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May 02, 2016
South African Business and Civic Leaders at Home and Abroad Rally Around New, Inclusive Growth Agenda to Pull Country Back from the Precipice and on a Way Back to Economic Vitality
Rowan Philp
Leading South African executives and business academics have given the country they love a courageous and workable recipe for success, and indeed survival, at the precipice.
Building on years of research and analysis, its leading business think-tank – the Centre for Development and Enterprise – has issued a “Growth Agenda” policy reform formula of 7 reports, which, together, offer a 12th-hour departure from the current trajectory of decline and worsening poverty, and a path to sustainable, inclusive growth.
It is a seismic national reality check: endorsing the Reserve Bank assessment that the current 1% growth economy cannot possibly grow above 1,8% on its current track, but offering small, manageable policy steps that could dramatically exceed this figure, while also strengthening social cohesion, investor confidence and stability.
And leading business figures are already hailing the document as the first to bridge the mismatch between the high skills, capital-intensive nature of South Africa’s economy and the needs and skills of its workforce.
The Growth Agenda – launched at various events throughout the country in April – also stands as an international rallying point for South Africa’s increasingly powerful business diaspora, including members of the SABLE Network (www.sablenetwork.com), who are already signaling their support for a new formula grounded in realism, free market thinking and the need to focus on the excluded masses over the elites.
Laurie Dippenaar, chairman of the FirstRand Group, and chairman of the CDE Board, said: “The CDE Growth Agenda delivers a strong and compelling argument for what South Africa must do to fulfil its potential. You cannot achieve high growth if government is anti-business and yet simultaneously crony capitalist. The priority actions that the CDE recommends would help to create an environment in which investors and entrepreneurs are willing to risk capital and help build a job-rich dynamic economy.”
Ann Bernstein, CDE executive director says: “South Africa needs accelerated growth that is urban-led, private sector-driven, enabled by a smart state, and targeted at mass employment. South Africa needs to put its faith in the revolutionary impact of rapid, labor-intensive economic growth.”
At its heart, the Growth Agenda provides sobering evidence that, tragically, South African economic and labor policies have been driven largely by idealistic fantasy defined by elites, rather than by the needs of the under-skilled poor, and the demands of the market.
“By driving up the costs and regulatory risks associated with employing people, the implementation of the decent work agenda has priced unskilled workers out of the labor market. In the eyes of our policy-makers, work that is not ‘decent’ is worse than no work."
Instead, the CDE makes a powerful argument for the dignity and opportunity inherent in mass private sector employment – even at initial low wage levels – and provides a realistic road map to mass job creation. It states: “Compared to subsisting on social grants, employment results in inclusion in the process of growth and a first step to individual empowerment. South Africa needs a jobs strategy that will employ far more unskilled and inexperienced workers. It should facilitate the entry and survival of firms that could compete in labor-intensive manufacturing and services sectors in the global economy. Given that levels of competition in these industries are very high, a strategy of this kind must accept that labor costs have to be minimized and wages must conform to global norms.”
The Growth Agenda reveals that 750 000 of the 900 000 net jobs created between 2008 and 2014 were in 'community and social services'; many of these in the public sector. The authors note: “It seems clear that, under present circumstances, the South African economy is effectively incapable of creating large numbers of jobs in the productive economy.”
It also reveals the policy absurdity which has seen government allowed to employ hundreds of thousands in low-wage projects, such as the Expanded Public Works Program, while prohibiting the private sector – which also offers training and opportunities for advancement – from employing unskilled workers at similar low wage levels.
In the U.S., Willem Ellis – President of SACCA (South African Chamber of Commerce in America) – told SABLE: “I have reviewed the materials from CDE, and the proposals seem to be a positive attempt to assist discussions between business and government to develop a common agenda for growth. My hope is that they will come together to reach a consensus and to jointly implement a shared vision for growth. In the absence of strong implementation strategies of this 'new vision', the country risks repeating the agenda that led to the current frustrations.”
Never have South Africa’s business leaders been so stark, and so brutally honest, in their warnings to government and policy makers. The authors say: “There is a broadening consensus that we are in deep trouble; this is an opportunity to focus on priorities for action. South Africa is on a low road of stagnating growth, policy confusion and gridlock, rising social tension and uncertainty about the future... (Continued) slow growth means South Africa’s poor will be left behind, society will stagnate, race relations will worsen and instability will increase.”
However, the CDE agenda offers concrete hope for a turn-around, with a set of catalytic priorities and recommendations which give millions a chance to earn, develop and become part of a national socio-economic reboot.
The Agenda is built around 5 catalytic priorities, including “transformation away from elite enrichment to growth-driven inclusion”; policies to enable labor-intensive businesses; embracing smart urbanization; and resetting the relationship between business and government.
Its primary call to policy makers is to acknowledge that ineffective policy is behind the current 'low road' trajectory, and that jobs and economic growth must be at the top of the agenda, and the first choice for resource allocation.
The Agenda shows that current policy is not only flawed, but is also based on three complex and sometimes contradictory policy documents – with no single strategy available to satisfy foreign investors or local businesses.
In terms of the critical goals of one of these – the National Development Plan (NDP) – South Africa’s economy would now need to grow at more than 6% per year, until 2030. In fact, growth has been around 1% for the past two years – and the Reserve Bank has declared that South Africa cannot exceed 1,8% growth, based on the economy’s existing structure. As the authors note: “(This is) barely faster than population growth of 1.2 per cent.”
The Growth Agenda then makes dozens of specific recommendations, including that the country should:
- Formulate policy which builds on South Africa’s strengths – including infrastructure, its strong financial institutions, its respected legal and constitutional framework, and the fact that – unlike many middle income countries – it has more than half a dozen major urban centers.
- Reform the country’s wage-setting institutions, and drastically cut the cost of employment.
- Generate investor confidence from a single, credible strategy for growth. “To get off the low road we need to grow faster, which means we need higher levels of investment, which in turn means we need the confidence and belief that we can and will grow faster. And the only way to achieve this is by making a credible commitment to a focused strategy to move onto a different growth path. Competition is good for growth. From energy, infrastructure delivery, to housing, transport, schooling and healthcare, appropriately regulated but liberalized markets can deliver cost effectively.”
- Encourage the emergence of labor-intensive industries that use lots of unskilled workers, including enabling policies for agriculture and clothing manufacture. It notes: “Unlike other developing countries, where it is the norm that one third of the working population is employed in agriculture, the figure for South Africa is just 5 per cent.”
- Expand dramatically the country’s skills pool – including actively incentivizing skilled foreign workers to migrate, and slashing barriers to their arrival in the economy. “While basic education will remain important, our focus (must be) on vocational education. This is because South Africa has both a chronic shortage of mid-level technical skills and a crisis of youth unemployment.”
- Capture some of the 85 million lower-skilled manufacturing jobs, which the World Bank projects will soon be relocated out of China, due to rising wage costs there, along with the export revenue that would flow.
- Establish an Export Processing Zone (EPZ) in the Nelson Mandela Metro – including duty-free imports and rapid customs procedures, and allow employers to freely negotiate wages in terms of market conditions. This EPZ would dramatically boost employment and export revenue, while protecting workers elsewhere in South Africa by requiring firms to export 100% of their output, and excluding the participation of firms already operating in SA. “While wages will be low at the outset, the global experience is that, over time, wages in EPZs will rise. China is a clear example of how quickly wages can rise as labor markets tighten. There, according to the Economist Intelligence Unit, average labor costs have risen from $0.40 per hour in 2000 to $2.10 per hour in 2012 – an annual average increase of nearly 15 per cent.”
- Empower South Africa’s cities as the engines for growth. “Larger metros need additional powers, (and) direct representation in meetings of the extended cabinet, and in other councils of state – and in the decisions affecting infrastructure by SOEs and the rest of government. A focus on making cities more attractive places for business start-ups, investment, innovation and employment. World Bank research demonstrates that South African cities currently lag far behind India, China, Brazil, Mexico, Kenya, Chile, Malaysia and many other countries in the number of days it takes to start a business.”
“We have written these recommendations not for your average CEO, but for your average Member of Parliament – where we say we recognize the unacceptable levels of poverty and inequality in the country, and we are concerned about this,” says Ann Bernstein, Executive Director of CDE. “Too often, business talks about growth from the perspective of where they sit – which is the upper end of the economy; they don’t engage enough at the tough realities of poverty and unemployment. On the other hand, a lot of consultants and international organizations come with templates which are solid in theory, but which make incorrect assumptions about basic realities in South Africa. We are saying: you won’t get growth if you are anti-business. But we are also saying: South Africa needs a growth path for the labor force we have, not the workforce we would like to have – and the work force we have is unskilled and very inexperienced.”
Unlike earlier proposals, the Growth Agenda is already attracting the interest of key policy-makers, and members of the ANC economic cluster, whose declared interest is on inclusivity and poverty reduction.
Bernstein told SABLE that the Agenda had support from some senior business leaders and is attracting attention from government, members of the Alliance, and state institutions – and that specific proposals would be rolled out in the months ahead.
“We are starting to see real interest, and we have major events lined up for the months ahead – on the focus on jobs; on the role of cities; on the EPZ for Port Elizabeth; on the actions we need to take to get moving. If one just looks at the jobs being relocated out of China – there is no reason why we can’t get some of those jobs if we open up space to do that.”
In demonstrating the tragic outcomes of the 'decent work agenda', the authors also reveal how new policies which enable even low-wage employment in the private sector can provide the needed springboard for individuals and the economy as a whole: “In a high-growth economy, a woman can move from rural poverty to a factory job to becoming a small entrepreneur in less than a generation, and can realistically hope for even more for her children. As the examples of India, Vietnam, Indonesia and China demonstrate, the dividends in national pride and the sense of expanding possibilities create a self-renewing momentum for further growth.”
The CDE paints a grim picture, if the current stagnation and exclusion persists: “As the country becomes poorer, policy-makers would come to believe that their options had narrowed and would likely succumb to the temptation to impose ever more extreme populist policies. It is possible to imagine extortionate taxes, widespread expropriation, defaults on debts held domestically and internationally, and the
Reserve Bank’s resorting to printing money to cover the budget deficit; (there is) the unnerving example of Argentina’s lurching through much of the 20th century from populism to authoritarianism and back.”
Instead, the agenda is premised on a starkly honest assessment: that the core of the problem is neither challenging dynamics within international markets, nor challenges in delivering on sound domestic policies. The new policy formula offers incontrovertible evidence that the principle problem is the policies themselves.
It states: “Policy-makers are slowing growth in four major ways: by playing high-risk games with our public finances; by allowing economic transformation to degenerate into elite enrichment; by undermining policy certainty and stability; and by neglecting the role of business in generating economic growth.”
Traditionally, business think-tank recommendations have focused on service economy-related improvements like higher-level skills development, tax reforms, and universal Internet access, and on public sector policies like land reform. Despite the fact that its board members and advisors include giants of high skills industries, the CDE’s Growth Agenda is sharply – almost shockingly – different. Instead – in a clear signal of the crisis-level policy choices at hand – the agenda is a full-throated call for mass employment, based on an enabling environment for low and semi-skilled jobs. Indeed, the Agenda also calls for business to “get its own house in order,” in supporting this critical leg of the future economy.
In another startling departure – endorsed by global development experts, like Professor Ed Glaeser, at Harvard – the authors call for a policy embrace of smart urbanization: to grow (not shrink) South Africa’s eight major metros, enabled by major investments in business start-ups and skills.
Bernstein says: “It’s time South Africa stopped being a reluctant urbanizer – especially given the competitive advantages we have in terms of infrastructure and the potential for growth with our large number of cities.”
Fani Titi, co-chair of Investec, says: “Even if you implemented a few of these ideas, the impact that they could have on the country I believe would be massive. Urban-led, private sector-driven, enabled by a smart state, targeted at massive employment. Just think about it – that really is the plan in a few words."
“I think that Ann is making a very powerful statement in the work that is being done by the CDE that you have to embrace the efficiency and effectiveness of the markets.”
Donovan Neale-May, the Silicon-Valley-based managing partner of SABLE, said influential U.S. business leaders with roots in South Africa were rallying around the Growth Agenda.
Bernstein said real growth required that the economy fire on all economic cylinders. She said high tech companies – such as those, supported by SABLE, which are seeking access to U.S. markets – should accelerate their efforts for competitive advantage over western incumbents in the global digital economy.
However, Bernstein said the success of the country overall – and even of hi-tech entrepreneurs – would ultimately hinge on a healthy economy and society, grounded in sustainable, and increasingly labor-intensive growth.
And she said the support of the South Africa’s business diaspora would represent an important impetus, as the conversation around the optimal growth path moves forward domestically.
“We encourage SABLE members and South Africans in the diaspora to read the CDE Growth Agenda and support this initiative; their support will be important as we move forward with this debate. We are trying to use networks as much as possible,” said Bernstein.
The deeply reality-based Agenda is even realistic about its own potential impacts, noting: “Complex societies with many challenges cannot fix everything at once. The main purpose of CDE’s Growth Agenda is to . . . identify a small number of achievable changes to the existing policy framework that could deliver faster growth; a small number of catalytic priorities on which South Africa must make progress if we are to achieve and then sustain rapid and inclusive growth over a significant period.”
In seeking to stimulate a national conversation, the authors leave policy-makers with this central thought: “A job is more than just an income. It is a rung on a developmental ladder; a foundation of family life and for creating better prospects for one’s children; an opportunity to learn new skills and to accumulate savings. A job is also the most direct route to securing a better position in social, economic and political life.”
The 7 reports of the Growth Agenda can be found via the following link:
http://www.cde.org.za/cde-growth-agenda-series/
The Press Release on its Launch can be found here: http://www.cde.org.za/new-policy-ideas-to-achieve-higher-sa-growth-and-create-millions-of-jobs/
About CDE: The Centre for Development and Enterprise (CDE), an independent policy research and advocacy organization, is South Africa’s leading development think tank. Since its establishment in 1995, CDE has been consulting widely, gathering evidence and generating innovative policy recommendations on issues critical to economic growth and democratic consolidation. By examining South African and international experience, CDE formulates practical policy proposals outlining ways in which South Africa can tackle major social and economic challenges. CDE has a special focus on the role of business and markets in development. CDE disseminates its research and proposals to a national audience of policy-makers, opinion formers and the wider public through printed and digital publications, which receive wide media coverage. CDE's track record of successful engagement enables them to bring together experts and stakeholders to debate the policy implications of research findings.