Here Is A Plan To Fix South Africa’s Economic Mess

The Institute of Race Relations (IRR) has launched a new economic recovery plan for South Africa called the National Growth Strategy or NGS.

The NGS was drafted by the policy team at the IRR to be implemented over the period 2016 to 2019 as the basis of a long term economic recovery targeting growth levels of 7% of GDP by the end of the decade.

South Africa is expected to face a tough economic year, with growth for 2016 expected to be under 1%. The country has slipped to third largest in Africa in terms of the size of its economy, behind Nigeria and Egypt.

“South Africa is in considerable economic trouble,” the IRR said. “The youth unemployment rate is above 50% and jobs are being lost, rather than created.”

“The economy is hovering on the brink of recession, while gross domestic product (GDP) per capita has shrunk for the past two years. The most optimistic forecasts for the next three years put economic growth at less than 2% of GDP.”

Downgrades to sub-investment rankings are likely by year-end, the institute said.

Building on many years of research and analysis, the IRR said it has developed a turnaround strategy. “Unlike other plans, this strategy is simple and workable,” it said.

The strategy has four steps, each of which builds on those already taken – and all of which can be initiated by the government within months.

The strategy is designed to be fully implemented over the years 2016 to 2018. Its first aim is to halt the current economic descent. Thereafter, it seeks to bring about an economic turnaround on which the country can build following the 2019 election.

At  its simplest, the plan seeks:

  1. To improve capital  inflows and foreign direct investment (FDI) into South
    Africa, so as to start raising the growth rate;
  2. Build and maintain essential economic and social infrastructure to stimulate growth  and provide a solid foundation for further economic expansion;
  3. Translate increased growth into increased employment; and
  4. Help the disadvantaged climb the economic ladder to increased prosperity, while sustaining current social protection.

“If the growth rate could be raised to 7% of GDP a year, the economy would double in size within ten years and average GDP per head would soar,” the IRR said.

It said that its policy would bring the unemployment rate down from roughly 35% to less than 10%.

If South Africa is to bring its unemployment rate down to single figures, it must double the number of people in employment. To do this the country must add roughly 1 million
net new jobs to the economy every year.

The IRR noted that over the past 22 years, the country has generated only about 300,000 net new jobs per annum. Most of these jobs were created in the years when economic growth rates averaged around 3% of GDP.

“If South Africa is to start generating around 1 million net new jobs a year, it will need an annual economic growth rate of between 6% and 8% of GDP.”

To get the growth rate up, South Africa needs to push up the ratio of fixed investment to GDP from 20% to 30%. To achieve this, it will have to attract significant amounts of both foreign and domestic capital.

To draw capital into the country, the government must ensure that property rights are  properly protected. It must also offer returns at rates comparable to those in other emerging markets, the IRR said.

Increasing the returns on capital investment in South Africa requires a major uptick in the country’s international competitiveness.

Among the obstacles needing to be overcome are:

  • Inadequate infrastructure;
  • A government bureaucracy so inefficient that it now ranks as the second most important barrier (after labour problems) to doing business in the country;
  • Rigid labour laws and damaging strikes;
  • Ever-shifting BEE requirements;
  • Excessive red tape; and
  • Sharply rising input costs (made worse in recent years by the rand’s decline).

Increased capital investment must be accompanied by the growth of new small and  medium enterprises (SMEs).

“To increase growth and help generate a million jobs a year, we must encourage businesses of all shapes and sizes, from micro businesses run by individuals and families to multi-million rand corporations run by professional managers,” the report said.

As the economy grows, there will be a massive need to expand infrastructure and ensure that existing infrastructure is properly maintained. The IRR said that the government’s role should be to reform regulations and contract with private sector providers to do the work.

“It should also increase public service efficiency by appointing on merit, using all available skills, and holding managers and bureaucrats to account. In addition, it should privatise many of its 700 state-owned enterprises to help generate revenue for infrastructure and bring private sector efficiencies to bear.

“Greater private sector involvement in the provision, maintenance, and management of economic and social infrastructure would provide a major boost to capital investment.”

The report also called for the labour market to be reformed to convert that investment into the generation of a million new jobs a year. “If the labour market is not reformed in this way, too many people will still be left out of the economy and social instability will persist.”

The IRR called for mandatory and secret strike ballots to be introduced, along with effective sanctions against unions which incite or perpetrate violence during stoppages.

Rules regarding dismissals and retrenchment must also be reformed. Greater
flexibility in the hiring and firing process is essential, it said.

“Major reforms are also needed to make social protection more effective. In essence, the government must develop appropriate policies, set targets, and raise the necessary revenue, while the private sector, communities, and individuals must take charge of delivery and implementation.”

Read the full National Growth Strategy here


Source: Business Tech


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