Here is the reality of South Africa’s economy now. A friend of mine is in the grain business. He has a small company that buys from farmers and sells to the large food producers. In the last few months his customers have started asking him to hold back on deliveries. People are cutting back on buying bread, so producers do not need the grain.
Our gross domestic product (GDP) numbers say we are not in a recession, but those numbers mislead. Because of how GDP is measured, when healthcare and education costs increase above inflation that translates straight into GDP growth. When your premiums jumped by 20% in January, that created “growth”.
By similarly arcane details, when interest rates rise the GDP supposedly created by finance rises almost mechanically. So the next time you see headlines saying the economy is improving, first check if your premiums have gone up, your children’s school fees have risen above inflation, or your mortgage payments are up.
More importantly, when the population grows, the economy should grow by the same amount, or each person is becoming poorer. So growth in GDP must always subtract growth in people, to yield “GDP per capita”. By that measure, the economy has been in recession since 2015. It is still in a recession, a year after the start of the “new dawn”. It is bad enough to have three going on four years of recession if your economy was doing well beforehand. We entered with 25% unemployment, now near 28%.
What is to be done?
What can be done? A great deal, if the new administration is willing to be pragmatic and creative, to act based on the economy’s real weaknesses rather than the President’s sense of what the business press will praise as “reforms”.
The economy has three core weaknesses: first, that households and companies save too much, and invest too little; second, that a failed education, labour law and immigration regime make skilled labour too protected and unskilled labour too exploited; third, that extreme inequality means large parts of the country have no capital or other resources to develop. Those together create a chronic shortfall of demand, as well as persistently high costs.
Some steps to address those weaknesses are easy. The most obvious would be immediately to allocate large amounts of spectrum to the mobile networks and at the same time give the telecoms regulator the power to impose maximum price caps on data. That would drop one of the most important input prices in the economy, while unlocking large amounts of investment in network rollout.
Another regulatory change would let households and cooperatives more easily install their own renewables and sell back to the grid, by raising the effective cap on such generation from one megawatt to five.
A third would end continued attempts by the Department of Home Affairs to restrict skilled immigration by expanding the critical skills list instead of cutting it.
Those actions could be taken today. They could have been taken a year ago. Some were announced in the “mini-stimulus” six months ago. They have not been done. Alongside them should come a whole series of long overdue regulatory reforms to throttle consumer lending and encourage people to save.
Tackling savings and investment
Other steps for the new administration are more ambitious. The two with the greatest potential in the short run explicitly target savings and investment. The first is to remove the current, failed “first time housing subsidy” and replace it with a mortgage guarantee available to the working poor.
We build several hundred thousand houses a year less than we should and public housing will not fill the gap. A programme that, for example, absorbed the first 20% of losses on mortgages to people earning between R5 000 and R15 000 per month, paid for by a levy on all mortgages, would unlock hundreds of billions in lending—not for cheap imported furniture, but for building houses and all the local demand and good jobs that creates.
The other is a tax code change. Introduce a second VAT rate on luxury goods, at 30%, and raise dividend taxes to 50%, from their current 20%, with an exemption for pension or provident funds. Use the proceeds to introduce an immediate tax write-off for any fixed investment undertaken in the next three years.
That is, tax the absence of household and company saving—consumption and dividend payouts—and use it to heavily incentivise immediate investment. We can keep waiting until some magic potion called “confidence” unlocks investment, or we can tax luxuries to bribe business to put their cash to work. The more pragmatic choice should be obvious.
The Naspers exception
One small but important wrinkle should apply. Most people don’t understand how big Naspers has become in our stock market. It owns 30% of a Chinese internet company, Tencent. Naspers’ stake is worth roughly R2 trillion rand, but Naspers itself is valued at only R1.5 trillion. Naspers would not need to sell its stake to close that gap. All it would have to do is announce that, until the gap is closed, it will sell shares in Hong Kong and buy back its shares in SA.
At that point any holder of Tencent shares would be stupid not to sell in Hong Kong and buy Naspers shares, resulting in a net inflow of R500 billion. Most of the inflow would accrue to workers’ pension funds and ordinary investors in the JSE. For comparison, whether the dreaded “junk rating” happens would affect at most R60 billion of capital flows. It would be technical, but not too difficult, to craft a provision to the dividend and capital gains regime to make this very likely to happen.
Immediate policy changes, unlocking housing credit, and unlocking corporate savings would deliver a jump start to the economy. One further pool of capital needs to be tapped. That is all the money tied up in the under-performing “SME funds” and “startup funds” and “industry funds” and the like, feeding thousands of middle-class consultants but achieving almost nothing. All should be shut down, concentrating their resources on two programmes.
One would provide a R200 000 grant to thousands of township entrepreneurs a year. All they would have to do is submit a business plan, which would be ranked not evaluated, with the top 1 000 each year entering the programme. They would receive cash, with no requirement to spend the money on any nonsense consultants or accelerator programmes. For the next 10 years, each year that they stayed in the programme and grew their payroll they would receive the same grant again. When the World Bank ran a similar programme in Nigeria, far from everyone running off with the cash, the results were hailed as possibly “the most effective development program in history”.
Aiming for ‘good jobs’ but how about good leadership?
The second would be a “good jobs” target. It would replace the failed youth employment tax incentive, which just displaces older workers, and the jobs fund and “youth employment service” and the like. Instead, it would have a simple mechanism: grow the number of above-average wage jobs in a company by more than 10% a year, and you receive all the PAYE back on those additional jobs, plus an easier labour law regime for employees earning over R30 000 a month.
Such a programme would combine quick policy wins, large but straightforward tax and credit changes and a reorientation of failed programmes away from bureaucrats and consultants and towards the direct injection of resources into townships and growing companies creating good jobs. Behind that would have to come true land redistribution, not through the state but to small black commercial farmers, and the heavy promotion of employee share ownership and worker representation on company boards.
But the single most important task is fixing education, without which all the rest is a band aid. Unfortunately, the President’s grand plan on education seems to involve the sick joke of coding and robotics. The task is huge and complex and cannot be covered here, but clearly runs through a massive improvement in the quality of teachers.
Nothing about this administration or public debate at present gives any confidence that any of the programme above, or anything like it, will be done. The easy steps on telecoms, energy and visas were supposed to be complete already. The tax changes could have happened in the budget. None of them have. The dominant characteristics of the old administration, and likely the new one, are lethargy, buddy networks and a deep anxiety about the business press. With the economy in such trouble, the Minister of Finance is not even in Pretoria, but instead mingling with journalists (in an interview that somehow caused no scandal).
Which comes to the most depressing fact. In an economic crisis so deep people are eating less bread, our public discourse is extraordinarily shallow, incapable of anything except soap opera “analysis”. Very few are even asking about what the new administration will do. All that is being discussed is how many people will be in the cabinet and who they will be, and whether the President will enact “reforms” (their content seems immaterial) before “factions” “oust him”. People sometimes say countries get the leadership they deserve. Perhaps we get the economy we deserve, too.