An alternative economic strategy for South Africa could see GDP doubling in 10 years, 10-million people moving out of poverty, and unemployment cut by two-thirds to 12% by 2030.
This strategy, proposed by Dr Nthabiseng Moleko and Professor Mark Swilling, seeks to ensure that there is better alignment between South Africa’s economic policy and the constitutional commitment to heal the divisions of the past and establish a society based on social justice and correcting structural economic inefficiencies and inequalities.
South Africa’s response to the Covid-19 crisis is an opportunity to reconfigure, restructure and rebuild the economy by departing from more than two decades of post-apartheid economic policy which has seen lacklustre growth and not achieved significant gains in economic equality, according to a report released by the University of Stellenbosch Business School (USB) and the Centre for Complex Systems in Transition at Stellenbosch University.
Continuing on the current path, reliant on “mainstream economic thinking and use of existing micro-economic solutions” is unlikely to deliver different outcomes in the future, while the proposed alternative strategies are geared to diversifying the economy to support inclusive economic transformation, labour-intensive growth and a globally competitive and sustainable economy.
Titled “New Wine into New Wine Skin: An Alternative Economic Strategy for South Africa’s Economic Reconstruction”, the report and proposed alternative economic framework are a collaborative effort by policy-makers, economists and academics from diverse public, private and research institutions convened under the Social Justice M-Plan by Professor Madonsela, the Law Trust Chair in Social Justice at Stellenbosch University.
To overcome the stagnation of the economy, which has been deepened by Covid-19 and the national lockdown, the South African government must boldly look to drafting new economic policies that can deliver on the vision set out in the National Development Plan (NDP), the report says.
Following workshops in Stellenbosch in late 2019, an economic working group led by Prof Mark Swilling, Distinguished Professor of Sustainable Development in the Stellenbosch University Centre for Complex Systems in Transition, and Dr Nthabiseng Moleko, Development Economist and Senior Lecturer: Managerial Economics and Statistics at USB, developed the proposed strategic interventions to support the emergence of an inclusive, equitable and sustainable economy.
The alternative economic framework is driven by strategic interventions in industrial policy with a target of doubling the contribution of manufacturing to GDP, prioritising labour-absorbing sectors, and boosting domestic food production and rural development.
The framework envisages shifting policy on investment and mobilising domestic capital, fiscal policy aggressively targeted at higher economic growth, building state capacity for innovation and governance, and re-shaping empowerment policies to achieve real growth through redistribution.
Sluggish economic growth and the triple crisis of unemployment, poverty and inequality have worsened during the Covid-19 pandemic, but the strategic interventions proposed in the alternative economic framework have the potential to use the current crisis spending to generate inclusive growth, the report says.
Dr Moleko says Covid-19 and lockdowns around the world could trigger an economic disaster worse than the global financial crisis of 2008, with South Africa’s economy expected to contract 7,2% in 2020.
“How government chooses to allocate relief funds in efforts to support economic recovery and longer-term growth can either deepen existing systemic structures or liberate South Africa’s people and the real economy to drive transformative economic change.”
Dr Moleko says the collaborative, multi-stakeholder exercise has produced alternative solutions to South Africa’s economic challenges packaged in seven strategic policy interventions and had used economic modelling techniques to develop scenarios and analyse the potential impact of the interventions on achieving the growth targets of the NDP.
While the “business as usual” scenario for the next decade sees the economy stuck in low growth with continued high rates of unemployment, poverty and inequality; modelling of the impact of the recommended policy interventions indicates “an inclusive growth path that will deliver real and significant benefits to the private sector and working-class and poor families,” she adds.
“It shows that a significant portion of the poor would be able to improve their living conditions, that unemployment would decrease significantly and that the private sector would benefit from a significant expansion of the domestic market.
“Direct benefits accrue to government through a declining debt-to-GDP ratio and an increasing average investment-GDP ratio. Indirect benefits include a growing sense of social cohesion that could promote stable capital accumulation.”
The alternative economic framework proposes a new model of the state, “enabled by enhanced coordination and supported by domestic capital mobilisation with a reduced reliance on external capital markets and financial flows”.
Summary of strategic interventions
On industrialisation as a key growth driver, the report recommends the establishment of an Industrial Council to enable coherent planning across the various institutions falling under the Department of Trade, Industry and Economic Development. Although under a single umbrella, agencies such as the Industrial Development Corporation, Small Enterprise Finance Agency and the National Empowerment Fund use different incentives and policy instruments, leading to fragmented and ineffective programmes.
The alternative framework sets a target of doubling the contribution of manufacturing to GDP by shifting from primary sector activities to high-value-added goods and processing of agricultural products.
A phased approach would initially develop highly labour-intensive sectors, adopting a more capital-intensive growth path over the longer term and transitioning to technology-based industrial development.
Arguing that South Africa’s unemployment challenges are due to ineffective interventions rather than lack of funding, labour-absorbing strategies are proposed to address the lack of unskilled and semi-skilled jobs and the mismatch between skills production and labour demand.
Sectors with potential to absorb large numbers of unemployed people – including agro-processing, plastics, metals, construction machinery and the transition to renewable energy – should be prioritised, with education and skills programmes aligned to their needs.
Sectors that do not hold the potential to absorb much more labour – chemicals, machinery and equipment, and agricultural and transport machinery, for example – but that still play a key role in value chains should be supported through employment-generation conditions in state procurement programmes.
Alternative rural development and domestic food production strategies are needed to address high levels of economic inactivity, unemployment, food insecurity and dependence on social grants in rural areas, and to grow the share of black farmers in the agricultural sector.
Alternative strategies would link the rural farming economy to upstream and downstream value chains, and improve access to markets, including by providing state-subsidised credit to small-scale farmers.
A “radical shift in approach” to investments, domestic resource mobilisation and private sector participation is proposed to support expansion of manufacturing sectors and stimulate long-term economic growth.
The new approach would include reconfiguring the role of the Public Investment Corporation, development finance institutions and public and private pension funds to mobilise domestic financial resources and drive growth through redistribution and structural reform.
Enabling debt instruments that will grow industrial and productive capacity and generate positive social outcomes are recommended, along with imposing a tax on “idle capital” to encourage corporations to reinvest rather than stockpiling capital.
Strategic fiscal measures should link government expenditure to economic output and the impact on poverty, inequality and unemployment, while fiscal stimulus packages would revive supply side sectors, boost industry and drive competitiveness.
Advancing economic recovery can be achieved through inflation targeting, quantitative monetary easing and lower interest rates, rather than by increasing public expenditure and tax cuts.
Fiscal stimulus should focus on sectors such as energy and those that can generate greatest socio-economic impacts over both short- and long-term, achieving poverty alleviation alongside growth. Non-debt fiscal stimulus interventions are also recommended, including redirecting the investments of the PIC and development finance institutions, zero-rating certain items, increasing grants and restructuring the tax system.
A new paradigm to build state capacity is needed to reverse the “hollowing out” of already limited capacity due to state capture and create a successful developmental state. This should focus on enabling effective relationships of trust between the state and stakeholders, particularly private business and civil society, and shifting to “good enough governance” that can adapt to changing dynamics.
Government officials should be supported and rewarded for innovative risk-taking (for the right reasons) and be able to work through partnerships to achieve their mandates.
State-led transformation interventions such as Broad-Based Black Economic Empowerment (B-BBEE) have failed to achieve equitable participation in the economy, and the alternative framework proposes a number of strategies for economic growth through redistribution.
An empowerment model should be driven by the Preferential Procurement Policy Framework Act to encourage and provide fiscal support to rural and township enterprises to participate in national and provincial procurement programmes.
Land transfers for agricultural and manufacturing use should be finalised in order to support the emergence of a new class of farmers and industrialists, while amendments to the Competition Act are recommended for fast-tracking to limit oligopolies and open access for locally-owned retailers in small towns, villages and townships.
“The recommended interventions aim to stimulate, stabilise and strengthen the economic framework to realise a socially just and sustainable economy,” says Dr Moleko.
“Shifting the economy will require the consistent implementation of stimulus-orientated policies that aim to expand aggregate demand and supply while growing productivity, employment levels, and income and expenditure at the business and household levels. This provides the foundation for enhanced participation in the economy, particularly by the most marginalised.”