The South African economy, like many emerging and developing economies, has high levels of poverty. As with many such countries, there are three primary objectives reducing poverty, unemployment and inequity. These three objectives take precedence over almost all other goals, writes Rob Jeffrey, economic risk consultant.
The only long term means of achieving these objectives is to increase the country’s economic growth rate. South Africa is in a unique position to achieve these objectives as it has an abundance of natural and human resources with a robust infrastructure to build on.
The natural resources in terms of commodities are one of the richest in the world, while the country has available a skilled workforce and an abundant unskilled workforce. The country also has a robust but rapidly weakening infrastructure to build on to support economic growth.
The country is short of capital to finance development. The country requires long finance, not fast return and changeable financial and monetary flows. The time horizon of most investors in real productive assets is between five and twenty-five years. The priority is, therefore, to create the economic political and social environment to foster both foreign and domestic investment.
Investment requires above all a stable and secure environment with certainty regarding ownership and future returns and a high degree of certainty that these will remain in place in the long term. Investors need to have confidence about the future economic, political and social policies and have confidence that the current and future governments will continue to support business investment, both foreign and domestic.
Immediate economic needs
The country has both short- and long-term economic requirements. The immediate needs are that the economy needs to recover from the lockdown implemented following the Coronavirus outbreak urgently. There is every indication that whilst the lockdown has achieved a slowing in the spread of the virus, it has caused and is continuing to cause widespread economic and social damage. Extreme poverty starvation and hunger have increased at exponential rates which could cause social unrest violence and even revolution.
The basic fact is that the lockdown has achieved a slowdown of the spread of the disease, but it does not prevent the disease. Ultimately it will infect everybody who is prone to it. The cure is now proving to be worse than the disease. The lockdown achieved its objective of at least preventing overloading of hospitals and health facilities but is a temporary measure and has little or no more role to play. The government, therefore, needs to urgently kickstart the economy’s recovery and ensure long term growth
Step 1: The lockdown should be rapidly eased over no more than two months. The government should as far as possible maintain distancing and insist that masks are worn.
Long term economic growth
Encouraging business investment requires that business people have confidence in the long-term growth future of the country. It is not just a question of returning to business as usual. After the recovery from the economic downturn caused by government’s prevention measures to control the virus, the South African government and South African people must be seen to be committed to the long-term economic development and growth of the economy.
Steps that must be taken to boost the lacklustre economic grow that prevailed before the lockdown. The GDP economic growth must be capable of achieving the GDP growth recommended in the National Development Plan (NDP) of 5% per annum. Only by doing this can the primary objectives of reducing, poverty, unemployment and inequality be achieved.
Many of the steps that are required to be taken are political and involve long term policy issues. They will be challenging to achieve but are also critically necessary steps. Nobody disputes that the economy must be transformed. Unfortunately, while many of the policies are well-meaning, they are being used to further corruption and self-enhancing agendas for favoured individuals and a political elite.
Others would appear to be relatively easy to take care of if there is the necessary political will and support. The following steps need to be taken and addressed. There appears to be recognition of many of the problems but not addressing and correcting the issues. The second step requires to confront and correct the following points.
Step 2: Confronting and correcting issues and problem areas hindering business confidence and investment
- Reducing corruption & state capture. It is necessary to restore confidence by bringing perpetrators to book and where possible to get back at least some of the money that has been stolen. This step includes withdrawing requirements governing state purchases which are currently exploited for corrupt practices
- Restructuring & improving competence & the finances of SOEs. Many need to be privatised or at least made into public-private partnerships. This restructuring is necessary to reduce financial liability on the government. These should not be sold to political cronies but to investors with business experience and with skills to add value to the business. It is clear that this government is incapable of managing any businesses efficiently
- Trim wasteful public expenditure, including the cost of public service remuneration. In particular, to reduce staffing levels recognising that most are essential services, and the focus should be on the efficiency of service delivery not on increased employment.
- The government needs to embark on a programme to reindustrialise the nation and in the end ensure the country has the infrastructure to grow. Apart from ensuring the development of the IT infrastructure the country needs to expand and improve the infrastructure regarding water- a central future problem area, transport particularly rail, passenger, commodity and freight transport, ports and related facilities and energy. The government must ensure Implemented infrastructural investment projects are speedily & successfully completed. Power is dealt with in a separate section.
- Education needs to be improved with the focus changing to work-related and skills training and education. Not everyone is suited to academic university education. This means reforming education and skills development to prepare for current and future economic development. In summary, the emphasis should focus more on technical college skills training which is the norm in most other countries, including developed economies such as the UK Germany, Japan.
- Industrial and business relations need to be improved. At present, there are too many political groups that have anti-business and racialistic attitudes. The relationship between business entities and businesses has deteriorated substantially because of hardening antiwhite and anti- WMC attitudes.
- The government must work towards increasing the ability of investors and business doing business in South Africa. Regulations governing doing business in South Africa must be eased. Such easing of regulations includes reviewing well-meaning policies such as affirmative action and BEE. The economy needs utilising the best trained and qualified people whatever race or religion they may be. Similarly, the requirement regarding BEE needs to be reviewed. Small family businesses are not in a position to give away 30% or more of their shareholdings. At the same time, it would appear that it is a political elite are the major beneficiaries. The same can be said for large companies. Eskom destroyed its own coal supply by requiring coal mining companies to give up 50% control of their shares. Effectively these rules, and uncertainty regarding mining legislation, have caused the de-industrialisation of the country and the demise of the mining industry
- Business investment and individuals need certainty regarding ownership and control of their assets. An ongoing problem remains the threat of expropriation of land without compensations. This uncertainty needs to be eliminated. Any examination of it shows that the concept has very wide and unacceptable connotations which preclude both companies and individual investing and fully contributing to the development of South Africa.
- The uncertainty regarding the shareholdings in many industries needs to be eliminated. This uncertainty importantly includes ownership and control of financial institutions and mining companies and many other industries. The issue is linked to the expropriation of land and nationalisation of the South African Reserve Bank.
- Unnecessary laws and taxes, which only effectively raise the cost of doing business in South Africa, must be eliminated. Some of these taxes only have perceived benefits, mainly in the view of vested interest and ideological groups. However, they often unnecessarily invade the rights of the individual and act as a subsidy to businesses that are not as effective and efficient as the products and enterprises producing them on which the tax is imposed. Two that immediately fall into this category are the sugar tax and the carbon tax. In the case of the tobacco and liquor market, they only lead to substantial increase in the illegal and illicit trade. Regarding the liquor trade, the case of the damage caused to society by the prohibition in the US needs to be studied. Rather than curbing freedoms, the better way is by educating the population regarding the damage certain actions or products bring about.
- Eliminating minimum wages or at least ensuring that these levels are set at extremely low levels. While the action is well-meaning, it only leads to an increase in unemployment and inefficiencies. Equally important, the laws favour inefficiency in the labour force while potentially more efficient unemployed labour remains unemployed.
- Finally, in this list, although there are many calls by experts for the promotion and development of small business & entrepreneurship. It must be recognised that real growth in an economy results from the growth and expansion of large and middle-sized companies and the role they play in developing megaprojects. There are two issues involved here. The risk of failure of small and entrepreneurial businesses are high, and costs are therefore high. This is true worldwide. Very few start-ups are successful. Secondly, small firms are incapable of handling the large projects necessary to create growth nodes in the country. Larger companies are capable of doing this whilst at the same time supporting and developing smaller entrepreneurial businesses as their suppliers. Current attitudes toward large companies must change. South Africa has virtually destroyed its construction and mining industries. This process must be reversed.
Step 3: The most effective way of creating growth opportunities and creating opportunities is to focus on developing South Africa’s key infrastructure. This has been done before in South Africa’s history when South Africa was facing major economic problems and hurdles. This included the major dam build programme, including Gariep, the development of Richards Bay and Saldanha Bay amongst others. Historically, Dr Hendrik Van Der Bijl built and developed the drivers of the South African economy, namely Eskom, Iscor, Vander Bijl Engineering, amongst others. It should be noted he did not necessarily believe in nationalised industry. He believed the state must provide the infrastructure for private business to thrive. Too many think that this means embarking on nationalising business.
Van der Bijl set out his and the government’s philosophy in these words.
“It is not the government’s function to do everything for its people, but it is its duty to create conditions that will encourage enterprise, not the type of enterprise that results in the unfair enrichment of some at the expense of others, but enterprise that results in equitable distribution of all the benefits.”
Government and political parties should heed these words. Van der Bijl believed the industrial base of the country depended on a reliable supply of electricity and steel. Hence the development of both Eskom and Iscor. The economy has diversified considerably since then, but the industrial and mining base of the country remains dependent on reliable supplies of these primary products
Business investment needs certainty about energy sources and future potential growth. As a developing economy, South Africa needs both to fulfil its key objectives. Economic growth depends on energy growth and certainty of supply. The NDP GDP economic growth objective of 5% per annum requires increasing electricity supply at approximately 4% per annum. Facts and science prove that this cannot be achieved by using renewables, particularly wind and solar. Furthermore, it has been proven that wind and large scale solar are environmentally damaging and costly. They require 100% back up and cause major chaos in supplies due to their variability and generally unpredictable supply.
Again, nobody disputes that pollution and damage to the environment from energy sources must be reduced. This paper cannot go into all the detail on the subject, but the following facts should be noted and followed up. Carbon dioxide is proven not to be harmful or environmentally damaging. Decision-makers must also watch the film directed by Michael Moore “Planet of the Humans”, read some of the latest science and update themselves on the facts and reality of the destruction of the environment and economic activity and the increase in energy poverty in countries where high penetration solar and wind have been introduced such as S Australia, Germany, Ontario Canada, and California.
The only energy sources available in South Africa capable of providing certainty of supply and economic growth at competitive prices are nuclear and HELE coal supported by limited gas and domestic solar. Both reduce South Africa carbon footprint while nuclear is carbon emissions-free. The steps necessary to foster investor investment and restore faith in South Africa’s future economic growth are as follows.
Step 4: No future investment should be made in electricity provided by IPP’s from windfarms. Apart from being unreliable, they cause major supply problems. They are, in fact, heavily subsidised. Their costs should in practice include all backup costs and economic costs of downtime arising from the inadequate supply and other substantial additional costs.
Step 5: Independent companies buying electricity from IPPs must provide there own back up electricity. Should it be expected that Eskom delivers the power, it must be at the full cost of back up power which includes a lengthy list of additional costs for having such resources available
Step 6: Municipalities should not be allowed to buy electricity from IPPs. Eskom should be the sole provider of power to municipalities. Where they already have been built electricity should be charged at a price that includes the full cost of backup power which consists of a lengthy list of additional expenses for the inefficiencies they cause and having such resources available.
Step 7: The government needs to announce a programme whereby at this stage all future baseload power will be based on HELE coal and nuclear power. An immediate announcement should be made of new coal-fired HELE power station inland and a nuclear power station at Thyspunt. Thyspunt is selected as this will guarantee power for the Eastern Cape and maximise alleviation of poverty in the area.
Step 8: The government should announce a programme to reinstate the PBMR project. The PBMR remains a real opportunity to support its nuclear programme. An impact study on the PBMR prepared and written in 2009 found that this was an ideal project for South Africa to undertake. This report should be released and reviewed by the government.
This paper is a brief review of the steps that are necessary for South Africa to return to a long-term economic growth path and achieve its primary objectives of reducing poverty, unemployment and inequity.