Explained: the ANC’s economic policy pitfalls
The ANC election manifesto is either an innocuous wish list or an unsettling reminder that some of what the party’s members want would ruin the economy
The ANC’s election manifesto is not government policy, but it is revealing as an indicator of what the ruling party wishes the government would prioritise over the next five years. It should therefore ring some warning bells about the potential long-term risks of investing in SA.
Two headline threats from the manifesto have garnered most of the attention. These are to change the mandate of the Reserve Bank and to institute prescribed asset requirements. It is right for these issues to raise concern, as both policies would be patently ruinous for confidence, investment and growth.
President Cyril Ramaphosa immediately countered this by saying the independence of the Bank is "sacrosanct" and nobody should be alarmed — that the manifesto is simply an expression of wishes and aspirations, not a change in policy.
But isn’t that the whole point: that what most ANC members really wish for, and would vote for, would be ruinous for the economy?
Over the past decade, SA has woefully underperformed against its own targets, as well as those of most other upper-middle-income countries, having grown by only 1.7% a year on average.
The National Development Plan’s annual growth target of 5% would have resulted in the creation of 500,000 jobs a year. The ANC has abandoned this goal. According to the manifesto, the aim is now to create 275,000 jobs a year.
But if SA continues along its current low-growth path, and fails to address state incapacity, corruption and fiscal sustainability, SA’s 27% unemployment rate will likely get worse. This requires a wholesale mindset shift in how the ANC views the economy — a shift that is not in evidence in the manifesto.
"The ANC’s general policy mindset is not changing," says Intellidex analyst Peter Attard Montalto. "The default mindset — which we see holding back potential growth — remains interventionist."
The ANC’s manifesto avoids addressing the tough questions and actionables the state needs to urgently address urgentlyJeffrey Schultz and Nic Borain
Attard Montalto rejects the assertion that there is nothing new to be alarmed about in the manifesto. "Instead we see a slow policy ratchet, in which expectations about issues such as the Reserve Bank and prescribed assets are slowly being tightened," he says.
While these two election promises should not cause immediate concern to investors — there is no chance they will be implemented while Ramaphosa, Reserve Bank governor Lesetja Kganyago and finance minister Tito Mboweni remain at the helm — they do suggest that policy uncertainty will continue to undermine growth and that economic reform will proceed haltingly.
Ramaphosa spent much of last year building bridges with business. Through the jobs and investment summits the government articulated that the only way of overcoming SA’s biggest economic challenges was in partnership with the private sector.
The manifesto completely misses this shift. Instead, it betrays that the ANC, at its heart, remains firmly wedded to an interventionist, developmental-state approach to growing the economy.
This approach means building a fully capacitated state, refuelling exhausted state-owned enterprises (SOEs) and extending state ownership. According to the manifesto, there will be a state bank and a state-owned pharmaceutical company, and Eskom must extend its reach into renewable energy.
What is missing is an acknowledgment that any strengthening of public sector delivery should be designed to support the private sector, because it is the latter that creates the bulk of jobs and growth.
Instead, where the manifesto does mention business other than SMEs or township enterprises, it is mostly to talk about the need to smash monopolies and eliminate tax evasion — as if business is the enemy, not a key partner in the country’s future development.
Business Unity SA declined to comment on the manifesto, saying it would wait until all the other parties have launched their manifestos before releasing a consolidated response.
As is perhaps the case with all election manifestos, there is no explicit recognition of the fiscal constraints the state faces. But in SA’s case, the fiscal risks — especially from defunct municipalities and SOEs — are so significant that they threaten not only economic growth but social stability.
The number of people on social grants increased from 3-million in 1994 to 17.5-million in 2017, giving SA the rare distinction of being a country with more people on welfare than in employment, of which there are only about 16-million.
This is not sustainable. In fact, according to the National Treasury’s long-term fiscal study, the country cannot afford the policies it has, let alone new ones, unless growth rises to 3% and stays there.
Despite this, the ANC’s manifesto promises to expand social grants to include low-paid workers and informal traders, institute new maternity benefit schemes and increase the coverage of the unemployment insurance fund, or UIF.
While there should be no prospect of these aspirations being met in the absence of rapid, sustainable growth, the same could have been said about free higher education. Just because SA cannot afford greater social spending doesn’t mean the government won’t cave in to pressure to spend more.
So the manifesto’s promises to expand social security cannot be dismissed as mere electioneering. They clearly add to SA’s long-term fiscal risks and bear watching.
The idea that the government needs new sources of funds is implicit in the proposal to create a sovereign wealth fund (typically, the custodian of a government’s pension fund and other assets) and to tap private pension funds to lend to "socially productive investments".
But instead of thinking that SA needs more funds or clever new policies to get growth going, the immediate focus should be on whether existing policies are being implemented and budgets spent.
SA’s municipalities, for example, now spend only about 50% of their infrastructure budgets on average, while the department of water & sanitation has racked up a spending shortfall of R600bn over the past decade. Just spending these budgets would stimulate the economy.
The first step to faster growth should therefore be to improve the quality of people in government so that departments are able to spend the budgets they have, thus restoring service delivery and winning back private sector confidence.
The next step should be to partner with the private sector to develop joint funding models for everything from building infrastructure to delivering health and education, thus spreading both the cost and the risk, and accelerating service delivery.
It is therefore extremely welcome that the manifesto promises to improve the skills base of local government by enforcing compliance with appropriate standards for senior officials and through the deployment of support teams of engineers, planners and other experts.
In addition, the manifesto undertakes to "put an end to state capture, restore the integrity of public institutions and tackle corruption". Among other things, it promises to conduct lifestyle audits of public officials, prevent public servants from doing business with the state and make tender systems more transparent.
With Ramaphosa’s clean-up operation gathering steam, there is a chance that some of these promises will finally be met.
What it means
The ANC’s view of the economy is stuck in the past
"The promise of developmental state-led growth in the ANC election manifesto is nothing significantly new," say BNP Paribas analysts Jeffrey Schultz and Nic Borain. "What makes some of these promises less plausible, however, is that institutions have been significantly weakened in recent years, state finances and parastatals are nearing a cliff and the country and its labour market have been left behind by the rest of the emerging markets in terms of productivity."
While Schultz and Borain have no doubt that many of the problems in the state are being addressed, they struggle to envisage a scenario over the next two years in which meaningful structural economic reforms are undertaken in the pivotal areas of the labour market, education system, SOEs and local government.
"The ANC’s manifesto avoids addressing the tough questions and actionables the state needs to address urgently," they say. These include making hefty job cuts in SOEs and the public service (even though this would push unemployment even higher initially), removing some countercyclical fiscal policy measures and slashing red tape.
But given the likelihood that SA’s realpolitik will continue to require that Ramaphosa make compromises with various power blocs, they have little confidence that he will be able to undertake the deep, daring reforms required to stabilise the public finances and get growth going.
In the absence of real reforms, the manifesto is likely to remain an unfulfilled wish list. Given some of its worst impulses, we can only hope so.