/ 8 March 2013

Budget might not drive shared growth

Moderator at the Neotel-sponsored Mail & Guardian Business Breakfast David O’ Sullivan with panellists Lumkile Mondi
Moderator at the Neotel-sponsored Mail & Guardian Business Breakfast David O’ Sullivan with panellists Lumkile Mondi

Few people were surprised when Finance Minister Pravin Gordhan, in his budget speech last month, said that the treasury had revised its economic growth forecasts for 2013 downwards to 2.7% from the 3% predicted in October 2012. The sentiment was that, although the budget was realistic and offered few surprises, it might not be aggressive enough for the health of the country.

At its Neotel-sponsored Business Breakfast held in Johannesburg on Tuesday, the Mail & Guardian asked a panel of experts whether the budget would indeed drive shared growth in the country.

Sitting on the panel were Liepollo Pheko, managing director of the management and development consultancy Four Rivers, which deals with economic policy analysis; Tim Harris, the spokesperson on finance for the Democratic Alliance (DA); and Lumkile Mondi, chief economist of the Industrial Development Corporation and a member of the state-owned enterprises presidential review committee.

Growth path
"What is heartening about this year's budget is the common point of departure and the fact that it talks about a growth path. "But when we are talking about social solidarity, in other words how to address the old chestnuts of unemployment, poverty, inequality and so on, there are no targeted objectives," said Pheko.

Although she viewed it is a "safe and comforting budget", the way that it had been framed was a result of the "shocking relationship" that existed between workers and big business.

"One just needs to look at the incident at Marikana to see an example of this poor relationship and its impact on the reputation of the country. This relationship has led, in part, to the economic downgrading of South Africa by several respected ratings agencies. Furthermore, a question we need to ask is how the budget is targeting infrastructure development and dealing with it as a public good."

She cited the building of functional hospitals and clinics in communities, establishing schools closer to where people live and the building of quality roads as examples of how infrastructure development could be used for the public good. This would involve putting checks and balances in place to ensure that things were done to accomplish the goals.

"Infrastructure is about social relationships. It is not just about the banking systems, IT infrastructure and building pretty bridges. So, while the budget has attempted to bring a message of comfort, I do not feel that it is necessarily one developed with small businesses and underprivileged communities in mind," said Pheko.

Harris agreed to some extent. "We welcome the narrative about growth in the budget, which has certainly been lacking in recent years. This year needs us to be focusing on growth and the minister certainly did talk about it. Unfortunately, it does seem that the fiscal policy has been placed in a holding pattern for the interim," he said.

Pressure from ratings agencies had forced the minister's hand and made him more conservative than expected, Harris said.

"These agencies have identified three common trends in the country: the emerging debt problem, the fact that the state lacks capacity to implement its plans and the ideological stand-off in the Cabinet. "There is no doubt that in debt terms, there are major problems in the country.

"Secondly, on the issue of whether the state is able to meet its capacity issues, it is difficult for the minister to get things done by just using the budget.

"Finally, he is actually putting a stake in the ground and making an ideological standpoint. For example, he has clearly stated he will make sure his proposals happen this year when it comes to things such as spending more money on the youth," said Harris.

This was encouraging, because the current deadlock had to be broken.

"When you have a deadlock, it is easy to end up doing nothing and that is exactly what has been happening in the country for the past few years." Mondi was more critical in his assessment of the budget.

"The economy is growing at a very low rate. South Africans are already paying a fortune for electricity and fuel and this is not going to change any time soon.

"More importantly, the settlement of costs emanating from the mining sector will also see the country paying a significant amount of money. This is creating a struggle in our economy, which has now turned into a high-cost one," Mondi said.

It had become difficult for business to see where the growth lay in the economy.

On the positive side, he said a shift was taking place in terms of subsidies and the development of export process zones that were providing incentives for the building of infrastructure, business located in the zones and providing them with tax benefits.

"We are seeing a positive shift in the budget and the minister is sending a strong message for the medium to long term. However, the budget is still being stifled by other sectors of the market, such as energy that is exclusively controlled by the state. Power stations that have been on the cards for a long time will certainly not be operational in the next four years, yet we need them for growth. Also, people in South Africa are paying two-thirds more for infrastructure costs than they are supposed to," said Mondi.

Cost cuts
However, Harris said there were several opportunities to cut unnecessary expenditure.

"South Africa has one of the biggest cabinets in the world. There is no logic behind some of the offices, such as the department of economic development, which uncomfortably tries to straddle business issues that other departments are already focusing on, and the department of women, children and people with disabilities.

"The mandate of this department needs to be run by the department of social development and needs to work closely with the justice department and the police," he said.

These departments, like many others, were just creating confusion about who needed to take responsibility on key issues, Harris said. Pheko agreed.

"The department with the long acronym [DWCPD] is a challenging one. The notion we are creating that women are victims is certainly problematic. "Also, the grouping here is difficult to explain, because women are equated to people with disabilities and with children who cannot act for themselves. There does need to be some kind of institution that tries to strengthen gender equality, but it needs to be one that works more efficiently and is given a lot more teeth," she said.

Pheko cautioned that a model that dumped everything into a single department was the worst possible one. The risk lay in every department assuming that another department would take responsibility for an action, with the result that nothing happens the way it should.

Another suggestion from the DA was that the government could save nearly R500-million a year by imposing a ministerial handbook similar to the one the party has implemented in the Western Cape.

"The handbook guides what our ministers are supposed to be doing. We have proven cost savings in the province and have significantly cut down on the use of external consultants. Our ministers are hard-working and we have measurable proof to show for it. What is certain is that there is a lot of fat one can cut from the existing budget," said Harris.

Mondi said the state needed to play its part, just as business had a role to play in reducing unnecessary expenses.

"Yes, this is a very simplistic way of looking at it, but there are precious few incentives for growing small business in the country. This is turning into a national crisis. One only needs to look at what is happening in India. Here is a country with a history of working with big multinationals and not doing enough for small business," he said.

The shift from being an employee to being an entrepreneur was a difficult one to make. Mondi said that although some support was offered for people to become entrepreneurs in South Africa, not enough was done to meet the existing demand.

"Another problem is the shareholder mentality we have created. The country has successfully created a pool of black people who are just used for company membership and to boost the equity rating of an organisation. They then spend their time on the golf course living a luxurious life and not actively engaging in business. We have created the culture of a stereotypical empowerment person that is not there to grow the industry. The image that South Africa is a country of entrepreneurship that drives small business growth is far from the reality," said Mondi.

State involvement
How does one address the increasing need for small business growth? Is it simply a case of getting the state more involved in what is supposed to be happening?

"Are people aware of programmes designed for entrepreneurs and have the ability to access small business opportunities? What is shared growth and how do we link it to income distribution and eradicate poverty by helping people create jobs?" Pheko asked. "The shrinking expenditure definitely gets people riled up and government needs to address these questions."

She said cutting down on basic benefits and downscaling created a vicious cycle. Key sectors needed to be protected but what sort of growth could be created and what targeting would government use to monitor the growth needed to be examined.

"It is one thing to say that focusing on small businesses is the be-all and end-all, yet we need more state involvement. As economies grow, government intervention is reduced. But we need that initial intervention to fuel growth.

"The less-state-involvement mentality has in many respects led to the economic issues we are seeing globally, where governments only got involved too late to address problems before they escalated," said Pheko. Mondi said the state "did not even have the competency to provide safety and security to people so how can we expect it to help with growth?"

"Government is putting pressure on parastatals instead of getting its own house in order first."

Harris said that it was an unfortunate caricature that opposition parties were looking at zero state involvement, but that the country still needed it.

"Just look at infrastructure. Currently, there is a R1.5-trillion backlog in terms of maintenance. The country should be spending 10% of its gross domestic product on infrastructure and yet this year we will only be spending 8%. The reason for this is that the state does not have the capacity to implement a big budget."

Harris said every year that budget was underspent was a year that showed the incapacity of the state to implement solutions. He cited Brazil as an example of a model that worked.

"The country privatised 51% of its largest airport and raised a substantial amount of money. The government there identified that it had a capacity problem and one of the ways to solve it was to get the private sector involved. In South Africa, this strategy is not even open for discussion. We need to take ideologically neutral solutions from other Brics countries and see how best they can work here."

Managing labour
Another area of concern was the youth wage subsidy.

"By and large, our workers are priced out of the market. It is the ultimate Catch-22," said Harris. "Job seekers have no work experience and are unable to get their first jobs to get the work experience they need. The state should decrease the cost of hiring young workers and get them jobs.

"Criticisms have been levelled at this, saying companies will simply retrench older workers to make these young appointments. Yet, all the labour laws still apply so this cannot happen. But Cosatu feels that this is not the solution needed to hire young workers."

Mondi said he believed that Cosatu would not be able to keep "pushing its will the way it has in the past".

"Cosatu's days are numbered in terms of its relationship with the ANC. With President Zuma determined to succeed at the next elections, there is some determination to do the right thing and get the country moving in the right direction. This will put Cosatu on the back foot. Even today, the union has competition and will feel the impact in terms of decreasing member numbers," said Mondi.

Pheko said that despite making "good noises over the years", Cosatu now had different sets of challenges to address as a result of changing market conditions.

"Today, they are facing more scrutiny than in the past. The post-Polo-kwane wave that brought President Zuma to power now comes across as a bit of a rag-tag move, with lots of disparate interests, as something that was quite selfish. This has led to the crossroads both President Zuma and Cosatu are faced with today. Cosatu is facing an inevitable slide and it needs to seriously consider the path ahead," she said.

There was a lot of pressure from Cosatu against the adoption of the national development plan (NDP), Harris said. The union was kicking against it and still had enough political clout to ensure that the NDP and the youth wage subsidies would not be implemented.

"The country is dealing with an insurmountable force that still has a lot of influence over the president. So, despite the challenges faced by the union, Cosatu is still proving to be a major stumbling block for significant economic reform in South Africa," he said.

Despite these issues, said Pheko, people were primarily concerned about having a roof over their heads.

"The political issues are secondary. People want to be safe, they want to have jobs and they do not care who can give it to them. There is currently such a distance between the state and its people that we are seeing a country at odds with itself. The lack of accountability in government is becoming more visible in the media. There is definitely cause for concern, because the state is in crisis and it has a considerable credibility deficit to deal with," she said.

The road ahead
Harris said one of the ways in which government was becoming accountable for its actions (or inaction) was through the ability of the other political parties in Parliament to present a united front to the ANC.

"This is frightening the government. In fact, given the circumstances the country has found itself in, the prospects for a broad coalition to bring the ANC below 51% control of Cabinet is very good," he said.

Pheko said that the premise of state intervention was a sound one to be implemented in South Africa, but that the required "qualitative intervention" was not possible because of "government being so far removed from the people".

"We need to claim back the state in the form it needs to be in. We cannot continue to have a government that is out of reach in terms of accountability. There are significant inefficiencies that need to be eradicated, but the quality of intervention needs to drastically improve," she said.

Harris said there were enough ideas to drive shared growth better than what was happening at present.

"Just look at other developing markets — such as Peru and Chile — that are similar to South Africa's. Each of them exceeded growth rates of 6%. The major difference between us and them has been these growth restraints, which have left South Africa lagging behind. Apartheid built the ultimate insiders-outsiders economy and the ANC has not done enough to change policy to change the system. In some respects, only the insiders have been replaced; the outsiders are still battling to get in," said Harris.

Sharing had become the engine to growth but not enough participation was taking place in the economy. "Our economy has been too monopolistic for too long. We need to address this and drive entrepreneurships. Company ownership also needs to change.

"Privatise some state-owned enterprises to give employees ownership. This will drive growth by increasing the economic participation in the country.

"We are not advocating tearing down what has been done; we just propose a growth plan that works."

Mondi said that one needed to move beyond politics and get stuck into building a new economy for a new country.

"The challenge is not political, but rather how to make a plan work in South Africa that is part of the long-term agenda. And, of course, government needs to be held accountable for the plan that is being implemented."

Inclusive economy
Pheko said: "If we are talking about creating an inclusive economy, then we need to look at the social consciousness that we are building. South Africa does not have a huge population in comparison to some of our peer countries.

"We also do not even have a similarly sized economy, so it would be unfair to continue to compare us to China. Deregulation needs to have other forms of social protection that consider the citizens built in. We cannot simply place one worker in direct competition with another and hope the economy will grow."

Harris shared the sentiment that wholesale deregulation would lead to problems. But what would work, he said, was the targeted overhaul of the labour market to accommodate regulations designed to be of particular benefit to small business.

"Small businesses often face similar constraints. Big businesses face similar constraints. The debate is not about whether an economic strategy will work, but about who has the most political influence over the economic policy."

Pheko's view was that there needed to be a model to stimulate interest in the youth and to pursue a more artisan-focused mentality.

"Government needs to create multiple exit points for the youth, so that they can create their own jobs. At the moment, we are not creating a culture of entrepreneurship. People are just waiting for jobs to come to them. We need to ask government what the vision is for the country for 2020, 2030 and 2050, and where we are putting the resources in place today that will come to fruition in the future," she said.

There were still significant challenges to overcome before significant growth could be achieved.

"The biggest of these is how schools and other centres of learning should be used to plant the entrepreneurial seed in students.

"Private sector companies like Sasol and Investec should not have to do it on their own. More needs to be done by government from a learning perspective," said Mondi.

But it was not all negative.

Harris said there were some "welcome developments" in the budget, such as the easing of taxation and other reforms, which would result in a R360-million tax loss for the state in favour of small businesses.

Although there were growth challenges, debt challenges, the challenge of the deficit, creating entrepreneurs and addressing unemployment, the big question was whether this year's conservative budget would create a platform for growth in South Africa.

The panellists might have been divided on the strategies for unlocking growth, but they agreed that part of the solution would be to find the right opportunities and to work together.

As Gordhan said during his budget speech last month: "The South African economy must grow faster and more inclusively than before."

This article was sponsored and approved by Neotel as part of its sponsorship of the Mail & Guardian Business Breakfast. It forms part of a larger supplement.