Opinion / 23 October 2019, 4:30pm / Sandy McGregor
JOHANNESBURG - Over the past year, there has been growing concern that the country has become trapped in economic stagnation because the Ramaphosa administration has failed to act decisively to address the many problems which we face. Hopefully the new plan will stimulate the action required to set us back on a growth path.
The paper rightly emphasises that policy should be focused. Successful economic policy requires that priority be given to interventions which offer the greatest impact at the least cost. The current situation is dire. However, there are simple things that can be done that can have a meaningful impact in a relatively short period of time. Rapid action to promote these opportunities is the best way to get the economy going again. Among these are the following:
* Export earnings and foreign investment: Economic growth in South Africa is leveraged off its export earnings. Accordingly, priority must be given to supporting initiatives which boost exports or generate service receipts. However, this alone will not be enough. Given South Africa's shortage of domestic savings, stimulating economic growth requires foreign investment.
The president’s programme to attract foreign investment recognises this reality. This will succeed only if policy is rationally formulated so that investors have confidence in the long-term sustainability of South Africa as an investment destination.
* The shortage of skills: The most important cause of South Africa's present economic woes is a shortage of technical and managerial skills. This is most clearly seen in the government, but it is a problem throughout the economy. The increasing income disparity between the skilled and unskilled referred to in the paper is a direct consequence of this shortage.
Notable business failures in the public sector, such as Eskom, and the scandalous state of public hospitals, can be directly attributed to appalling mismanagement. The failures of the state educational system are well known and understood. It will take a long time to fix this and to build up the required skill base. In the interim, if South Africa is to get its economy going again, it must be open to importing skills where required.
* Decisive changes at Home Affairs: In the modern global economy, skills are mobile. Multinational companies require the freedom to transfer key personnel from country to country. They will not willingly locate their operations in countries which deny them this right. South African business also needs to tap into such skills.
It must be understood that in a society with a skills shortage, inward migration of persons who can fill this gap does not create unemployment. On the contrary, as a rule, every skilled person entering the country contributes to economic growth, which creates work opportunities in the domestic economy. This is cautiously admitted in the Treasury paper, which argues for the admission of persons with acceptable tertiary degrees. Policy changes need to be much bolder.
At the very least they should be expanded to include people who are willing to establish a business and those whom existing businesses are willing to sponsor.
* The tourism opportunity: It is encouraging that President Cyril Ramaphosa has publicly stated that in recent years, visa regulations have damaged the tourism industry and that steps were being taken to remedy this. Tourism probably represents South Africa's greatest short-term economic opportunity.
Apart from instituting a welcoming visa regime, little else is required of government. Some international promotion is desirable and the proposal that there be some mechanism to reduce red tape has merit. The rest can be left to the private sector.
* Documentation of property ownership: There is widespread occupation of land and houses by people who are legally entitled to a property but do not have title deeds to confirm their ownership. A serious effort by the state to remedy this is required.
* Opportunity in agriculture: In the past decade, agriculture has been one of South Africa's success stories. Its farmers have taken advantage of growing demand in Africa and China becoming a major food importer. This has been achieved despite serious climatic challenges.
It is often said that 800 farmers produce 80percent of South Africa’s food. While this is a soft statistic, it provides an accurate representation of reality. Only well-managed, efficient farming businesses can meet the demand of domestic retailers and the international food trade for low prices.
Agricultural policy should be focused on taking advantage of this success. Policies aimed at promoting subsistence farming may have considerable social value, but are unlikely to be sustainable without continuing financial support from the state.
* Eskom: Everyone now recognises that fixing Eskom is an urgent priority. Underlying its financial collapse has been a flawed business model. It ignored the simple law of economics that increasing prices reduces demand. Massive price increases have decimated demand as consumers have reorganised their affairs to reduce consumption. Certain energy-intensive industries have been driven into closure.
The electricity price shock has been a significant contributor to South Africa’s current economic malaise. Tariff increases have wiped out a significant proportion of Eskom’s potential sales, leaving them 10percent lower than they were eight years ago. This, in turn, has diminished the cash flow available to service Eskom’s financial obligations. More tariff hikes will exacerbate matters.
The debate on tariffs should not be about how much they should be increased to make Eskom financially viable, rather it should be about how Eskom should be structured to keep prices low enough to promote growth.
The paper correctly sees the opportunity presented by renewables. However, a baseload of coal will be required for many years. The economically best outcome requires optimal use of existing capital stock. The idea of selling existing coal-fired stations looks good in theory, but it may prove difficult in practice.
Coal is increasingly being demonised. Large pension funds in developed economies are unwilling to invest in coal. Banks are being pressured by lobby groups to cease lending to the carbon economy. Funding of any purchase of coal stations is likely to be very expensive.
The most important task in fixing Eskom is to install an efficient and credible management team. While a lot of attention has been given to how Eskom is to be funded, nothing can be done until the management issues are resolved.
The urban rail system:
The commuter rail system in South Africa's major cities is in a state of serious decay due to a combination of mismanagement and neglect. This diverts traffic on to the roads, aggravating an already serious congestion problem. High priority should be given to fixing the management of the urban rail system as this can deliver at relatively low cost a significant improvement in the quality of life of commuters and will have a positive economic impact on major cities.
While the political impediments to creating a more business-friendly labour dispensation are well known, it needs to be clearly recognised that the present dispensation is a principal cause of the high level of unemployment. It constitutes a formidable obstacle to starting a new business and has the unintended consequence that investment is biased towards technologies that require a minimal workforce. Curtailing the activities of labour brokers has eliminated what was one of the easiest ways for a new entrant to the labour market to find a job.
Promoting apprenticeships is probably the most effective intervention which can ameliorate the adverse consequences of labour legislation. A combination of further subsidies and incentives to promote apprenticeship schemes is required.
Law and order:
Perhaps the most serious immediate threat to the South African economy is increasing lawlessness. The operation of many businesses is being disrupted by extortionate demands from communities and opportunists who are conducting what can be described as protection rackets.
Social disorder is imposing a serious additional burden on business, which will have a cost in the form of reduced economic growth, which, in turn, will further exacerbate poverty.
If the police are unable to protect those conducting legitimate businesses, many of them will close.
The president’s ambitious programme to attract foreign investment is being put at risk. More resources need to be allocated to maintaining law and order and to training the police on how to maintain civic peace.
Sandy McGregor is a portfolio manager at Allan Gray.