Cabinet reshuffle, but where’s the reform? – Jonathan Katzenellenbogen - Biznews

11 August 2021 - Last week’s cabinet reshuffle was crisis-driven. But the crisis will not drive reforms to boost economic growth and deal with massive and growing unemployment.

Last week, President Cyril Ramaphosa reshuffled his cabinet, with a number of surprise changes taking place. In response to the looting and civil unrest that gripped KwaZulu-Natal and parts of Gauteng, Ramaphosa made changes to assuage the failures highlighted by the rioting. But to expect that reform would follow the cabinet reshuffling is a step too far, says Jonathan Katzenellenbogen. As the author writes below, “The ANC is politically trapped and shows no signs that it is willing to stand up against its favoured constituents for the good of the country.” Currently, unemployment is rampant in South Africa. Recent figures show that over 74% of SA’s youth face unemployment. “In total about 6.8 million young people, that is more than ten percent of the population, can’t find work,” writes the freelance journalist. Below, Katzenellenbogen notes that the South African government has demonstrated that it has ‘limited capacity” to run big schemes. “Government just does not have the political courage to take the leap of faith in market mechanisms that work.” – Jarryd Neves

Jonathan Katzenellenbogen
Last week’s cabinet reshuffle was crisis-driven. But the crisis will not drive reforms to boost economic growth and deal with massive and growing unemployment.

President Cyril Ramaphosa was forced into a big reshuffle by the violence and looting across KwaZulu-Natal and parts of Gauteng. The surprise and scale of the violence showed up glaring failures in the security portfolios and opened the way for a partial clear-out.

But to expect that crisis-driven policy reform will now follow is a step too far. The ANC is politically trapped and shows no signs that it is willing to stand up against its favoured constituents for the good of the country. It cannot take on the unions by allowing minimum wages to become more flexible, so as to give the young unemployed and unskilled a better chance to find jobs. And it can’t make big spending cuts as this would mean the lay-off of civil servants, another favoured constituency. And it cannot be more welcoming of all investment by scrapping BEE requirements as this would mean an erosion in its power of patronage.

Government trapped
Finding itself trapped in its policies, government can only spend more to get out of its fix. Without reforms to generate growth, government will mainly have to rely on spending for poverty relief and to buy social peace. So far the government’s economic response to the looting has been mainly to roll out additional welfare support with the special R350 Covid-19 Social Relief of Distress grant.

While the commodity price upswing lasts, luck is on the government’s side. A tax windfall from mining companies benefiting from higher commodity prices should offer new scope to spend on welfare. The windfall would have been far greater, had South Africa’s policies been supportive of investment. With public debt fast approaching unsustainable levels, rapidly blowing this windfall has its own dangers. So, the government has limited leeway to take the politically easy route in spending and delaying reform.

Reform not on the horizon
It is evident that reform is not on the mind of government, in view of those who are now in charge of economic policy. The Minister of Trade, Industry, and Competition, Ebrahim Patel, who wants to raise protectionist barriers and push for aggressive “localisation” of manufacturing with the risk of raising the prices of input costs, remains in place. And the Minister of Public Enterprises, Pravin Gordhan, has been behind the successive bailouts of South African Airways, and now the sell-off to what appears to be a fund closely connected to government, also remains in place.

As Chair of the ANC’s Economic Transformation Committee, Enoch Godongwana, who is now the new Finance Minister, must have had influence over policy for some time.  He has spoken out in favour of prescribed assets and in May last year presented a state-centred “Economic Reconstruction” plan. Among much else this speaks of the need for the “hgemony of the developmental state” and social compacts between government, business, and community groups to achieve buy-in, other compacts for radical economic transformation, localisation, and the promotion of broad-based black economic empowerment. While there is no explicit mention of Expropriation without Compensation, the document says that vacant land in cities “must” be used for housing. There is no mention of reforms that would encourage private investors.

Former Finance Minister, Tito Mboweni, gave frequent warnings about the size of the deficit and the growth in public debt, and lamented the extreme difficulties he had in convincing his ANC colleagues to address these. He also admitted that he had lost the battle in Cabinet to halt a bailout to SAA. So, with Mboweni sidelined, the past four budgets he presented were the budgets the party probably wanted. The party did not want reform then and it does not want it now.

Youth unemployment crisis
A good test of the government’s intentions on reform is how it will deal with our massive youth unemployment problem.  On the one hand such a move would enrage the unions as the present mechanism prevents competition in wage settlements, but the upside would be a far better chance of job creation. One of the most damning statistics of ANC economic failure is the high and rising youth unemployment rate. Close to 75 percent of those between the ages of 15 and 24 are unemployed, and more than 51 percent between the ages of 25 and 35 are out of work. In total about 6.8 million young people, that is more than ten percent of the population, can’t find work.

With the recently recorded highest-ever unemployment rate of 43 percent, government has signalled increased attention to the problem. In a Sunday Times interview that ran over the past weekend, Godongwana spoke of how grants such as a Basic Income Grant are not the solution to dealing with youth unemployment as they create dependency.  He said he would prefer it if the funds were used to pay the unemployed to work and to give them skills.

Although there are no specifics as yet on how such a grant would work, many in the ruling party have now grabbed hold of the idea of a Basic Income Grant.  Our current fiscal position makes this unaffordable. Yet government is now under rising pressure to extend the grant system.

“My argument is that we must invest in them (the young unemployed). Even the amount we may spend could be more than a grant,” Godongwana told the newspaper.

The Minister has yet to outline his proposal for dealing with the problem of youth unemployment, but from the little he said, there are hints that this would involve some sort of public works programme with a training component for unemployed youth. Government started a Presidential Employment Stimulus programme last year and says it has created more than 422 000 jobs so far.  Seeking to greatly expand the programme could also be an enormous and growing burden on state finances, raising questions about its sustainability in the face of rising joblessness. And would those in such a programme, in the face of slow private sector job creation, also not be dependent on the state?

Heavy price
Grants or government make-work schemes would effectively mean that government is paying a heavy price for its failure to allow a flexible wage setting mechanism to allow many more to find jobs. Price setting on wages across many sectors in South Africa reflect the outcome of bargaining between big firms and trade unions. These bargaining council settlements are then legally imposed on the rest of the sector. This is a form of price fixing by the big guys. Smaller firms cannot afford these imposed settlements and therefore hire fewer people,

Giving the unemployed work to keep them busy and teaching them a few skills is a poor substitute for allowing the private sector to create jobs by leaving an inequitable wage setting mechanism in place. In addition, the private sector often wants to train people their own way for the jobs they want filled.

Over and over again, government has demonstrated that it has limited capacity to manage big schemes. Yet government just does not have the political courage to take the leap of faith in market mechanisms that work.

This article was first published on the IRR's online platform, the Daily Friend.

Jonathan Katzenellenbogen is a Johannesburg-based freelance financial journalist. His articles have appeared on DefenceWeb, Politicsweb, as well as in a number of overseas publications. Jonathan has also worked on Business Day and as a TV and radio reporter and newsreader.

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