The Gear policy introduced five years ago had implications for growth, but it was aimed more at stabilising the economy, writes Howard Barrell South Africans stand on the cusp of a period of strong economic growth. To propel the economy into sustained high growth, however, the country now needs to make some bold choices and to pursue them with single- minded purpose. Whether on the left or right, economists and politicians appear to agree that the country has been, variously, “trundling on”, “ticking over” and “bumbling along” over the past three or four years without clear direction. They agree that the major challenge before South Africans now is to take a clear decision on the best path to growth.
There is also a wide measure of agreement among economists and politicians that South Africans need clear and focused leadership both in making that choice and in travelling the growth path agreed upon. That leadership will have to come from President Thabo Mbeki no less than from individual leaders in business, the trade unions and civil society.
“We have somehow failed to rally the nation around a growth path,” according to Iraj Abedian, chief economist at Standard Bank. Abedian believes a major reason for this has been a misunderstanding of the purpose of the government’s growth, employment and redistribution strategy (Gear), the tough spending and borrowing regime imposed by the government in 1996. “We have confused a stabilisation strategy with a growth path.” Many people – again, on both the left and right – believed that Gear outlined a strategy for economic growth, according to Abedian, one of its architects. It was, however, no such thing. Instead, it was a policy for stabilising the economy at the end of the apartheid era, when government spending and inflation had got completely out of hand. Gear did have growth implications, but it could never be a growth plan.
This confusion probably had something to do with the name given to the policy. The acronym Gear stands for policy on growth, employment and redistribution. Gear’s introduction five years ago needed to be followed by the introduction of an economic growth strategy. But no such plan was forthcoming. “This was not so much a question of failure as an error of technical sequencing,” according to Abedian. But, he says: “We now need the same urgency about developing a growth strategy as we had five years ago about stabilising the economy.”
On this, he gets support from Jeremy Cronin, deputy general secretary of the South African Communist Party. “There is national consensus on the need for a growth strategy.” But that is about as far as the consensus extends. According to a senior African National Congress member who preferred not to be named: “We have to take the plunge – one way or the other. Either we go for the post- Keynesian route, with the state as a significant developmental agent. Or we take the more driven, orthodox approach. But we can’t continue bumbling along.” Cronin, unsurprisingly, wants a big role for the state in securing growth. But he and many of his colleagues on the left accept that, if this route were followed, the government would still need to be careful about its own level of spending. Their argument with Gear is now more nuanced and is directed more against the tight targets Gear set than against the principles of prudence that underpin it. Whatever Gear’s merits or demerits, however, the policy has not led to the inflow of the levels of foreign direct investment that some predicted. “Therefore,” Cronin argues, “much more emphasis needs to be placed now on the government playing a leading role in getting the real economy going. It must mobilise domestic investment, both public and private. It is then that foreign investors will say, ‘You are investing in your own economy. So we will, too.’ “Attracting foreign direct investment has much more to do with developing an industrial policy that focuses on the potential of particular sectors of the economy,” he adds. Abedian agrees that there is a crying need for a series of creative dialogues between particular sectors of industry and government officials over how to promote to potential foreign investors opportunities to invest in South Africa. The local motor industry provides an example of the potential for this kind of dialogue. A number of overseas motor investors have identified South Africa as a highly advantageous place in which to produce components and engines for overseas markets. And this comparative advantage can be aggressively marketed abroad. It is no use, says Abedian, making generalised appeals for foreign investment. The point is to identify the particular industries and sectors into which investment can be attracted and then to set about attracting it with expertise and energy. “We need an operational approach to attracting investment,” he says.
But Abedian, like the senior ANC member interviewed, opts for a more orthodox growth path. “Growth can be facilitated by a government, but it cannot be brought about by a government. The best a government can do, and should do, is to focus on the business of redressing inequality in society; becoming more efficient, not less efficient; less bureaucratic, not more bureaucratic; providing good roads and good policing; and such things; becoming a service-delivering, poverty-reducing state; but not becoming an equity-holding state. “An equity-holding state is an ideologue’s dream but society’s nightmare,” Abedian argues.
Economists and business people arguing along similar lines to Abedian stress the need for accelerated privatisation and, in some cases, tax holidays for foreign direct investors. On privatisation, all agree that massive opportunities have been lost over the past six years to attract billions of dollars as well as new technology into the country. One economist (not Abedian) described the government’s policy framework on privatisation, released three months ago, as “an embarrassment, like an undergraduate’s long essay”. The argument over what growth path is best is unlikely to be settled in coming months. What is likely, however, is that a resolution of it will require of individual business people, union leaders and politicians a more creative set of responses to each other than they have proven capable of in the past. “A strong president and finance minister can stabilise the macro economy,” says Abedian, but it takes a wide range of people and interests to launch and sustain a growth path.
Launching an appropriate growth path will also take very close attention to the millions of South Africans excluded from the main economy but who are nonetheless engaged in economic activity worth billions. Few if any mechanisms exist to transfer these proceeds into the main economy as capital, whether these proceeds are obtained legally by piecework or illegally in car chop shops or cocaine-smuggling syndicates. Until the moment of resolution or decision on a growth path, the pluses that have been scored over the past six years – which include improvements in social delivery – do provide a basis for some optimism. Gear’s stabilisation of the economy – Cronin concedes that the South African economy is no longer heading for the “full-on cul de sac” it was in 1994/95 – has been achieved remarkably easily. By comparison, Abedian suggests, “Brazil, Chile, Argentina and other countries had to go through 30 years of coups and juntas to stabilise their economies.”
Likewise, tariff reform has opened up the South African economy considerably – a fact mourned by most trade unions and some industrial sectors, but praised by others as the only sensible route the country can take in the current international economic climate.
South Africa now also has a predictability in state revenues and expenditure that is widely admired abroad. This has been achieved largely by the medium-term expenditure framework, which provides a three-year projection of government accounts.
In addition, the central government has placed strict controls on borrowing by provincial and local governments. This has avoided full-scale macroeconomic crises of the kind suffered by countries such as Brazil because of over-borrowing by provincial governments. The government is also busy introducing a revolutionary tightening up of the management of state finances by means of the Public Finance Management Act. And the system by which three or four Cabinet portfolios concerned with broadly related areas are clustered together has begun to correct the blinkered, uncoordinated approach to government that has long applied in South Africa. For its part, the political left likes the government’s spatial development initiatives, such as the Maputo Corridor. It sees in the state-owned Industrial Development Corporation’s equity share, alongside private capital, in the Mozal aluminium smelter a pointer to the way ahead.
And South Africa’s increasingly self- assertive approach on international economic matters has gone down well with various constituencies. The tenacity of South African negotiators on the trade deal with the European Union appears to have paid off. The success the government, mine owners and mine workers shared in reversing International Monetary Fund plans to sell a portion of its gold reserves revealed a more variegated face of South African nationalism than had probably ever been seen before. The shortcomings in our economic governance and performance six years on from the dawn of democracy are, however, considerable. At the international level we are still presenting ourselves in a clumsy way. We are, yes, part of Africa. But we are also very different from the rest of Africa – in the extent of our economic development, our wealth and our potential. We may wish to lead the rest of Africa out of its miserable economic condition. But, when we market ourselves as a destination for foreign direct investment, we need to distinguish ourselves quite clearly from the rest of Africa. This we are failing to do, according to business people, and we are suffering as a result.
Immigration policy has been similarly damaging. Business leaders tell of the government’s embarrassment at the World Economic Forum meeting in Durban earlier this year. Ministers dealing with the economy had to listen to potential foreign investors in South Africa complaining about how their attempts to locate highly skilled executives or technicians in the country had been stymied by the Department of Home Affairs. The Minister of Home Affairs, Mangosuthu Buthelezi, seemed blissfully unaware of the problem. These frustrations continue.
But the problem surpassing all others remains unemployment. Two out of every five potentially economically active South Africans (39%) do not have jobs. The proportion is rising. And, increasingly, the message coming from economists and business people is that there is no easy solution to the problem. The effects of being out of a job were well described by two Oxford University academics, Geeta Gandhi Kingdon and John Knight, at a three-day conference hosted by the Trade and Industrial Policy Secretariat (Tips) outside Johannesburg last month. “Unemployment,” they wrote in a conference paper, “reduces output and wastes productive power; it erodes human capital owing to the depreciation of unused skills; it leads to social exclusion, a deprivation that goes well beyond the fall in income associated with unemployment; it can cause suffering, deterioration in family life and in social values; unemployment can induce discouragement, resignation, and loss of morale.”
What Kingdon and Knight set out to test was an idea, held by some, that a considerable part of South Africa’s unemployment problem was voluntary – in other words that many people out of a job simply did not want to work. On the evidence they uncovered they found this notion “implausible”. Economists seem to agree that South Africa’s unemployment problem cannot be solved without sustained high rates of economic growth – although there is no guarantee, even in the medium term, that high growth will have the desired result. South Africa’s current growth rate – hovering between 2% and 3% – is completely inadequate to the task. Some economists, like Nicoli Nattrass, professor of economics at the University of Cape Town, raise doubts about what she calls “high-productivity-now” growth strategies. These are strategies that involve the creation of quite capital-intensive, well- paid jobs for relatively skilled workers. In this growth path, creating jobs is expensive and relatively few are created. But the theory is that, in time, the high growth these jobs help stimulate will, in time, induce the creation of many more jobs for others. This, in effect, is the main approach suggested by the SACP and the Congress of South African Trade Unions. It is the opposite of labour-intensive, or of what Nattrass calls “labour-demanding”, growth.
Nattrass notes: “The high-productivity-now strategy essentially asks the currently unemployed generation to make a sacrifice for the sake of the employed and better skilled among them and for the next generation that will (supposedly) enjoy the fruits of a more dynamic economy.” Abedian is suspicious of any growth path for South Africa – labour-intensive or not – that does not embrace the entire Southern African region. South Africa, he points out, is by and large a services-based economy. The tertiary sector – wholesale and retail trade, tourism, transport, communications as well as financial, business and government services – now accounts for about 65% of gross value added in the South African economy. What growth occurs in an economy structured along these lines is likely to create very few, if any, new jobs. But, says Abedian, place South Africa in a region in which not only capital but also labour can move around in freedom, and the prospects of reducing South Africa’s unemployment improve radically. For this degree of capital and labour mobility would enable various areas of the region to establish their comparative advantage in particular industries – say labour-intensive agriculture in the case of much of Zambia, financial services in the case of Johannesburg. Unfettered, this process could release the kind of economic energies in the region that could soak up much of the labour available.
Another supposed sponge for the unemployed is the variety of small, micro and medium enterprises (SMMEs) promoted (in most cases very badly) by various government agencies. It is becoming increasingly clear, however, that the expectations being raised about their job-creating capacities are unrealistic.
Despite the claims of recent years that SMMEs are a vital part of the government’s strategy against unemployment, there are few statistics on them and even fewer that are at all reliable. But various issues of State of Small Business in South Africa suggest that nearly half (47%) of agricultural employment is in small and medium enterprises, about 2% of mining employment, and 24% of manufacturing employment. Anna Kesper of the University of Witwatersrand told the recent Tips conference of research findings that show that “a substantial number of SMMEs have not been able to grow since 1994”. She said: “They report neither a profit or turnover increase, nor – as one would then expect – employment growth.” Her research among SMMEs showed, instead, that “the number of firms decreasing their workforce is larger than the number of firms experiencing decreasing turnover of profits”. Worse, “the growth that does take place in these SMME economies is, to a large extent, jobless”. Accordingly, she questions the notion that SMMEs are “the panacea to tackle the problems of employment growth and income distribution in South Africa”. Kesper says SMME owners cite labour legislation among the major factors dissuading them from taking on additional employees – an oft-quoted disincentive to new job creation in larger businesses, too. The government’s recently announced plans to soften some of these regulations – yet to be enacted – do not go far enough, according to employers’ organisations. There has also been another class of disincentive in the business community. An increasingly worrying negative has been, in the words of a senior business person who also wanted to remain unnamed, “the tendency for race to trump clear thinking at the top of the government”. Significant sections of the white population, the main owners of the economy, have been demoralised, in some senses destabilised, as a result.
Repeated criticism of whites by President Thabo Mbeki and the ruling party have had direct economic costs, and have contributed to the fragility of sentiment both inside the country and abroad about the prospects for South Africa and its economy. Moreover, while many whites continue to emigrate – notably the young in possession of sought- after skills – others are “semigrating”, as the business leader puts it. That is, they are remaining in South Africa, but “withdrawing, opting out of being citizens”. Many of these whites are convinced – and who can convince them otherwise? – that they can never be anything other than second-class citizens in the present government’s eyes. So, they ask themselves, why concern themselves with the obligations of citizenship?
It is likely, however, to take a sense of citizenship among all South Africans – a sense of belonging, of being wanted and of wanting to belong – to overcome the country’s daunting economic challenges. South Africa, for South Africans as well as for foreigners, will have to become a country in which they want to invest, not a country in which they are told they should invest.
“It requires a leap of political courage,” says the unnamed senior ANC member. “The problem is ourselves.”