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SA needs a grand bargain to foster economic growth

by Thanti Mthanti: Head of the UCT GSB's Development Finance Centre.
Since Nelson Mandela's inauguration in 1994 as the first democratic president, the African National Congress (ANC) government has made significant progress in enhancing employment opportunities, implementing broad social protection measures, fostering the growth of the black middle class, and increasing the enrolment of black students in higher education institutions.

However, South Africa's economy is currently grappling with a series of mounting economic and social challenges. The country has been adversely affected by the Covid-19 pandemic, Russia's war in Ukraine, global tightening of monetary policies, severe floods, grey-listing by the Financial Action Task Force (FATF), and an unprecedented energy crisis.

According to the latest RMB/BER Business Confidence Index (BCI), a staggering 73% of businesses express dissatisfaction with the current state of the economy. Moreover, the growth outlook has significantly deteriorated, with the International Monetary Fund (IMF) projecting a mere 0.1% real GDP growth for 2023 and approximately 1.5% in the medium term. Of great concern is the fact that South Africa's sovereign spread remains higher than pre-pandemic levels, and the average employment level in 2022 was still around 5% lower than in 2019. In fact, youth unemployment now exceeds 50 percent, posing a threat to social cohesion and stability.

The data concerning transformation and inequality paints a similarly disheartening picture. The B-BBEE Commission report for the calendar year 2021 reveals a 1.5% decline in transformation levels, with none of the entities listed on the JSE being 100% black owned. Similarly, the Commission for Employment Equity Report highlights a slow pace of workplace transformation in the country. Currently, 62% of top management positions are held by whites, while Africans occupy only 16%, despite Africans having the highest number of professional qualifications at 48%, compared to whites at 30%.

According to the World Bank, South Africa continues to be the most unequal country in the world, ranking first among 164 countries. In most countries, the top 20% of the population holds a median of 47% of the income, while in South Africa, the top 20% of the population controls nearly 70% of the income. Essentially, the lingering effects of colonialism and apartheid, characterised by racial and spatial segregation, persistently reinforce exclusion and inequality.

Certainly, despite the discouraging figures regarding the economy, transformation, and inequality, South Africans possesses, as seen in the CODESA negotiations, the ability to reach across racial and tribal enclaves to solve pressing national problems. As Nelson Mandela, and FW De Klerk put aside their differences to birth our constitutional democracy, our generation is called to make sacrifices to ensure future prosperity for our children.

To be sure, our strong economic fundamentals provide a solid basis for rebuilding our economy and promoting inclusivity. The government has made significant progress through the implementation of operation Vulindlela, and we can also rely on the credibility of our central bank, substantial external assets, a robust domestic financial system, and favorable debt composition. These factors allow our economy to withstand fiscal and external shocks without resorting to risky monetary measures or depleting our foreign reserves.

However, it is important to recognise that the numerous social and economic crises we face highlight the urgent need to build upon our strengths to enhance economic growth, reduce unemployment, and promote transformation and equality.

One crucial strength lies in the constitutional independence of the South African Reserve Bank (SARB). The credibility of our inflation targeting framework and proactive monetary policy have ensured stable inflation expectations. However, despite these positive outcomes on inflation, we have experienced poor economic and employment growth, along with worsening inequality. As a result, it is important, as the 55th National Conference recognises, that the SARB implement monetary policy in a balanced manner, considering factors such as growth, employment, and inflation.

To enhance the South African Reserve Bank (SARB) and enable it to effectively carry out its expanded responsibilities, it is crucial to implement changes in macroeconomic policies and promote a higher savings rate to tackle external imbalances. The country's external balance, which heavily relies on short-term portfolio flows, poses a significant challenge to our economy, particularly during times of global uncertainty when these flows are constrained, necessitating the implementation of fiscal and monetary tightening measures. Social security reform and a sovereign wealth fund are crucial instruments that can increase the savings rate and help tackle external imbalances.

Additionally, our government has undertaken significant efforts towards fiscal consolidation based on expenditure cuts. Since 2019, there have been substantial reductions in the fiscal deficit. However, to safeguard growth, employment, and social cohesion, it may be necessary, as recognised by the 55th National Conference, to strike a more appropriate balance between expenditure cuts and revenue measures in our fiscal consolidation efforts.

Moreover, significant efforts are being made to reform key network industries such as electricity, telecommunications, water, and logistics infrastructure, with the goal of improving their performance. While there has been some progress, challenges persist. Eskom, for instance, continues to face operational and financial difficulties, and the private sector has shown limited interest in participating in third-party rail access. Additionally, it is important to consider the potential impact of these efficiency-enhancing interventions on low-income individuals, as they may bear a disproportionate burden.

Addressing these concerns requires a multi-pronged approach, as recognised by the 55th Conference. Firstly, it is essential to stabilise state-owned enterprises like Eskom and Transnet, ensuring their continued involvement in relevant industries. Secondly, a just transition must be implemented, while avoiding exacerbating the country's sovereign debt position and prioritising the inclusion of marginalised groups.

Furthermore, structural barriers and limited competition in the financial services and telecommunications sectors hinder the achievement of transformation, economic growth, and job creation. Competition and procurement policies, and other measures should be employed to address concentrated ownership and market dominance in the financial services and telecommunications sectors.

The fault lines in our country disproportionately affect marginalised groups such as black people, women, rural communities, youth, and persons with disabilities. While there has been some progress, transformation and empowerment has somewhat stagnated over the last decade. It is time to intensify and purposefully undertake empowerment efforts, accelerate the implementation of procurement targets, and move beyond acquiring minority stakes in white businesses to creating productive and large black owned and controlled companies across all sectors of the economy.

Regrettably, the pace of land reform has also been disappointingly slow, as various ANC conferences have suggested measures to expedite the process without significant progress. The presidential advisory panel on land reform and agriculture estimated that only 10% of all commercial farmland had been redistributed by 2019, falling far short of the initial target of 30% by 2014. Notably, Klaus Deininger, a prominent authority on land policy, has shown through his research that countries with unequal land distribution struggle to achieve sustainable long-term growth rates exceeding 2.5%. Moreover, his insights indicate that such land inequality leads to reduced income for the poor.

Substantive land reform is, therefore, a crucial step to address poverty, of negotiation and compromise within our society to expedite both land reform, transformation, inequality, and accelerate economic transformation in South Africa. It is imperative that we rely on the patriotism and spirit and economic growth.

The ambitious economic vision outlined in this document is attainable. However, its success hinges on effective implementation, appropriate sequencing of reforms, and social compacting. It is time for a grand bargain that will lift us out of the malaise of economic stagnation and poverty, transforming our country to ensure future prosperity for our children. Our problems are significant, and our vision must be equal to the task at hand. It is through collective effort and a shared commitment that we can overcome these challenges and create a more inclusive and prosperous South Africa.

Useful resources:
University of Cape Town Graduate School of Business
UCT GSB is internationally renowned as one of a few business schools in Africa with the prestigious triple-crown accreditation with endorsements from EQUIS, AACSB and AMBA.
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