The urgency of effective empowerment policy - Daily Maverick, 22 September 2017

By Frans Cronje 

Success or failure in empowerment policy will do more to determine South Africa’s long-term future than any decision taken in any other policy area. 10

The need is urgent. Despite political promises of ever more effective empowerment policies over the past decade and a half, the labour market absorption rate for black South Africans has fallen (from 42.1% in 2001 to 39.4% in 2016). The absorption rate measures what proportion of people of working age have a job. It is an excellent measure of the success of empowerment policy, as employment is a necessary stepping stone away from poverty and welfare dependency towards middle-class self-sufficiency and optimism.

Our analysts have found a correlation between levels of fixed investment, economic growth, and formal-sector employment growth. The pattern of the past 20 years reveals that high levels of fixed investment correspond with high levels of growth, which trigger high levels of job creation. Yet fixed investment levels have essentially fallen flat in recent years on the back of policy hostility and uncertainty.

Regular readers of our work will know that the Institute of Race Relations has spent a great deal of time and effort making a case for the successes we have achieved as a country since 1994. In our estimation, the argument that very little was achieved in terms of raising living standards post-1994 is simply not true. It surprises many of the groups that seek our advice that the number of people with a job has doubled since 1994 – in part a function of the incubatory role played by the civil service:

• The middle class essentially doubled, as reflected in a number of indicators, including the number of annual new car sales and vehicle registrations.
• The number of families in a formal house doubled.
• So, too, the number of students enrolled at university – which more than doubled.
• The number of families using electricity increased from 5.2-million in 1996 to 15.2-million in 2016, while;
• The proportion of families with access to electricity increased from 58% to 90%. 
   

The redistribution of earnings and company profits through the tax system was central to these successes. But as economic growth stalled after 2007, revenues have come under pressure while government debt levels have essentially doubled. South Africa’s tax take as a proportion of GDP has also, arguably, reached a point of diminishing returns, meaning that any increases in tax rates or the introduction of new backdoor taxes will come to have a net negative effect on the economy.

The result has been the stalling of many of the indicators of socio-economic progress. From job creation levels and consumer spending sentiment to inflation-adjusted per capita GDP, the positive trajectory South Africa assumed in the first decade after 1994 has been broken.

The consequences can be measured by the high levels of protest action and the declining confidence in the future of the country. The now unmet expectations of South Africans pose a significant risk to the future stability of the country. Yet, the expectations cannot be met, or the consequent stability achieved, in an environment of continued economic stagnation.

Under-pressure political leaders across many parties have promised to accelerate empowerment. But these promises, while often relying heavily on political rhetoric and divisive incitement, have remained weak on content and lack, as a rule, the fresh thinking that will be necessary to develop policy that will be any more effective.

Our sense is that four things are central to any future empowerment policy framework:

• The first is employment creation, either directly or through the support of emerging entrepreneurs. Fail at this and a stable future will elude South Africa amid deepening political incitement and social conflict.
• The second is attracting the levels of fixed investment without which economic growth recovery is impossible. In the absence of such a recovery, South Africa will not resume the living standards and employment trajectory of the early- to mid-2000s. There is a watershed number – GDP growth of 5%, maintained for 20 years – at which it is possible to envisage the unemployment rate falling to around 10% and South Africa transitioning into becoming an increasingly middle-class economy.
• The third is restoring South Africa’s fiscal health in order to make possible the tax revenues to finance the infrastructure and education that will be needed to support a growing and labour-absorptive economy.
• The fourth is positioning South Africa as a competitive export destination.
   

These four pillars must be in place to support any effective future empowerment policy framework. And, of course, they all relate closely to one another, for it is unlikely that any one will be sustainable without the others.

Yet, too often, empowerment policy as it has come to be practised undermines these pillars. The effect of the recently announced mining charter remains one of the best such examples. But there are scores of others that stretch across industries from banking, finance and insurance to tourism, agriculture, and manufacturing.

Our advice to policy-makers is to ensure these four pillars are central to any future empowerment policy framework. Scorecards and measures of empowerment should take their lead from the four pillars and the extent to which they support the creation of new opportunities for disadvantaged people. South Africa’s track record, and correlations we have discerned in historical data, make it clear that this is an approach to empowerment that will work.

*Frans Cronje is CEO at the Institute of Race Relations, a think tank that promotes political and academic freedom. 

Read the article on Daily Maverick here.