FMF article: How to grow the South African economy

Control and cut government spending
While much has been written about the need for structural reform in the economy, and the need for the government to have more investment friendly policies, it is also useful to look at where the government can cut costs to prevent South Africa falling off a fiscal cliff in the medium term. South Africa must adopt a philosophy similar to how car manufacturers produce faster cars; build better engines (investment friendly policies), and reduce the weight (cut the size and expenditure of government) of the car. The country needs both to both get onto a path of economic and job growth, and to stabilize our out-of-control public finances.

Between 2014-15 and 2019-20, public sector compensation grew at an average annual rate of 7.3%. A report titled, The Public Sector Wage Bill – an evidence-based assessment and how to address the challenge, compiled by research house Intellidex, found that that there was no indication that there were any productivity increases to justify wage increases, and that increase in wage costs from 2006-2019 outstripped the rate of economic growth and productivity.

While government does recognize the importance of cutting the public sector wage bill, their efforts to do so have been vociferously opposed at every step by unions who’ve taken to litigating against any efforts to curb unjustified increases – despite mounting evidence that the public sector wage bill poses a significant risk to the recovery of South Africa’s public finances, something which the 2022 parliament budget review acknowledges.

Despite President Ramaphosa’s reduction of the size of his cabinet ministers from 36 to 28 – saving the taxpayer R21 million per year – South Africa still has more cabinet members than the US (15 ministers) and the UK (21 ministers); and this is not counting South Africa’s 37 deputy ministers.

Cutting all 37 deputy ministers would immediately save over R70 million per year, which would make sense both financially and constitutionally as deputy ministers are not part of the cabinet and executive and do not ordinarily sit in on cabinet meetings. Section 85 of the Constitution states that executive authority is only exercised by the president and cabinet, and section 98 directs the president to pick a substitute or stand in minister from among other cabinet members when a minister is absent or unable to carry out their duties.

While deputy ministers are accountable to parliament for the exercise of their functions, only ministers need to submit full and regular reports to parliament. This lack of oversight leaves deputy ministers unchecked even though they earn more than parliamentarians. It is a massive waste of public finances and serves no real purpose for forwarding any governance objectives.

Pro-growth policies and the Rule of Law
Reform of 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 reorganized their affairs to reduce consumption. Certain energy-intensive industries have also 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. This, in turn, has diminished the cash flow available to service Eskom’s financial obligations. Further 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 short-term interventions to fix Eskom include buying extra energy, managing tariffs, addressing illegal connections, recovering debt owed to the utility, tackling corruption and reviewing Eskom’s operating model.

Restructuring of Eskom into three entities – generation, transmission and distribution – would ensure transparency of the business making it easier to regulate and result in efficiencies as each of the businesses will be more focused.

Acknowledging that the core problems in Eskom spring from broken generation and that the solution is to lose the unproductive and attract the skills, investment and expertise to sort out the existing fleet, is crucial to turning Eskom around.

Improvements to educational and vocational training need to be made. This will take time, but one way to do it efficiently is to introduce a school voucher system in the most deprived places in the country where private providers can compete. Giving parents more control and choice over their children’s education is something only available to the middle and upper classes in the country; this may be part of the reason why lower income parents can be seemingly disengaged from their children’s education prospects in relation to wealthier parents.

South Africa’s economy cannot reach its potential in the medium to long term if only half of all children graduate high school and two thirds are functionally illiterate and innumerate (cannot read or write for understanding). This will exacerbate inequality between the educated and skilled and those who are uneducated and unskilled and will compromise the social order.

There is widespread occupation of land and houses by persons 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 not merely on grounds of simple justice, but also because registered ownership would provide collateral which entrepreneurs could use to raise capital, thereby boosting the small business sector.

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 onto 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.

This last reform can have positive effects on self-employment, and employment more broadly, as businesses can spring up around commuter lines which serve workers going to work in the morning and coming back in the afternoons and evenings. The mobility afforded to poorer residents of cities who can access job opportunities they otherwise would not, will also contribute to the job growth within cities.