Fiery fighters: Residents of Eldorado Park, Johannesburg, demand houses and land as anger engulfs poor South Africans whose upliftment was abandoned by the ANC, the writer says. The Times
Fiery fighters: Residents of Eldorado Park, Johannesburg, demand houses and land as anger engulfs poor South Africans whose upliftment was abandoned by the ANC, the writer says. The Times

The World Bank Group’s corporate mission is to help countries eliminate extreme poverty by 2030 and reduce inequality. This mission perfectly reflects the goals in SA’s Vision 2030 in the National Development Plan (NDP).

To prepare its next country partnership framework with SA, the World Bank Group drafted a systematic country diagnostic — An Incomplete Transition: Overcoming the Legacy of Exclusion — to strengthen its understanding of key constraints to achieving these twin goals in SA. The diagnostic is anchored in the NDP and benefited from an extensive consultation process with key stakeholders in SA.

The diagnostic acknowledges that SA has come a long way since democracy but argues that its transition remains incomplete as too many South Africans remain excluded from actively participating in the economy. The incomplete transition results in contestation over resources, which creates policy uncertainty and undermines attempts to foster growth and create jobs.

In this sense, the legacy of exclusion is the root cause of many of SA’s ills, including the triple challenge of high inequality, poverty and unemployment, as well as what the diagnostic terms "symptoms", including a volatile currency, pressure on property rights, high rates of crime and even "state capture".

The diagnostic argues that focusing policy on root causes will be critical for further reducing poverty and inequality, and sustainably tackling other symptoms of the incomplete transition. Building a social contract is required, which needs to establish a consensus between poor and rich on how to tackle inequality.

The legacy of Bantu education continues to deprive SA of the skills it needs and contributes to low growth, productivity and competitiveness, alongside high unemployment.

Job creation plays a central role, although there will also need to be a plan for those South Africans who will continue to struggle to access employment opportunities.

Insufficient skills are the first root cause of poverty and inequality. Skills are critical for labour supply and demand: they raise the productivity of workers and entrepreneurs, help companies expand production at competitive prices, lead to additional hiring, boost aggregate demand and contribute to a growing economy. Yet despite slow and steady progress, learning outcomes are still poor by global and regional standards.

The legacy of Bantu education continues to deprive SA of the skills it needs and contributes to low growth, productivity and competitiveness, alongside high unemployment.

The skills constraint is the main contributor to income inequality in SA and it is exacerbated when the economy grows and requires more skills.

Given that the skills constraint raises the cost of labour in a growing economy, it is also one explanation for relatively low economic growth in SA compared to many peer countries, although growth is needed to create jobs for skilled and unskilled South Africans. SA needs a skills revolution to turn around the economy and create more well-paying jobs.

The skewed distribution of land and productive assets is a major source of inequality and social fragility, further fuelling the contestation over resources. Property rights are weak or under pressure.

Despite some progress, wealth and land ownership remain highly concentrated.

Public housing programmes provide a growing number of poor households with tangible assets. Yet weak titling of property, especially in poor and informal areas, limits its value, including as collateral to access finance. Security of tenure in the former homelands is fragile. Even where the poor hold land, the value of these assets is therefore limited.

Land expropriation without compensation and aspects of the third Mining Charter further challenge property rights. A new social contract will require greater certainty about what will be redistributed — and how this will take place — while ensuring that secure property rights provide a sustainable platform for private investment. Black economic empowerment should be evaluated to minimise adverse effects on investment.

Low levels of competition and integration into global and regional value chains deter growth and job creation. They also keep prices high, especially for the poor. The country’s banks are well integrated into the global economy, but manufacturers have traditionally been protected by natural trade barriers (for example, distance) and a history of import substitution and government support.

The country’s product markets have high barriers to entry and are poorly integrated into the global economy.

Businesses consequently miss out on opportunities to trade internationally and grow through technology transfers associated with participating in the value chain.

This is especially acute for smaller companies, which struggle to find new demand in a stagnant economy and face barriers imposed on them by incumbents while the skills constraint exacerbates matters, particularly hurting manufacturers, small companies, emerging entrepreneurs and farmers.

Productivity gains from competition and innovation are needed to produce goods more cheaply for all South Africans, especially the poor, allowing their budgets to stretch further.

Enabling business to compete effectively will have the dual benefits of overcoming the exclusion of historically disadvantaged South Africans and ending the country’s historical economic isolation from global markets.

Exclusion is also underpinned by limited or expensive connectivity and underserviced historically disadvantaged settlements. Many South Africans continue to live far from job opportunities in underserviced townships, informal settlements and the former homelands. This makes commuting expensive.

There has been significant migration from rural to urban areas as people seek work. While migration supports poverty reduction, it can also put pressure on existing public services and raise social tension as new arrivals compete with existing residents for jobs, services and business. The government has made considerable efforts to reduce these skewed spatial patterns but has at times inadvertently reinforced them — for example, by adopting housing policies that do not encourage urban densification.

Climate change will impose considerable costs on SA, which relies heavily on coal to power its economy

Urban planning is increasingly focused on sustainably densifying cities, but this is a long-term process. For some years many South Africans will continue to live in relatively remote locations with limited opportunities for employment. Access to electricity, water, sanitation, good public clinics and schools and financial services remains much weaker in such areas, limiting opportunities for growth and weighing down living standards.

For many living in disadvantaged settlements, improving the delivery of public and social services is one of the most expected democratic dividends.

Climate change will impose considerable costs on SA, which relies heavily on coal to power its economy. Managing the low-carbon transition and addressing water insecurity will be critical. Cheap coal was one of the key factors in the country’s development and the economy remains heavily dependent on coal for energy and mining. In the transition to a low-carbon economy, a viable decarbonisation strategy will be needed to ensure that important economic sectors are not negatively affected. This includes implementing the carbon tax and leveraging private investment in energy conservation and clean energy technologies.

Although climate change exacerbates the country’s water challenges, it is not the source of the structural water deficit. Population growth, urbanisation, and economic expansion are increasing demand for water, outstripping fixed supply. Reducing this deficit requires policies targeting water supply, management and demand. Climate-smart agriculture will be important to guarantee adequate food production for SA and the region and to protect farmers’ livelihoods, as will insurance products covering climate shocks. SA is a water-scarce country, and it will be critical to strengthen the regulatory and investment framework for more resilient and efficient water service delivery while incentivising consumers to use water more efficiently.

"State capture" was a term coined by the World Bank when the Soviet Union unravelled, pointing to a phenomenon of elites using times of transition to institutionalise rules to their personal benefit. It is a phenomenon often associated with transition and can thus also be seen as a symptom of SA’s "incomplete transition".

The diagnostic acknowledges the recent determination to roll back state capture.

Beyond this, strengthening the state further requires the reduction of fragmentation in government and stronger monitoring and evaluation to ensure that policies deliver what they are intended to do.

Focusing the government on priority areas, such as "root causes", can also ensure that the needed human resources are devoted to the most critical intervention areas, especially in a skills-constrained environment. The diagnostic argues for greater involvement of the private sector in the formulation and implementation of policy. Eventually it is the private sector that needs to create most of the required jobs.

Undoing the legacy of exclusion is a long-term process, and the diagnostic reminds that expectations need to be managed carefully. SA has come a long way since 1994 and has contained the centrifugal forces tearing at the fabric of a highly unequal society.

The global economic recovery, coupled with renewed commitment by the political leadership to strengthen institutions and strengthen the social contract, presents an enormous opportunity. But social progress takes time and a social contract needs to take this into account, providing an acceptable framework for South Africans to work towards the Vision 2030.

• Hanusch is a senior economist for the World Bank, based in Pretoria. This is an edited extract of his book, An Incomplete Transition: Overcoming the Legacy of Exclusion in South Africa, published by Juta.