Government must focus on the rule of law, energy and logistics, and stable public finances

Economic growth has collapsed in SA because of a combination of bad policy, catastrophic governance and lack of leadership. In effect the country has an anti-growth strategy.

At no stage has the president provided a convincing or comprehensive diagnosis of why the country is in crisis. Specific challenges are framed as unexpected — a series of unfortunate, unpredictable accidents that just happen. The result is that SA is in perpetual crisis response that never begins to address the causes of our expanding polycrisis.

The country is awash with growth plans and strategies with two dominant but flawed approaches. One consists of a long laundry list of reforms and aspirations with little sense of what to prioritise. The second tries to prioritise immediate actions but fails to take into account state collapse or the country’s devastating lack of leadership.

The essential precondition of economic growth is that you can’t start to rise until you have stopped falling. To stop the country falling apart we need a different approach. Government’s focus needs to be on three core priorities: improving security and the rule of law, addressing the crises in energy and logistics, and stabilising public finances.

These priorities should dominate cabinet meetings, the president’s diary, government budgets and government communication. Everything else is likely to be a distraction. This is not a recipe for rapid and sustained economic growth. But failing to address them guarantees that accelerated and sustained growth will never be achieved.

In implementing these priorities the government must be guided by hard-nosed realism about what it can do now. Everyone should stop fantasising about a capacitated state emerging soon and recognise that pro-market policies will work far better than policies that weaken markets.

Law enforcement

No country can expect to grow with a security situation as bad as SA’s, especially if there is deepening penetration of organised crime into a rising number of economic sectors. To turn the tide is a huge challenge, but law enforcement agencies should start by making more aggressive use of terrorism and sabotage charges against people who use violence and the destruction of property to secure a policy change or some other concession from government. They should also explore the more aggressive use of charges relating to money-laundering, which would make it possible to charge people who benefit from crimes they did not themselves commit.

In relation to corruption cases, prosecutors seem determined to maximise the number of charges they put to every accused person, and as a result investigations take forever and are endlessly delayed. A more efficient approach would be to lay a narrower set of charges — even if these are not the most serious — so that cases can proceed more quickly. Prosecutors should also be open to plea bargains.

No economy can function, much less grow, without access to reliable and affordable energy, while the increasing dysfunction at Transnet is further undermining growth. A key reason for these crises is that decades of cadre deployment have resulted in leadership that lacks the know-how to manage such businesses. The government must recognise this reality and address the technical, managerial and governance deficits in both Transnet and Eskom.

Freeing up firms and households to generate energy has relieved pressure on Eskom’s generating fleet and demonstrated how we can make rapid progress. But to derive the full benefit of liberalisation we need to create competitive markets, which requires the establishment of an independent systems operator buying electricity from lowest-cost producers on a continuous basis, proper feed-in tariffs and adjustable tariffs. Corresponding needs in a liberalised logistics market might include competing firms using the freight lines and providing port services so that users would be able to choose the best offering from more than one provider.

The need to create markets in these sectors is not satisfied through public-private partnerships and subcontracting arrangements. These might improve efficiency in the short term, but they are not a real departure from the basic model of a monopoly provider and could result in a new form of corruption and state capture.

Spending cuts

Finally, though the government’s budgets articulate the need to reduce the deficit and stabilise the debt ratio, far too little has been achieved. There is no option but actual spending cuts. Furthermore, the government must roll back the commitments it has been making for higher levels of spending: faster-than-inflation increases in public sector salaries, unrealistic promises relating to a basic income grant, and the uncosted commitments being made to implement the proposed National Health Insurance.

There are no easy ways to cut government spending and doing so will provoke resistance from those affected, particularly public servants. It is undesirable to reduce spending on infrastructure, though infrastructure spending should be more focused on alleviating constraints to growth. In the context of state weakness and fiscal limits, expanding the role of the private sector in infrastructure delivery must be a top priority.

Cuts should be made where public spending offers the lowest returns. This might include subsidies provided to favoured sectors and businesses, and financial support provided to public entities that have reached a point of institutional failure. Larger cuts should focus on reducing employment in non-essential areas such as head office and support functions.

Entire government departments could be cut, including planning, monitoring & evaluation, public enterprises, the sector education & training authorities and significant parts of departments such as employment & labour, sports, arts & culture, and co-operative governance & traditional affairs. The National Student Financial Aid Scheme might also be converted into a student loan programme, with income-contingent repayment plans administered through the tax system.

Effective leaders

We have doubts that any of what we have proposed will happen. Certainly, it won’t unless there are significant changes in the way SA is led. Replacing ineffective leaders and officials with more effective ones is the first principle of reform. SA needs leaders who place the interests of the country at the heart of their agenda, led by a president who is backed by a committed, credible and unified team that understands how to manage and bed down change in complex systems.

As “communicator-in-chief” the president must build a credible, hopeful narrative, a new consensus of where the country is going, how to change SA in the interests of all (not just a well-connected elite), and the progress that is needed to do so.

The leadership team needs to be cognisant of the desperate poverty of nearly 60% of the population, and provide hope to all those who are excluded, while at the same time opening up the economy for more new firms. The team will need courage and legitimacy to drive change. It will need to build alliances with a broad range of constituencies and ensure the incremental inclusion of more South Africans, coupled with real improvement of public services.

There is no way to model the effect achieving significant success in pursuit of these goals would have on growth, and it is even less possible to model what the effect would be of merely being seen to be pursuing them. What we do know is that failing to adopt and implement these three priorities guarantees that SA’s growth rate will continue to fall and will eventually turn negative, with dire consequences for poverty, inequality and stability.

Written by Ann Bernstein, head of the Centre for Development & Enterprise. This article is based on a new CDE research report, ‘A Country in Crisis: First steps towards a growth strategy’

This article was first published by Business Day.