From the moment he became president, Cyril Ramaphosa has been wanting to confer with leading economists on how to get growth going. But when he finally convened a series of three economic discussions starting late last year — each taking place behind closed doors, away from the scrutiny of the press — the message he received was apparently dire.
After years of kicking the can down the road, it seems SA has finally run out of road.
Harvard economics professor Robert Lawrence told the assembled ministers and officials that SA is in "serious trouble". The country is caught in a low-growth trap, skirting close to a downgrade, and in danger of suffering a sudden stop in capital inflows and a run on the currency.
Alarmingly, the government doesn’t have a cogent plan to revive growth.
SA’s 500-page long-term vision, the National Development Plan, was barely mentioned during the discussions, Ramaphosa having made it clear that he was looking for immediate steps that could kick-start growth with minimal political contestation.
But when it comes to reforming the SA economy, controversy is impossible to avoid.
Professor Ricardo Hausmann, director of the Center for International Development at Harvard, reportedly waded into the thick of it by suggesting SA’s new national minimum wage (NMW) could potentially cause severe job losses and will not be the solution to inequality and poverty.
The room exploded, as this contradicts the government’s view that the NMW will strike a major blow against inequality by addressing SA’s working poor problem.
[The national minimum wage] can’t reduce poverty, inequality and create better living conditions — and it’s a poisoned chalice in that it can cause job losses
— Haroon Bhorat
It even prompted finance minister Tito Mboweni to tweet: "The debate is getting hot here!"
Once Mboweni had explained that the NMW had taken effect from January 1 and there would be no going back, Hausmann — who chaired the Harvard Group, former finance minister Trevor Manuel’s international growth panel in 2007 — apparently highlighted ways to soften its impact.
Wits professor Imraan Valodia, who chaired the NMW advisory panel but was not at the colloquium, hit back last week, querying whether Hausmann had actually read the panel’s report.
"I do agree that, by itself, [the NMW] is not the solution to poverty and inequality," Valodia said. "But I do think it is part of a package of policies that need to be implemented to address the serious challenge of poverty and inequality in SA."
Valodia is one of 42 signatories to a letter sent by former ANC MP Ben Turok to Mboweni on January 18, expressing concern that the participants invited to the talks were "disappointingly skewed towards economic orthodoxy" and noting the absence of economists associated with labour or civil society.
However, University of Cape Town labour economist Haroon Bhorat, who attended the talks, shares Hausmann’s concerns. Bhorat suggests that the NMW be combined with complementary policies such as free housing or health care and transport vouchers for certain categories of workers, so it is not required to do all the heavy lifting.
"They want the NMW to do too much. It can’t reduce poverty and inequality or create better living conditions — and it’s a poisoned chalice in that it can cause job losses," he says. "If the government is serious about protecting jobs it can’t implement the NMW in an aggressive way."
Instead, he urges the government to expedite a full exemption process; not sanction automatic, above-inflation annual increases in the NMW; give SMEs more time to become compliant; and allow more time for farm and domestic workers’ wages to reach the target of R20 an hour.
Further contestation emerged around reducing the high levels of industry concentration in SA.
It’s widely accepted that the economy is highly concentrated and dominant firms invest and innovate less than firms that are under competitive pressure.
One way to drive productivity and growth is therefore to reduce barriers to allow new players with fresh ideas and business models into a sector. If these new firms are black, it will also make the economy more inclusive.
Given that SA’s twin challenges are to transform and grow the economy, the government has armed the competition authorities with new powers to reduce industry concentration, including through forced divestiture, if they judge that any features of a market adversely affect competition.
However, Hausmann believes high industry concentration might be the result, not the cause, of SA’s woes. The reason industry is so concentrated could be that SA’s tough policy and operating environment prevents small firms from surviving.
If so, the remedy might lie not so much in breaking up big firms but in addressing the regulatory and policy hurdles that inhibit all firms, especially small ones.
University of the Free State economics professor Philippe Burger sides with Hausmann on this. In his presentation to Ramaphosa, Burger pointed out that at least SA’s high levels of industry concentration would make it easier for the government and business to conclude sectoral investment deals.
In his view, the quickest way to raise fixed investment is for big companies to set out what the stumbling blocks to investment are in their sectors, and what changes they need in legislation and policy to commit to specific investment targets.
This could constitute the supply-side leg of a new investment-driven growth strategy, he argued. To raise demand, SA should focus on exporting into the region rather than overseas, where the competition is ruthless.
SA has tried and failed to embark on export-driven growth because it lacks competitiveness, especially in terms of labour costs, according to Burger. This — together with the rise in global trade tension and rapid technological advances — makes a labour-intensive, overseas export-driven growth strategy problematic.
However, Burger pointed out there are 300-million people in the Southern African Development Community. If just 10% of them were to join the middle class in the next 10 years, it would translate into a captive market of 30-million people, creating huge possibilities to export SA’s manufactured goods over land if the region were better integrated.
Areas of apparent consensus during the talks included the need to promote the labour-intensive, fast-growing areas of agri-processing and tourism, correct SA’s distorted apartheid spatial geography and facilitate skilled immigration.
Numerous studies show that increasing skilled immigration increases jobs for locals by inducing new economic activity.
But this doesn’t mean SA can escape fixing its education system, which has become a chief source of inequality as well as a cap on the country’s growth rate.
Speaker after speaker argued worker productivity and economic growth will continue to languish until SA raises the quality of education.
In one of the best-received presentations, Stellenbosch University economics researcher Nic Spaull unpacked SA’s education crisis and advocated a radical reprioritisation of resources to remedy it.
It’s unclear whether SA has the political will to act on expert advice
— What it means
In SA, just 3% of high schools create more maths or science distinctions than the remaining 97% together. Almost all are former whites-only schools and charge significant fees. At the other extreme, almost half of SA’s primary and high schools are "academic wastelands" in which not a single grade 4 pupil is able to read, or grade 9 pupil do maths, at the intermediate international benchmark level.
Given that underperformance in matric and high dropout rates are rooted in weak foundations in primary school, SA should focus its limited resources exclusively on improving literacy and numeracy in the first three years of school, says Spaull.
The crux of Spaull’s advice is that the president should embark on a national literacy campaign which deploys "a small army" of reading coaches to primary schools and provides graded readers to all pupils as well as lesson plans for teachers on how to use them.
He estimates the government could reach half of all primary schools within eight years at about R1.3bn a year and boost reading outcomes by 40% in the short term. In contrast, the government has set aside almost R20bn a year over the next three years to roll out free higher education, which will cause the post-school budget to grow at twice the pace of that of school education.
"I left there with a huge question mark," says Burger. "It’s completely unclear to me whether [the government has] the resolve to implement the structural changes required for better growth. Ramaphosa is serious about this and if it were just up to him and Mboweni it would be fine. The question is whether the factionalism in the party will grind them to a halt."
This is indeed the million-dollar question — and one that may be answered once the summary document of the discussion series is sent to cabinet.
SA can tap the best economic minds in the world, but if there is no political will to implement their suggestions — as was the case with the Harvard Group 10 years ago — the process will all be for naught. And all South Africans will be the poorer for it.
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