Start economic reforms now, or risk further stagnation
If reforms are not initiated soon, before a crisis blows up, the domestic and external constraints will become worse
The South African economy is currently in a precarious state. It has stumbled along for the past 10 years with extremely low growth — what economists call “secular stagnation”. The case for reforms to generate faster growth has never been as urgent. State finances are stretched, with debt soaring and limited room for a fiscal stimulus.
But while the case for reforms is strong, it will meet with some resistance from vested interests. The credibility of the new government, which initially offered hope and promise, rests on it launching reforms that can convince the electorate that it is turning things around.
However, while government has prioritised dealing with corruption and state capture, there has been a lag in tackling economic reforms. We need immediate reform to quickly advance inclusive growth. Inaction creates apathy and pessimism and the danger of SA going down a populist path can become real. There are many such cautionary tales from around the world.
Economic crises do not happen overnight. They’re the product of long-term imbalances in the economy, which policymakers either ignore or fail to address. The longer the delay in tackling them, the larger the imbalances and the costs associated with them — and the more difficult it becomes to implement reforms. And, in the meantime, government loses its support and credibility, while those opposed to economic reforms grow stronger.
The government needs to implement reforms and stick to them. If reforms are not initiated soon, before a crisis blows up, the domestic and external constraints will become worse. SA, highly dependent on foreign capital, cannot afford threats to its credit lines.
Fiscal consolidation must be balanced with structural reforms. Too much fiscal tightening can hamper the impact of reforms, which take time to show results. Fiscal consolidation should be phased in gradually to ensure the positive effects of structural reforms are not eliminated. A harsh fiscal consolidation could generate a strong political backlash, which must be avoided.
The sequence of reforms must consider domestic political constraints. The first one is ‘’political capital’’, which is a scarce commodity for a government. Therefore, it should be invested in a few crucial reforms, necessary to unblock economic growth. Political capital can quickly erode if it’s all invested at once. It is often best to start with some quick wins rather than wholesale reforms.
The reforms must consider the adjustment costs and be distributed with the least pain. By way of examples, in the product market, priority should be given to lowering barriers of entry; in the labour market, increase the flow of skills.
Here are some quick wins for government that can generate confidence:
• Finalise the Mining Charter in a way that encourages local and global investment in mining, while emphasising that the state already owns the mineral rights.
• Expand broadband rapidly as we move into a digital phase. This can be a new source of productivity growth or “catch-up growth”.
• Make it easier for skilled labour to enter through our borders: we are a skill-constrained economy.
• Make it easier to register and start businesses.
• Make state-owned enterprises less dependent on state funding and guarantees, and consider minority equity stakes for interested investors.
• Begin a robust process to determine which state enterprises are strategic, which provide a required service but could be hived off, and which should be closed.
A few good reforms rather than a wholesale approach can buy time to fast track economic growth. But, economic reforms require politicians who are ready to invest their political capital to demonstrate the will of government.
• Cassim is economist at the Banking Association SA.