could have been better addressed through an appropriate RIA is the challenge of the Gauteng Freeway Improvement Project. Other examples which come to mind are the far-reaching Companies Act, the latest consumer legislation, and the proposed ban on liquor advertising, all of which would have been greatly improved through an RIA process. We do not need to reinvent government but we do need to make the machinery we have work properly and critically interrogate regulatory requirements.

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performance over the past few years. SA needs a more competitive and friendly regulatory framework, especially for small business, where the greatest potential for job creation lies. Although this need is partially recognised in both the NGP and NDP, government can still do much more to reduce the transaction costs of doing business in SA. SA is far from having this kind of regulatory culture, which should also extend to parliamentary processes.

The RIA is therefore a policy tool which assesses the impact on the economy – in terms of costs, benefits and risks – of any proposed law or regulation, with some exceptions. All government agencies and departments seeking additional statutory power for making new regulations should be required to produce a preliminary assessment in advance of engaging with stakeholders. It does not replace decisionmaking but puts such decision-making on a far better footing regarding its quality.

The universal introduction of an RIA mechanism in government departments and state agencies should therefore be urgently expedited.

The central RIA unit, originally established in February 2007 under the political leadership of the Deputy President, needs to gain widespread traction in the bureaucratic machine. Over time, we need to make regulation easier in areas where it matters. This will go a long way in creating a framework of ‘smart tape’ rather than ‘red tape’ in SA. RIAs introduced early in the official decision-making process will assist in determining whether regulation is necessarily the best option to deal with a particular problem, or if there are better solutions.

RIAs act as an early warning system to both government and the private sector about official intentions in a specific area of policy, for example environmental legislation or transport. Where there is deep RIA analysis, it creates an opportunity to offer a coherent, well-argued and evidenced case for whatever the government is proposing. It is then possible to begin to identify any unintended consequences that may flow from such proposed actions in a structured way. By reducing sudden legislative or policy ‘shocks’ and minimising uncertainty, RIAs are likely to have a favourable impact on business and investor confidence.

The evaluation process is not only intended to be helpful at Cabinet level. It also extends to Parliament, where specialist portfolio committees scrutinise draft legislation. In May 2012 the Speaker of the National 140

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Assembly, Max Sisulu, chided its members for the poor quality of the legislation it was approving. The same applies to NEDLAC, where such a process could find common ground among stakeholders in the interests of growth and development.

With the creation of the Parliamentary Budget Office in 2013, there could be risk of duplication with any expanded role for RIAs. In a newspaper interview, the newly appointed Director of the Budget Office, Professor Mohammed Jared, spoke of also developing ‘the methodology for costing new bills, we’ll develop the economic, financial and policy assumptions and we’ll put the numbers on the table’ (Mail & Guardian, 28 June 2013). This appears to go beyond dealing with the budgeting process and government spending and seems to enter the terrain of RIAs. It is clear that the usefulness of RIAs lies in the fact that they should be deployed long before bills get to Parliament and even to the Cabinet, thus informing decision-making at an early stage. Ideally, where an RIA has been done, it should be attached to draft legislation submitted to Parliament by the Cabinet. If the role of RIAs is to be effective, these aspects will need to be clarified with the Parliamentary Budget Office in due course, to avoid any wasteful duplication and unnecessary possible conflict.

Another advantage of an RIA is that of coordinating the work of different regulators or agencies. Policy proposals usually start from a world that is moving, not one that has to be set in motion. There is an institutional history and background. The compilation of an RIA encourages government departments to evaluate the range of regulations in a particular sector and to consider afresh how such regulation could be streamlined, even if that regulation is not under the direct control of the department. Reports by the OECD on SA have often emphasised that poor scoring on regulatory processes partly reflects the failure by legislation and institutions to allow for market solutions, and results as well in serious coordination problems among different state agencies.

Whether it is a cost-benefit analysis or a variation on that theme, an RIA could also help to build support for policy proposals by taking account of stakeholder views, which would form part of the consultative process around an RIA study. This could help to strengthen confidence in the outcome of an RIA by demonstrating the extent to which the RIA is evidence-led and based on a rigorous in-depth analysis. The emphasis, 141

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then, is on deep rather than fast. Perhaps a new test that could be added to the process is whether the forecasts are consistent with the NDP framework.

At a time when the global focus is on the need for good governance, the RIA becomes an indispensable tool for any government that wants to get more things right the first time around. ‘Prevention is better than cure’ remains the adage. One truism is that rules that constantly have to be amended and strengthened are not rules. Whatever the precise RIA mechanism applied in SA, it has become a necessary instrument for coherent and coordinated policymaking in a developmental state.

For an emerging market like SA, the risk of getting it wrong while trying to do the right thing has become high. This is the major lesson emerging from the e-tolling experience and various other highly contested legislative changes. SA should want to enjoy ‘best practice’ in regulatory efficiency, drawing on international experience. The American economist Thomas Savell offers the maxim that the true measure of a policy is not the intention of its framers, but the quality of its outcomes. Using RIAs to pursue a more rigorous cost–benefit analysis of legislative and policy proposals will help to promote certainty and boost investor confidence.

Finally, RIAs are not a substitute for final decision-making in the public sector. In a democracy, there are still decisions to be made by political leaders and representatives. They will continue to bring a host of considerations – rational and even possibly irrational – to bear on their decisions. What RIAs can do is highlight the economic implications more sharply and clearly. They permit us to ask more intelligent questions from politicians and civil servants about projects and policies. If it is eventually decided, all things considered, to reject the RIA analysis, then so be it. The policy decisions will nonetheless have been based on the best available information.

Are public–private sector partnerships an additional mechanism for delivery?

The NDP supports partnership between government and business in pursuit of SA’s socio-economic objectives. One area that could be more usefully explored is public–private sector partnerships (PPPs). The context underpinning the hopes of the PPP market in SA is one of largescale investment and development by the state of social and economic 142

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infrastructure, as outlined in earlier chapters.

There is a serious concern as to how these ambitious plans will be funded and delivered. We must assume that on the back of the global economic slowdown, sharp growth in the direct and contingent liabilities of national government, rising levels of public sector borrowing and slowing tax revenues, it is highly unlikely that the planned infrastructure can be funded wholly from public sources alone. While government has allocated significant amounts of funding to infrastructure, this will be insufficient to meet funding needs over the medium term, particularly in respect of the large infrastructure building programmes for SOEs. This makes the increased use of private funding through PPPs a more considered supplementary option.

Nor, considering the shortage of capacity in the state especially at local government level, is it likely that state institutions will have the ability or capacity to deliver infrastructure projects and services on the scale envisioned. In 2007/08, for example, of 295 local authorities, only 61 (or 20%) could spend between 80% and 100% of their capital budgets while 95 (or 32%) spent 40% or less of their capital budgets. National departments and provinces also have a record of being unable to spend capital budgets.

As outlined in the ‘delivery deficit’ section, this suggests severe capacity constraints in the state in the delivery of infrastructural services. The reasonable conclusion is that innovative arrangements that involve the use of private balance sheets and expertise and experience will necessarily become a core component of larger infrastructure projects, especially at a municipal level. The Presidential Review of SOEs referred to earlier also includes greater use of PPPs in its recommendations. This bodes well, in theory, for the health of the PPP sector. We should be prepared to experiment with all kinds of new partnerships between the state and private enterprise.

In reality, however, the data suggest that PPPs have so far only played a marginal role in the delivery of infrastructure and services. The official forecast of the medium term for the use of PPPs is similarly marginal.

While the value of infrastructure delivered by public–private partnerships increased from 2006/07 to 2009/10 from 1.6% of total infrastructure spend in 2006/07 to a peak of 5.9% in 2009/10, the contribution is set to decline over the medium term, according to Treasury forecasts, to a 143

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mere 2% in 2012/13. The cumulative public sector infrastructure spend between 2006/07 and 2012/13 will be in the region of R1.47 trillion, yet of this cumulative total, only R51 billion was or will be budgeted for delivery by way of PPPs. Over the period, spending involving a PPP constituted an average of 3.3% of total infrastructure spend each year.

Thus, although SA has a growing need for more infrastructure provision, has a well-respected PPP regulatory framework, and PPP expertise has delivered some first-rate projects, the overall conclusion that must be drawn from the data is that the PPP mechanism is not well supported or used in SA. While PPPs are not a panacea or magic wand for public sector delivery in times of budgetary constraint, we need to see whether their role can be sensibly strengthened in SA. Some of the aspects that could therefore be enhanced through the PPP framework include: a clearer political commitment to the use of PPPs, better risk allocation, a strengthened and more predictable flow of PPP deals, lowered transaction costs in the process of bidding for and closing PPP agreements, improved capacity to manage PPPs within the public and private sector, and amendments to the technical framework that would allow for an opportunity for the private sector to identify potential projects. There is also capacity for an increased role for development finance institutions and the standardisation of smaller transactions and projects in order to maximise the gains from this financing and ownership structure.

In summary, what appears to be generally needed from the public sector if a mixed economy is to work successfully is to build confidence in its strategic thinking, in dealing with poor performance, managing change effectively, learning from mistakes and working across government departments. This reiterates that raising the rate of growth in SA and achieving shared prosperity have much to do with strengthening state capacity where it matters, or otherwise devising new and innovative mechanisms to ensure effective delivery. Policies do matter, but so do the institutions and mechanisms through which they are approved and implemented.

And the business sector?

To begin with, what is the role of organised business in SA? Globally it plays a significant role in representing and mobilising the business community. Business associations have flourished for many years 144

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in this country and have broadly made a valuable and constructive contribution to policymaking over this period. In a mixed economy the right of business to organise itself remains an essential balancing factor in policy formation and implementation. The first Chamber of Commerce was formed in Cape Town in 1804. Since then, the organised business network in SA has evolved in line with economic and political developments in the country, and as businesspeople felt the need to pursue certain issues collectively in a changing scenario. Organised business was especially active in the formative years leading up to 1994, playing a leading role in the formation of NEDLAC. The NDP has now added, both practically and symbolically, a major new dimension to the policymaking environment for business in SA through its emphasis on consultation and collaboration.

Yet, is business now sufficiently well-organised and structured nationally, sectorally and regionally to meet the new challenge and respond to President Zuma’s stated receptiveness to the private sector’s role? Given its current fragmented nature, organised business in SA is perceived by many to be structurally weak, with insufficient political credibility to generate enough clout. Business associations in SA have to grapple with the imperatives of rationalisation and deracialisation within their ranks in order to extend their influence. This calls for the highest skills in diplomacy and negotiation to bridge the deep divide that still persists between white and black business in SA. We need to see the development of larger and more meaningful black–white business coalitions in future. Apart from forging closer cooperation between black and white business, there also has to be greater unification within black business itself. We must bring together those who belong together if the sphere of influence of business in the unfolding NDP scenario is to be maximised. Bringing Business Unity South Africa and the Black Business Council back together would be a good point of departure.

‘When spider-webs unite,’ says an old African proverb, ‘they can tie up a lion.’

All over the world business associations, like their members, have been facing a changing and more complex environment. When individual enterprises change their strategies in order to become or remain competitive, their expectations of their business associations or employer organisations also undergo change. What this all means is that organised 145

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business has to constantly renew its relevance. In SA the implementation of the NDP will invest the policy environment with a new dynamic that seeks to transform the economy significantly by 2030. Government has undertaken to steadily align its policies with the NDP. Business associations should see this as a challenge to build their capacity, generate ideas, demonstrate their relevance, and increase their importance. They need to acknowledge their role in effective policymaking and, where necessary, form strategic alliances or promote mergers to meet new goals.

Countless surveys of businesspeople highlight ‘government relations’ as a vital function of business associations.

National business associations also often underestimate the importance of interaction with provincial and local governments. Despite its long tradition, the organised business network is very uneven in its coverage across the country as a whole and there are large gaps. Although SA is not a federal system, there are significant points of access for business at other levels of government in this country. There are 283 local authorities and nine provincial governments with which to engage. This is where much of the ‘delivery’ takes place and where extended cooperative action can not only help to improve delivery, but also enhance business opportunities.

Business associations are now strengthening their existing collaboration with structures such as the South African Local Government Association and the relevant state departments to mobilise business more effectively at the local level, as part of the implementation of the NDP. Many of the current changes are playing into the hands of business associations. After all, they are by their very nature information brokers.

The ‘information age’ presents a great opportunity for association growth, by providing sifted information on a value-added basis. What members really need from business associations is not so much information, but ideas, knowledge and analysis, underpinned by good research. Organised business should be both a consumer and a contributor of ideas on policy.

These are the major drivers of a new relevance for organised business in mobilising and serving their membership through collective action.

What matters now is that organised business at different levels in SA is structured in ways that will effectively influence the course of events in the interests of business and the country as a whole within the broad framework of the NDP. What more can be expected of the business community at large?

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Political leaders like both President Zuma and ANC Deputy President Cyril Ramaphosa have recently again urged business to take inequality more seriously. A key challenge since 1994 has been about how to deal with the legacy of inequality as a collective effort. That challenge remains as we move into the next phase, but it needs a different mind-set. That is not to say that business has been passive. Numerous initiatives, both old and new, testify to the willingness of business to make a positive contribution to alleviating social tensions in SA. Business also played an influential role in the transition of the 1990s. More recently, five accords on skills, education, local procurement, youth employment and the green economy have been signed under the auspices of the NGP. Although these accords can be seen as an important step forward in action-oriented social dialogue in SA, they nevertheless run the risk of being neutralised by a rising level of ‘accord-fatigue’ and cynicism on the part of many participants. ‘Where have they made a difference?’ critics ask. It is important now, especially if we note the ‘accord-language’ of the NDP, to critically evaluate what has, or has not, been achieved by previous ‘mini-accords’. It will then be possible to identify the conditions in which such instruments of joint commitment by stakeholders, like business, stand the best chance of yielding good results and what has been learned so far about the obstacles to success. This is particularly necessary if we recall that the success or otherwise of these arrangements ultimately rests on voluntary commitments by participants.

By world standards, corporate social investment (CSI) in SA is high and is estimated to currently be in the region of about R7 billion. There are also a number of companies that have created foundations to manage their CSI funds to support socio-economic upliftment. It is believed that about 40% of CSI in SA is currently dedicated to investing in education at various levels. If the NDP is now to be a new framework of policy, the research underlying the NDP could provide fresh insights for CSI activities. It may be advisable to see to what extent it is necessary to adjust the strategies and targets of individual CSI programmes, not only in the light of experience to date, but also to assess whether new gaps or priorities have emerged to change the CSI ‘mix’. It also seems as if the major foundations work in isolation from each other, at least officially.

Although corporates understandably want to drive their own projects, there could nonetheless be scope for a degree of increased 147

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collaboration, where interests do not clash. There may be merit in seeing whether cooperation could be ‘institutionalised’ in ways that would limit duplication and promote information-sharing so as to maximise the value added by CSI funds, yet at the same time not detract from the brand of the corporate or company concerned. This could be worth exploring in order to update broad focus areas for CSI generally and could help to make the total impact of what is being done ‘greater than the sum of its parts’.

An important area of enhanced cooperation between the public and private sectors in a mixed economy lies in the sphere of research and development, within the framework of the national system of innovation.

Official documents on the subject in earlier years repeatedly emphasised the need to strengthen the role of research and development (R&D) in the SA economy and proposed an investment target of 2% of GDP being dedicated to R&D by 2018. We need to see more ‘home-grown’ technology in SA. SA’s chances for improved competitiveness and economic growth depend, to a large degree, on science and technology.

An especially significant gap which exists is to commercialise the results of scientific research on a larger scale; here much closer alignment with specific economic sectors is needed. To adequately meet the challenges of the NDP will therefore require much stronger collaborative steps towards SA becoming more of a knowledge-based economy, in which science and technology, information, and learning move closer to the centre of economic activity.

In its initial assessment of the NDP in 2012, BLSA identified at least eight areas in which business could contribute to the goals of the NDP: evising a code of conduct on remuneration and labour practices; • d • assisting government in project management and in filling the backlog of government vacancies; • i mproving the skilled immigration programme; • m aking infrastructural development an attractive asset class; • s upporting infrastructure maintenance; • s etting up dedicated corruption courts; • placing more emphasis on incorporating independent power producers into the power grid; and • c onducting joint economic diplomacy, such as in BRICS.

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There are no doubt other possibilities as we begin to implement the NDP. We need to close the gap between what the government wants and what business needs. We need to see a step-change in collaboration here. A recent global CEO survey found that companies recognise this and are willing to increase their commitment to social and sustainable development over the next three years. In 2013 a group of South African CEOs took an important initiative and published a major letter in two of the leading Sunday newspapers, calling for greater collaboration between the public and private sectors on key issues.

One focus area in the mixed economy in SA which requires special attention is the issue of youth unemployment, where serious interventions have been considered to stabilise the situation. During the course of 2013, business, labour and government endorsed a ‘youth accord’. The National Employment Incentive Bill proposed by the National Treasury to subsidise the wages of first-time employees, and thus to lower the risk of taking on inexperienced workers, needs a positive response from business. Partnerships between business and the National Youth Development Agency need to be forged on a larger scale. It is necessary to introduce youth to the world of work. It is in the long-term interests of all businesses in SA that the youth are actively engaged in the economy and society. We know that high youth unemployment compromises social stability, and that this stability is critical to creating an environment that is conducive for growth.

While there are some unique factors driving youth unemployment in this country, it is also a global phenomenon. Official figures prepared by the International Labour Organisation record that 75 million young people are unemployed, or 6% of all 15- to 24-year-olds. Other statistics from the OECD and the World Bank paint an even more dismal picture.

Depending on how it is measured, the number of young people without a job in the world today has been estimated at nearly equal to the US population (311 million). There are both cyclical and structural elements at work here and they require proactive policies to be ameliorated.

Meeting the challenge obviously requires a multi-pronged approach, including measures such as higher growth, lighter regulation of labour markets, building new bridges between education and work, promoting entrepreneurship and encouraging business to invest in the young.

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the EU, because of combining apprenticeships with formal schooling to match education and skills closer to the job market. All these perspectives have their relevance to SA as the country seeks to grapple with its youth unemployment problem.

Business already implements programmes that enable young people to make the transition into the labour market and employment. However, some of these programmes fail to have the desired impact for the youth, and many do not meet the needs of business. There is a need for business to review these programmes and ensure that they are designed so that they are aligned with business strategy. Business then needs to drive these programmes so that they meet their needs. Far more attention should be devoted to learning from the good practices that are emerging and developing new ideas to promote youth employment.

There nevertheless needs to be a strong note of caution that there should not be excessive expectations about these interventions. The recent emphasis on specific labour market programmes rightly reflects rising concern about unemployment, especially among the youth. While on the basis of the ‘theory of the second-best’ such direct job creation schemes are and should be explored, it nonetheless remains true that they ultimately fail to address the underlying causes of unemployment. They do not explain the perceived failures in the labour market which such schemes are expected to correct.

All the schemes have some potential to promote employment. Yet international evidence strongly suggests that, unless the interventions are carefully designed and administered, their costs outweigh their benefits. If these projects are to have the maximum chances of success, they should not: (a) i ntroduce too much red tape; (b) force firms out of their traditional recruitment channels; (c) m ake the programme’s success depend largely upon the enthusiasm and competence of official bureaucracy; or (d) give windfall gains to some employers and a redistribution of job opportunities, rather than a net increase in jobs.

What would be best is for business to agree that, in the spirit of the NDP, all these special steps to boost employment should be reviewed after, say, five years. If such measures have any favourable impact on job creation, 150

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it is because they reduce the relative cost to business of employing them.

If they have a positive effect on total employment (net of displacement effects), it is because relative wage costs of different categories of workers really do matter to total employment.

More generally, while the issue of wage equity, or what constitutes a ‘proper’ wage, remains important to a country like SA, it cannot be entirely divorced from employment prospects and current levels of unemployment. If employment is the only objective of policy, to which all other aims must be subordinated, then it would seem impossible to formulate a satisfactory approach that will at one and the same time maintain job security and allow that flexibility that is the mechanism of economic change.

Too many commentators and policymakers assume that all demand and supply curves for labour have what economists call ‘zero-elasticity’, i.e. they are utterly unresponsive to changes in price. This is not so, as changes in relative wage costs do eventually influence business in their employment and labour-saving decisions. Wage costs do ultimately matter, especially to small business, and can be absorbed only to the extent that productivity gains permit. It is not pleasant to highlight these realities, as they affect people’s livelihoods, but they need to be recognised if SA is to manage the trade-offs more successfully than hitherto. But what can good decisions be based on beyond theory?

The UCT economist Professor Haroon Bhorat has done a great deal of useful work on the labour market and minimum wages, most recently on the economic impact of minimum wages in certain sectors of the economy such as retail, domestic work, forestry, and the security and taxi industries. This research helps to create perspective on an issue which, as he has pointed out, raises strong opposition and strong support both in SA and elsewhere. He has also emphasised that these assessments depend to a large extent on the degree of compliance and enforcement of minimum wages.

As could be expected, his results are mixed. He says that ‘the mediumterm labour market consequences of a minimum wage are more varied and unpredictable than most theory would suggest’ (Financial Mail, 17–22 May 2013). That is what we would have anticipated from a ‘real world’ study. The interpretation that should be placed on his findings is not that there may not often be an argument for minimum wages at a 151

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sectoral level, but that their determination should be based on a case-bycase analysis of the socio-economic circumstances of each sector.

What went wrong in the Western Cape in 2013, with the saga of farmworkers’ jobs being shed there as a result of the new minimum wage announced? It is thought that as many as one in seven farmworkers have lost their jobs since the decision was imposed, being the result of a combination of increased mechanisation by larger farms and smaller farms going out of business. While apparently some preliminary research was done, it is not clear whether this was sufficient to support a minimum wage decision covering the whole sector. It again emphasises the importance of in-depth and transparent case studies.

Given the commitment in the NDP to create jobs rather than raise the wages of those already employed, let us not forget the unemployed (outsiders) as competitors of the workers in jobs (insiders) when minimum wage policies are being discussed. There is a balance of interests to be weighed here. The fact that collective bargaining is also fortuitously helping extended families and the unemployed in them does not alter the economic realities that have to be managed. There is clearly no place here for dogma but rather for empirical evidence. Questions of a minimum wage policy and other similar interventions in the labour market therefore have a necessary role in the public policy debate, but they do need to be accompanied by an incisive economic investigation as to what would be the most suitable application in SA. In this way more care could be taken to ensure that the impact of unintended consequences does not swamp the intended ones if the wrong decisions are taken.

We also hear too much about wage claims and not enough about productivity accords in SA, a factor which ought to feature more prominently in future evidence-led studies. Wage claims and productivity seem to be ‘decoupled’. After all, labour market policy is the crucial intersection where economic, social and political policies meet, in SA as elsewhere. It will never be free of controversy and conflict. Facts alone will not settle the issue. Yet unnecessary contestation and ugly conflict could be minimised if the mechanisms and processes that surround these decisions could be better informed to narrow down the areas of disagreement where these exist. Agreement on the facts remains a necessary, but not a sufficient, condition for finding consensus.

To meet this requirement not only calls for a change in attitude on the 152

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part of key stakeholders towards productivity in the collective bargaining process but, as said above, policy interventions will need to be better informed by substantial economic analysis. We can also gain if local negotiators tap into the vast experience of the ILO, which has resources in SA, to contribute its expertise and experience to finding solutions where gridlocked situations exist. Whether this can all eventually be pulled together to make the mixed economy in SA work better through the NDP’s idea of an overall ‘social compact’ is a matter on which the jury is still out; but there are other options, such as sectoral accords, available in the meantime. A social compact in any case seems unlikely before the next election.

To the extent that the question of executive pay also remains an issue, it must not be shirked and should form part of the debate; let the chips fall where they may. The challenge of restraint in earnings should be the subject of sensible debate on what could be the advantages of such action, and what guidance we can get from other countries, such as the United Kingdom. Compromises can be found on the subject of executive pay but they should be workable ones – not forged for the sake of appearances, which experience has shown usually collapse into further recriminations and mistrust.

All the above confirms in one way or another that the question of labour market reform is still a major challenge for SA. In the earlier spirit of ‘learning from others’ (see Chapter 6) a 2013 report by the Centre for Development and Enterprise drawn from a round-table discussion on ‘Rethinking SA’s labour market: lessons from Brazil, India and Malaysia’ reached the following key conclusion: ‘The imperative to reform the SA labour market derives from our very high unemployment rates, our low levels of new firm creation and relatively low levels of investment (foreign and domestic). We are not like Brazil (which has expanded millions into its urban economy), India (where growth is rapid) or Malaysia (where employment levels are very high). The differences in our circumstances mean that labour market reform is a more urgent priority here than in India, Brazil or Malaysia.

With millions of people without work it is no exaggeration to say that SA’s future depends on its ability to make the necessary changes.’

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especially business, in reducing the inevitable impact of uncertainty about government actions on decision-making. The ideal relationship between business and the public sector in SA is to find a ‘goldilocks’ one – ‘not too hot and not too cold’, but one which works. Strengthening the relationship with the private sector in a mixed economy could well rest on what might be called the five ‘c’s or pillars of policy to help support it.

These are the elements of: • c oordination • c oherence • c onsultation • c ollaboration • c onstructive criticism In summary, therefore, the focus that is emerging under the NDP is macro stability, micro dynamism, skills, education, infrastructure and public sector capacity. The mixed economy in SA would be seen to be working at its best if the business sector and other key stakeholders identified practical areas of cooperation that matter in these areas and that could make a difference to outcomes and delivery. This would include some of the issues raised when the ‘trade deficit’ was discussed earlier, to enable SA business to project itself more successfully on the global stage. As new ways of enhancing collaboration are identified, so the mixed economy will increasingly be seen as a means to greater ends, rather than as an end in itself. The emphasis should now fall on implementation, rather than diagnosis, to successfully address agreed priorities.

For those who remain uncomfortable with what may appear an uncertain and fungible boundary between the public and private sectors, there is an empirical tool suggested to broadly assess which way the pendulum is swinging in this regard from time to time. This can keep the debate dynamic and alive. Professor Robert Skidelsky has proposed that an independent think-tank in any particular country should construct a ‘collectivism index’ to provide an empirical basis for monitoring state involvement in an economy, so that policy could be derived from a process of experiment and observation, not from dogma.

Finally, an economic system is judged – whether mixed or not – largely, though not exclusively, by its ability to organise the factors of production in such a way as to attain the maximum output of which they are capable.

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To suppose that unemployment, poverty and inequality in SA can be successfully addressed in an economy in which output and investment are weak or declining is a hopeless illusion. It should be frankly recognised that no economic system is likely to survive in a country where public opinion is critical and effective, unless there is a general feeling that it is able in due course to ‘deliver the goods’ to as many people as possible.

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8 The National Development Plan and President Zuma’s place in history

There is a tide in the affairs of man, which, taken at the flood, leads on to fortune; Omitted, all the voyage of their life Is bound in shallows and in miseries.

– Julius C aesar , Shakespeare ‘Politics’, said nineteenth- century UK Prime Minister Benjamin Disraeli, ‘is the science of the unexpected.’ Against the background of the decisions taken at the ANC elective conference in Mangaung in December 2012, on the one hand, and the forthcoming general election in 2014, on the other, there is plenty of room for the unexpected. But for the purposes of looking ahead in SA, we need to make some political assumptions. We must assume that, following his overwhelming election as ANC president at Mangaung in December 2012, the ANC will win the 2014 election and Jacob Zuma will be President until 2019. Even if something else happens there need to be enough core policies in place to ensure a degree of continuity should someone replace him before 2019. The challenges will not change. For the moment the focus is on the next general election in 2014 and its aftermath, with President Zuma remaining in office.

All presidents leave legacies by which they hope they will be remembered by posterity. Nelson Mandela defined his as one of reconciliation and nation-building, to bring people together after years of bitterness and hostility. Thabo Mbeki committed himself to Africa – developing the ‘African Renaissance’ – and promoted SA as the spokesperson for the continent and its diaspora. Whatever history’s

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ultimate verdict, both these presidents sought to leave their mark.

President Zuma must therefore start to think about the long view, as there is a two-term limit on the Presidency. By 2019 he will have been President for ten years. How will history view him? More favourably, it must be hoped, than if he were judged only on the past four years.

That is not to minimise the achievements of his first term. He took office against the background of a dismal global economy, which subsequent developments in the eurozone have exacerbated. As said earlier, SA has done a creditable job in maintaining a countercyclical policy since 2009, in a period of lacklustre growth and high unemployment globally.

Then there has also been President Zuma’s commitment to promoting trade and investment through extensive trade missions abroad, culminating in SA’s membership of BRICS. SA hosted the BRICS Summit in 2013, with tangible outcomes. President Zuma has also been active in African diplomacy. Under his watch Eskom has managed to keep the lights on, even if by a slim margin. There has been some tempering of excessive rises in ‘administered prices’. An essential infrastructural programme is being launched and both the NGP and NDP were formulated during his Presidency. The fact that the NPC and the NDP have come to play a key role in the present debate is a strong positive for President Zuma and must not be underestimated.

But perceptions are important. Issues around the rule of law, the breakdown in labour relations, the Marikana tragedy, social violence, downgrading by international credit ratings, ‘cronyism,’ the underperforming health and education sectors, rising service delivery protests, the Gupta saga, as well as failure to deal adequately with corruption – these are on the negative side of the balance sheet of the past few years. There is also a credibility challenge that needs to be met. We have to factor these elements into the assessment.

President Zuma’s first term has thus been seen by many as falling short of what was expected – and he will require a shift in direction if his second term is to deliver what he is likely to want his legacy to be by 2019. Political capital, like all leaders’ time and effort, is a scarce resource, and the areas where President Zuma and his team could spend their time wisely should be clear. President Zuma must hope that by 2019 – when we are nearly halfway to the 2030 NDP goals – he will have put his stamp on interim outcomes with the assistance of ANC Deputy President Cyril 158

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Ramaphosa, a former trade unionist and businessman. President Zuma’s legacy is inextricably bound up with the NDP. ‘The challenge for President Zuma’s leadership with the NDP’, a senior economic analyst has written to the author, ‘is that since 1994 important segments of many new voters have been “bamboozled” into believing that that the arrival of democracy in SA meant “free lunches” for everyone, irrespective of economic and capacity realities. Perhaps historically it was inevitable that “equity” had to trump everything else in the immediate aftermath of apartheid. There were many urgent things to be put right.

Understandably, excessive expectations were generated. There was no grasp of “trade-offs”, however. Any effort to warn, as matters unfolded, that an economic balance needed to be kept, if serious problems were not going to eventually develop, were dismissed and resisted as “neoliberalism” or something worse. This has been reinforced by a backdrop of disappointment among many of the previously disadvantaged about poor progress in reducing inequality, failure to meaningfully reduce unemployment and the poor state of government delivery. The cumulative effect is thus one in which the culture of entitlement has hopelessly swamped the culture of efficiency.’

My economist friend added that ‘this has progressively not only paradoxically undermined the capacity to deliver what citizens need, but has also weakened SA’s global competitiveness. Previous efforts and programmes to jack up SA’s economic performance have either been a casualty of poor implementation or of ANC–COSATU–SACP infighting. Global developments and internal structural weaknesses have in any case now forced an independent rethink through the NDP, for which full marks to President Jacob Zuma for initiating the process through the original appointment of the NPC in 2010. But the implications are that, despite its reasonable and pragmatic tone, a “centrist” framework like the NDP is going to be a hard sell given what the nation has been told for the past nearly 20 years. This will require skilful leadership to create a new basis for the future.’

Whether we agree with all of these comments or not, and cynicism aside, what President Zuma can offer are remedial steps that can create hope. We should recall that the democratic elections in SA in 1994 offered great promise and unleashed a volume of hope, not all of which has been realised. Widespread hope is the most useful force that can be offered 159

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by political and civil leadership. The hope of democracy when Nelson Mandela was released from prison in 1990, the advent of democracy in 1994, and the hope of countless socio-economic programmes since then were winds of opportunity. But these big winds of opportunity do not wait for boats to be built or for navigation to be perfected. If ships are not ready for them, they blow themselves out. They pass, and they are not easily recalled. And so it is with the implementation of the NDP. It should also be remembered that political history throughout the democratic world is replete with examples of second terms for presidents that generated trouble, especially on the economic front. The more time in office, the greater the risk of things going wrong. President Zuma needs to implement a vision that makes any short-term pain and conflict seem like an investment in the future. To achieve this, he needs to keep his eyes on the big picture. The President has to rally the country, not just special interest groups. He needs to forge a consensus which has leverage to get outcomes, even a few small quick successes to build confidence. He has to maintain moral authority by tackling corruption and maladministration through effective leadership.

It is not necessary to be mesmerised by the role of international credit agencies to see nonetheless that President Zuma would not want to experience another credit-rating downgrade on his watch in the near future. What influences this type of perspective is not that a country may have to deal with formidable socio-economic problems from time to time. After all, many countries share these challenges. What generates confidence is the perception that the leadership is willing and able to implement what needs to be done to change the outlook for the better.

As it is over the next 12 months that the agencies will engage in what has been called a ‘rolling perspective’ of developments in SA, including the 2014 election and progress made with the implementation of the NDP, their relevance to perceptions of SA is no distant matter.

The first year of President Zuma’s second term will therefore probably be the toughest yet, because that is when the implementation of the NDP should be getting into its stride, almost two years after it was officially accepted. Inevitably, with a general election intervening, there could be further distractions and implementation may not be able to proceed as rapidly as desired in the meantime. If credibility has become a serious problem, while there are always techniques and strategies for addressing 160

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it, the most potent antidote will lie in deeds, rather than words. Once the election is over and a renewed mandate has been given by the electorate, there must then be a sense of urgency, no complacency and strong determination to see the NDP through. To do so, he may well consider going outside the normal political framework to find additional expertise to help with the implementation of the NDP, and assist in lifting SA into a new future.

In a recent book, The Art of Doing: How Superachievers Do What They Do and How They Do It So Well, the authors Camille Sweeney and Joe Gosfeld interrogated highly successful leaders from various walks of life and concluded: ‘The successful people we spoke with all had similar responses when faced with obstacles: they subjected themselves to fairly merciless self-examination that prompted reassessment of their goals and the methods by which they achieve them … challenging assumptions, objectives at times, even our goals, may sometimes push us further than we thought possible.’

The history of SA in recent years shows how difficult it can be to achieve structural change. If we accept a particular set of economic policies – and therefore the reform which leads towards them – as an overriding condition for growth, then politics often becomes a constraint, a frequent irrational obstacle to the achievement of reform goals. Political leaders like President Zuma who undertake to manage a reform programme like the NDP should therefore be judged by their ability to navigate the political minefields that often lie buried beneath the path to reform.

This will remain a stern litmus test, especially as an election campaign gets under way. A second-term president with no expectation of reelection can, however, afford to take a strong line and should do so.

Skilful interpersonal relations are required to persuade. President Zuma has great charm. Nothing in politics is so potent, or so little understood, as charm. Business Day editor Peter Bruce has referred to ‘the rise of the new Jacob Zuma in the mould (sort of) of Ronald Reagan … I sometimes think JZ could surprise us all’ (Business Day, 29 April 2013).

Although a major asset, charm alone will not enable the ‘tale of five deficits’ outlined earlier to be successfully managed. This will need to be driven through a constant, strong and visible message from the top leadership that the commitment to the NDP is irreversible and that the outcome of the 2014 election will serve to reinforce the decisions of 161

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Mangaung. The message must remain unequivocal. The ANC elective conference in December 2012 gave birth to a new and powerful potential for change and recovery. The political power gained must now be used to good effect. This should provide added momentum to the NDP process.

What can help?

In this task President Zuma is fortunate in having a credible framework in the NDP, which is already the product of widespread consultation and which has now been officially accepted. He is also greatly assisted by having acquired Cyril Ramaphosa as the Deputy-President of the ANC, who enjoyed wide support at the ANC’s elective conference in Mangaung and of whom expectations are high. Cyril Ramaphosa brings a rare combination of expertise and experience to decision-making as a trade unionist, constitutional negotiator, politician and businessperson.

He adds particular strength to the Zuma team by virtue of this constellation of talents at a crucial time. As deputy chairman of the NPC, he also participated in the large-scale research and consultation which accompanied the preparation and release of the NDP and is therefore perceived as a champion of it.

While business and the markets rightly applaud the fine qualities and economic insights that Cyril Ramaphosa brings to political leadership, he will need to build a network of support for what he wants to achieve, as his election was mainly the result of a special set of political circumstances around the Mangaung conference. The fact that Ramaphosa, as deputychairman of the NPC, has been steeped in both the strengths and the vulnerabilities of the NDP is a welcome bonus. Much now rests on his broad shoulders in helping to steer implementation of the NDP, and he needs to be seen in due course to be doing this more visibly in future.

Assuming Cyril Ramaphosa is likely to become the next Deputy-President of SA, perhaps he should be placed in charge of the implementation of the NDP after the next election. What is his profile?

In his original authoritative 2007 biography and frank appraisal of Cyril Ramaphosa, Professor Anthony Butler described him as a ‘visionary pragmatist’. ‘Many South Africans’, said Butler at the time, ‘see the problem-solving and institution-building Ramaphosa as a future State President of South Africa.’ He concluded that ‘Ramaphosa is a natural politician who gravitates towards and embraces power. It would not be a surprise to find that his time, at last, has come.’ And so it does 162

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seem to have happened. However, in the light of unfolding developments, the business community would be unwise to see Ramaphosa, in view of his many years in the private sector, as possibly ‘one of their own’ in a future government. Looking further ahead, Butler quotes one leading businessperson as saying that, despite Ramaphosa’s acknowledged pragmatism, ‘I would not expect a Ramaphosa government to be in any way an “easy wicket” for business’.

As someone who has successfully climbed nearly to the top of Disraeli’s ‘greasy pole’ of politics, there is clearly growing interest in what the future might hold, given his career so far. There are ample tributes to his excellent capacity for leadership and his ultimate commitment to politics. Butler has nonetheless mentioned that people who have known Ramaphosa for a long time have little idea of what his stance might be on some key aspects of economic or foreign policy, although his commitment to black economic empowerment has been noticeably strong and visible. Involvement in broader policy may become inevitable after his participation in the NPC and NDP, given the decisions of the Mangaung conference and his anticipated promotion after the 2014 election. Yet Butler quoted one of Ramaphosa’s oldest friends as saying that he is not a ‘prisoner of friendship who would feel obliged to pay back his friends for their loyalty … if he was a president, he would be a president’.

At the same time it will be necessary for Cyril Ramaphosa to manage expectations about himself. As significant a role as he now has politically, he is still one person – albeit an important one – out of many political participants. Nevertheless, one of his great strengths in the past has been to forge agreement where few thought it possible, and to build ‘sufficient consensus’ around what still needs to be done in SA is one of his major challenges. This in turn will help to shape President Zuma’s legacy in the years ahead. The question is whether the combination of Zuma and Ramaphosa will be strong enough to implement the NDP framework successfully. Much will, of course, also depend on the efficacy of the structures used to oversee the implementation of the NDP. In the light of what has been said about the proliferation of processes and institutions in SA, there is understandable hesitation to suggest any new structures. There remains a strong case for streamlining and rationalising the configuration of government, wherever possible. Yet it could be speculated 163

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Zuma’s 2nd term as President of SA (2014–2019)

Zuma’s 2nd term as President of the ANC (2012–2017)

Dec 2012

Mangaung Conference

Apr 2014

Dec 2017

General election

Apr 2019

Next ANC Conference

General election

Zone of uncertainty. Zuma’s 2nd term as ANC president ends. Is this the entry of Cyril Ramaphosa?

Zuma’s 2nd term as ANC president ends in December 2017, but he may still be the President of SA. Is this the entry of Cyrily Ramaphosa?

Figure 8.1: President Zuma’s election choices (Source: Theo Venter)

that, despite the valuable institutions that exist, such as the National Treasury and the Reserve Bank, to provide economic analysis and advice to the Cabinet, President Zuma may be well-served by having access to an independent source of top-level economic thinking. In the US the Council of Economic Advisers is an agency within the office of the President that advises him on economic policy. It provides much of the objective empirical research for the White House, and prepares the annual economic report of the President. President Zuma would do well to consider whether such a structure, which need not be a large unit, could add value to his economic policy decision-making, eventually possibly replacing the NPC. Together with the presence of Ramaphosa, a great deal will also rest on the Cabinet team as a whole that Zuma takes with him into his second term as President after the elections in 2014. The dynamics of Cabinet selection obviously go way beyond economic policy, but clearly who fills key economic portfolios like Finance, Trade and Industry, Public Enterprises and Transport, and perhaps even International Cooperation, will be important for economic performance and business confidence.

The Cabinet needs to be fully behind the NDP now and in the future.

Seen as a whole, we could imagine that, while Zuma will mainly balance his Cabinet in accordance with traditional political considerations, he will nonetheless want a team that is committed to making a success of the NDP, and hence to a large extent his Presidency by 2019.

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9 Conclusion: Can South Africa prove the sceptics wrong?

You cannot prevent the birds of sorrow from winging overhead, but you can prevent them from nesting in your hair.

– Chinese proverb Sweet are the uses of adversity.

– A s You L ike I t, Shakespeare T here is no magic in the words ‘National Development Plan’ as such: it is not a key which will spontaneously unlock the door to Utopia. It means instead embarking on a new economic phase in SA in which everything depends on the efficacy of the implementation. If we are to think clearly about unlocking SA’s true potential in the years ahead, we must not become hypnotised by slogans like capitalism, socialism, communism or globalism, as though economic salvation is to be found in any particular ‘ism’, except perhaps ‘pragmatism’! Having set ourselves broad socioeconomic goals, we must decide how they can best be attained within the shortest compass of time, while recognising the need to deal with any unintended consequences that are likely to emerge. With the help of the NDP and related projects, SA now has the best chance since 1994 of substantially raising its economic performance and its ‘game’ in the years ahead.

Despite the diagnosis and prescriptions offered in this book and elsewhere, in many ways the public debate in SA still shows strong signs of myopia and schizophrenia. Trade unions are concerned about unemployment but continue to want wage increases regardless of the capacity to pay. Businesspeople advocate the competitive system but are

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willing to collude and accept ‘cronyism’. Politicians condemn corruption but uncritically support cadre deployment. Stakeholders endorse the need for fiscal discipline, except for their own special causes. In addition, consumers simultaneously want access to cheap imports but, as workers, lobby against them as threatening their jobs. The general public wants better infrastructure, such as roads, but angrily resist paying for it. We have to design intelligent systems that force them (or their representatives) to reconcile their contradictory approaches. These realities need to be successfully managed and located within a broader framework if they are not to eventually culminate in a gridlock which neutralises decisions needed in the broad national interest.

Even in NDP-supportive circles there is friendly scepticism about the chances of successfully implementing the NDP. ‘Will it not’, asked one captain of industry, ‘go the same way as previously well-intentioned development programmes – why should things be different this time around?’ Is SA then inevitably heading towards Clem Sunter’s ‘failed state’? No – although we must not be complacent. Economic performance can be rather like a game of snakes-and-ladders. At one moment a country is going up the ladder, the next moment down the snake! (The example of Brazil’s new vulnerability is referred to in Chapter 5.) SA is still a very resilient society, with many pockets of excellence in both the public and private sectors which can be built on and mobilised, especially if key elements of the NDP can be implemented soon. There is a strong desire and commitment to do better.

A GDP growth rate of 2.5% to 3% therefore cannot be the ‘new normal’ for SA. We need a reliable and predictable framework that can help to maximise the potential that lies ahead in factors such as: • t he opportunities in Africa and BRICS; • successful infrastructural developments in spheres such as energy and water; • t he upgrading of the education and skills of the labour force; • f racking developments in the Karoo over the next few decades; and • being seized with building confidence in a shared vision for SA’s future.

Of course, there may be a few failures along the way, from which we can learn. There are still too many inconsistencies and contradictions in policy which generate uncertainty under present circumstances. The 166

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existing constraints on the private sector need to be recognised and addressed in ways that build trust and confidence. But this also requires that the business sector should become more specific about where the shoe is pinching and what concretely must be done to remedy it. All this nevertheless requires a change in mind-set and approach which insists that SA can avoid becoming a ‘failed state’. ‘Attitude is a little thing’, said Winston Churchill, ‘that makes a big difference’, especially today in what would be called ‘perception management’.

One dimension of prospective change needs to be removed in passing from the agenda at this juncture. There is sometimes criticism that the preoccupation with economic growth and the production of material things, such as in the NDP, does not necessarily make South Africans happier. While the NDP does want SA to rediscover its core values, it is not about making South Africans ‘happier’. Those answers must rather be sought elsewhere – in philosophy, psychology or religion. Of course, development is not just a matter of having plenty of money, nor is it a purely economic phenomenon. It is common cause that development is not governed by economic forces alone and this is, indeed, embedded in the NDP framework. ‘We do not know what the purpose of life is,’ said Professor Arthur Lewis, ‘but if it were happiness, then evolution could just as well have stopped a long time ago, since there is no reason to believe that men are happier than pigs or fishes. What distinguishes men from pigs is that men have greater control over their environment, not that they are happier. And on this test, economic growth is greatly to be desired.’

By steadily building a truly strong economy over time, inclusive economic development gives individuals a wider range of choices and better control of their external environment. It starts from the recognition that, although humankind does not live by bread alone, neither does it live without bread. There is still too much want in SA, and too many people whose full development is limited by their poverty.

In consequence, addressing the much emphasised triple challenges of unemployment, poverty and inequality forms the priorities on which the NDP is properly focused.

The NDP and a major global developmental organisation like the World Bank therefore both draw their broad approach to poverty from the eminent Indian economist (and Nobel prize-winner) Amartya Sen 167

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– namely, that poverty is what denies everyone the freedom he or she should have to lead the life he or she decides to lead, and disempowers them from making better choices. Being the product of independent research and extensive consultation from both here and abroad, the NDP is thus well positioned to act as both a goad and a catalyst in these matters. Its recognition of process, of policy evolution, of time needed to bring about further change and transformation, of the inevitability of messy less-than-perfect arrangements – in short, what has been called ‘realism’ – is what the NDP offers.

We know that economic and social history is replete with examples of how the flow of the economy, society and culture can often contradict, even invalidate, the ideas and theories of planners. Hence the NDP rests on pragmatism and flexibility, not on ideology. It seeks to put SA on a broad track for 2030, to provide a much-needed sense of direction, given our history. The NDP is therefore rightly being discussed at various levels, and indeed it should become an integral part of the national conversation.

Consent-oriented dialogue and consultation are building blocks for the implementation of the NDP. The constructive participation of the general population in the implementation of the NDP will enrich outcomes. We need to become a nation of pragmatists.

Yet we must nonetheless again warn that, if decisions are to be eventually taken expeditiously and implemented, consultation and dialogue must be driven by reasonable but enforceable deadlines. In the absence of sufficient consensus, an extensive and high degree of political participation would stultify implementation of the NDP, unless the extent of government intervention is limited either by decentralisation or by narrowing its scope in the overall economy. Here, too, there is a trade-off between the desire for greater rationality and efficiency in achieving given ends, and the goal of more extensive participation in the determination of both ends and means. There need to be tight timelines.

And when a serious economic debate is needed, there must be certain agreed minimum standards of technical competence. Otherwise there can be no serious discussion and the opportunity to enlarge areas of agreement could be lost. If everybody can have his or her say, then nobody can be heard, because serious argument is drowned in clamour, which differs from constructive discussion in the same way as does a melee from a boxing match. In a boxing match, the performance of the contestants 168

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can be assessed, and in a melee it cannot. Therefore competent boxers command respect and participants in a melee do not.

The high-level debate around the implementation of the NDP should therefore seek to promote both knowledge and policy in ways that help to clarify the distinction between ends and means. In the rough-and-tumble of political struggle, differences of opinion may arise either as a result of differences about ends, or as a result of differences about the means of obtaining those ends. For example, shut Minister of Planning Trevor Manuel in a room with COSATU, the Chamber of Mines, Karl Marx, Adam Smith, Pope Francis and Warren Buffett, to decide on benefits of nationalisation, and it is unlikely that he could produce an ‘agreed document’.

However, ask the same group to determine the objective outcome of state regulation on small business, and it ought not to be beyond human ingenuity to produce consensus, or ‘sufficient consensus’, with perhaps Marx dissenting. For the sake of securing what agreement we can in a country in which avoidable differences of opinion are all too visible, we need to concentrate on the best means of implementing the NDP where there can at least be a ‘shared vision’. ‘Does it really matter whether the cat is black or white,’ a prominent Chinese political leader asked a few years ago, ‘as long as it catches the mice?’

It is inevitable that all philosophies and programmes that are ‘centrist’ will be attacked by both left and right, and so it has been with the NDP. The differing reactions suggest what sorts of changes many South Africans believe in. The general proposition that the SA economy needs structural changes and that this is preferably tackled on a holistic basis is now incontestable. It is also true that the NDP comes after several years of previous efforts to improve SA’s economic performance have not succeeded, primarily because of lack of coherence in policy, weak implementation and ideological polarisation. ‘Centrists’ need to speak up now if they believe in the NDP. The 2030 vision that is on the table offers a good chance to promote ‘shared prosperity’ and the plan, unlike many of its predecessors, has a credible inclusive provenance through the NPC. Any critique of the NDP needs to start here. And the critics have to face squarely the question of what broadly would be a better choice, given SA’s pressing socioeconomic realities and the homework that has already been done? Critics 169

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set themselves too easy a task if they merely pick holes in the plan now being pursued and ignore the opportunity costs of the alternatives. We cannot afford to wait until the costs of conflict have risen high enough to force compromise and compel our society to come to its senses.

Where several critics of the NDP may be at fault has been in not judging it by the test of using it. Of course, the NDP has several pitfalls, but on the whole it is greatly superior to most of its predecessors. Many critics of the NDP look at the new model car from the kerb of the pavement and point out all sorts of features which they think unsatisfactory. But they lack the courage to get into it and drive away in it. If they do so, they would not want to return to the old ways of doing things, but to get real movement into a better future for all.

Although first prize would undoubtedly be to see the NDP framework implemented as a whole, in practice it will be essential to grasp the difference between the central fortifications of the plan, which need to be defended, and the outposts, which can be conceded if necessary.

Educational reform and strengthening state capacity might be classified as the former, whereas the latter would be a few ‘nice-to-do’ changes that can be further negotiated or postponed without jeopardising essential outcomes. In several instances the NDP is a tool-box of half-forged policy instruments that can be moulded for use in the years ahead, if the necessary goodwill exists. The NDP also needs to chart a narrow path between the Scylla of an overweening ‘activist’ state and the Charybdis of too little government support, or, put differently, the middle ground between the absence of rules and the existence of suffocating rules. It is because we need a balance of forces that no single mantra will succeed.

We must therefore not underestimate, especially in these early stages, the extent to which the successful implementation of a programme like the NDP must rest on sound political foundations. While ultimately most citizens can benefit from the NDP, without strong political constituencies supporting it, the inclusive outcomes will be difficult to achieve. It must not become a casualty of the vagaries of ‘low’ politics. It needs inclusivity in its implementation not only to generate continued support but also to keep narrow vested interests at bay. People will support what they helped to create. Leadership here is all about smart change management. The political management of the NDP process and the demonstration of its positive outcomes over time are thus of great importance.

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Nonetheless, as outlined earlier, the formative period of the NDP’s implementation coincides with an election in 2014, with all that this conjuncture implies. The NDP needs a ‘critical mass’ of implementation to create momentum. Increasing polarisation in political debate heightens the risk that the NDP, rather than providing a rallying call for long-term thinking about the economy, will become a political football instead.

The government, having officially accepted the NDP, is in essence the custodian of the NDP and has the responsibility to see that the mandate it seeks from the electorate in the coming election is consistent with its commitment to the NDP. Perceptions around the future of the NDP will to a large extent depend on assessments of the extent to which it is seen to survive the election campaign and still provide a roadmap to 2030. There are no soft options here.

‘History will judge government leaders and MPs harshly if they fail to implement the NDP,’ said Planning Minister Trevor Manuel to Parliament in June 2013. Minister Manuel again reminded Parliament of what was at stake as far as the NDP was concerned and emphasised the need to ensure that policies are put in place to deal with SA’s socioeconomic challenges. In this appeal he was fully supported by President Jacob Zuma, who again called on MPs and the country to rally behind the plan. In the welter of an election campaign, much more of this kind of reaffirmation will undoubtedly be needed to anchor expectations about economic steersmanship in the post-election period.

Frank Luntz, an American political consultant, once said: ‘There’s a simple rule. You say it again, and you say it again, and you say it again, and you say it again, and you say it again, and then again and again and again and again, and about the time you’re absolutely sick of saying it, is the time that your target audience has heard it for the first time.’

Following on a top-level meeting with the NPC in early July 2013, President Jacob Zuma said the government was going ahead with the NDP, regardless of next year’s election or those who had criticised the document. He said that those who took exception to the NDP should provide alternatives, as the government was ‘forging ahead’ with a drive to implement the plan. At the same meeting Minister of Planning, Trevor Manuel, said that for the post-2014-election government to ‘find work waiting’, the groundwork for the implementation of the plan had to begin now. This could be done without arguing about whether it was a ‘perfect 171

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document or not’ (Business Day, 4 July 2013). Whilst the door obviously remains open to consultation on implementation aspects, these remarks could be seen as a firm answer to those groups or individuals who by accident or design may end up ‘talking the NDP to death’.

The crucial role of good leadership is also echoed in the NDP. In the post-election phase, there must emerge, as a continuing element in the life of this country, a cadre of political, labour, business, civic and administrative leaders who can be relied upon to implement the NDP framework in coherent and inclusive ways. A developing society, with the acute challenges of a country like SA, needs particularly to encourage this kind of leadership. It is leadership that wins the confidence of the nation by demonstrating its capacity to tackle problems successfully and implement policies that will make for a better future by 2030.

What is another one of the big messages emerging from the study Why Nations Fail by professors Daron Acemoglu and James Robinson? It is that promoting shared prosperity is not just a question of ‘good’ economics – it also requires ‘good’ politics. The policymakers and bureaucrats who are supposed to act on well-intentioned advice may be as much part of the problem, and many attempts to rectify these inefficiencies may backfire precisely because those in charge are not grappling with the institutional causes of poverty in the first place.

While economic institutions are critical for determining whether a country is poor or prosperous, Acemoglu and Robinson emphasise, it is politics and political institutions that determine what economic institutions exist. Attempts therefore to engineer shared prosperity without confronting the root cause of the problems, namely ‘extractive’ institutions and the politics that keep them in place, will thus be undermined. The strength of the NDP framework is that it adopts a holistic approach about what needs to be done in SA to get both the economics and the politics ‘right’.

An important lesson of the past few years in SA seems to be that even good institutions may work badly if wrong methods of procedure are followed (e.g. cadre deployment), or if there is no adequate pressure demanding accountability, or if implementation fails. Good institutions can erode under the weight of corruption, racism, careerism and patronage. There needs to be widespread acceptance that development without efficiency constraints cannot long endure, as such institutions and structures are intrinsically brittle.

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C o n c l u s i o n : ca n S o u t h A f r i ca p r o v e t h e s c e p t i c s w r o n g ?

This is where the future role of the NPC and its outcomes assume particular significance. The NPC was appointed for a five-year period.

It has been requested to assist in providing ideas to drive implementation and also to conduct further research during the remainder of its term.

Even though the implementation of the NDP understandably falls to the executive arms of government at various levels in order to align official policies, where will the overall situation be monitored? How and where will SA keep track of the ‘big picture’? We need to identify the incremental milestones that will take us to 2030. An effective monitoring structure will be needed to oversee implementation of the NDP and table reports to Parliament, which could then inform future debate and improve communication and updates around the NDP. This feedback also strengthens the capacity of the NDP for self-correction and adaptation.

The ‘tale of five deficits’ therefore need not be an inevitable one. The gaps can be steadily closed if tackled in coordinated and coherent ways. There is a sustainable ‘virtuous circle’ of high growth, democratic governance and social development possible in SA. The transition to a high-skill, high-productivity and rising-wage economy is both economically necessary and politically desirable. The forces of globalisation abroad, and the dynamics of transformation within, must meet in a much faster ‘catch-up’ growth for SA, of the kind experienced by several other emerging economies. But time is not on our side and the margin for error has shrunk. This could be SA’s last opportunity for some years to mobilise the country behind a shared vision.

SA needs a new burst of energy and effective leadership to make more things possible. We urgently need to build a national economic purpose.

The battle for the future is now. Without an overall framework like the NDP at this juncture, we cannot generate an economy that will be bigger, stronger and better by 2030. A vision for 2030 provides the reason and hope on which all South Africans must build their future. Our country’s story is still unfolding. It lies largely in our hands to write our own story from now on. The onus is on South Africa to prove the sceptics wrong.

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Friedman, Steven, 2013, ‘Business and government – too many pointing fingers’, Banker, SA Edition, no. 5.

Fukuyama, Francis, 1995, Trust: The Social Virtues and the Creation of Prosperity, Hamish Hamilton, London Fukuyama, Francis, 1999, The Great Disruption: Human Nature and the Reconstitution of Social Order, Profile Books, London Fukuyama, Francis, 2004, State Building: Governance and World Order in the Twenty-First Century, Profile Books, London Global Competitiveness Report 2011–2012, World Economic Forum, Geneva, Switzerland Gramme, O & Diamond, P, 2012, After the Third Way: The Future of Social Democracy in Europe, Tauris, London Hailsham, Lord, 1978, The Dilemma of Democracy, William Collins, London Harrison, LE & Huntington, SP, 2000, Culture Matters: How Values Shape Human Progress, Basic Books, New York Helpman, E (ed.), 2008, Institutions and Economic Performance, Harvard University Press, Cambridge Ilo, Geneva, various policy documents ITC (International Trade Centre), 2013, Trademap, Trade statistics for international business development, http://www.trademap.org/Bilateral_TS.aspx (Accessed 1 May 2013) ITC International Trade Forum, various issues ITRISA (International Trade Institute of Southern Africa), 2013, International Trade Relations, Certificate in International Trade International Monetary Fund, Washington DC, Annual Reports on SA Jones, S & Vivian, TW, 2010, South African Economy and Policy, 1990–2000: An Economy in Transition, Manchester University Press, Manchester Kasparov, Gary, 2008, How Life Imitates Chess: Insights into Life as a Game of Strategy, Arrow Books, New York Keynes, JM, 1936, The General Theory of Employment Interest and Money, Macmillan, London Lewis, Arthur W, 1955, The Theory of Economic Growth, Homewood, Illinois Lipton, Merle, 2008, Liberals, Marxists and Nationalists: Competing Interpretations of South African History, Palgrave Macmillan, New York Lipton, Michael, 1968, Assessing Economic Performance, Staples Press, London Machiavelli, Niccolo, 1532, The Prince, Florence Mackey, David JC, 2008, Sustainable Energy: Without the Hot Air, UIT, Cambridge National Development Plan 2012, RP 270/2011 National Treasury, National Budget Speech, February 2013 NEDLAC, Annual Reports New Growth Path, various publications by the Department of Economic Development OECD, Annual Reports on SA OECD Economic Surveys, 2013, South Africa 2013, OECD Publishing O’NEILL, J, 2011, The Growth Map: Economic Opportunity in the BRICs and Beyond, Penguin, London Parsons, Raymond, 2000, The Mbeki Inheritance: SA’s Economy, 1990–2004, Hodder and Stoughton, Ravan Press, Johannesburg Parsons, Raymond, 2002, Parsons’ Perspective: Focus on the Economy, Jonathan Ball, Johannesburg

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Parsons, Raymond (ed.), 2004, Manuel, Markets and Money: Essays in Appraisal, Double Storey (Juta), Cape Town Parsons, Raymond, 2007, ‘The emergence of institutionalised social dialogue in South Africa’, South African Journal of Economics, March 2007 Parsons, Raymond (ed.), 2009, Zumanomics: Which Way to Shared Prosperity in SA? – Challenges for a New Government, Jacana Media, Johannesburg Presidency, The, State of the Nation Address, 14 February 2013 Rachman, G, 2012, ‘The BRICS has taken an unhappy turn’, Financial Times, 9 October 2012 Ragan, MG & Zingales, L, 2003, Saving Capitalism from Capitalists, Random House, New York Ravallon, RM, ‘How long will it take to lift one billion people out of poverty?’, World Bank, Research Writing Paper, 6325 Rossouw, J & Joubert, F, 2013, ‘Lewenstandaard: ’n Ekonomiese perspektief op lewensgehalte in Suid-Afrika’, Journal of Humanities, The South African Academy for Science and Arts, 53 (1), March 2013 SAIIA (South African Institute of International Affairs), various occasional papers SAIRR (South African Institute of Race Relations), South Africa Survey 2010/2011, various tables, charts and research documents Schumpeter, JA, 1950, Capitalism, Socialism and Democracy, Harper, New York Sharma, R, 2012, Breakout Nations: In Search of the Next Economic Miracle, Allen Lane, London Skidelsky, Robert, 1995. The World After Communism, Macmillan, London Skidelsky, Robert, 2009, Keynes: The Return of the Master, Allen Lane, London South African Reserve Bank, various publications and media releases Steyn, W, 2013, ‘The budget’s fiscal stance: The noncyclical element may be a cause for concern’, www.econ3x3.org Stiglitz, Joseph, 2006, Making Globalization Work, Penguin Books, London Strydom, PDF, 2011, ‘The National Planning Commission’s Vision 2030’, Colloquium North-West University, Potchefstroom Strydom, PDF, 2012, Emerging Markets, Growth Resilience or Hitting a Low Growth Trap, http//skoolvirekonomie.org/colloquium TIPS, 2008, 15-Year Review: Trade Policy in South Africa TRALAC, various newsletters and working papers UNCTADstat, 2013a, Values and shares of merchandise exports and imports, annual, 1948-2012, http://unctadstat.unctad.org/TableViewer/tableView.aspx (Accessed 6 May 2013) UNCTADstat, 2013b, Values, shares and growth of exports and imports of total services, annual, 1980–2012, http://unctadstat.unctad.org/TableViewer/ tableView.aspx (Accessed 6 May 2013) Viviers, W & Steenkamp, E, 2012, ‘The identification of realistic export opportunities for South Africa: Special reference to the IPAP-2 clusters’. In: Bruggemans, C and Loots, E (eds), Economic prespectives: Ruiterbosch essays in honour of Peet Strydom, Sun Media Metro, 129–136 Word Bank, Washington DC, Reports on SA World Economic Forum, 2013. Global Competitive Index 2002–2012

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Index

A Accelerated and Shared Growth Initiative for South Africa (ASGISA) 31, 113 accountability 44, 71, 78, 103, 107, 112, 172 active citizenry 44, 105–108 Acemoglu, Professor Daron 130, 138, 172 Why the Nations Fail: The Origins of Power, Prosperity and Poverty 130, 172 African Development Bank 8 African Growth and Opportunity Act (AGOA) 85 African National Council (ANC) 17, 33, 34, 69, 76, 109, 110, 143, 157, 158, 159, 162, 164 African Renaissance 157 agriculture 16, 17, 19, 24 ANC-COSATU-SACP political alliance 32, 33, 34 infighting 159 Andersen, Hans Christian 70 anti-corruption 106 apartheid 33, 109, 132, 159 apprenticeship 150 Asia 8, 81, 82, 84, 85 Audit(ing) 24, 55, 56 Auditor-General 55, 56, 71 Austria 149 B Bacon, Francis 60 balance of payments 7, 20, 21, 22, 71, 72, 73, 95, 117 Barber, Michael 104 BEE Amendment Bill 116, 121 Bell, Daniel 125

Bhorat, Professor Haroon 151 Black Business Council 145 Black Economic Empowerment (BEE) 116, 121, 123, 124, 163 Blair, Prime Minister Tony 104 Bloemfontein 94 Brazil 6, 13, 20, 49, 55, 75, 77, 85, 116, 117, 118, 123, 124, 153, 166, Brazil, Russia, India, China and South Africa (BRICS) 6, 21, 77, 78, 80, 85, 86, 87, 88, 122, 124, 148, 158, 166 BRICS Development Bank Bringing Business Unity South Africa 145 Bruce, Peter 161 Bruggemans, Cees 25, 73 Buffett, Warren 4, 16, 169 Butter, Professor Anthony 124, 162 bureaucracy 41, 121, 150 bureaucratic 96, 103, 136, 140 bureaucrats 102, 120, 124, 170 Burke, Edmund 45, 60 bus rapid transport system 94 Business Day 64, 124, 161, 172 Business Licensing Bill 116 Business Unity South Africa (BUSA) 116 business-friendly 120 Business Leadership South Africa (BLSA) 59, 148 C cadre deployment 166, 172 Canada 16 Cape Town 8, 88, 94, 145 capital formation 13, 15, 39, 43, 95, 113, 120 goods 43, 101 investment 15, 120

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markets 48 spending 53 capitalism 3, 27, 125, 134, 138, 165 capitalist 27, 131 carbon dioxide 127 economy 127 emissions 44, 75 footprint 75 reduction 128 tax 127, 128 Carroll, Lewis 2 The Hunting of the Shark 2 central bank autonomy 70, 71 central banks 66, 69, 70, 71 Centre for Development and Enterprise 153 Centre for Development and Enterprise Round Table 47 Centre for Innovation and Entrepreneurship 122 Chabane, Minister Collins 96 Chamber of Commerce 145 Chamber of Mines 169 child support grant 54, 55 Chile 116, 117, 118 China 6, 19, 47, 71, 77, 80, 81, 84–87, 118, 123, 124, 132 Citizens Movement 107 climate change 75, 113, 126, 127, 128 Climate Change Centre 128 Clinton, President Bill 41 CODESA 40 Coega 88 collective bargaining 28, 34, 108, 111, 152, 153 Commission on Growth and Development 113 commodities 19, 78, 80, 81, 82, 86 Common Market for Eastern and Southern Africa (COMESA) 83 communications technology 93, 130 Community Survey 96, 97, 99, 100 Companies Act 139 competition 68, 72, 76, 85, 86, 102, 120, 121, 126, 133, 134 commission 121, 133 policy 120, 121 competitiveness 26, 28, 49, 75 Conference of the Parties 128 Congress of South African Trade Unions (COSATU) 32, 33, 34, 110, 159, 169

Congressional Budget Office 59 Constitution 25, 70, 71 consumer goods 43, 73 consumer price index (CPI) 18, 19 consumption 18, 25, 42, 81 corporate boards 24 governance 24 social investment (CSI0) 147, 148 corruption 6, 13, 24, 25, 40, 98, 102, 106, 107, 108, 118, 124, 131, 135, 148, 158, 160 credibility 69, 114, 129, 135 crime 24, 75 criminality 122 cronyism 158 cross-border capital flows 6 current account deficit 20, 21, 22, 72 D Davis, Judge Dennis 60, 61, 65 daylight saving 126, 127 De Kiewiet 28 Decision Support Model (DSM) 91 deficits 45, 46, 52, 57, 58, 66, 72, 161, 173 delivery deficit 45, 56, 93, 94, 98, 99, 101, 143 protests see also service delivery protests 98, 102, 137 democracy 31, 42, 70, 107, 109, 115, 126, 142, 159, 160 Democratic Republic of Congo 82 Department of Cooperative Governance and Traditional Affairs 122 Department of Energy 126 Department of Public Works 94 Department of Trade and Industry (DTI) 68, 78, 86, 88, 91, 121, 122 developed countries 2, 7, 26, 78, 80, 81, 85, 131, 132, 136 markets 87 developing countries 2, 26, 58, 76, 81, 82, 131, 132 economics 80, 134 Dinokeng Scenarios 31 Disraeli, Prime Minister Benjamin 157, 163 Doha Round 77 Drucker, Peter 26 Durban 21, 88 duty-free 84, 88

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E East African Community (EAC) 83 East London 88 Eastern Cape 55 economic cooperation 5, 117, 118 development 28, 34, 91, 101, 108, 121, 167 growth 11, 12, 13, 18, 25, 26, 40, 43, 47, 48, 49, 51, 55, 57, 58, 67, 77, 78, 102, 117 infrastructure 15, 93, 95, 142 Economic Partnership Agreement (EPA) 84 economic policy 71, 75, 78, 92, 132 resources 56 Economist, The 8, 87, 108, 127, 137 education 13, 23, 25, 39, 40, 47, 51, 53, 75, 81, 94, 119, 136, 137, 149, 154, 158, 166 elections 128, 129, 130, 161 electricity 10, 94, 97, 126 costs 68, 121 tariffs 67 emerging business 121, 122 economies 25, 75, 76, 80, 81, 116, 131 markets 27, 66, 78, 81, 87, 115 employment 10, 11, 12, 39, 43, 48, 67, 95, 117, 121, 150, 151 creation 16 growth 13, 67 opportunities 55, 88 energy 19, 80, 88, 93, 97, 113, 126, 127, 128, 166 policy 113, 126 saving 127 resources 88 enterprises 26, 120, 121, 122, 145 entrepreneurial activity 121, 124 drive 124 skills 136 talent 136 entrepreneurship 113, 120, 121, 122, 123, 124, 149 equality 46, 135 Equatorial Guinea 11 equity 6, 60, 66, 109, 111, 159 Erdogan, President 115 Eskom 15, 93, 94 e-tolling 95 Europe 72, 84, 85, 86 European Free Trade Association (EFTA) 83

European Union (EU) 3, 7, 76, 84, 127, 150 Eurozone 2, 3, 69, 84, 127 exchange rate 19, 20, 28, 68 export earnings 22, 73 growth rate 72, 78, 91, 92 markets 22, 72, 87, 89, 91 opportunities 90, 91 exporters 76, 82, 89, 91 export-import courses 89 exports 21, 26, 28, 39, 43, 71–76, 79, 80–84, 86, 87, 88 external debt 13, 21 F Fannie Mac 4 Fannie Mae 4 FEDUSA 34 financial flows 21, 22 financial capitalism 3, 134 crisis 2, 3, 4, 6, 12, 14, 16, 17, 48, 49, 51, 52, 69, 72, 78, 80, 81, 85, 93, 123 globalisation 4, 6 markets 59, stability 69, 70 system 5, 6, Financial Mail 151 fiscal austerity 57 deficit 45, 46, 47, 48, 52, 59, 60 discipline 18, 51, 53, 55, 57, 59, 163, 166 policy 17, 48, 49, 57, 58, 59, 61, 66 fixed investment 10, 16, 34, 44, 120 foreign debt 21, 43 direct investment (FDI) 27, 43, 78, 81, 95, 117, 120 exchange 69 investment 15, 16, 22, 27, 59, 79, 95, 120, 153 markets 75, 78, 83, 89 policy 86, 163 products 77 trade 28 traders 122 Fourastié, Jean 27 Fourie, Professor Frederick 12 fracking 166 Frasier Institute 16 free trade agreement (FTA) 83, 84 Friedman, Professor Steven 32, 124 Fukuyama, Professor Francis 193, 125

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G G7 85, 87 Galbraith, John Kenneth 131 Gammon, Max 136, 137 Gauteng 88, 95 Gauteng Freeway Improvement Project 139 Gautrain 94 general election 128, 157, 160, 164 campaign 128 General Export Incentive Scheme (GEIS) 76 Germany 126, 131, 149 Ghana 116 Gini Coefficient 44, 46 Global Competitiveness Index (GCI) 22, 23, 24, 27, 34, 75 global economy 2–7, 48, 71, 85, 109, 158 Global Entrepreneurship Monitor (GEM) 122, 124 global poverty 46, 77 recession 3, 18 trade 72, 75, 79, 83, 84, 85, 93 trade environment 79 village 5 warming 127 globalisation 4, 5, 6, 7, 92, 110, 173 globalism 6, 138, 165 Gordhan, Finance Minister Pravin 10, 61, 119 governance 6, 24, 25, 40, 41, 69, 75, 88, 107, 109, 115, 135, 142, 173 government deficit 13 grants 10, 54, 55, 57, 101, 118, 119, Great Depression 3, 66 Greece 60 green economy 43, 147 greenhouse gas 127 Greenspan, Alan 4 gross domestic product (GDP) 3, 5, 7, 10–13, 15, 17, 18, 21, 22, 29, 35, 38, 39, 48, 49, 51, 52, 57, 58, 60, 64, 68, 90, 95, 100, 101, 120, 121, 132, 166 Growth and Development Summit 31 Growth Commission, The 31 growth environment index score 13, 25 path 93, 117, 118 rate 9, 13, 15, 37, 38, 57, 72, 91, 131, 166 Growth, Employment and Redistribution (GEAR) 51 Growth, Employment and

Redistribution Strategy 31 Gupta saga 158 H Harvard Economist Study 31 Hausmann, Ricardo 93 health 40, 53, 75, 94, 136, 137, 158 clinics 55 HIV/Aids pandemic 23 household services 95 human resources 93, 99 human skills 72 I import surcharges 63, 76 imports 28, 43, 72, 73, 76, 80, 82, 84, 166, India 83, 85, 86, 153 Indonesia 75 industrial development zone (IDZ) 88 industrial policy 77, 78, 83, 92 Industrial Policy Action Plan (IPAP) 26, 78, 79 Industrial Policy Plan 113 industrialisation 78, 79, 80, 88 inequality 9, 12, 38, 46, 47, 49, 117, 147, 155, 159, 167 inflation 7, 13, 18, 19, 20, 22, 29, 43, 51, 66, 67, 68, 117, 129 rates 18, 19, 51, 66 informal settlements 101 information age 146 information and communications technology 93 infrastructural development 32, 68 infrastructure 8, 11, 40, 43, 49, 68, 73, 75, 87, 93, 94, 95, 98, 101, 143, 144, 148, 154 Infrastructure Bill 116 instability 135 interest rates 19, 20, 49, 51, 66, 68 International Labour Organisation (ILO) 149, 153 International Monetary Fund (IMF) 6, 7, 8, 31, 49, 86, 87, 91 International Panel on Climate Change 128 international trade 75, 76, 78, 80, 81, 89, 92 International Trade Administration Commission (ITAC) 87 international trade policy 75

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Index

investment 10, 14, 18, 39, 43, 48, 50, 77, 78, 84, 95, 101, 111, 120, 121, 153 performance 16, 17, Italy 60 J Japan 72, 86 Jared, Professor Mohammed 141 job creation 13, 26, 78, 88, 109, 117, 121, 123, 140, 150 losses 3, 77, 79 security 151 Job Summit 31 jobs 3, 9, 12, 16, 27, 39, 47, 77, 88, 127, 135, 149, 150, 152, 158, 166 Johannesburg 94 K Kantor, Professor Brian 61 Karoo 166 Katz Commission 60 Keynes, John Maynard 125 Kimberley 94 Kindleberger, Professor Charles 5 Manias, Panics and Crashes 5 Krugman, Professor Paul 6 L labour brokers 110 costs 49, 87 force 39, 118, 166 law 110 leaders 75 legislation 12 market 12, 13, 23, 25, 75, 88, 111, 149, 150, 151, 152, 153 policy 34 relations 110, 158 unrest 24 Lao, Tzu 113 Lenin, VI 27 Lewis, Professor Arthur 167 life expectancy 13, 23 Limpopo 103 Limpopo textbook scandal 23 living standards 5, 9, 26 M macroeconomic 13, 21, 22, 25 policy 67 models 4

stability 43, 117, 118 Mail & Guardian 141 maladministration 160 Malawi 82 Malaysia 13, 116, 117, 118, 153 Mandela, Nelson 109, 157, 160 Mangaung 69, 134, 157, 162, 163, 164 Manuel, Trevor 76, 169, 171 manufacturing 16, 17, 78, 79, 81, 88, 118 Marcus, Gill 68 marginalised communities 78 Marikana 73, 108, 110, 158 market capitalism 134 Marshall, Alfred 9 Marxist 27 Mauritius 11 Mbeki, Thabo 131, 157 Mboweni, Tito 68 McKinsey Global Institute 6 media 128, 130 Medium Term Budget Policy Statement (MTBPS) 57, 58, 59 Medupi power plant 95 Mercosur 83 meritocracy 108 Mexico 14, 49 microeconomic 13, 121 middle income 26, 71, 118 Millennium Development Goals 76 minimum wages 151, 152 mining 16, 17, 24, 73, 81, 84, 112 mixed economy 47, 112, 131–135, 144, 145, 148, 149, 153, 154 monetary policy 20, 25, 48, 66, 67, 69, 70, 71 Monetary Policy Committee (MPC) 69 monopolies 67 Mozambique 82 municipal integrated development 38 municipalities 53, 98, 99, 100, 101, 102 N National Development Plan (NDP) 5, 9, 26, 29, 31, 35, 37–40, 42–48, 59, 60, 65, 71, 78, 91, 93, 95, 96, 101, 105–109, 111–117, 120, 121, 126–130, 132, 133, 136, 138, 139, 140, 142, 145–150, 152, 153, 154, 157–173 Namibia 82, 85 National Budget 52, 138 National Economic Development and

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Labour Council (NEDLAC) 108, 109, 110, 111, 141, 145 National Employment Incentive Bill 149 National Exporter Development Programme (NEDP) 91 national health scheme 137 National Industrial Policy Framework (NIPF) 78, 91 National Infrastructure Plan 94 National Planning Commission (NPC) 126, 162, 169, 171, 172 National Treasury 48, 49, 50, 57, 59, 60, 149, 164 National Youth Development Agency 149 nationalisation 17, 34, 120, 169 nation-building 109, 157 Nelson Mandela Bay 94 neo-liberalism 159 nepotism 118 New Growth Path (NGP) 9, 26, 31, 78, 82, 91, 113, 114, 140, 147, 158, 163 Nigeria 10 North Korea 131 North West 55 North West University 89 Northern Cape 55 nuclear power 126, 128 O Obama, President Barack 85, 108 OECD Annual Country Reports 31 Office for Budget Responsibility 59 old age pensions 54 O’Neill, Jim 6, 13, 23, 25, 135 The Growth Map 13 open trade 5 Organisation for Economic Cooperation and Development (OECD) 31, 67, 121, 141, 149 organised business 144, 145, 146 P parastatals 67, 96 Parliamentary Budget Office 59, 116, 141 per capita income 8, 10, 11, 44 personal income-tax payers 54 Pietermaritzburg 88 Plato 70 Polokwane 69

Poland 116, 117 political appointees 133 Pope Francis 169 Popper, Karl 70 population growth 100 Port Elizabeth 88 Potchefstroom 89 poverty 5, 9, 12, 13, 28, 38, 45, 46, 47, 54, 55, 76, 79, 100, 102, 109, 119, 155, 167, 168, 172 reduction 77, 118 power outages 10 preferential trade agreement (PTA) 83 Presidential Infrastructure Coordinating Commission (PICC) 93, 94 Presidential Panel 96 Presidential Review 96 Presidential Task Team 31 previously disadvantaged 78 private sector 4, 16, 28, 32, 33, 40, 41, 42, 88, 89, 103, 104, 105, 106, 115, 121, 123, 133, 136, 137, 140, 149, 154 privatisation 96 productivity 24, 26, 27, 28, 43, 81, 95, 103, 119, 126, 135, 151, 152, 153, 173 public corporations 15, 16, 53, 93 debt 47, 48, 51, 57, 58 finances 49, 51, 55, 60, 87 health system 40 policy 110, 152 Public Protector 71 public sector 9, 15, 21, 26, 32, 39, 40, 41, 42, 55, 93, 95, 96, 102–106, 108, 123, 124, 132–138, 142, 143, 144, 149, 154, 166 services 40, 56, 104, 137 public-private sector partnerships (PPPs) 142, 143, 144 R Ramaphosa, Deputy President Cyril 147, 158, 162, 163, 164 ratepayers’ associations 98 Ravallon, Martin 46 reconciliation 109, 157 Reconstruction and Development Programme (RDP) 31, 93 red tape 122, 127, 140, 150 redistribution 25, 31, 47, 50, 150 regulatory impact assessments (RIAs) 116, 121, 139, 140, 141, 142

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Reinhart, Carmen 58 renewable energy 127, 128 research and development (R&D) 148 Reserve Bank 66, 164 Rhys, Jean 41 Richards Bay 88 Robinson, James 130, 172 Why the Nations Fail: The Origins of Power, Prosperity and Poverty 130, 172 Rogoff, Ken 58 Rousseff, President Dilma 117 rural areas 39, 101 rule of law 13, 24, 25, 70, 108, 135, 158 Russia 6, 21, 49, 75, 77, 85, 123 S SANRAL 94 Savell, Thomas 142 saving 5, 18, 39, 43, 48, 67, 69 Schumpeter, Joseph 125 science and technology 148 semi-skilled workers 88 Sen, Amartya 167 service delivery 98, 99, 100, 101, 103, 104, 158 protests 99, 136, 158 Seychelles 11 shale gas 126 Shakespeare 134, 157, 165 Julius Caesar 137 As You Like It 165 Sisulu, Max 140 Skidelsky, Professor Robert 154 small businesses 91, 103, 121, 122, 140, 151, 169 Small Enterprise Development Agency (SEDA) 91 small, medium and micro-sized enterprises (SMMEs) 121, 122 Smith, Adam 132, 135, 169 Smuts government 41 social assistance 54, 55 conflicts 5 deficit 13, 45, 46 development 173 dialogue 108, 109, 110, 111, 112, 147 equality 135 grants 10, 57 policy 109 protests 117

security 41, 42, 51, 119 services 41 stability 106, 111, 149 tensions 5, 25, 43, 49, 136, 147 violence 158 socialism 27, 138, 165 socialist 125, 131 socio-economic challenges 9, 113, 124 socio-economic conditions 101 solidarity 106, 107, 112, 128 South African Communist Party (SACP) 32, 33, 34, 159 South African Local Government Association 122 South African Reserve Bank (SARB) 10, 15, 38, 66, 67, 68, 69, 71 South African Revenue Services (SARS) 18, 52 South Korea 24 Southern African Customs Union (SACU) 82, 83, 84 Southern African Development Community (SADC) 76, 82, 83, 84 Spain 127, 128 Speaker of National Assembly 140 Special Economic Zones (SEZs) 88 Special Economic Zones Bill 88 stability of government 13, 24 STANLIB 136 State of Local Government in South Africa 98 state-owned enterprises (SOEs) 96, 143 Statistics South Africa 23 Statistics South Africa’s Labour Force Survey 12 stealth taxes 61, 95 Steyn, Wynnona 52 stock exchange 11 Stockholm 137 Strategies for Sustained Growth and Development (SSGD) 37 Strategic Infrastructure Projects (SIPs) 94 strikes 24, 111 sub-Saharan Africa 7, 8, 10, 24, 81, 82, 83 Supreme Court of Appeal 94 sustainability 18, 21, 47, 49, 50, 53, 54, 59, 114 sustainable development 92, 149 economic growth 9, 26, 48 Sweden 137

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Zumanomics Revisited

Sweeney, Camille and Gosfeld, Joe 161 The Art of Doing: How Superachievers Do What They Do and How They Di It So Well 161 T tariff protection 26, 76, 77, 87 reductions 77, 83 structure 87 tax collection 18, 51, 60 options 65 policy 65, 66 rates 48, 49, 51, 61 reform 60, 61, 64, 65 relief 18 returns 56 revenue 52, 57, 63, 64, 143 system 60, 61, 65, 66 taxpayers 54, 55, 56, 57, 61, 66, 137 technological development 134 innovation 118 Telkom 15, 93 tender fraud 56 tenderpreneurs 106 Thailand 14 time zones 126, 127 toll roads 95 trade deficit 27, 45, 46, 71, 72, 154 Trade Development and Cooperative Agreement (TDCA) 84, 85 trade liberalisation 76, 77, 78 opportunities 77, 82 policy 75, 76, 77, 78, 79, 82, 92 Trade Policy and Strategy Framework (TPSF) 79, 82, 91 trade reform 77 trade relations 71, 84 union 33, 34 transformation 25, 31, 103, 110, 115, 121, 124, 168, 173 Transnet 15, 93 transparency 50, 69, 71 transport 17, 68, 81, 93, 94, 126, 137, 140 Tripartite Free Trade Area (TFTA) 82 trust deficit 45, 46, 61, 105, 106 Turkey 14, 49, 75, 115 U unauthorised expenditure 55 unemployed 23, 152

unemployment 3, 9, 12, 23, 28, 38, 40, 45, 49, 57, 77, 79, 119, 129, 149, 150, 151, 153, 155, 158 United Kingdom (UK) 59, 104, 136, 137, 153, 157 United States (US) 4, 7, 20, 56, 59, 66, 72, 84, 85, 86, 108, 118, 149, 164 University of Cape town (UCT) 122, 151 University of Massachusetts, Amherst 58 urbanisation 78, 101 Us Federal Reserve 4, 66 V violence 24, 75, 135, 136, 158 W wage bill 21, 57 Wagner’s law 132 war veterans’ grant 54 water 17, 93, 97, 98, 136, 166 welfare 105, 119, 126, 137, payments 21 Wellington, Duke of 34 Western Cape 152 White House 164 Wilson, Harold 59 World Bank 46, 86, 90, 118, 149, 167 World Economic Forum (WEF) 8, 24, 26, 75 World Economic Outlook 91 World Trade Organisation (WTO) 76, 77, 81 World War I 126 World War II 10, 41, 126 X xenophobia 122 Y youth employment 147, 150 unemployment 23, 149, 150 wage subsidy 34 Z Zambia 82 Zimbabwe 82 Zuma, President Jacob 37, 38, 93, 119, 134, 145, 147, 157–164, 171

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zuma4 1

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