SA has long been plagued by deep-seated inefficiencies that are thwarting its growth ambitions: the rates of saving and of investment are too low; productivity growth is too slow; and what growth there is, is not labour-intensive enough.
These are some of the main levers that government needs to adjust if it is to put SA on the high road to faster, more inclusive growth.
But, as much as South Africans think they understand what is needed to supercharge the growth rate, debates are often riddled with misconceptions about the economy.
As the years following SA’s democratic transition have rolled by and the country has continued to make no visible dent in unemployment, poverty and inequality, a sense of hopelessness has taken hold. In the absence of credible leadership and economic growth, some have started looking to radical policies for answers.
But SA’s problems are too deep-seated to be solved by knee-jerk, populist means. There are no short cuts to prosperity. SA can no longer avoid taking the tough political decisions if it wants to achieve this. It’s time the nation stopped kidding itself.
The following edited excerpt from On the Brink debunks some of the top economic myths that are frequently perpetuated in SA.
Myth 1: SA’s three chief problems — unemployment, poverty and inequality — are intractable, so it is just a matter of time before it becomes a failed state. True or false?
False: These problems seem insurmountable, given how little progress has been made in addressing them over the past 20 years, but they are not intractable if the right economic policies are applied.
Unemployment: SA’s official unemployment rate has exceeded 20% since the early 1990s. Such a sustained high unemployment rate is extremely rare for any country that has avoided war or a prolonged economic crisis. The truly frightening thing is that even when the economy grew by 5.2% on average from 2004 to 2007, unemployment failed to dip below 22%. This is because a large proportion of SA’s working-age population is unemployable given the capital-and skills-intensive nature of SA’s growth path: they have the wrong or inadequate skills and qualifications and weak basic schooling, and few can afford tertiary study. This means that even when the economy improves, the employment prospects for the unskilled and most marginalised usually do not.
In short, SA is stuck with an unemployment rate of above 20% because unemployment has become structurally entrenched after decades of below-par education for the majority of the population. This, combined with an inflexible labour-market regime and the capital-intensive structural nature of SA’s growth path, is at the root of its unemployment problem.
Poverty. It is well understood that poverty in SA is a problem of extremely low pay for those who are lucky enough to have jobs, as well as extremely high and widespread unemployment. From May 2018, all South Africans in the formal sector will have to be paid a minimum wage of R3,440/month. This will fall above the current pay of 6,2m workers or 47% of the workforce. Even so, the amount is still below a living wage.
This is why simply creating more jobs, though essential, would not necessarily solve the problem of SA’s working poor. Given the conclusion reached in the National Development Plan (NDP) — that most new jobs will continue to be created in the low-wage, low-skill, domestic-orientated services sector — poverty among those who have work is set to remain a major concern for decades.
For those without jobs, social grants keep the wolf from the door. Grants have been successful in helping to alleviate dire poverty for the 17m beneficiaries but they are too small to shift people off the very bottom of the income scale. Given poor families’ reliance on grants, they will probably continue to claim a large share of the national budget, unless employment growth accelerates markedly.
Inequality. Economists distinguish between income inequality and wealth inequality. SA has both types and both are extremely high because of the country’s history.
Stellenbosch University researcher Anna Orthofer shows that in SA wealth is much more unequally distributed than income. According to her research, the top 10% of the population owns 90%-95% of the wealth. This means SA suffers from almost perfect wealth inequality, with a wealth Gini coefficient of about 0.95 (where 1 = perfect inequality).
When it comes to income inequality, Orthofer finds that 10%-20% of the population receive 55%-60% of all the income, generating an income Gini coefficient close to 0.7.
Using an innovative measure, the Human Opportunity Index (HOI), World Bank economists have been able to compare the extent of SA’s inequality problem with that of other developing countries.
The HOI measures the coverage rate of a particular basic service, adjusted by how equitably the service is distributed among groups differentiated by circumstances. For instance, SA has an HOI of almost 100% for school enrolment, which means almost every child goes to school, irrespective of their circumstances. But when the quality of that schooling is measured, SA’s HOI falls to 50%, way below Zimbabwe, Chile and Argentina, which all score over 75%.
Similarly, for access to safe water and improved sanitation, with HOI scores for both of 25% or less, SA is in the company of Nicaragua, Honduras and El Salvador.
The key finding is that the provision of basic public services, including education, is so inadequate in SA that most poor children are unable to break out of poverty. This ensures that inequality remains entrenched.
When it comes to employment, not only does SA create fewer job opportunities than all the other 17 middle-income countries in the study, but in SA the odds of finding work are much more strongly associated with a person’s education, age and circumstances than in peer countries.
Debates about the ingredients for growth are often riddled with misconceptions about the economy
— WHAT IT MEANS
The increasing importance of education in finding work means the disadvantages conferred by unequal education opportunities earlier in life become a bigger stumbling block to people’s social and economic mobility over time. Wage inequality arising out of this skills premium is a key driver of income inequality in SA.
Moreover, the disadvantages get transmitted across generations. The policy challenge is to find a way to break this vicious, self-perpetuating cycle of inequality.
This is not to say that unemployment, poverty and inequality are intractable. They are admittedly deeply entrenched but they only appear intractable because this government has made so little progress in defeating them. Government hasn’t implemented a coherent growth strategy, some of its policies and many of its ministerial appointments have made things worse, the civil service is racked with corruption and inefficiency and business has had one foot out the door.
But if a new administration partnered with the private sector and labour — united by a vision to reject corruption and go for growth in order to defeat unemployment, poverty and inequality — much could be achieved.
Myth 2: The NDP is a wish-list devoid of costing or priorities, making it impossible to implement. True or false?
False: This is the myth that has grown up around government’s failure to implement the NDP. But all the excuses given for not implementing it are threadbare. The real reason has been a lack of political will.
The problem with the NDP, we are told, is that it runs to almost 500 pages, contains scores of policy recommendations in its 15 chapters, and fails to prioritise or cost the actions that must be taken.
But, in fact, the NDP sets out just three cogent priorities: creating jobs, improving education and building the capability of the state so that it can deliver more effectively.
Even more telling is that more than half of the plan is dedicated not to specific policy changes but to the type of institutional reform needed if government is to improve service delivery. "In some instances, policy change may be necessary, but in most areas it is about getting the basics right, implementing government programmes, holding people accountable for their actions and finding innovative solutions to complex challenges," states the NDP.
Former National Planning Commission chair Trevor Manuel underlined this point when the NDP was launched, saying what SA needed wasn’t to throw more money at a problem like education but to jettison its "culture of blame-shifting" and put in place formal systems that held leaders accountable for their conduct — from principals to cabinet ministers.
The NDP proposes, for instance, that principals be appointed purely on merit, given greater powers over school management and be held accountable for school performance. This will ensure that they hold their teachers to account. With these reforms, it believes, up to 60% of problems in schools could be solved.
Addressing weak lines of accountability is only part of the task of raising SA’s institutional capacity, it says. SA must also reduce high levels of corruption and put a stop to the ANC’s disastrous cadre-deployment policy.
When the NDP unveiled its goal of getting the economy growing by at least 5% a year it seemed extremely ambitious but still worth striving for. By 2017 it provided a yardstick against which SA could measure just how far it had fallen below its potential. To quote Discovery Health’s Adrian Gore, "the NDP’s growth target isn’t a goal, it’s a threat".
Western Cape premier Helen Zille, like many, believed that by 2017 the NDP was stone dead. "It died on divisions within the ANC," she said, pointing out that the NDP was totally incompatible with "radical economic transformation".
Zille may well be right that the NDP can’t be resuscitated. On the other hand, the NDP was embraced by nearly all South Africans and political parties. It wouldn’t be hard to build support and put energy behind it.
The bottom line is that SA has a national development plan just sitting on the shelf. Should a future administration wish to dust it off, rebrand it, and use it as a launch pad to get growth going, it will find that all that’s really been lacking has been the political will to do so.
Myth 3: SA’s fiscal policies have failed to reduce inequality because they are not progressive enough. True or false?
False: It’s not the targeting of public spending at the poor or even the amount of money being allocated that is the problem. The problem is that government is hopeless at turning social spending into opportunity because the quality of its spending is so poor.
According to a World Bank study, 3.6m South Africans have been rescued from poverty, and income inequality has been reduced by 25% through taxes and social grants that redirect resources from the rich to the poor. In fact, it found that SA has had more success in this than 11 peer countries, among them Brazil, Mexico, Argentina, Indonesia and Ethiopia.
Whereas the income of SA’s richest 10% was more than 1,000 times bigger than the poorest 10% before the effect of taxes and social spending were taken into account, after these fiscal measures the gap narrowed to 66 times. This led to a significant reduction in SA’s income Gini coefficient, from 0.7 to 0.59, it found.
However, a Stellenbosch University study found that while fiscal spending was well targeted at the poor, there was a "tenuous link" between spending and social outcomes because the state’s spending efficiency was very low.
The Boston Consulting Group tried to measure the size of this link — how effectively SA converted wealth into wellbeing.
It ranked SA 138th out of 149 countries, below all other Brics countries and many other developing nations. SA significantly lagged behind in education, health care, employment and income equality.
"These four problem areas are key components of a vicious circle that undermines prosperity and social wellbeing," the report states.
With the scope for further fiscal redistribution constrained by the size of the budget, a limited tax base and by the extent of redistribution that has already occurred, it is clear that to achieve greater social equity government will have to raise the quality of public-service provision to the poor.
At a time when the capacity of the state is at what seems to be a record low, when state capture and corruption have hollowed out key institutions, there is little chance of this happening without wholesale leadership renewal in government, a prospect that may be very far off.
Myth 4: SA can address unemployment without labour-market reform. True or false?
False: To reduce unemployment SA will need to create many new, small, labour-intensive firms but its labour-market institutions penalise these firms. In fact, they have shut off a whole spectrum of lower-paid jobs and industries.
In the first quarter of 2017, SA’s official unemployment rate jumped to 27.7% — its highest level yet. In a normal economy with masses of surplus labour, entry-level wages would drop to absorb this labour and then rise over time as workers acquired on-the-job skills and experience.
Entry wages don’t fall in SA, despite the large number of unemployed, for three main reasons: institutional factors, including bargaining councils and minimum wages; the political strength of organised labour and its high propensity to strike; and high living costs, which put a floor under wages.
This explains why wages have been able to increase above the inflation rate each year for the past five years, even though economic growth and job creation have stalled.
"We’ve built an economy that produces much more inflation than growth and spits out unemployment as a by-product," declared Reserve Bank governor Lesetja Kganyago when presenting these statistics at the Labour Law Conference in 2016.
Simply reducing the inflationary impulse from price and wage setting would help to create jobs and ease policy constraints, Kganyago said. But to achieve this would require reforming SA’s labour-market institutions, including the way in which wages are determined in our collective bargaining system, he added.
Under this system, dominant firms in a sector negotiate wage rates with the dominant unions. The agreed wages are invariably extended by government to the whole sector. In the absence of exemptions, this forces new and smaller firms to close unless they can shift to a more capital-intensive approach. Either that, or they ignore the legislated wage.
The upshot, Kganyago said, has been a lower level of employment at higher wages and a concentration of fewer, more profitable firms. He went on to cite studies that suggest central bargaining in SA reduces employment in affected industries by 8%-13%, in large part because they hurt small, labour-intensive firms. Yet these are exactly the types of firms SA needs.
Stellenbosch University economist Prof Neil Rankin agrees that SA’s labour-market institutions have limited job creation by shutting off a spectrum of lower-paid jobs and industries.
His research shows the country has experienced an erosion of lower-paid jobs in small firms over the past 15 years to the point where less than 20% of jobs are now found in small firms (those with under 50 workers).
Myth 5: Smaller firms are better job creators than large firms and will provide 90% of all new jobs in SA over the longer term. True or false?
Possibly false: A new body of research suggests that lower-paid jobs in smaller firms are vanishing rapidly.
Over the five years to 2013, small SA firms shed more than 1m jobs. Most of these were lower-paying jobs occupied by young people. Over time, the economy has regained most of these jobs but this seems to have been driven exclusively by big companies.
"If this data is a true reflection of underlying trends, it paints a very disturbing picture: lower-paid jobs in smaller firms are vanishing at a very rapid rate," explained Rankin. "The data suggests that small firms are in fact playing a smaller and smaller role in the economy."
Rankin’s findings are corroborated by the fact that the share of small-medium-and-micro enterprise (SME) investment in the economy declined from just under 13% of total investment by nonfinancial corporates in 2010 to 8.5% in 2012. If these trends mean SA is experiencing a broader structural shift in which small firms are losing their dynamism, then lowering the costs experienced by small firms should be one of the country’s top priorities.
This has implications for the current minimum-wage debate, since it is small firms employing low-paid workers that will bear the brunt of government’s plan to institute a national minimum wage.
Myth 6: A national minimum wage is a sure way to address inequality and unemployment. True or false?
Partly true: A national minimum wage (NMW) will most certainly reduce wage inequality but it will widen the gap between those with jobs and the unemployed. It is also more likely to cost jobs than create new ones.
The planned introduction of an NMW is seen as a way to confer a concrete welfare benefit on the working poor by raising the wages of millions of low-income earners.
The intention is to narrow the wage gap between higher and lower wage earners, thereby reducing wage inequality.
What an NMW cannot do, however, is to reduce inequality between the unemployed and those with jobs. In fact, it does the opposite. It widens the gap between those inside the tent — workers who are now better paid — and those outside it, who now have even less chance of getting entry-level jobs. This reinforces the insider/outsider dynamic that characterises the SA economy and which is partly responsible for the high levels of overall inequality.
By raising the entry-level cost of labour, the policy might increase unemployment. If many jobs are lost, the overall impact on poverty could even be negative. Only time will tell whether SA has found a short cut to addressing the plight of the working poor or whether vote-hungry politicians have sold the economy (and the unemployed) down the river.
A big part of the problem is that the NMW discussion was divorced from SA’s broader economic-policy thrust. Among other things, economic policy seeks to lower entry-level wages by means of the youth wage subsidy, encourage job creation and increase the economy’s labour intensity.
The NMW will undermine all three imperatives, though by narrowing the wage gap between top and bottom wage earners, it might improve trust and productivity within firms.
Because the NMW policy is not located within a broader growth or jobs strategy, the result is more policy incoherence. Those economists who welcomed the youth wage subsidy are alarmed, saying there is every possibility that the NMW will wipe out the few remaining pockets of low-cost, labour-intensive manufacturing. Looked at this way, the country has taken a dangerous populist gamble with the NMW, one that might well blow up in everyone’s faces.
Myth 7: A wealth tax is the best way to address inequality. True or false?
False: A wealth tax is certainly one available instrument but the problem in SA is that higher taxes don’t readily translate into better living conditions for the poor because the quality of government spending and services is so poor.
A wealth tax has been mooted for SA and various types are under consideration. As French economist Thomas Piketty told the Financial Mail: "If properly administered and calibrated, then a progressive wealth tax could raise economic mobility and efficiency. It is also highly complementary with policies such as BEE."
However, while SA’s fiscal policy is well targeted at the poor, we have already established that government is hopeless at turning social spending into opportunity and upward mobility because the quality of its spending is so poor.
The problem with a wealth tax is that it would transfer cash from the private sector to the state, which would be responsible for how the money was spent.
It’s also illogical for a savings-starved economy like SA’s to be raising taxes on savings and investment. SA should be reducing these taxes to stimulate economic growth. But this is impossible on the fiscal tightrope it is walking.
There is simply no getting away from the conclusion that SA must spend tax revenue more efficiently to raise the effectiveness of public services, especially education. Even Piketty doesn’t disagree with that.
"To maintain a competitive edge in a rapidly transforming knowledge economy, countries need to invest more in quality education," he says. "Not even minimum wage schedules can multiply wages by factors of five or 10: to achieve that level of progress, education and technology are the decisive factors."
Myth 8: Free tertiary education will reduce inequality, address the skills shortage and raise economic growth. True or false?
False: Free higher education for all is a regressive policy that will privilege the affluent middle class and the rich. In the absence of rising participation rates, it will also increase SA’s shortage of high-level skills, thereby curbing economic growth.
Free university education for all — the rallying cry of militant students who trashed SA’s campuses in 2016 — will widen inequality, not reduce it. This is because it will give a free ride to the children of the rich and affluent middle classes, who make up roughly half of all university admissions. Fewer than 5% of the poor qualify for higher education entrance (see graph).
In short, as long as the school system remains bifurcated and dysfunctional, unequal participation rates between black and white students will prevail
If education were to be free to all, not only would the education of the rich be subsidised by the taxpayer but the fees they used to pay, which were used by universities to cross-subsidise the poor, would be lost.
This would raise the cost to the state of funding higher education, resulting in lower enrolments and declining institutional quality, given that SA is severely fiscally constrained and stuck in a low-growth environment.
In short, as long as the school system remains bifurcated and dysfunctional, unequal participation rates between black and white students will prevail. Under these conditions, free higher education for all is a regressive policy that would privilege the affluent middle class and the rich. In the absence of rising participation rates, it would also increase SA’s shortage of high-level skills, thereby curbing economic growth.
Myth 9: Business and labour will never be able to work together to put the national interest ahead of their own interests. True or false?
False: When pushed to the wall, pragmatism can prevail even in a country as polarised as SA.
According to business and labour representatives, the adversarial tone in the National Economic Development & Labour Council (Nedlac) changed during the negotiations on labour stability in 2016, as all the players came to realise that they had to make significant shifts for the national good.
With the economy backed against a wall, the importance of stimulating employment, particularly youth employment, at a time of stagnating economic growth was recognised by all. Describing the labour stability negotiations as "remarkably constructive", Business Unity CEO Tanya Cohen was of the view that "for the first time in many years, Nedlac’s doing what it’s supposed to be doing".
So, what changed? For one thing, government fielded a full team, including all three economics departments. This meant it considered the impact of the reforms on the economy and society as a whole, and not just the impact on workers’ wages and benefits.
More philosophically, the turning point was the violent, five-month platinum strike in 2014. The damage to the economy, workers’ livelihoods and the loss of life forced SA to take a hard look at its fraught industrial-relations environment. The Nedlac labour stability reforms were the result of this process.
Business has high hopes that if the reforms — which include the requirement that unions must undertake secret balloting before embarking on a strike — are honoured in practice, they will mark a shift towards a more mature labour-relations environment.
But the mere fact that business, labour and government compromised to conclude these reforms means they have acknowledged that the current state of the labour market is not sustainable and shows that they are able to work together when the crunch comes.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.