Ricardo Hausmann, the economics professor leading Harvard University’s Growth Lab, knows a thing or two about how a country’s economy can collapse.
He was, after all, minister of planning in Venezuela from 1992 to 1993, six years before the election of Hugo Chávez, who imposed economically ruinous populist measures, including price controls and nationalising banks.
Today, Hausmann is effectively exiled, depicted as a traitor by President Nicolás Maduro for pointing out that Venezuela has seen “the biggest economic collapse in human history outside of war or state collapse”, with a GDP 50% below its peak.
For years, Hausmann taught an enthralling course at Harvard on why some countries are poor, volatile and unequal, and others aren’t. Few people are as well equipped to diagnose why it is that South Africa’s economy derailed, after all the stars aligned in 1994.
For the past two years, he has been doing precisely that, and this week he released a 170-page report (alongside nine specialised reports) into what ails South Africa. It’s an exhaustive study, the product of meetings with policymakers, National Treasury officials and even argumentative journalists at the home of Ann Bernstein, head of the Centre for Development & Enterprise (CDE), which facilitated Hausmann’s research.
It pulls no punches. “South Africa faces deteriorating social indicators and declining levels of public satisfaction,” it says. “Attempts to stimulate the economy through fiscal policy and to address exclusion through social grants have failed to achieve their goals. Instead, they have sacrificed the country’s investment grade, increasing the cost of capital to the whole economy, with little social progress.”
That’s obvious enough. But Hausmann’s biggest contribution is to explain why: why has South Africa grown so slowly, despite policies — from empowerment, to a grant system which pays 19-million people every month — meant to improve things.
As Bernstein tells the FM: “Until now, we haven’t had that diagnosis. It’s inadequate to just say ‘oh, this was nine wasted years’. Ricardo’s [Hausmann’s] team actually grapples with why South Africa has failed to deliver — and those answers aren’t something our government has been keen to grapple with,” she says.
Hausmann attributes this to a number of factors, foremost of which is that “South Africa is facing the economic consequences of collapsing state capacity”.
The Harvard team recommends opening ‘green industrial parks, run on clean energy, [which] attract energy-intensive industries that want to decarbonise their footprint’
The report cites four reasons: gridlock in the ANC “that prevents action”; “an ideology that justifies excluding society from participating in state-reserved activities”; overburdening state entities with goals beyond their core mission and capability; and political patronage that has corrupted the state and the ANC.
Grants haven’t changed this, since they “merely compensate people ... for their exclusion, rather than include them in the productive economy. They do not create the basis to increase sustainable employment.”
Instead, the ANC “empowered” well-connected cadres, while throwing scraps to everyone else. This patronage network, along with the ANC’s ideological fixation on controlling the economy, meant any economic reforms spluttered to a halt.
Second, Hausmann speaks of “spatial exclusion”, inadvertently entrenched through well-intentioned post-apartheid housing policies. To fix this, he says the system of “housing grants” must be overhauled, providing subsidies to people to “buy or rent houses of their choosing” near job opportunities.
And, beyond simply flagging what went wrong, Hausmann’s report includes pages of possible solutions.
On electricity, for example, Hausmann says power plants should be rented to private operators. And he says municipalities should be staffed with dedicated career civil servants, while cadre deployment should be jettisoned.
Another contentious proposal is to ditch “preferential procurement rules”, which have become a huge obstacle to effective public investment and service delivery. “When procurement constraints lead to the failure of rural infrastructure, it excludes and disempowers the very people and businesses [it] is intended to benefit,” he says.
This underscores an IMF study in June, which found that a better state procurement system could save South Africa 20% of what it spends — a saving equal to 3% of GDP, or $12.7bn.
Hausmann argues that by creating this “tenderpreneur economy”, South Africa has “increased costs, worsened the effectiveness of public spending, and expanded space for systems of patronage”.
But perhaps the biggest opportunity to fix South Africa, he says, lies in shifting the focus of our industrial policy away from “localisation” of goods, and instead prioritising green energy as a vehicle to put the country back on the world economic map.
South Africa is in a prime position to “provide the world with many of the enablers of clean technology such as vanadium redox flow batteries for grid-level storage, platinum-metal-group-based fuel cells, and electric vehicles — among other goods and services that the world will need to decarbonise”.
The Harvard team recommends opening “green industrial parks, run on clean energy, [which] attract energy-intensive industries that want to decarbonise their footprint”.
These “green parks” would be run by private companies, which would find tenants from industries such as “mineral processing, green steel, ammonia-based fertilisers, as well as highly electricity-intensive services like data centres”.
Hausmann’s report has now been given to the Treasury, which is well aware of how precarious South Africa’s economic position is; the real question is whether anyone else in the government or ANC who can shift policy is listening.
“Let’s hope so,” says Bernstein. “This report shows clearly that we have a state falling apart around us. Ricardo suggests real, practical solutions, including an innovative approach to ‘green growth’, so hopefully this jolts the government into action.”
These proposals may be doable — but it would require political bravery, such as loosening the statist control over the power grid, fixing the glacial bureaucracy in the mining department (headed by ANC stalwart Gwede Mantashe), opening up our immigration system so South Africa can become “a destination for global talent” and torpedoing cadre deployment.
And, it must be said, this isn’t an administration renowned for its bravery. Dare we dream that this time it could be different?
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