What SA needs to fix, according to World Bank
The World Bank has listed five binding constraints that SA must address if it wants to make inroads into poverty and inequality before patience runs out
The World Bank has for many years been criticised for being too prescriptive about the economic policies that countries should follow. In producing a new diagnostic report on SA it has been careful not to make the same mistake.
Bank officials engaged in a two-year process of consultation during which they met business chambers, township youth and organised labour, and drew on the expertise of national treasury, the national planning commission (NPC) and the cream of SA’s academic community.
The report, "An Incomplete Transition: Overcoming the Legacy of Exclusion in SA", finds that though poverty has declined significantly since 1994, inequality has risen and SA remains the world’s most unequal country.
So, despite the progress in granting political and civil rights to all citizens, and in increasing access to basic services and social assistance, SA’s economic transition still has a way to go.
High levels of inequality and the legacy of exclusion hamper the country’s ability to grow because they fuel contestation over resources, increase policy uncertainty and deter investment.
The report identifies five persistent, binding constraints to addressing the legacy of exclusion. These are the root causes of SA’s inability to grow faster and reduce poverty and inequality.
They are: insufficient skills; weak property rights and skewed distribution of land and productive assets; low levels of competition and integration in global and regional value chains; limited or expensive spatial connectivity and underserviced settlements; and climate shocks and water insecurity.
For World Bank senior economist Marek Hanusch, the lead author of the report, the most important thing for SA in tackling persistent inequality and poverty is to prioritise a short list of reforms that all South Africans can rally around.
"The national development plan has something like 114 actions," he points out. "The more selective you are, the more efficient you’ll become, especially in an environment of constrained resources."
But as much as many South Africans would love president Cyril Ramaphosa to grab the bank’s short list and begin implementing it, the report says there is an essential step that can’t be skipped — SA needs a stronger social contract. To the bank, this is "an essential foundation" on which to build the country’s future.
Hanusch says SA suffers from "constant creep" where demands for redistribution, more radical policies and tighter BEE keep increasing.
"The rich are worried about rising taxes and having to give away more assets; the poor are unhappy because progress is taking too long," he says.
The point of a social contract, he feels, would be to determine the minimum the poor are willing to accept (be it a job, a house, or land) and the maximum that the rich are prepared to give, for both sides to consider the system fair.
In his first state of the nation address in February, Ramaphosa announced that a social compact would be negotiated in collaboration with business, labour and civil society.
"One of the big measures of Ramaphosa’s performance will be whether he can set in motion an efficient, lean process to arrive at a sufficient social consensus this year," says Richard Calland, a professor of public law at the University of Cape Town and partner of the Paternoster Group.
Calland contributed to the World Bank report on political economy and governance issues. "Ramaphosa’s big vulnerability will be if he is all talk and no action," says Calland. "By the fourth quarter he’s got to be able to show that sufficient consensus has been achieved on what constitute the main stumbling blocks to growth, and that the key trade-offs have been made between business, labour and government."
If he can’t show progress by then, Ramaphosa will be vulnerable in the elections, Calland warns.
"It’s just about getting the key stakeholders to achieve sufficient consensus so that we can move forward. But if it gets out of hand and drags on beyond the end of this year it will be a mistake," he says.
There are already several parallel processes under way. The NPC is reviewing progress towards its Vision 2030 and devising proposals to get back on track, and Business Leadership SA has drafted its own road map to assist with SA’s socioeconomic recovery.
"Ramaphosa just has to join the dots between these things," says Calland.
Miriam Altman, a national planning commissioner, says the NPC has been consulting leading stakeholder groups since around February.
Each group should have its own view, but the point of the NPC process is to help narrow things down to a focused set of common actions and draw the various consultative processes together, she says.
Of the five binding constraints to reducing poverty and inequality that the World Bank has identified, it considers insufficient skills to be the key problem.
Progress has been steady, albeit slow, but learning outcomes are still poor by global and regional standards, it notes. "Since skills raise the productivity of workers and entrepreneurs, help firms expand production at competitive prices, lead to additional hiring, boost aggregate demand, and contribute to a growing economy, improving the quality of education is an essential ingredient for national development," it states.
Importantly, the report acknowledges that SA has to address the highly skewed distribution of land and other productive assets to increase the asset base of the poor.
"A new social compact 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 investment," it says.
The bank doesn’t believe in expropriation without compensation. Rather, it emphasises that property rights are critical for all South Africans so they can leverage their assets in support of economic growth, household incomes, and jobs.
Hanusch says SA’s model of willing buyer, willing seller should be made more effective by strengthening the existing institutions that implement land reform.
But perhaps even more important, he says, is the need to strengthen tenure security and the titling of property, especially for the poor in informal and communal areas in the former homelands. This is because the weak titling of property limits its value, including as collateral to access finance. As a result, even where the poor hold land, the value of these assets is limited.
Third, the bank argues that in manufacturing, low levels of competition and the lack of integration of SA firms into global and regional value chains keeps domestic prices high and deters growth and job creation. This is especially a problem for smaller firms in that they struggle to find new demand in a stagnant economy and face barriers imposed by incumbents.
The bottom line is that productivity gains from competition and innovation are sorely needed if SA is to produce goods more cheaply for all its citizens, especially the poor.
Fourth, exclusion in SA is perpetuated by limited or expensive transport and communication costs, and because settlements in remote locations are underserviced. Slashing transport and Internet costs would boost connectivity.
The bank concludes that given the global recovery and Ramaphosa’s election, SA has "an enormous opportunity" to strengthen institutions and the social contract.
However, it warns that because social progress takes time, government will have to manage expectations to stave off disappointment that could undermine progress.
Hanusch stresses the need for a Plan B to ensure that if the economy fails to create the millions more jobs required, even those without jobs will be better off.
He recommends that as part of this back-up plan SA should improve tenure security on land, provide much better access to health services (especially for HIV and TB), and reduce transport costs between disadvantaged areas and places of work.
SA should also introduce a contributory social pension system — so that even those without jobs can build assets — and investigate the possibility of introducing a basic income grant.