A first step towards halving poverty

Note to editors: The following comprehensive policy development document was presented during a DA press conference in Cape Town today.

Today the Democratic Alliance (DA) launches the first phase of the 8% Growth Project - a diagnostic assessment that identifies twelve sets of growth impediments that need to be addressed if South Africa is to achieve a sustainable economic growth rate of 8%.

At this rate of growth, we will create millions of jobs. Poverty would halve in five years, just like it has in places such as Brazil.

In 2010, the South African economy grew at 2,8% while the Brazilian economy grew at 7.5%. High growth in Brazil over the past decade has created jobs, and increased tax revenues have been used to boost public goods such as a social safety net and improved education systems. Furthermore, poverty rates in Brazil declined from 20% of the population in 2004 to 7 percent in 2009.

With smarter policies, and effective implementation, we can match these achievements.

The DA is driving the 8% Growth Project as an alternative to the ANC's state-centric approach that stifles innovation, enterprise and job creation.

The national government does not have a coherent vision for the economy. It lacks the political will to drive a growth agenda that will roll back unemployment and poverty. It is over-reliant on a corrupt and incapacitated state apparatus that often crowds out the more efficient private sector. It is mired in the politics of patronage for the politically connected. And it is paralysed by the pay-offs it needs to make to its alliance partners.

The DA has no such baggage. Where we govern, we have a coherent vision that centres on growth and jobs. This approach is at the heart of our 8% Growth Project, which will form the basis of our policy platform heading into the 2014 elections.

We do not have to go the route of the failed state. There is still time to choose a different future if we follow the pragmatic, high-growth trajectory pursued by successful developing countries in Asia, Africa and Latin America.

But before we talk of solutions, we need to diagnose the problem. That is what the document we are presenting today is all about. It has been informed by extensive internal and external consultation with subject experts. 

Please click here for the full document; the key findings are listed below.

KEY FINDINGS

1. Low demand for labour

SA's current growth trajectory is skills and capital intensive, featuring low demand for unskilled and low-skilled labour as a result of high costs, a restrictive regulatory environment and antagonistic labour-employer relations.

South Africa has the highest unemployment rate amongst emerging markets. Currently the official unemployment figure stands at 35.8%, using the expanded definition of unemployment. Skyrocketing wage demands (which often far outstrip inflation), antagonistic labour-employer relations, low productivity, and restrictive hiring and firing practices have led to firms shifting to high-skill, capital-intensive production methods.

This means hiring fewer workers. Young, unskilled and inexperienced job-seekers are increasingly being ‘frozen out' of the formal economy as a consequence of South Africa's current growth trajectory.

2. Skills shortage

A failing education system means that school leavers lack basic literacy and numeracy skills.

Severe shortages of managerial, professional and technical skills limit economic expansion and lower operating standards.

South Africa faces serious skills shortages. This places a constraint on economic growth because it limits the ability of enterprises to expand their operations or venture into new areas. It also means that existing economic activities may be carried out to a low standard, without the requisite expertise. According to labour advisory firm Adcorp, shortages are most acute in managerial, professional and technical occupations, which together contribute to the approximately 829 800 vacant skilled positions in South Africa.

3. Crumbling infrastructure

An infrastructure backlog of R220 billion inhibits economic activity and places a major constraint on future growth.

The infrastructure that South Africa depends upon to move people and goods around the country, and to our trading partners abroad, is showing signs of stress. Investment in infrastructure has been inadequate and badly planned, with a backlog estimated to be R220 billion at 2011 rand value. This undermines South Africa's competitiveness. The decline of South Africa's rail infrastructure, for example, means that more and more goods have to be transported by road, which increases operating costs for enterprises as well as maintenance costs for the authorities. Wear and tear on the country's electricity grid and waterworks also has direct negative consequences for the economy. These problems are exacerbated by weak management and human capacity constraints in government.

4. Barriers that discourage entrepreneurship

High costs and a heavy regulatory burden discourage entrepreneurship and contribute to growing ‘informalisation' in the economy.

South Africa is a difficult place to start a new enterprise. According to the World Bank index for starting a business, South Africa ranks 75th in the world because, currently, setting up an enterprise in our country is a complicated, expensive and time-consuming process compared with other parts of the world. This prompts ever more entrepreneurs to ‘go informal' and bypass the heavy regulatory burden imposed by the state. South Africa is unusual in that the burden has become worse over the last decade while the global trend has been in the opposite direction.

5. Economic exclusion of the poor

Lack of access to capital leads to exclusion of the poor from the formal economy.

One of the key barriers limiting the ability of millions of poor South Africans to participate in the formal economy is their lack of access to capital, which makes it difficult for poor households to do things like develop enterprises, gain additional skills or make investments in key inputs. Creative policies are needed to capitalise the poor so that low-income individuals can participate meaningfully in the formal economy.

6. Insufficient competition

A lack of competition in the South African economy inhibits innovation by the private sector and the growth of small business, and contributes to high transaction costs and inflation.

Enhancing South Africa's competitiveness is crucial if we are to attract investment, increase productivity, drive product innovation and bring down prices for consumers. Monopolistic behaviour by large firms, the dominance of state-owned enterprises in key sectors, and capital concentration create conditions that inhibit opportunity and competitiveness.

7. Lack of innovation in terms of social security

While over 15 m people receive a social grant from the state, the social security system itself has not done enough to create incentives that enhance human and social capital.

Currently, over 15 million people, a quarter of South Africa's population, receive one or more of the government's seven different kinds of social grants. The number of beneficiaries has increased dramatically over the years, and looks set to increase further. The social security budget is due to expand to R171 billion in 2014, which raises questions about the system's long-term sustainability. Social security needs follow the example set by the Bolsa Familia system in Brazil and do more to break the inter-generational poverty cycle by providing a better stepping stone into the mainstream economy.

8. Insufficient engagement with Africa

BRICS show that a large market is key to success: Africa is South Africa's strategic market, but integration has been hampered by slow and expensive cross-border trade.

The economic success of each of the other four BRICS countries has been linked, in large part, to their very large domestic markets. In order to compete internationally we must dramatically scale up trade with the rest of Africa, our strategic market. Despite government lip-service, high costs, complex customs procedures and delays caused by poor and inadequate port infrastructure and corrupt border officials hold us back. Exporting a container load of goods, for example, can take 30 days, compared to 13 in Mauritius. South Africa ranks 149th in the world for ease of doing cross-border trade.

9. BEE and EE haven't worked

Current approaches to BBBEE and EE have had only limited success in broadening ownership of the economy and expanding opportunities.

Genuine Broad-Based Black Economic Empowerment (BBBEE) and Employment Equity (EE) are critical to the achievement of a fairer, more equitable society. The success of both sets of policies, however, has been limited. Black South Africans own 17 percent of the shares in the top 100 companies listed on the JSE (as of October 2011) while EE has been uneven and has had numerous unintended consequences such as skills losses and emigration, both of which ultimately constrain growth.

10. Ineffective industrial policy

IPAP2 requires extensive intervention by government departments that do not have sufficient capacity, and tends to ‘direct' rather than incentivise innovation and self-discovery by the private sector.

The Industrial Policy Action Plan (IPAP2) strategy requires extensive intervention across too much of the economy by too many government departments. It is impossible to co-ordinate all of the departments meant to collaborate on the objectives of IPAP2. Hence many proposed interventions simply do not occur. Industrial policy interventions need to be based on incentives and target activities rather than sectors. They should be temporary in nature with regularly published status updates. 

11. Fiscal unsustainability

Budget deficits need to drive strong growth for long-term stability.

Current spending does not prioritise growth and contributes to low levels of capital formation, which fell from 23 percent of GDP in 2008 to 18.9 percent in the second quarter of 2011.

Increased public spending can have positive economic and social benefits, but, as recent crises in Europe have shown, it needs to generate strong economic growth to ensure fiscal sustainability While the social security bill continues to climb every year, the state has not spent enough on roads, railway lines, dams and power stations, which has contributed to capital formation falling from 23 percent of GDP in 2008 to 18.9 percent in the second quarter of 2011. This inhibited economic growth and compromised our ability to pay off rising debt. In addition, lax auditing and accounting procedures and outright corruption in many government departments mean that large sums of money go unaccounted for. The Auditor General this year found that irregular expenditure by government departments had increased by 62%, with fruitless and wasteful expenditure up 200%.

12. High cost of crime

Crime inflicts direct economic and psychological costs, which deters investors and fuels emigration, both of which undermine economic growth.

South Africa's crime rate undermines competitiveness in all sectors of the economy by increasing the costs and risks of doing business. Furthermore, the country's dysfunctional criminal justice system appears unable to tackle this effectively. Some crimes, such as theft or malicious damage to property, inflict direct economic costs on the victim. Others, especially violent crimes, impact on the economy in other ways by weakening investor sentiment and by encouraging skilled emigration. The economic cost of crime was estimated to be R164 billion in 2007 alone.

Conclusion

This diagnostic is the first part of the DA's journey towards achieving an economic growth rate of 8% that could halve poverty in 5 years.

The next step is to produce a series of in-depth policy proposals outlining how we plan to achieve this growth rate and unlock South Africa's true potential. These will be subject to rigorous debate and discussion - both inside and outside our party.

Ultimately, the proposals that emerge from this process will form the basis of a revised DA economic policy that we will take with us into government. The journey to 2019 starts now.

Statement issued by Dr Wilmot James MP, DA Federal Chairperson, November 10 2011

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