Seven steps to get SA out of its economic rut

“It doesn’t matter what you say about South Africa, it’s going to sound better than Brazil or Russia.” Those were the words that greeted my arrival for the dessert course of a triangular dinner conversation on emerging markets hosted by financial services company UBS in London last week.

An amusing “speed dating” format required analysts from the three countries to rotate around three dining rooms replete with investors, traders and fund managers.

In the markets everything is relative. So while we look at things against an absolute standard, the people who decide where to put their clients’ capital are comparing South Africa with the likes of Turkey, Russia, Indonesia, Chile and Brazil. In most of these places – and especially in the bigger, more established emerging markets such as India and China – growth has slowed rapidly.
Economic sluggishness is par for the course at the moment.

If you think things are going badly in South Africa and want cheering up, look at the world of emerging markets. In the case of many of South Africa’s most obvious comparators, the wheels are coming off.

This is not to say everything is rosy in the South African garden or to provide an excuse for mediocrity. Far from it. But it does invite a greater sense of perspective.

Take President Jacob Zuma’s apparent sense of political impunity and his willingness to legally filibuster the hell out of any attempt to impose accountability on him. He is not alone. In three of South Africa’s most obvious global market competitors, his opposite numbers are no less compromised.

One of a number of negative factors that link the four countries is the subject of presidential impeachment. In Brazil the Petrobras oil scandal has prompted a number of organisations and tens of thousands of protesters to seek President Dilma Rousseff’s impeachment.

In Turkey, after 13 years in power, President Recep Erdoğan now appears vulnerable – and not just because his party lost its parliamentary majority following the recent national election, but because of the backlash against his plans for a Putinesque presidential power grab.

And in Russia there is Vladimir Putin. Need anything more be said about this reckless nationalist, who arranges for the incarceration (and, some allege, the assassination) of his political opponents?

Putin is playing a risky game and may not be invulnerable. Capital is in flight from Russia; few investors will take the chance – not in a country where the rule of law is so easily manipulated and where the chief executive of the company you have invested in may be arrested on spurious charges.

On this, South Africa has an admirable competitive advantage – its rule of law is strong. There are many good lawyers and the court system, especially at the higher reaches, functions well, with an honest, capable, independent judiciary.

But what are South Africa’s other competitive advantages? Does it even know?

One can speak of the National Development Plan, but it contains too many internal contradictions: one chapter speaks of South Africa’s obligation to be a good global citizen and to reduce its carbon emissions: another appears to invite infrastructure development in support of the coal industry.

Since form follows content, what lies behind this weakness is a debilitating policy incoherence derived from an ideological heterodoxity in the ruling party and in Cabinet, which is not the subject of political management and leadership.

Selling the positives has become much harder. What is downright frustrating in South Africa is that so many of the mistakes could so easily have been prevented from happening. In tennis terms, we have to cut out the unforced errors. Recent examples include the bizarre flip-flopping on black economic empowerment (BEE) and home affairs regulations for entry into the country.

On BEE, the corporate sector and the investor world need certainty. So when the nationalist wing of the ANC succumbed to pressure from the venal get-rich-quick part of the black business community and removed the “broad-based” element of (BB)BEE that had been built into scorecarding in the past decade, there was immediate concern and confusion.

The change was signed off by Lindiwe Zulu, who is as smart as she is tough, but who is more inclined to align with the nationalist faction in the ANC rather than its remaining social democrat component. Zulu, the minister for small business, was acting minister of trade and industry at the time. And so when the actual minister, Rob Davies, returned from overseas he was astonished to discover what had happened and immediately reversed the decision.

The home affairs entry regulations are hopelessly misjudged and are doing huge damage to the tourism sector – the one area where the economy was growing and where the relationship between growth and jobs is unusually tight (9% of gross domestic product and 1.5-million jobs).

The numbers are devastating: revenue from Chinese tourism is down 70% and China Air has cancelled its South African route. Tourism Minister Derek Hanekom warned his Cabinet colleagues, but they were not willing to listen. Now an internal review is taking place, but the horse has bolted.

South Africa cannot afford these mistakes. The electricity crisis means that economic growth is stymied for at least the next two years. The two largest traditional export markets of the European Union and China have flatlined, and so the weaker rand cannot be exploited.

Accordingly, the political risk calculus is changing as socioeconomic instability increases and the industrial relations environment remains unsteady, with break-away unions such as the Association of Mineworkers and Construction Union raising the ante and hastening the break-up of labour federation Cosatu.

Workers in the private sector, however, are entitled to ask for more; real wages have fallen, even where productivity has increased. In contrast, public sector wages have soared yet productivity has arguably declined: there is far too much incompetence and corruption in the public service.

Addressing these fundamental risks to the short- and medium-term outlook requires clear-minded leadership, which is conspicuous by its absence. The reality is that it is very hard to impose such leadership when the leader is so severely compromised. It follows that Number One needs to go.

Although this would, at a stroke, encourage a far more positive investor attitude among local and international investment, it would not make any difference to the fiscal bind that South Africa is in.

Necessity, therefore, must be the mother of invention – and newfound resolve. While public spending on infrastructure is declining, public expenditure on the welfare state has to be maintained to protect the poor from the harshest consequences of the structural inequalities and injustice in the economy, and to mitigate socioeconomic risks.

Raising taxes would probably chill any consumer-led growth potential, not least because interest rates are likely to increase in the coming year. Increased public borrowing would risk South Africa’s reputation for sustained fiscal rectitude – another rare comparative advantage.

Hence, the only option is to examine public subsidies in an attempt to fundamentally shift the economy away from mining towards manufacturing. The trade and industry department has called for 100 black industrialists to be created. A former treasury official has wittily asked them to name one white industrialist.

Outgoing national planning commissioner Tasneem Essop has called for public subsidies for fossil fuels to end. Even more controversially, the state needs to consider privatisation not so much for the revenue it will raise but to galvanise niche parts of the economy.

As I write, I can hear political economist Patrick Bond’s laptop whirring into life (assuming he ever turns it off) and his digital pen sharpening. I am acutely aware of the shortcomings of the private sector; replacing a public monopoly with a private one is hardly the answer.

Although it took a few years to get going, in the end a renewable energy industry was created – one that is now referred to in glowing terms around the world as a case study on how to align public policy and fiscal incentives with creating better jobs and cleaner energy.

South Africa is stuck in a rut that appears to stop it from seeing these kinds of opportunities. The global economic context and national fiscal tight spot means the best it can do is to focus on a clear-minded medium- to long-term strategy, accompanied by a compelling political narrative and a new leader who can communicate it.

This would be based on the following key steps: one, remove Zuma; two, forge a new social contract between labour and capital premised on strategic trade-offs on pay, productivity and labour market flexibility; three, shift public subsidies away from the coal industry to the job-creating manufacturing industry; four, create more incentives for investment in renewable energy and bring in the delayed carbon tax; five, abandon the disaster of a corrupt nuclear power deal with Russia; six, shift export strategy towards Africa’s growing markets and position the country’s foreign and trade policy accordingly; and seven, ring-fence the revenue from the VAT increase that the Davis committee is likely to recommend for investment in public schooling, governed by a multistakeholder trust.

  This is not a short-term palliative, but it would signal real strategic intent for the long term. In the meantime, we will just have to muddle through. I think the word is vasbyt.

Richard Calland is the director of the democratic governance rights unit at the University of Cape Town

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