ANC ‘dismal’ on economic growth and reform – UWC economics professor
Successive ANC administrations have made progress in its redistribution efforts, but has been “dismal” on economic growth, says Matthew Kofi Ocran, an economics professor at the University of the Western Cape.
For example, Ocran says, the National Development Plan (NDP) – the first draft of which was released in August 2012 – was intended to move the country to a higher annual growth trajectory of 5%.
“This hasn’t happened. Over the past decade, growth has averaged less than 2% annually, according to the World Bank.
“The administrations have made progress in the redistribution effort, but on economic growth the performance has been dismal.”
Technical recession
Even before the onset of the Covid-19 pandemic, the economy was in a “technical recession” – defined as two consecutive quarters of negative growth.
The situation has considerably deteriorated since then, says Ocran, with GDP for the second quarter of 2020 shrinking by 16.4% year-on-year, and by 51% on an annualised basis, according to data from Stats SA.
An economy that is not growing rapidly can’t create enough jobs to absorb greater numbers of young people entering the labour market every year, Ocran pointed out.
“Unemployment has worsened as the economy has steadily deteriorated. One out of three people who are willing and able to work are without jobs.”
South Africa’s already reeling economy has been further battered by the health and economic shocks caused by the pandemic.
In the light of the economic challenges, Ocran says, the economy must be revived in a way that benefits all South Africans.
He says that can only be achieved through a “shared-growth strategy,” a plan that seeks to address the many economic challenges the country faces.
“Most economists, policymakers and international financial institutions agree that monetary policies – as directed by the central bank – and fiscal policies – as co-ordinated by the national treasury – are necessary but insufficient to raise the economy’s rate of growth. To raise the level of economic growth requires changes to the economy’s structure.”
Ocran says this is so because the South African economy has deep structural challenges.
These are partly historical, arising from the years of alienation and exploitation of the majority.
“Unfortunately, they have not been reformed.”
Legacies
A number of legacies from bygone years continue to stymie the economy.
One of these ‘legacies,’Ocran points out, is the continued dominance of a few companies in various sectors, including banking, finance, retail, telecommunications and transportation.
“Even an industry as mundane as bread production is characterised by a few dominant firms.”
Dominance by a few companies stifles entrepreneurship because dominant companies raise barriers to entry, he says.
Another inherited problem is the role of state-owned enterprises.
Enormous resources have been spent on these entities yet most can barely survive without continued financial support from the state.
The liabilities of state-owned enterprises have grown faster than assets, says Ocran drawing on data from National Treasury.
And over the past five years, the return on equity of these companies has averaged -2% a year.
This means that investment in enterprises has been unprofitable, he says.
“The challenges facing these institutions have historical antecedents. But their plight has worsened in recent years.”
Labour market regulations
Labour market regulations have not been supportive of robust growth, says Ocran, adding that there is an urgent need for reforms that make it possible for firms to set wages that are appropriate for labour-intensive activities.
“Addressing these problems requires changes to the fabric of the economy. But structural reforms are painful because they create losers and winners, and take time to bear fruit. And they can’t be addressed with monetary and fiscal policies.”
But, he says, the “motivation for reforms” is often highly contested.
For instance, Ocran asks, how does an economy that has a considerable proportion of low-skilled people provide adequate incentives for labour-intensive industries to thrive?
The divergence between the real minimum wage and employment in the clothing industry in South Africa between 2000 and 2018 is instructive, he says.
While minimum wage legislation is important to safeguard the interests of workers, it needs to be “crafted in a way that provides exemptions for labour-intensive industries.”
The UWC economic professor says the fierce opposition from labour partly explains why labour market reforms have stalled for years.
Reforms have already been proposed by Treasury, the ANC’s Economic Transformation Committee and lobby group Business Unity SA.
“All have similarities. But the issues of labour market reforms, industry concentration, weak state capacity and the management of state-owned enterprises have to be elevated and addressed adequately. In addition, all three fail to identify a number of structural constraints that need addressing.”
Additional constraints
The first is the role played by professional accreditation bodies, such as those in health care, according to Ocran.
“Most are not designed to assist new graduates to participate in the economy as independent service providers.”
“Some of these institutions have operated like medieval guilds because they have onerous certification and accreditation processes that make it near impossible for newly graduated professionals to set up shop. These processes need to be streamlined to be more inclusive without compromising professional standards.”
Ocran believes that another area in which there is scope for structural reform is in the financial sector.
Citing the SA Reserve Bank as an example, he says the central bank has to reform its regulations to facilitate the expansion of the mobile money economy to foster financial inclusivity.
“An improved legislative environment would make it possible for an agent-based mobile money transfer industry to thrive. And financial reforms would assist in lowering barriers to entry into the financial market.”
Procurement policy overhaul
Finally, the country’s procurement policy needs an overhaul, says Ocran.
“The current system encourages rent-seeking. Recent abuses associated with the COVID-19 procurement processes are proof of this.”
He says the policy has to be modified to encourage local production in that state and parastatal institutions must procure goods and services directly from previously disadvantaged producers and not through middlemen, and that public institutions must learn from successful retailers who have built expertise in sourcing goods and services directly from many producers.
In addition, Ocran says, government institutions should be prepared to provide their suppliers with resources and training to increase their productivity and incomes.
“A good example can be found in agri-business industry, where outgrowers provide raw materials to agro companies that lack adequate production capacity for their raw materials.”
And while government has its work cut out as structural reforms are concerned, Ocran points out that other stakeholders, such as professional bodies and the Reserve Bank, also have a major role to play.
“Together, they can unlock sustained economic growth for job creation, poverty alleviation and a reduction in inequality.”
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