SAIRR Today: ‘New thinking’ needs to challenge policy and racial holy-cows - 1st July 2010

Finance Minister Pravin Gordhan has said that South Africa needs ‘new thinking’ on jobs and growth. This comes after StatsSA released data last week which showed that formal employment in South Africa declined by close on 3% over a period that saw the economy grow by 1.6%. As Business Day pointed out, this was not ‘jobless growth’ but ‘job shedding growth’. It remains to be seen what Mr Gordhan’s ‘new thinking’ may be, but it may be a good time to consider how South Africa measures up against some of the attributes of successful free market economies.

The first basic attribute of a successful free market economy is that it is the private sector, and therefore private entrepreneurs, that create wealth in successful economies. In South Africa’s case, government policy and intervention may have done much to stifle the efforts of the private sector. Here policies such as employment equity, black economic empowerment, and excessive labour regulation are pertinent. Critical commentary on any of these policy areas is met with anger and often accusations of racism. However, no cost-benefit analysis has ever been conducted to gauge the impact that these three critical policy areas have had on the ability of South Africa’s private sector to grow and add value to the country’s economy.

There is reason to believe that these three areas may have added significant costs while slowing the efficiency of the private sector. Forcing companies, on the pain of penalties, to ensure that their workforces match certain demographics, that their procurement spending does the same, and that their management follows suit must have had the result of slowing their own capacity for growth and expansion. This ‘slow down’ may have been a response to the fact that the above policy interventions in effect retarded the free flow of capital within the private sector, which is in turn the foundation upon which the private sector can create new wealth and job opportunities. The effects on smaller and family companies may have been even more severe than on multinationals or super-corporates, which operate on economies of scale large enough to carry the extra burdens imposed on them by the State.

Related to the above is the hostility with which the Government has often treated much of South Africa’s private sector. Threats are made to ‘name and shame’ companies that fail to comply with government directives, politicians slate companies that ‘have not transformed’ and many in both politics and the media repeat the mantra that the private sector in the country ‘resists transformation’. The net result of both the transformation policy, and the threats that accompany it, may have been to create a depressed business environment in which private sector entrepreneurs are often held up as negative examples. To the extent that some in our society would seem to have them apologise for conducting business in South Africa.

Even the deputy president, Kgalema Motlanthe, was guilty of this recently when he welcomed new investment by Volkswagen in South Africa while at the same time rebuking the company for not meeting certain demographic targets.

In their defence, some of these government interventions might at least have been well-intended. But there are other examples of interventions that have been explicitly hostile. An example here was the nationalisation of mining rights. This legislation appears to have had a direct impact on depressing mining investment in South Africa, particularly when South Africa’s mining industry is compared to that of China or Australia over the past decade. Read the policy in conjunction with comments from a former mining minister that ‘white’ mining companies were thieves that ‘looted’ the country, and some of the thinking that gave rise to the nationalisation of mining rights is revealed.

Consider too the threat, now a published government policy proposal, to nationalise private farmland in South Africa. This is directly contrary to constitutional guarantees of private property rights, which are a central policy pillar of most successful free market economies.

For good measure, one can consider the impact of threats by the ANC Youth League on nationalising the operations of South Africa’s mining industry and nationalising the private banks. The ANC has sought to dismiss these threats. However, it is has been our direct experience as an Institute that these threats are being taken very seriously by many large companies, both foreign and domestic. These companies do not flight their concerns publicly for fear of offending the ANC. The risk of course becomes that the ANC fails to realise what damage it is inflicting on investor sentiment in South Africa.

We may as a country have reached a point when it is important to ask for how much longer many private sector entrepreneurs will be prepared to put up with such hostility from their Government. Equally important is the question of how many foreign and domestic investors have already chosen not to put up with it and decided to direct their capital and emotional investments elsewhere.

Now add into the mix Business Day’s revelations about the manner in which Imperial Crown Trading 289, a company closely associated with Jacob Zuma’s family and their benefactors, obtained a prospecting licence at Sishen. Business Day’s Tim Cohen was spot-on in describing the saga as South Africa’s ‘Venezuela moment’. Disregard for the rule of law when applied to corporate investors, in an already hostile business environment, will do little to instil confidence among private entrepreneurs in South Africa.

A second basic attribute of successful free market economies is possessing a highly skilled workforce. South Africa will never succeed in providing opportunities for people to work in an increasingly tertiary economy when its school and education systems continue to perform at very low levels. The statistics are well known and the Institute has produced them for decades. They are in fact so well known that there is a risk of South Africans becoming numb to their meaning. Consider that 50% of children who sit in a Grade One class in South Africa will never write matric, that only 30% of those children will ever pass matric, that the matric pass rate has been ‘dumbed down’ to an aggregate of between 30% and 40%, and that white children still get more top passes in mathematics than African children.

It is therefore possible to make the case that the Government has created a depressed business environment that is unlikely to spawn significant employment growth. Quite where the Government thinks its poorly skilled population will find work when it both harangues and stifles the efforts of private sector employers while at the same time providing these employers with a very poorly skilled workforce, is unclear.

But it must not be forgotten that there are also important positives that hold much promise for South Africa as long as counter-productive policy interventions and policy failures are reversed. The ANC has maintained a sound fiscal and macro-economic framework for the country. This is arguably their greatest achievement since 1994 and one for which they have never received sufficient credit. South Africa’s financial services sector survived the global financial crisis well when compared to its counterparts in Europe and North America. The skills that are produced in the country have often remained world class, even in technical fields such as medicine and engineering. As a result, the country has been able to fund its considerable social welfare and other state spending priorities out of revenue generated in the country. That revenue base was of course generated by private entrepreneurs and people paid by those entrepreneurs.

It is growing that tax base that is important now. Large and stable corporate and income tax bases might be described as a third attribute of successful free market economies. The fact that last week’s employment data suggests that this is not happening, even as the economy grows, is the reason that there should be much concern about those employment figures.

Growing the tax base is something that is certainly within our reach as a country. GDP growth forecasts that the Institute published via Fast Facts in July last year showed how attaining growth rates of above 5% of GDP in the period to 2030 would move South Africa from being a generally poor to a generally lower middle class economy within only 20 years. That has to be the target at the forefront of the minds of people like Pravin Gordhan, his cabinet colleagues, and senior business leaders in South Africa.

Where do the ‘the poor’ fit into this argument? There are many of them. According to data the Institute has published in its South Africa Survey, close on 50% of African individuals live in what we consider a measure of poverty at under R800 per month. Without any doubt this is a terrible and shameful figure in a country where many people reading this article live to western middle class standards. Even among whites, poverty levels have doubled in a decade and current data now indicates that only 50% of white adults could independently afford the bond repayments on a home costing more than R300 000 – a quite incredible figure considering that many commentators still publicly describe whites as ‘wealthy’ and ‘over privileged’. Despite such figures, the direct answer to the question is that unless private entrepreneurs are placed in a position to grow South Africa’s economy at over 5% of GDP for the next twenty years, there is little to no chance of the 50% of poor Africans, or their children, ever assuming a middle class lifestyle.

Calls to redistribute mining assets or private land have preceded Mr. Gordhan’s call for new thinking on South Africa’s economy. These populist ideas might come to resonate politically in South Africa, but will simply retard the progress of all South Africans – ‘the poor’ included. Certainly you will not find such proposals within the policy portfolios of successful free market economies!

So Mr. Gordhan’s call for ‘new thinking’ is to be welcomed. However, the call will elicit useful proposals only if conservative views such as this one, which challenge many of South Africa’s policy and racial holy cows, are considered and not simply dismissed, as has been the fashion, as right-wing propaganda designed to ensure white hegemony in South Africa.

- Frans Cronje

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