NEWS & ANALYSIS

The economy: Adapt or die (II) – The medium term

Charles Simkins discusses priorities for the following two years

The economy: Adapt or die (II) – The medium term

11 July 2019

INTRODUCTION

 If short term stabilization is successful, it will be possible to move on to growth stimulation policies and projects in the medium term. Success will depend on a laser focus on a limited number of activities. This brief discusses four priorities.

1. INITIATE A NATIONAL CONVERSATION ABOUT ECONOMIC GROWTH

 There have been calls for some time for a national conversation about the economy. If, as the June 2019 SONA indicated, there is a need for a much higher growth rate, the conversation should be about how to get it. A necessary condition for growth is a much greater public commitment to growth than we have at present.

 The best instrument we have for a national conversation is a parliamentary hearing, supervised by an Ad Hoc National Assembly committee on growth. The National Planning Commission should appear before it with an assessment of progress to date on National Development Plan goals. Proposals for improving growth from high-powered academics and international organizations over the past fifteen years should be dusted off, presented, and carefully considered. The Ministers in the economics cluster should testify about their objectives, and there should be ample opportunity for political party, business, labour, civil society and academic inputs, as well as submissions from the public at large. The work of the ad hoc committee should be adequately supported by the parliamentary administration, unlike the ad hoc committee on the amendment of Section 25 of the Constitution which was not. The support would include the stimulation of debates on radio and television, in the press, and on social media.

 The report of the Committee to Parliament should identify the most promising ways to promote growth and to overcome obstacles to it. The best model for the report is the Report of the High Level Panel on the Assessment of Key Legislation and the Acceleration of Fundamental Change. Indeed the whole Ad Hoc committee report should be an amplification of the High Level Panel’s section on slow economic growth. Specification of ‘must have’ targets should be avoided in favour of ‘can do’ projects and policies.

 Some will regard this proposal as a formula for a mere talk shop and, badly handled, it will turn out that way. But it should be remembered that democracy is about the discursive formation of will. No debate, then no mobilization of effort.

2. REASSESS THE PORTFOLIO OF STATE OWNED ENTERPRISES

 From time to time, government mentions the possibility of disposing of non-core state-owned enterprises. To date, these statements have led nowhere. They have the status of a pitch of incense to Caesar, like the protestations by Jacob Zuma in office that he was pro-growth and anti-corruption. What is needed now is a rigorous assessment of what should remain in public ownership against standard economic criteria for state involvement in the economy.

 In the first place, a clear distinction should be made between public goods and publicly provided goods. Public goods are non-rival in consumption (my benefiting from national defence does not preclude your benefiting from it) and non-excludable (no-one can be excluded from enjoying the benefits of national defence). Private goods are rival in consumption (my consumption of this ice-cream means you cannot consume it) and excludable (to consume an ice-cream you have to be able to afford it). Publicly provided goods are produced by the state or state owned-enterprises.

 Public goods should be produced by the state or state-owned enterprises. The problem is that many private goods are publicly provided and, in each case, an argument has to be made for continuing with public provision. It is possible to make a convincing argument in some cases. But where it is impossible, disposal is appropriate. Disposal is not an all or nothing matter. It may be best to retain some parts of a state function or a state-owned enterprise while disposing of other parts.

 All this suggests a process of rigorous review of state programmes and state-owned enterprises, starting with the largest first, followed by disposals as appropriate. The proceeds of the disposals can be applied to strengthening activities which remain the responsibility of the state and state-owned enterprises. It goes without saying that this approach is incompatible with the view that state ownership is ‘good in itself’. The view underpinning a programme of re-assessment is that state provision is sometimes appropriate and sometimes not, depending on the circumstances in each case. Taking a priori positions on review outcomes is absolutely not the way to go. Mistakes cause inefficiency and lower potential output.

3. TAKE STEPS TO EASE THE HUMAN CAPITAL CONSTRAINT ON GROWTH

 Four initiatives are needed.

I. Sort out the mess at the post-Grade 9 level. Education up to Grade 9 should be universal and it very nearly is. Up to this point, there is a single and clear route to progress. But after Grade 9 there is a great deal of unfocused splashing about, which both demoralises learners and wastes resources. There are several reasons for this. First, learners arrive at the end of Grade 9 without a clear view of their interests and capacities. This uncertainty could be reduced by a national examination assessing literacy, numeracy and interests. The examination period could be limited to three days, with multiple choice formats where possible to cut down the marking requirement. The output of the examination would be a literacy score, a numeracy score, a brief description of the outcome of the interest assessment, and a suggested route for post-Grade 9 education and training. There would be four main routes forward:

- Preparation for university by completing Grade 12 and the National Senior Certificate (NSC). Optional subjects taken for the NSC should be academic.

- Preparation for Technical and Vocational Education and Training (TVET), with entry after completing Grade 12 and the National Senior Certificate. Optional subjects taken for the NSC should be vocational.

- Entry in TVET education after completing Grade 9

- For those whose literacy and numeracy fall so far behind Grade 9 levels that they cannot be expected to benefit from further school or TVET education, entry into a programme of unit standards in practical skills. These could be offered in schools or community colleges and the unit standards would be chosen for their relevance to the community in which the sites of instruction are located.

The results of the public Grade 9 examination should be advisory rather than forming the basis for compulsory streaming. However, initially well-designed examinations, refined over time by experience, should produce results which learners ignore at their peril. Above all, one wants to discourage routes unsuitable to learners1, and to make entry into TVET a deliberate choice rather than resulting from drift when other options have failed.

II. Strengthen literacy at the foundational and intermediate levels of general education. One welcomes the stated goal in the June 2019 SONA that every ten year old will be able to read for meaning. Reaching this goal will be not be easy. It involves strengthening of primary school management in order to increase time on task, emphasising the issue in initial teacher training and continuing professional development, increasing stocks of suitable material in school and public libraries and a campaign to increase awareness of the importance of reading among those caring for junior primary learners.

III. Encourage skilled immigration. In the first instance, this requires a major effort to shift the erroneous, but widespread and tenacious, view that every job for an immigrant is a job less for a South African. The view is erroneous in its focus on substitution rather than complementarity. Every additional skilled person when growth is tightly constrained by the supply of skilled people creates additional semi-skilled and unskilled jobs. Immigration policy, after a liberalization in the initial post-apartheid years, has turned restrictive again. There needs to be a major policy review. It doesn’t help that the Minister of Home Affairs has been called out for xenophobia, and the Chair of the Parliamentary Committee presided over a collapsed administration in the North West. But the matter could be raised before an Ad Hoc Committee on growth.

IV. Encourage private provision of education. Experience in a number of countries (India is a particularly instructive case) shows that low cost independent schools are able to compete with public schools in all communities. This competition has two advantages: it relieves pressure on the fiscus and it keeps public schools on their toes. Equally, there are opportunities for participation in both the TVET and university sectors, in part already realised. A further, and strong, stimulus could be provided by extending assistance to private students who would be eligible for assistance if they were at public universities. The assistance itself could be lower for private sector than public sector students, enabling expansion of further and higher education at lower cost than if done exclusively by the public sector.

4. EXPLOIT OPPORTUNITIES IN THE FIVE LARGE METROS

Between them, Cape Town, Ekurhuleni, Ethekwini, Johannesburg and Tshwane produce half of the country’s Gross Domestic Product, and nearly 60% of household income is received there. It is the modernising half, and a commitment to growth means maximising its potential for increasing growth in the country as a whole. The Appendix sets out the ways in which resources are concentrated in the five metros, making them the hubs for innovation and technical progress, well-anchored investment2 and modern, competitive politics.

Constructing a wholly new smart city is neither feasible nor desirable, and any Chinese proposal to do this in South Africa should be very carefully scrutinised. China’s own record in this respect is less than perfect:

Fancy villas, high-rise apartment blocks, lakes, parks and sprawling road networks: Ghost cities in China have it all. Just one crucial element is missing — the people. Built for a population that never came, about 50 of these surreal sites lie desolate across the country3

But new smart nodes within and adjacent to the five metros are certainly both possible and desirable. The criteria for success are good placing in relation to infrastructure, and a rational relationship between industrial and commercial development, on the one hand, and residential development on the other. Most of the land reform needed for new settlements is in the metros4. It is urgent, and it can often be satisfied by redeveloping land in well situated places.

 On 8 March 2019, the Mail and Guardian reported the Premier of Gauteng as saying that 31 Mega Human Settlements planned in the province in the next five years, 10 already under construction, 11 in detailed planning and the remaining 10 at a conceptual stage. Mines have released land for construction. Likewise, Helen Zille has repeatedly pointed out that well-situated but unused land in the possession of the state can be used for residential development.

The metros have integrated development plans, urban land use management plans, substantial municipal rates and service charge bases. The deals are there. Do them.

CONCLUSION

It is certainly possible to complete these projects, or at least reach a much higher plateau of performance over the medium term. The hardest part of the struggle will be a transformation of outdated mentalities in order to grasp the real opportunities.

The third and final brief will consider further measures to improve growth in the long run.

Charles Simkins is Head of Research, Helen Suzman Foundation. 

1 The secondary school system is clogged with repeaters, especially in Grade 10. If one compares enrolments in successive grades and successive years, starting with Grade 7 in 2013 and setting enrolment there at an index of 100, enrolments were as follows:

Grade 8: 104

Grade 9: 105

Grade 10: 122

Grade 11: 99

Grade 12: 71

2 On this, see Torben Iversen and David Soskice, Democracy and prosperity: reinventing capitalism through a turbulent century, Princeton University Press, 2019

3 Tracey Shelton, Christina Zhou and Ning Pan, China's eerie ghost cities a 'symptom' of the country's economic troubles and housing bubble, ABC News, 26 June 2018

4 On this, see Helen Suzman Foundation, Human Settlements and Urban Land Reform, 2018. To read click here.

Appendix

Key variables in the five large metros

 

 

 

Per cent of national population

35%

Per cent of national employment

45%

Employment ratio 20-59

58%

Employment ratio 20-59 outside the metros

46%

 

 

Per cent of national households

40%

Per cent of national household income

51%

Per cent of households with income of at least R 40000 per month

68%

 

 

Per cent of national population with highest educational qualification of:

 

University entrance Senior Certificate/National Senior Certificate

63%

Post-Grade 12 diplomas

56%

Degrees up to Honours with or without certificate

63%

Higher degrees (Master's, PhD)

75%

 

 

Per cent of national employed people who are:

 

Legislators; senior officials and managers

62%

Professionals

59%

 

 

Per cent of national employed persons by sector

 

Manufacturing

54%

Transport; storage and communication

61%

Financial intermediation; insurance; real estate and business services

63%

 

 

Sources; Quarterly Labour Force Survey, third quarter 2018

 

General Household Survey 2017