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10 ideas for reviving the economy and reducing SA’s dire inequality

- Imraan Valodia

Few dispute that the South African economy is in serious trouble but how do we fix it?

Millions of citizens, especially women, continue to live in abject poverty; unemployment rates and inequality levels are among the highest in the world and economic growth continues to be extremely low. These problems have characterised the economy since well before the transition to democracy in 1994, and SA’s history of dispossession, low wages, racial and gender discrimination and inequality is a key part of why the economy continues to be hamstrung.

In recent years, the problems in the economy have become more severe due to a number of short-to medium-term challenges that have exacerbated the crisis.

Among these, the most important are: public finances are in a mess; the SA Revenue Service’s ability to collect revenue has been undermined; unemployment continues to increase; household expenditure is falling as households cope with increasing prices and higher costs of living; important sectors of the private-sector economy such as mining and manufacturing are shedding thousands of jobs; critical areas of the economic infrastructure — including energy, water and roads — are in a crisis; and state-owned enterprises have not only failed to stimulate the economy but have also been the vehicle for looting by politicians and business.

SA is part of a global economy and is vulnerable to international fluctuations, but this does not mean the country does not have some agency to improve its domestic situation.

Over the past few weeks Business Day has published a number of contributions that urge the president to act decisively to fix this crisis. One set of contributions has proposed what can only be described as austerity measures: enormous cuts in government expenditure; significant trimming of the public service; the clearing away of regulatory hurdles and red tape; reduced company taxes and further incentives for business to promote investment; and privatisation of state-owned enterprises (SOEs).

There has been much talk about a "fiscal stimulus", with some suggesting a R500bn expenditure programme to boost economic growth, without explaining where this money will come from. It does seem bizarre to be arguing for a fiscal stimulus package while the government is attempting to deal with a huge gap in the funding of its existing expenditure programmes.

An austerity package would only further reduce the level of economic growth and accentuate the existing set of economic problems. Enormous reductions in state expenditure will hurt the poor. Reductions in the public service will only result in the rate of unemployment worsening, social conflict increasing and a reduction in the already poor levels of service delivery in the public sector. And while red tape should clearly be cut and the efficiency of the regulatory environment improved, overzealous action of this sort will only entrench the power of vested interests in the business community.

Besides, since 1994 the government has introduced various measures to promote investment by the private sector, and other than interest in the property and finance sectors there have been very low levels of investment in the real economy over the decades.

Despite an alarming decline recently, the economy has been caught in a low-growth, high-inequality trap for a long time. SA is stuck because it has a small group of very wealthy people and a very large number of poor people. Furthermore, the economy is dominated by a group of vested interests, extremely high levels of economic concentration and a dominance of financial sector interests. Many proposals for so-called "business-friendly" reforms in fact precisely trumpet the interests of these vested groups.

What is needed is game-changers that will unlock the economy from the low-growth, high-inequality trap.

Long-term, sustainable growth will come from unlocking new things rather than from austerity measures, which have failed everywhere else, have failed for all of SA’s recent history, and will fail again.

The following ideas for game-changers will get SA out of the trap:

  • The public sector does need to reform, but the problem is not that SA has too many workers who are paid too much, it is a productivity problem — SA receives very poor results for the investment. The country needs a productivity-enhancing pact in the public sector: moderate wage increases; improved management; and a set of agreed output measures that will improve the levels of productivity and service delivery. Some parts of the public sector do need to be cut, and a good place to start would be the size of the cabinet.
  • Land reform should seek not only to address a historic political legacy, but should be part of an economic strategy to unlock the economic potential of land and assets in the rural economy. In addition to redress in the commercial farming sector, the potential of land and rural assets under traditional authorities has to be unlocked. And land reform has to be accompanied by support measures for agricultural development and food security to ensure that the potential of freed-up land is realised.
  • Energy is a key driver of economic growth, and the narrow interests of Eskom are a barrier to unlocking the potential of energy to foster economic growth. Eskom’s business model is hopelessly out of touch with the needs of the economy. The government should act decisively to unbundle Eskom and allow new entrants into the energy sector to promote competition.
  • Despite the concerns of vested interests about "unintended consequences", the Competition Amendment Bill can address the high levels of concentration in ownership. The economy is dominated by a handful of companies in almost every sector, which means it is almost impossible for new businesses to enter the market. It also means consumer prices are much higher than they should be. The government should review what other measures can tackle this problem, and enhance the capacity and funding of the competition authorities to ensure enforcement.
  • Reform of SOEs should be strategic rather than ideological. Some, such as SAA, are failed businesses based on outdated notions of what the public sector ought to be doing. There is no need for SA to continue to pour billions into a state-owned airline. SAA and others like it should be sold off or closed down. Other SOEs, such as Transnet, are of huge strategic importance for solving critical constraints in the economic infrastructure, such as transport. These should be strengthened, given a clear mandate and be effectively managed.
  • The manufacturing sector should find new markets. Two initiatives need to be urgently implemented: a free trade area for Africa and manufactured export growth to China.
  • SA must tackle inequality. Policies such as a national minimum wage need to be speedily implemented to increase the income of the poor, while earnings by top executives should be checked. Most important, however, are policies that will create a larger middle-class — for this, education policies are key. SA urgently needs clarity on policies in the basic and higher-education sectors and better resourcing where necessary to ensure much better outcomes across the board.
  • SA should address the fact that the economy is dominated by men. Half of the population has to compete in a patriarchal and hostile economy. Policies that address women’s economic empowerment — to promote women’s participation in both the formal and informal economy — will contribute significant new resources to the economy and boost growth.
  • There is great potential for the green economy to boost economic growth. A key part of this is renewable energy, but SA should promote policies that recognise the full environmental costs of investments and that promote investments in environmentally sustainable production in mining, industry and agriculture.
  • Everyone is talking about the digital economy and the fourth industrial revolution’s threats to jobs. But it could instead disrupt the current vested interests that dominate the economy, create opportunities for new entrants and allow developing countries such as SA to participate in the global economy on more favourable terms.

The president should appoint a special task team (not including the current vested interests) to put together a plan of action on the fourth industrial revolution.

Citizens of the country should expect a plan in three months.

What this economy urgently requires is a combination of specific interventions and bold political decisiveness.

Imraan Valodia is the Dean of the Faculty of Commerce, Law and Management. This article was originally published on