The Challenge Ahead: How to Unlock Rapid Economic Growth in South Africa

Note to editors: This speech was delivered by DA Federal Chairperson, Dr Wilmot James MP at the South Africa Breakfast Indaba in London, June 28 2012.

As we look toward the second half of 2012, it is clear that South Africa is facing immense economic challenges, challenges that undermine both the historic struggle against poverty and unemployment and the prospects for industrial development and business growth.

According to official statistics, over 24% of the economically active population is out of work, rising to approximately 35% using the expanded definition of unemployment. Women, young people and low-skill job seekers have been hit the hardest by South Africa's slow economic performance. To reach the global average employment rate of 60%, 6 million more South Africans will need to be in formal or informal employment.

It is an unacceptable state of affairs, and a betrayal of the better life promised to South Africans in 1994. The following indicators paint a tragic picture of what these statistics actually mean for millions of South Africans:

• One in three households in our country report that they run out of money to buy food, while half of all households say they experience hunger.
• The poorest 20% of the population earns just 2.3% of the national income, while the wealthiest 20% enjoys 70% of the income.
• Three out of every five households live on R3500 per month or less, while the poorest 2% live on R 1500 or less, which is barely enough to survive given the rapidly rising cost of living.

Lacklustre economic growth, exacerbated by the Eurozone crisis, and entrenched by the Zuma administration's dithering with regard to important policy matters, has meant that the economy has failed to expand opportunities to the millions of South Africans who continue to live in poverty.

This need not be the case.

Other middle-income developing countries have made significant progress towards tackling poverty, unemployment and poverty, even in this challenging global economic climate.

Brazil, for example, by implementing smart social policies, has managed to halve poverty in less than a decade.

In China and India, the expanding opportunities that come with rapid economic growth has seen millions of people join the ranks of the middle class every year, faster than any period in history.

Here are some very revealing statistics:

• In Brazil, the poverty rate has fallen from 20% of the population to 7% in five years
• 150 million people in China - three times the population of South Africa, now earn incomes of R 6500 or more.
• By 2025, the Indian urban middle class will be larger than the entire current population of the United States at over 400 million.
• By 2030, Indonesia will have the fourth largest middle class in the world consuming  R 20 trillion in goods and services.

What all these economies have in common is robust economic growth of 8% per year or more.

Compared to these high-growth emerging countries, South Africa can boast a highly sophisticated services sector, a solid, though vulnerable manufacturing sector, and some of the richest mineral deposits in the word.

At face value, we have what it takes to become a dynamic and fully fledged partner in the club of rapidly growing emerging economies - the BRICS.

This is amply demonstrated by our country's strong performance in certain key indices measured in global competitiveness review reports.

In the most recent global competitiveness yearbook put together by the Swiss business school IMD, South Africa scored particularly well in areas such as quality of corporate governance, and the effectiveness of the country's legal environment. IMD ranked South Africa 50^th out of 59 countries surveyed: ahead of developing countries such as Colombia and Venezuela, but far behind our middle-income competitors Brazil and Malaysia, Chile and Turkey, which ranked 14^th, 28^th and 38^th respectively.

If we have these world-class economic assets, why then have we fallen behind? Why is there double digit growth in China while South Africa trails along at under 3%?

Since coming to power in 1994, the ANC government has sought to implement a plethora of economic development plans and strategies representing a broad spectrum of interests and ideological preferences.

The Growth, Employment and Redistribution (GEAR) programme, which advocated open markets and tight control of inflation, made some progress, notably in the area such of budgetary reform.

Building on these gains was the Accelerated and Shared Growth initiative (AsgiSA), launched by then President Mbeki in 2005, which sought to overcome ‘structural deficiencies' in the South African economy through targeted investments and increased state intervention in the economy.

The plan aimed to achieve 6% annual growth in GDP: the rate considered necessary to make a noticeable impact on poverty and unemployment.

Politics intervened, and the implementation of AsgiSA suffered after Mbeki was removed from office by his own party.

More recently, the New Growth Path (NGP), introduced by Economic Development Minister Ebrahim Patel in 2010, represents another stab at the persistent problem of unemployment in South Africa.

Promising ‘5 million jobs in 10 years', the NGP advocates massive increases in state spending on infrastructure as the primary driver of employment creation, though it does not specify where these additional funds should come from, nor does it take into account the massive skills deficit plaguing the public sector today. There are two key sets of problems that have underpinned the failure of these programmes

First, with the exception of GEAR, the economic development programmes introduced by successive ANC governments have consistently squeezed out the private sector in favour of state dominance of the economy.

They have paid too little attention to high input costs, low levels of competition, unnecessary red tape, state inefficiency, corruption, and high barriers to entry in the labour market.

A selection of some of the shortcomings of the dominant state approach include: regulatory failure, inefficient resource allocation, reduced innovation, reduced competition, poor corporate governance and heightened corruption.

Indeed, many of these trends are already evident in South Africa's state-owned enterprises (SOEs), the majority of which are poorly managed and commercially unviable dinosaurs.

Second, factionalism and political pay-offs to the ANC's alliance partners have led to considerable policy inconsistency, uncertainty and paralysis. The politicisation of the public service through a process of so-called ‘cadre deployment' means that many policy decisions go unimplemented.

The canning of AsgiSA is a good example. More recently, the side-lining of the National Planning Commission's National Development Plan - which is overall an excellent document with much to recommend it - is another.

The Democratic Alliance (DA) believes it is time to chart a new course for South Africa's future, one inspired by the high growth trajectories followed by successful middle-income countries such as Brazil, Turkey and Malaysia.

That is why we have embarked on a comprehensive policy review and development process that places the goal of 8% annual growth in GDP front and centre and offers a new vision of hope and prosperity to all South Africans.

Where state dominance, bureaucracy and factionalism have stymied previous reform agendas, we, the DA, will focus on building an economy that is internationally competitive, that builds on our strategic position on the African continent, that is sustainable, and that creates jobs and expands opportunities to all.

The DA's 8% growth project sets out the party's plan to reduce poverty and create jobs by putting South Africa on a high-growth path.

Monopolies that keep the cost of living high need to tackled head-on; the high costs and bureaucratic red tape facing entrepreneurs and small businesses needs to be drastically reduced; and the scourge of corruption and poor service delivery needs to be eliminated so that we can begin to build an effective state that works to improve the lives of South Africans, rather than simply line the pockets of politically-connected elites.

Numerous economic studies have shown that to make a significant impact on poverty and unemployment, the economy would have to grow at a rate of at least 7% per year. The DA wants 8%.

The National Planning Commission's Diagnostic Overview emphasised that growth is essential for fighting poverty and raising per capita incomes.

The report notes that, at current growth rates, it would take South Africa 35 years to reach the per capita income levels of a small developed country like Poland or Portugal.

If GDP growth were to increase to 4% it would take approximately 17 years, while at 8% it would take less than a decade. In formulating this policy platform, the DA has drawn on the ‘best practice' experiences of developing countries that have witnessed high rates of economic growth while simultaneously tackling complex social challenges.

The five most important areas where we as a political party have focused our efforts on developing strong and well-researched policy solutions are:

• Creating jobs
• Promoting economic inclusion
• Enhancing South Africa's competitiveness
• Deepening trade and investment
• Ensuring sustainability for future generations

It is clear that the most fundamental challenge facing South Africa today is that too few people are employed.

The DA's policy proposals in this area focus on:

• Creating incentives that encourage businesses to hire more people
• Ensuring the delivery of high-quality education and training so that job-seekers have marketable skills
• Making it is easier for young people to access employment by reducing barriers to entry faced by first-time job seekers
• Ensuring a fairer relationship between work and pay
• Injecting greater flexibility into the labour market and allowing people with drive and determination to reach their full potential.

While growth is a prerequisite for overcoming the inequalities inherited from our past and opening up opportunities for all, it needs to be inclusive if it is to make a difference to peoples' lives.

Providing redress by assisting poor South Africans to access capital is a high priority for the DA. Accordingly, half of all policies in this section concern ‘capitalising the poor'.

Proposals aimed at inclusive growth cover the following areas:

• Financial incentives to enhance Broad-Based Black Economic Empowerment
• Legislative changes to make it easier for poor and low-income households to own their own homes and other assets
• Additional state assistance to expedite land reform and broaden ownership in the agricultural sector
• Changes to the social security system to make it more proactive in helping people to bridge the gap between poverty and opportunity.
• Changes to the tax code that encourage wealthy South Africans to give more

Competitiveness is the third core policy area. This is because it is the essential element that allows people who have been excluded by elite interests to become productive members of a dynamic, integrated and forward-looking society.

Competition is what drives down the prices of basic necessities - such as food, power and transport - so that we can enjoy a good standard of living. It makes easier for people with ideas and ambition to start businesses and get ahead, and puts pressure on the state to deliver better services.

Breaking down the barriers that keep the cost of living high, and protecting economic insiders from competition from new and innovative entrepreneurs, will require a range of policy interventions that challenge established interests. It requires that we:

• Increase budget allocations to the competition authorities and the National Consumer Commission, and increase their powers
• Slash red tape so that it is easier for new entrants to start new businesses
• Create an environment that is conducive to innovation and entrepreneurship
• Develop a much simplified, incentives-driven industrial policy
• Ensure that we have government support services that are reliable, efficient, high-quality and corruption-free.

Fourthly, the DA realises that a healthy, growing economy that opens opportunities to all requires solid foundations that facilitate trade and investment.

. This requires that we:

• Engage Africa as a strategic economic partner and market
• Expedite the regional integration process
• Radically simplify import, export and customs clearance procedures
• Increase infrastructure investment to 10% of GDP with a focus on core economic needs
• Eliminate corruption and wasteful expenditure by politicians and public officials

Finally, in the wake of the Rio+20 Conference held recently in Brazil, we are all becoming aware that we have an ethical responsibility to ensure that economic prosperity creates jobs and opportunities not only for the current generation, but for generations to come.

This requires that we take proactive measures to ensure that economic growth is sustainable in the long term. It requires that we develop smarter ways to manage our natural resources by planning for the future and learning to live within our means. The DA proposals include:

• Adopting a transversal approach to environmental management through integrating permitting and planning
• Separating Eskom's different functions to encourage competition and maximise efficiency
• Investing in water storage and distribution infrastructure upgrades and expansion
• Implementing climate change adaptation programmes
• Introducing measures to assist entrepreneurs and communities participate in, and benefit from, environmental programmes

This is an overview of some of the most important economic challenges facing South Africa today, and outlined the DA's approach to addressing them through sound and well-research policy solutions.

The unequal legacy of our country's past has taken on new forms as a consequence of South Africa's insider/ outsider economy in the post-apartheid area. But, given sufficient political will and with the right policies in place, we no longer have to go down this road.

Issued by the DA, June 28 2012

Click here to sign up to receive our free daily headline email newsletter