Building solid foundations

Change is pain: Enoch Godongwana says that, in several areas, growth has been too slow and the benefits of change have been narrowly distributed. (Madelene Cronjé, M&G)

Change is pain: Enoch Godongwana says that, in several areas, growth has been too slow and the benefits of change have been narrowly distributed. (Madelene Cronjé, M&G)

In 20 years, the post-apartheid government has been able to dig the South African economy out of a deep hole and has built a foundation for higher growth and shared prosperity.

The economy today is better managed, more competitive, more labour absorbing, and much larger than the one inherited in 1994.

Gross domestic product (GDP) has expanded, employment has increased, public finances are sound, inflation is lower, ownership is more diffuse and diverse, and many economic institutions are competent and credible.

Despite these advances, South Africa still faces high unemployment, low labour force participation, high inequality and too many people live fragile lives on the margins of poverty.

When the ANC came to power in 1994, it set out its goals for economic transformation in Ready to Govern and the Reconstruction and Development Programme (RDP).

In summary, these goals were to boost economic growth, raise investment, grow employment, reduce inequality, diversify the production structure of the economy, reduce concentration in the economy, stabilise public finances and broaden ownership of the economy to historically disadvantaged South Africans.

In many of these areas, the RDP set clear targets and objectives. The post-apartheid government has made solid progress in many of these areas.

However, in several areas, progress has been too slow and the benefits of change have been narrowly distributed. Most people, including people inside the ANC, perceived the apartheid economy to be a strong and powerful one, able to generate wealth and resources at pace.

The reality was that the apartheid economy experienced its heyday in the 1970s and had been in steady decline since then. Economic growth between 1970 and 1993 averaged 2.2% a year. Per capita income was falling.

Public finances were in a mess. The savings rate was low. Inflation was in the high double digits. Employment was stagnant.

The country had almost no foreign exchange reserves and had little access to either global product or capital markets. Not only was the economic structure designed to serve a few; it was also unsustainable.

For this reason, the ANC’s task was not just about reorienting the economy to serve a broader population. It was also about changing the economic structure and boosting investment and growth.

Economic transformation is always a complex process. In South Africa’s case, two factors further complicate the process.

The first is the international context within which economic policy is developed and executed. The second is the starting point of massive inequality in assets, resources, opportunities and capacity, principally between blacks and whites.

South Africa achieved its freedom at a time when socialism was collapsing, left of centre parties even in social democratic countries were on the back foot, and laissez-faire capitalism was triumphant.

The Washington Consensus dominated economic policy thinking. Whatever the ANC thought about economic policy or the merits or demerits of the liberalisation agenda, its own choices were constrained by the weak state of the domestic economy and the prevailing economic paradigm at the time.

Even though the economy benefited from rising commodity prices and a buoyant global economy in the period 2003 to 2008, South Africa also had to contend with the Asian economic crisis, which resulted in the first quarter of negative growth for the post-apartheid economy in 2008, and the recent global financial crisis which has severely damaged employment and growth.

In 1994, the government faced three main trade-offs. The first was the balance that had to be struck between driving growth (which often meant appeasing those with investable capital) and redistributing that growth (through the budget, through higher wages, and through black economic empowerment).

The second was between internally focused policies, a pull-ourselves-up-by-our-bootstraps approach versus opening the economy up to take advantage of global capital and product markets.

The third related to public finances. Should the government borrow to fund increased services or should it reduce debt to free up resources for investment in public services?

In all these cases, a balance had to be struck. There would always be winners and losers. And there had to be a trade-off between short-term gain versus longer-term pain (or vice versa).

The first achievement of the ANC government was to restore the health of the public finances. It did this because it believed that healthy public finances were necessary to invest sustainably in public services such as education, health, housing and security.

In a relatively short period of time, the ANC government reduced the deficit, reformed the tax system and improved the budget process.

Despite criticism regarding the process, this achievement has been one of the most significant for the country. It enabled a massive expansion in public spending on services such as education, social security and housing, which would not have been possible if public finances were not healthy.

Between 1994 and 2014, public spending went from about R120-billion a year to more than R1-trillion a year, a significant increase even after adjusting for inflation.

The second challenge of government was to break the constraint on the financing of investment. South Africa had and still has a low savings ratio.

This implies that if the country wanted to raise investment, it either had to reduce consumption (which was both economically and politically dangerous) or it had to access foreign savings.

It could do this either through attracting foreign investment or by selling more goods and services to the rest of the world. So, despite the ANC’s initial instincts, it set about opening up the economy.

Tariffs were reduced and capital markets were gradually opened. In general, this process has been a success. South Africa has access to foreign capital and this now funds about a third of our investment needs.

We are also able to access foreign technology and capital where these do not exist inside the country.

South Africa has access to foreign markets and South Africa’s exports have grown steadily since the lifting of sanctions. The process forced prices down in many sectors and forced domestic companies to increase their productivity.

This success, however, has not been without costs. Many workers in uncompetitive industries either lost their jobs or experinced a fall in their real income. While opening capital markets has enabled more investment, it has also increased volatility in the exchange rate, which makes life difficult for exporters.

The redistribution aspect of economic policy has several dimensions. Public policy seeks to redistribute resources to the poor through public funded services such as education, to the indigent through social grants, land through land reform, income to workers through jobs and rising wages, to black entrepreneurs and to black capitalists through black economic empowerment.

The easiest of these tasks, the expansion of the social grants system, is also the area of greatest success. Social grants have contributed significantly to lowering the poverty level, reducing hunger and promoting labour participation amongst women.

The distribution of (or providing access to) assets and services such as housing, water, sanitation, electricity and refuse removal is the second most successful outcome of the fiscal and economic policies of government.

Increasing access to education and healthcare has also been largely successful, though the quality of these services remains a challenge. Land reform and land restitution have been slower, for both financial and institutional reasons.

Black ownership of companies has grown from practically zero to about a fifth, when looking at listed companies. While there are problems with the pace of ownership change and the modalities of funding, this policy has largely been successful in changing ownership patterns in the country, given the period of time under consideration.

It is true, however, that to sustain progress in broadening ownership, more attention needs to be paid to incentive structures and financing arrangements in order to encourage value addition and reduce fronting.

In terms of creating a class of black entrepreneurs who own and run small businesses, government policy has been less successful. Some progress has been made in the small-scale construction industry and through the procurement of services within government; but this trend has been too narrow to support more broad-based economic empowerment.

A major success of the post-apartheid government has been in making improvements to the working conditions, labour rights and incomes of the working class.

By broadening social security benefits such as unemployment insurance, the extension of collective bargaining arrangements and the establishment of basic conditions of employment, working conditions for most workers have improved significantly since 1994.

In labour intensive sectors, including the public sector, workers’ wages have increased steadily in real terms and benefits have improved considerably.

Employment has grown by about 30% since 1994. This performance must, however, be compared to a large increase in the working age population and rapid urbanisation.

Furthermore, most of the jobs created have been in higher skilled areas, whereas total employment in lower skilled areas has fallen. In the context of historically poor education for black people, this trend of skills-biased technological change (a global phenomenon) has had a significant effect on both total employment and equality in South Africa.

To add to the melée, in a context of skills-biased technological change and poor educational outcomes, the incomes of skilled workers have increased faster than those of unskilled workers.

In short, job creation has been too slow and too focused on skilled workers to make a significant dent in either unemployment or equity.

While this phenomenon of skills-biased technological change is universal, its pace and thrust has been faster in South Africa than in other comparative middle income countries.

Put differently, South Africa has failed to create jobs for the labour force it has, and has failed to substantially alter the skills composition of the population.

This failure, to create jobs for millions of relatively low-skilled people, is one of the biggest failures of the post-apartheid period.

The causes of this failure relate, in part, to a failure to diversify the economy and to grow labour intensive sectors such as mining, agriculture, manufacturing and construction. The reasons for the lack of dynamism in these labour intensive sectors are complex.

They relate to poor skills, high freight logistics costs (due to distance from markets), a volatile exchange rate and uncompetitive pricing for upstream inputs such as steel and chemicals.

In mining and agriculture, slow growth is largely as a result of policy challenges such as land reform, mineral licensing and poor infrastructure.

Another area where policy makers have not met their desired objectives has been in raising the level of public infrastructure spending.

The apartheid state left a mixed legacy. While the country had a good road network and surplus capacity in electricity, its rail network — both passenger and freight — were antiquated, its ports were inefficient, its water systems served a small minority and South Africa suffered from some of the most dysfunctional cities on the planet.

The post-apartheid government has maintained and even expanded the road network, expanded water supply, provided sanitation to millions more and constructed more than 2.5 million houses. However, the decay in the rail network has continued and the electricity surplus has quickly turned into a shortage.

The massive housing programme has improved living conditions for almost a third of the population, but little has been done to correct the spatial patterns of apartheid cities.

Massive recent investment in electricity and bulk water systems are likely to boost capacity; and investment in rail rolling stock and new coal and other freight lines will enhance the capacity of the economy.

Similarly, vast investments in bus rapid transit systems and new passenger rail links have the potential to transform our urban spaces and contribute towards higher productivity.

In conclusion, South Africa’s economy has been transformed in many respects. It is better managed, larger, more competitive and dynamic and benefits a far wider range of people.

These successes in such a short period of time, under very difficult domestic and international circumstances constitute one of the biggest successes of the post-apartheid era. Despite this progress, the economy still fails all those seeking employment.
Enoch Godongwana is the ANC’s head of transformation

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