DAAN STEENKAMP: Practical measures needed to remove barriers to SA’s growth

The Harvard Growth Lab has published a paper asking why “three decades after the end of apartheid, the [SA] economy is defined by stagnation and exclusion, and current strategies are not achieving inclusion and empowerment in practice”. The authors suggest this reflects collapsing state capability.

The report points to a lack of meritocracy in public appointments, counterproductive ideologicallydriven policies, and active discouragement of local authority or private sector resolution to problems. Despite lofty goals such as transforming the economy and including the excluded, government development policies have hurt millions to protect a few.

It is worth quoting from the paper directly on the fundamental explanations for SA’s economic stagnation: “State capacity has collapsed across many government functions that are essential for a functioning economy”, and “urban planning regulations and zoning policies prevent dense, affordable housing in desirable locations and consequently limit both formal and informal employment.”

The collapse of state capacity to provide electricity is the main reason for SA’s accelerating deindustrialisation and weakening international competitiveness. The Growth Lab’s Ricardo Hausmann and his team attribute 40% of SA’s post-global financial crisis slowdown to the collapse of utilities.

Government rules disincentivise private sector participation in key areas of the economy (such as electricity transmission and storage). The paper attributes the 17-year delay for government to remove the prohibition on private participation in electricity generation to ideological gridlock that halts decision-making.

This gridlock in large part reflects a lack of political opposition to the ANC that implies little incentive to address problems. The report states that “the collapse in state capacity has policy and political causes and will not be resolved without significant change and bold leadership.”

On the other hand, government rules incentivise urban sprawl, which discriminates against job creation and efficient service provision. The report argues that low population density and long commutes raise transportation costs and reservation wages. For example, research by the Growth Lab’s Kishan Shah estimates that direct commuting costs are 17% of net wage income, compared to a total cost (which includes the time cost) of an average of 57% of net wage income.

The study suggests transport costs to work represent over than 35% of labour income for the lowest income quintile, compared with below 10% for the highest quintile. Low density and high dispersion have also meant that government’s bus rapid transit systems were not appropriate for SA cities.

Preferential procurement is highlighted as a key cause of SA’s stagnation. The paper suggests that government suffered from “the mistaken belief that preferential procurement rules could be imposed on complex organisations such as the network industries, at little cost.”

Instead, the report suggests that "‘these rules have... in many cases overburdened critical public organisations.” It argues that procurement policies in SA distort markets, raise costs and create opportunities for patronage (consider the rise of “tenderpreneurs”).

The report cites research showing, for example, that the Preferential Procurement Policy Framework Act implies a 27% premium in the transport department, 28% in agriculture and public works, and 62% in sports, arts and culture. The report also cites an IMF note that presented National Treasury estimates that procurement policy reforms could save as much as “20% of the cost of goods and services procured (3% of GDP)”.

The report bemoans the “endemic use of state-owned enterprises for political patronage”. The patronage network created by BEE and procurement policies to transform society now resists any changes to the status quo.

Because SA’s growth malaise is driven by “persistent and worsening domestic supply-side constraints”, this “has meant that demand stimulus measures via fiscal policy have proven ineffective or even counterproductive”. The paper argues that fiscal multipliers have been negative, which means fiscal policy has been actively weighing on growth by crowding out investment and raising the economy’s cost of capital.

The report notes that grants “compensate people for their exclusion” rather than drawing them into the economy. But if higher grants and fiscal stimulus are not the answer to raising growth and reducing poverty, then what is? The paper provides a laundry list of practical measures to remove barriers to growth, stimulate investment and create employment. These include:

• Relaxing preferential procurement rules;
• Ensuring “clear rules for all market participants that eliminate conflicts of interest and prevent discriminatory treatment”;
• Regarding electricity, “appoint a reform and unbundling sherpa/czar to push implementation”;
• On municipal government, “reassign responsibility for electricity and water distribution to geographically efficient regulated monopolies;
• “Gradual civil service reform to replace the reliance on cadre deployment” and a shift to “merit-based employment”;
• Establishing clear markets that allow for societal capabilities to help fill supply gaps in network industries (rather than selling assets through privatisation);
• Reform of building and zoning regulations to encourage densification;
• Revival of passenger rail and formalisation of the minibus taxi system;
• Creating and expanding markets for business partnerships through supporting investments in hard infrastructure such as roads, and soft infrastructure and services (information systems for matching, partnership advising);
• Redirecting industrial policy away from import substitution for a limited and stagnant domestic market and instead targeting industries that “have the potential to grow by supplying the global market”;
• Reducing administrative delays and costs of business visas to encourage tourism and attract global talent; and
• Leveraging Sasol’s technological strengths to develop green fuels, developing mining strategies for critical minerals, and strengthening R&D support policies for green technologies.

• Dr Steenkamp, a former lead economist at the SA Reserve Bank and senior analyst at the Reserve Bank of New Zealand, is a research fellow in the economics department of Stellenbosch University and CEO at Codera Analytics.