The first two briefs in this series considered internal constraints and external constraints on growth. The third outlined the situation in public finance, monetary policy and state-owned enterprises. This brief deals with structural reform.
Introduction
The IMF recommends structural reforms to create greater resilience against adverse shocks. Emerging market countries which have taken these measures have achieved the most significant improvements in fundamentals and growth. The reforms suggested for South Africa are:
A more competitive economy
1. Labour and product market reforms
2. Robust and inclusive private sector led growth
3. Clear focus on jobs
4. Increase of private participation in state controlled sectors
5. Better training and education
Connection with the global and regional economy
1. Facilitation of foreign direct investment
2. Trade liberalization to promote regional integration
3. Accelerate transport projects and reduce port tariffs
Political conditions
4. Improved governance
5. More policy certainty
The trouble is that structural reform, of the sort advocated by the IMF, is by and large the road not taken in South Africa. It is not for lack of advice. The past decade has seen much of it from different sources – the OECD, the World Bank, the IMF, the Harvard Group which analysed the South African economy between 2006 and 2008, the McKinsey 2015 report on bold priorities for inclusive growth – and much of it has been consistent and mutually reinforcing. By contrast, we have three inconsistent documents concerned with structural reform – the National Development Plan, the New Growth Path and the Industrial Policy Action Plan – all proclaimed to enjoy ‘equal status’.
Why are we in this situation?
1. A high level of inequality. This places distributional issues at the front and centre of the political stage. Claims crowd out attention to strengthening productive capacity, manageable in good times, but threatening political instability in difficult economic circumstances. Inequality makes it hard for poor people to stay healthy, acquire skills, look after or educate their children, while in the middle class keeping up with the Joneses’ can lead to over-borrowing and financial distress. Political capture of institutions by the wealthy is an issue.
2. Ethnic cleavages. Cleavages based on ethnic, linguistic and religious identities are often powerful enough to outweigh the economic interests or individuals or classes. Where they form the basis of politics, they weaken error correction capacity since many cannot bring themselves to change allegiance even in the light of political failure.
3. Impatience. Structural reform takes sustained work and its benefits appear only after a time. When the creation and appropriation of rents – both illegal and illegal – becomes possible, they create a quicker route to wealth on the part of appropriately situated elites, imposing costs on everyone else, undermining rather than developing institutions, and adding to inequality.
4. Patronage. Patronage collapses the party-state distinction and parachutes politically connected people into state positions, usually of some seniority, for which they are not qualified by training or experience. This has three adverse consequences: it undermines institutional capacity proportionally to the seniority of the position, it subordinates institutional function to political loyalty, and it facilitates corruption, as lines of accountability become confused.
5. The absence of a coherent, modernising elite. The disarray has become worse in recent years. Indicators of it are
· clear tensions between the President and the Minister of Finance, not present when Trevor Manuel was Minister of Finance
· extremely rapid turnover at the top of the public service
· very limited circulation of people and ideas between universities, think tanks, the public service, business and labour.
A modernising elite cannot be monolithic. Its ability to debate issues at a high level is essential. But it must always be concerned with key policy issues and how to embed their resolution in new social capacity. And it must subscribe to an ethic of argument and evidence, rather than regarding ideas as weapons in wars of position.
It is the absence of background work and circulation of ideas that has made successive growth summits so brittle. The great and the good gather, they exchange courtesies, they express support for consultation and dialogue if they think it will help relationships with investors and ratings agencies, they set up working groups. But the intellectual spadework has not been done, ideas have not been transformed, and nothing happens.
We are in a structural reform cul-de-sac, with large swathes of our elites not interested in reform, failing to register that our 2013 level of real GDP per capita is not likely to be reached again until 2020 and to consider the social consequences. Can we do better than wait for the next windfall? The final brief in this series discusses necessary conditions for an alternative.
Charles Simkins
Head of Research
charles@hsf.org.za
