A diagnostic approach to growing the economy of South Africa

Finance Minister Tito Mboweni. Picture: Nokuthula Mbatha/African News Agency(ANA).

The South African economy is currently characterized by low growth and high levels of unemployment. The economy contracted by 3.2% year on year, in the first quarter. Unemployment rate at its 11 year high, at 29%. The fiscal deficit is expected to climb to over 4.5% of the GDP forecast. Investment credit rating on a downward trajectory. Political divisions within the ruling party, create high political uncertainty levels for the country. These factors, amongst others, provide a glooming image as far as the state of the economy of South Africa is concerned. 

With that said the Finance Minister has, despite political and economic pandemonium, published a thorough and pragmatic proposal on how the economy of South Africa should be approached to turn things around. On the 27th of August 2019, the Treasury released a paper titled “Economic Transformation, inclusive growth, and competitiveness: Towards an Economic Strategy for South Africa”. 

Despite critics, particularly from labor, this paper depicts a more collaborative approach to the functionality of this country. All motive forces of society will be given an opportunity to participate within the functions of the state which inherently will improve efficiency, effectiveness and in turn accountability. The paper seeks to unlock the value chain of the state by collapsing the monopolistic power of government in certain areas such as, energy, telecoms, transport, water, etc. with the intention of opening to private companies to buy and sell to end users. 

The new innovation, for instance, is to allow households to sell excess electricity for income generation. The paper intends to diagnose the paralyzed State Owned Entities through unbundling processes where-in an independent transmission company can buy electricity from Independent Power Producers, in the case of Eskom. The paper focused in modernizing industries to competitiveness and inclusive growth; lowering barriers to entry to increase competition and small business growth; prioritizing labor intensive growth, channeling the agricultural and services sectors; focused and flexible industrial trade policies; promoting export competitiveness and quantifying the impact of proposed growth reforms. 

With these initiatives, the Treasury targets 2.3% GDP growth and 1 million jobs to be created. The upside to this approach is, the Treasury seeks to unlock an existing economy as an alternative to populist reinventions that might not find the light of day. There’s an implied hypothesis that the fundamental reason for the South Africa’s glooming economy is the monopolistic power of government towards certain sectors. 

For instance, in the case of energy, the power utility is in tortuous. R420 billion of debt with 37 000 excess labor, high levels of corruption and unstable senior management are factors that have led to the condition in which it has found itself in. The President, in his State of the Nation Address, then proposed an unbundling of Eskom into three components. One of the components, mentioned in the paper, is the independent transmission company to be created will be able to buy electricity to Independent Power Producers. 

Diagnosing the issue of Eskom through the process of unbundling will relief government and have the opportunity to identify the “cancer” amongst the three areas, i.e Generation, Transmission distribution and/or Commercialization. Furthermore, the new proposal that seeks to allow households to sell excess electricity they generated, will kick-start a new economy which will create new business and job opportunities for smaller entities. 

The downside to this approach could be, the redistribution of state functions to private companies could distort the fundamental purpose or intent of these sectors overseen solely by the state. The inherent purpose of business is profit maximization and cost cutting, which does not always necessarily preclude economic growth and wealth redistribution. 

Furthermore, the inherent intent to enhance profits have made businesses synonymous to efficiency and effectiveness. Efficiency does, at times, lead to exclusion and this is where the distortion plays a role. The role of government is to create a developmental state and protect the poor majority. The inclusion of the private sector could lead to the exclusion and/or exploitation of the proletariat as far as basic services are concerned. 

Therefore, private entities being given the opportunity to trade with functions as sensitive as energy and water, could induce high levels of exploitation and thus increase the already existing levels of inequalities. Another aspect which seems to be absent in the paper released by Treasury, is the new digital private entities whom sustain themselves outside of South African government. 

The paper mentions an intention to unlock the transport industry, focusing on rail and ports as well as formalizing the taxi industry. There are new online international transport giants penetrating local markets through the App industry. Moreover, there’s another Tech hospitality giants penetrating the BnB and hotel market, reshaping the conventional ways of doing business with Travel Agencies. 

These digital markets are growing in different sectors and the paper seems to target the conventional ways of doing business and using it as an avenue to grow the economy. Innovation and technology should be the order of the day. The approach to growth as pragmatic as it is, is short of the “missing market”. This diagnostic form of growing the economy will definitely unlock opportunities, create an export based state with high levels of comparative advantage.

However, there are more areas in which the state can diagnose. With the newly introduced coding and data analytics at basic education level, what forms of innovative industries could be created for growth purposes? Given the ailing manufacturing sector, what could be done to infuse digitization to the sector to enhance growth opportunities? The other pronged approach is the innovation of regulation and policies to the unlocked economy. 

Given that business will be having an opportunity to participate in state affairs, innovation will be the order of the day which could lead to exclusion of human capital. This then means, government must be proactive and forward looking to such impacts. The South African economy, despite its current state, can be characterized as resilient. Notwithstanding, the statistics, the economy has proven its potential at worst possible situations. It has remained one of the most powerful economies in the continent and emerging markets. It is collaborative, democratic and has the willingness to adapt to political and economic fluctuations. 

Therefore, the proposal of Treasury indicates as such; the potential that could be unlocked, once given the opportunity. The growth prospects and economic opportunities could be redistributed to the poor majority. Despite political uncertainties and implied capture of the state, it is an economy that continues to sustain independently and resist unwarranted economic and politics revelations. 

Noma Gamede is an Economist and Political Researcher.