The recent economic policy discourse in South Africa has been dominated by the release of a thought-provoking discussion document by the national Treasury, which highlights key reforms needed for economic growth in South Africa. This is a welcome document with a range of probing questions being asked of a number of government departments.
Economic policy document
The release of the document came as South Africans realise that the current economic trajectory is unsustainable. Stagnant gross domestic product (GDP) per capita growth combined with the triple challenges of poverty, inequality and unemployment, are clearly a ticking time bomb. The significant underperformance in government revenue during the first four months of the 2019/2020 fiscal year highlights the adverse fiscal implications of record low nominal GDP growth. Besides the weak economy, the lack of meaningful policy reform may be a contributing factor to low expectations by the business sector. This was again highlighted by the RMB/BER Business Confidence Index, which declined sharply to only 21 in the third quarter of 2019. This means that about 80% of the respondents were not satisfied with current business conditions. Business confidence is now at the lowest level since the late 1990s.
Treasury’s document reintroduces the National Development Plan (NDP) as an important pillar to policy-making in South Africa and highlights a list of important micro and structural reforms. The proposals to improve potential GDP growth focus on micro as opposed to macro policy interventions. This is appropriate and largely in line with the recommendations from the Harvard team of experts a decade ago. Our read of the major binding constraints to growth is also that micro issues are largely responsible for the lack of growth. The micro domain is where some of the low-hanging fruit in reform lie, such as e-visas for tourists, relaxing onerous skilled immigration requirements, etc.
The document also highlights a greater role for the private sector than in many other government policy proposals that typically favour more statist solutions. Whether it be in energy (IPPs and potential privatisation of coal-fired power stations), water provision, broadband spectrum roll-out or increased competition in the rail and ports network, the document is unashamedly pro the private sector. Given the apparent lack of state capacity (including a rising public sector debt burden) to address the country’s ills, an enhanced role for the private sector is appropriate.
We are particularly encouraged by the suggestion that certain onerous regulations, including collective wage bargaining, should not be applicable to the small business sector.
While we welcome the focus on micro issues, some analysis of the negative impact of rising public debt, i.e. the worsening fiscal position, on growth could have been highlighted to express the need for an urgent solution to the debt problem of the state-owned enterprises (SOEs).
On land reform, the document is not explicit on the interventions for fast-tracked land reform and might benefit from including certain sections of the recent report by the Presidential Advisory Panel on Land Reform and Agriculture.
The report by the advisory panel briefly refers to the introduction of a ‘recognition mechanism’ that could have a significant and sustainable impact on the land reform process without draining the fiscus. This is the crux of a successful and sustainable land reform programme. It suggests that the government should avoid lengthy design processes at all costs and focus on policy incentives that could efficiently bring about a sustainable land reform process and a growing agricultural sector.
Implicitly, the panel’s report recommends the implementation of the lessons from modern policy design which now makes use of behavioural insights to design policy instruments and programmes. In essence, the approach is to create effective incentive mechanisms. The insights from this new strand of the economic theory suggest that economic incentives which reward cooperation can be an efficient means of addressing complex problems (such as land reform in the South African case). The bottom-line of this approach, as argued by Nobel laureate, Richard Thaler, is: ‘If you want people to do something, make it easy.’
The Treasury document raises the critical issue of innovative mechanisms for financing new entrants in agriculture, but is largely silent on the details on how to do this. The advisory panel’s suggestion on a land reform fund established at the Land Bank and managed jointly with the private sector could be the missing piece in the puzzle. The fund could be created through a process whereby government funds, capital raised through land reform bonds, foreign donor funds and incentivised individual contributions from the wealthy elite are all merged into one fund which should be easily accessible by implementing agents and beneficiaries of land reform.
By combining the various sources of capital in one fund, the cost of capital is reduced, which should allow the fund to on-lend to beneficiaries and benefactors (of land donations) at far below market interest rates. This speaks to Treasury’s suggestion of subsidised loans to farmers. In the process, it will ensure the successful establishment of new enterprises and production growth of existing enterprises.
The growth of the agricultural sector depends largely on growing export markets, securing land and water rights, improving transport systems and eliminating theft and damage of productive infrastructure and trucks.
International best practice
Export markets for wool, red meat and certain fruits for certain markets are currently hampered by South Africa’s inability to comply with international best practice related to sanitary and phytosanitary measures. This can be addressed by dealing with the staff and skills shortage and upgrading the laboratories and other infrastructure in the various government departments. Modernising the application and certification processes via electronic and other means could also help many smaller businesses to enter the export market. This should be seen as another low hanging fruit that has the potential to be implemented without much delay at limited cost.