South Africa is caught in a low growth high unemployment trap. The signs are that the reforms that are necessary to bring about growth and large-scale job creation are politically too difficult for the ANC to undertake. Yet, the need for reform is becoming increasingly urgent to avoid an economic crisis.
The International Monetary Fund, IMF, and Goldman Sachs have recently underscored the urgency for SA to face up to its challenges. SA has sizeable government budget and current account deficits that make the country highly vulnerable to a change in investor sentiment. Recent downgrades by credit rating agencies and a steep slide in the rand could mean the deficits will become increasingly difficult to finance.
SA is more exposed than other Emerging Markets to capital flow reversals because of the risky foreign funding mix to finance these deficits. The main risk, says the Fund, "is a prolonged stop in capital inflows and a disorderly adjustment in the twin deficits." The trigger could be either external, like an unwinding of quantitative easing in the US, "or a further escalation in domestic labour and social unrest," says the Fund.
Ultimately, the choice that SA might face will be whether to reform on its own to avert a crisis or have reform conditions imposed on it by an agreement with the IMF to gain access to emergency financing. IMF conditions would, conceivably, involve massive cuts to government spending, layoffs of civil servants as wage growth is one of the fastest growing components of the budget, and an easing up of the labour laws to improve competitiveness. Given the likely wave of protests against such measures, it would be extremely difficult for the government to ride out the ensuing political fallout. It would be far better for SA carry out reform on its own in its own way.
Through affirmative action, empowerment, government jobs, and social grants the ANC has consolidated a support base that stands to be hit hard by serious reform. Entrenched interests like COSATU, government employees, and the bosses of state owned enterprises would possibly pay a short-term price from comprehensive reform, although potentially the wider economy and the poorest would benefit in the medium term. It is currently difficult to conceive of a winning coalition that would support reform in SA.
Might the "Pact for Mexico", an agreement between the three largest Mexican political parties on a package of structural reforms signed last year, at least offer insights to SA?
In its report on the SA economy released last month the IMF suggests South Africans take a look at a social bargain along the lines of the Pact for Mexico. The Pact for Mexico is an agreement in principle on a reform agenda that covers issues that are strikingly similar to those faced by SA. These include labour market rigidity, competition policy, telecommunications, ease of doing business, foreign investment, and education.
The report released last week by Goldman Sachs on the South African economy points to the need for a "Team South Africa Response" to the country's challenges. Goldman also suggests a labour pact for sustainable growth and employment to ensure that rises in wages match productivity growth. "Leaders across Government, business, labour, academia, institutions, and civil society need to take individual and collective decisive actions to improve SA's competitiveness and overall performance" says Goldman in its report.
In Mexico, the need to adopt structural reforms had been widely recognized for years, but the political impetus for implementation was lacking. The day after his election as President of Mexico in December last year, Enrique Pena Nieto, leader of the centrist Institutional Revolutionary Party (PRI) signed the Pact with the two other largest parties in the country, the right wing National Action Party (PAN), and the left wing Party of the Democratic Revolution (PDR). The powerful Mexican labour movement was divided on the reforms, as were business interests.
Up until its loss of the Presidential election in 2000, the PRI controlled Mexico for more that 70 years. It is during the PRI's time in power that much of what is being changed now was brought in to benefit party supporters.
The dominant party position held by the PRI for 70 years is similar to that presently held by the ANC, with its control of the Presidency and a parliamentary majority. The political landscape in SA is different to that in Mexico, and unlike the PRI, the ANC does not need cross party support. Should the ANC wish to reform it will have to form a coalition from factions within itself and probably also win support from business.
The most likely impetus for reform in SA would be as a result of an economic crisis or a change in the political architecture of the country as a result of a split in the ANC into worker and pragmatist offshoots, and the formation of new parties. Could a new party of ANC pragmatists in alliance with the present DA form that coalition for reform, or would such a party limit any reform platform to obtain votes from some of the traditional ANC support bases?
The institution that is meant to play the role of forging social bargains for growth in SA, the National Economic Development and Labour Council, NEDLAC, has failed to find a real role and has become a mechanism for rubber stamping for government. Much of this is due to the failure of business to press for a wide-ranging reform agenda.SA business is politically weak, divided, and afraid of speaking out, in stark contrast to the formidable role that sections of the business community played in the final decade of apartheid. There is good reason for Planning Minister Trevor Manuel calling business leaders "cowards" in failing to stand up to unions. The present SA climate is made all the more difficult for a Pact by the divisions within COSATU and the emergence of new trade unions.
Although the impetus for reform in SA might be lacking in urgency, possible models are still useful. The Pact for Mexico covers 95 individual commitments across five areas - rights and liberties; economic growth, employment, and justice; transparency, accountability, and combating corruption; and democratic governance. A broad agreement can be better sold as a package as those signing up can then have a chance of showing that they have won on certain matters and made the outcome less objectionable to their supporters on others. This holds out the possibility for watering down initiatives through horse-trading and compromise, but that is the reality of politics. Industry type pacts might be possible, but matters have not really been settled in the SA mining industry by attempts at a settlement. The lesson might be that high level national leadership might really be required, although industry pacts have been valuable.
One of the highlights of the Pact for Mexico is the Labour Market Reform Law aimed at increasing flexibility and productivity, but also improving labour conditions. The Banco de Mexico, the country's central bank, and the OECD estimate that the labour reforms could boost potential growth by up to half a percentage point a year and lead to a large increase in formal job creation. There could also be large gains in temporary employment and worker productivity as a result of the measures. In SA, a scrapping of Section 32 of the Labour Relations Act, which imposes minimum wages on firms that are not even part of the wage bargaining process, would have to be part of any reform agenda.
A tougher competition policy with criminal penalties to fight anti-competitive practices has been adopted as part of the Pact. The Mexican Telecoms Reform Bill aimed at improving competition through greater power over dominant firms was passed earlier this year. This is a win for all, except shareholders of the dominant telecommunications company. The measures should improve access to broadband and reduce the cost of service in Mexico. It is often argued that lack of competition in SA telecommunications lies behind low broadband penetration and high prices for service in SA. Under the reforms Mexico also eased procedures to start a business.
Implementation of the Pact has not been smooth sailing, but it has survived. In July this year opposition parties threatened to pull out of the Pact after they accused the PRI of handing out anti-poverty funds to buy votes in a state election. There were mass protests over education reform and the opposition PAN party voted against higher taxes and questioned continuing with the Pact, according to the Financial Times. Now President Pena Nieto is facing challenges on the left and the right to opening up the energy sector to foreign investment, something that is key to invigorating the sector, lowering prices, and boosting growth. He is up against oil workers who have traditionally been staunch supporters of the PRI. According to the Financial Times, President Pena Nieto's could be forced to climb down and compromise on this reform, which would mean a great political loss.
Frans Cronje the CEO designate of the SA Institute of Race Relations believes that the ANC will possibly surprise by undertaking a reform process. Just as the National Party reformed, so he expects the "verligtes" in the ANC back reform. Under the Institute's "New Dawn" scenario, the ANC reforms and attains high growth in an open society. In an alternate scenario - the "Dark Night", the political space closes and the ANC does not reform, which is strikingly similar to a Zimbabwean scenario of low growth and political repression. Then there is the type of Asian developmental state scenario - the ANC reforms for growth but closes the political space.
Despite the need to reform, the direction of travel on investment policy is in the wrong direction. The new mining amendment bill creates immense uncertainty by giving the minister new arbitrary powers, the Broad Based Economic Empowerment Bill allows the already richly empowered to become more empowered, and the Employment Equity Bill proposes tighter racial quotas and out of proportion penalties on business. Moreover, SA is declining to offer investment protection to foreign investors, while fears of state seizure of assets are rising. SA has scrapped bilateral investment treaties with Germany, Belgium, and Spain and will not give protection to seizure of assets to new investors under the Protection and Promotion of Investment Bill.
At some time SA will have to face up to reform and the Pact for Mexico does offer a model of coalition building for a historic deal to modernise and propel an economy forward. If anything the Mexician model shows that reform is possible in a highly ossified political system.
This article was published with the assistance of the Friedrich-Naumann-Stiftung für die Freiheit (FNF). The views presented in the article are those of the author and do not necessarily represent the views of FNF.
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