/ 5 March 2013

Growing South Africa’s economy will be a ‘political decision’

We gauged the response across political and business spectrums following Finance Minister Pravin Gordhan's budget speech. It seems he won their favour.
We gauged the response across political and business spectrums following Finance Minister Pravin Gordhan's budget speech. It seems he won their favour.

"There is lots of room for the economy to do better," Finance Minister Pravin Gordhan said on Monday, "But what will get us there is a political question."

"We provide to the authorities the comparators; we say this is how you look in the photo compared to all the other countries of how taxes work. And then of course it will be up to the South Africans. In the end it's a very political decision, its about political options," said Angel Gurría, secretary general of the Organisation for Economic Cooperation and Development (OECD).

Gurría said the country also faced the "big paradox" of high levels of unemployment and skills shortages at the same time, deploring South Africa's education system.

"All successful countries had one thing in common: they invested in education," he said.

Gordhan said the government was aware of the importance of education. "This government has placed education as its apex priority," he said. "Having improved access we now have to work on improving quality," he said.

Not going green
Gurría also slated South Africa for its lack of green initiatives and its inability to bring down its high level of carbon emissions. 

"This is the one place where you may look like a developed country but you don't want to," said Gurría. He said that while such economic activities as mining were energy intensive, South Africa's electricity prices were among the lowest in the world.

Gurría said electricity prices needed to be increased to cover the costs of reducing coal subsidies.

While Gordhan highlighted that reducing carbon emissions was taken seriously in the 2013 national budget, he also mentioned the temptation South Africa faces when it comes to fossil fuel consumption.

"We have good people but we also have coal," he said.

According to a survey by OECD, South Africa lacked the dynamism of the emerging economies of Brazil, Russia, India and China and the problems it faced were more in line with Europe's recession setbacks.

Europe's problems
Gurría praised the state of South Africa's public finances as better than many OECD countries' adding, however, that the country's response to the recession was more in line with Europe's than that of the booming economies' of the Brics countries.

"It's no consolation but we in Europe are experiencing some of the same problems; unemployment is edging to 12%, inequality is growing."

While praising the state of South Africa's public finances as better than many OECD countries', the survey criticised South Africa's growth in state spending over the years that came mainly in the form of increases in public sector wages. The ratio of public debt to gross domestic product was expected to rise to above 40% in 2015/16.

He added South Africa's economic growth was not where it could be. 

"Growth has been sluggish compared to other middle-income countries," said Gurría. 

The South African product market, he said, was too uncompetitive, creating high barriers for new small businesses. 

Gordhan agreed. "The South African public don't quite understand what it means to have inadequate competition in the product market. Even our journalists don't write about it adequately," he said. "That is one of the more fundamental structural changes we need to undertake in this economy, having inherited what we inherited X years ago."

Fostering greater competition
The survey recommended expanding the scope of the Competition Commission and eroding the dominance of parastatals in the economy.

"It will be important to foster greater competition in network industries via reduced barriers to entry and an unbundling of the functions of the state-owned energy utility Eskom and the transport conglomerate Transnet," read the survey.

Gurría said the private sector was not providing help. "If the private sector doesn't do its job and take risks in the economy, it [growth] is not going to happen," he said. 

The survey found that while corporate profits increased even through the global economic downturn, the private sector has been reluctant to borrow or spend. This "is almost certainly linked to gloom about economic prospects, reinforced by domestic political uncertainty and outbreaks of social instability", read the survey.

High unemployment was blamed partly on the "dualised" labour market that kept outsiders out. The collective bargaining system meant that workers in formal employment were protected while for the unemployed, the prospects of a job in the formal sector moved further away. Gurría said that many countries shifted from collective bargaining that covered an entire economic sector to bargaining that was conducted at company level.

But Gordhan gently demurred, pointing out that the mine disagreements at Marikana stemmed in part from the absence of a collective bargaining system at the platinum mines and that negotiations were currently under way to create one.

Gordhan added it was important to "open ourselves to external comparison and hear others' views about our economy."