The findings of the Covid Project — a series of independent papers commissioned from several of SA’s leading research economists — are alarming but not surprising. Overall, they paint a dismal picture of lost opportunities in a country that has failed to grow substantially for the past decade.
While the research reinforces much of what is already known about the economy — that SA “is getting poorer and its people more desperate” — its main departure is to show that the country’s failure to grow faster stems from inappropriate or inadequate policy choices.
It goes so far as to say that, in many instances, the government’s existing policy interventions and regulatory hurdles have aggravated SA’s already deep structural constraints.
The research was commissioned in late 2020 by the Reserve Bank, in collaboration with the International Food Policy Research Institute and Economic Research Southern Africa, with international donor funding.
Chris Loewald, a member of the monetary policy committee and head of economic research at the Bank, and Matthew Stern, a director of Pretoria-based consultancy DNA Economics, who both participated in the project, have written a discussion paper summarising its key findings.
While welcoming the emergency relief provided by the government to the economy during Covid, Loewald and Stern say the government now needs to act more quickly to move SA out of its social and economic malaise, or unemployment will continue to tick higher.
However, SA’s recent history shows that “the existing policy framework is not up to this task”.
Their conclusion, based on the evidence unearthed during the project, is that the existing policy framework is not working well or fast enough, and that “different and more purposeful policy reforms are needed to alter the trajectory of the slow-growing SA economy”.
Their overview starts by noting that SA has underperformed over the past decade relative to its peer countries.
For a start, SA has grown too slowly to create enough jobs. From 2009 to 2019, SA recorded average real growth of just 1.6% — slower than all other developing countries bar Brazil, Russia and Argentina. According to research by Tumisang Loate, Ekaterina Pirozhkova and Nicola Viegi, this is mainly due to a decline in the economy’s potential output and very low levels of investment.
In addition, SA’s export performance has fallen so sharply that its share of world exports dropped from 0.6% to 0.4% between 1990 and 2019, shaving $50bn off the country’s GDP.
Finally, despite a significant head start (in 1990, SA’s CO2 emissions per unit of GDP were below those of Brazil, Russia, India and China), the country is now the least energy-efficient of the group. This is largely due to its ongoing dependence on coal.
The causes of SA’s poor economic and employment performance are generally understood and largely structural in nature. To name just three: a deficient education system that is unable to provide modern skills; ageing, badly maintained and costly transport and electricity infrastructure; and the spatial legacy of apartheid, which locks many people out of the formal economy.
However, the paper points to numerous self-inflicted policy hurdles that are compounding SA’s deep structural constraints.
For instance, underlying research by Loewald, David Faulkner and Konstantin Makrelov identifies SA’s “relatively rigid” labour market regime as a reason the economy has not been more labour-absorbing. Specifically, extended collective bargaining has contributed to wages that are too high to clear the labour market, while long and costly firing procedures discourage small firms from taking on new employees.
Likewise, Stern and Yash Ramkolowan raise concerns that SA’s cautious approach to regional and international trade negotiations, the high cost of logistics and the preferences afforded to local companies increase the incentive to produce for the protected domestic market over exploring new export opportunities.
Several other papers note that the regulatory compliance costs associated with BEE may impede labour utilisation, especially among SMEs. BEE may also reduce competition and overall economic activity, deter international investment and make it harder to use foreign skills and technology.
In short, SA’s low labour absorption rate is partly because of labour market policies that effectively limit new entrants and heighten the costs of employment. SA’s poor export performance is partly a consequence of trade and industrial policies that punt domestic interests and industrialisation over deep regional integration and international competitiveness. To compound it all, SA’s administratively complex transformation agenda, and restrictive immigration regime, constrain access to new skills and international investment.
The government’s existing economic growth strategy relies on a big infrastructure push, modernising the network industries (energy, rail, ports, telecoms), rapidly expanding energy generation, lowering barriers to entry and reforming regulations to support small businesses, prioritising labour-intensive growth (mostly in agriculture and services), pursuing regional integration, leveraging public procurement, and promoting exports and localisation alike, among other things.
However, the authors believe that, based on the evidence unearthed, “wider policy reforms are needed to reverse the steady deterioration in growth, exports, employment, and access to critical and clean inputs, such as energy, that have undermined the country’s longer-term development potential”.
The papers put forward a few alternative policy proposals.
First, SA’s approach to trade and industrial policy should be overhauled because it is overly concerned with promoting local content and protecting existing manufacturing capabilities rather than enabling firms to explore new, bigger opportunities abroad. Stronger incentives are also needed to encourage businesses to invest, innovate and export, and inappropriate incentives should be removed.
“SA will not create the jobs needed to address its gaping unemployment crisis by selling to itself,” say the authors.
A research project by leading economists has found that SA’s existing economic reform plan is falling short, and suggests an alternative reform agenda
— What it means:
Second, to ensure that this export-led expansion is sufficiently labour intensive, multiple labour market reforms are needed to lower the risk and costs associated with hiring unskilled workers. Active labour market interventions are also required to absorb unemployed youth.
Third, recognising SA’s skills constraints, a much more aggressive immigration policy is needed to encourage foreign firms and talent to locate in SA. The economic simulations undertaken by Channing Arndt and others demonstrate that this has the potential to stimulate growth, create jobs and reduce inequality at little cost to the government and at very low risk.
Fourth, lighten the BEE burden. “Changing the ownership and employment profile of SA’s domestic industrial structure is a social and economic imperative,” the authors acknowledge, “[but] so too is the need for increased international knowledge, technology, investment, and competition.”
They call for an independent assessment of the unintended consequences of local content and BEE policies on employment, competition, trade and investment, with a view to developing new, “administratively light” mechanisms.
Fifth, SA must ramp up investment in renewable energy production, remove barriers to green industrialisation and review industrial incentives to encourage firms to adopt cleaner, more energy-efficient technologies.
With regard to the basic income grant debate, the underlying research urges the government to taper off its Covid income support programme, as “there is little space for [it] to continue without running into serious fiscal and structural constraints”. Instead, it should focus on alleviating SA’s underlying growth constraints.
Loate and others also warn against interfering with the Reserve Bank’s independence. According to their paper, any relaxation in monetary policy that increases inflation expectations will have a rapid effect on nominal wages without any significant boost to firm-level profitability and investment. The net impact on economic growth and jobs is likely to be negative.
They also argue strongly against furnishing the Bank with any kind of developmental role. Not only is this unnecessary, they say, finding no evidence that the credit market is a major constraint to industrial development, but it would also risk damaging the Bank’s international credibility.
Last, the papers also call for greater ambition and leadership in regional and continent-wide trade agreements, as well as targeted land reform to shift production away from bulk commodities into the intensive production of higher-value crops such as fruit and vegetables.
The country is getting poorer and its people more desperate
— Chris Loewald & Matthew Stern
Most of these policy recommendations can be implemented quickly and at reasonable cost, according to the authors. Many are also not out of line with the government’s own economic thinking.
However, for them to be implemented fully and effectively will require a change to the policymaking process.
“Currently, it would seem that government departments are given an open mandate to define their own policy agenda, with insufficient co-ordination and a lack of consistency between programmes and instruments,” the authors note.
To get the economic departments to work together will require strong leadership from the centre, they say, as well as a willingness to look beyond short-term sector and insider interests, and to consider the economy-wide net effects of reforms.
Whether the government can achieve this remains to be seen. But thanks to the Covid Project, it now has ample evidence from some of the country’s top economists that its current approach is deficient. Much more can — and should — be done.
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