When economies lose momentum and stagnation becomes entrenched, a shift in thinking and action is imperative.
So urged Kofi Annan at a Davos panel decades ago — a call that now rings true for SA, where economic growth has languished and policy has too often wavered. The likes of Singapore, Vietnam and Poland have shown that sweeping, resolute reform can spark lasting development and social change.
Yet SA’s blueprint for transformation remains indecisive, stymied by a web of economic and political constraints that breeds cautious incrementalism over bold progress. Escaping this impasse will require a re-examination of the state’s architecture and, in particular, rethinking its sprawling and inefficient system of transfers — a legacy that has held back economic dynamism and social advancement.
SA’s state architecture, conceived three decades ago, was built on the idea of a powerful central authority amassing tax revenue and redistributing it through a labyrinth of transfers to provinces, municipalities and citizens.
The aim was virtuous: to mend deep historical scars and deliver essential services to all. Yet the country has taken fiscal redistribution to impressive heights, orchestrating a system where about three-quarters of public spending flows through its coffers — a proportion double that of middle-income peers and triple the continental norm. Central authorities hold 80% of public resources, but control merely a fifth of actual spending.
Such overreliance on transfers would be less concerning if it had yielded positive results, as the three main channels of public transfers illustrate. Local governments, which receive about half of all transfers, remain unable to provide reliable social and infrastructure services; a staggering nine out of 10 teeter on the edge of insolvency. Transfers to households, though a lifeline for millions, are marred by inefficiency: SA’s grant system is about 30% less cost-effective than those of Brazil or Mexico.
The transfers lavished on state-owned enterprises (SOEs) have become notorious: since 2009 central government has had to bail them out to the tune of R520bn (about $26bn), which failed to halt the well-documented decline of their services in energy, transport and water.
Incremental reforms may provide temporary improvements, but enhancing the performance of the above transfer system’s model may require a departure from current practices. SA could consider the following bold actions, based on international examples, that may affect outcomes:
- Redistribute responsibilities between central and local governments based on the preferred level of fiscal decentralisation. For less decentralisation, centralise major infrastructure and some education and health spending (Norway, Singapore, China; South Korea, France, Turkey). For more decentralisation, devolve revenue collection — as in Switzerland, Canada or Vietnam — and consider consolidating small municipalities that lack capacity. Ultimately, political preferences drive the choice, but aligning revenues with spending responsibilities is key for economic efficiency.
- Enhance the efficiency of transfers to households for addressing extreme poverty. A fraction of existing social grants amounting to about 4% of GDP could be consolidated and directed towards the 18-million South Africans living on less than $3 a day. This measure would be bold, but it could ensure that these individuals are lifted above the World Bank’s threshold for extreme poverty. Furthermore, integrating new digital platforms and authorising e-money can minimise transaction costs and reduce leakages. Additionally, implementing conditional cash transfers may yield improved outcomes compared with the broad, nonconditional grants now available.
- Encourage partnerships between SOEs and the private sector. Recent reforms have limited Eskom and Transnet’s monopolies and expanded private sector involvement, while enhancing regulations, co-ordination and accountability in the power and freight transport sectors. This aims to improve delivery service and attract investment, as the state cannot fund all needs alone. The transformation now needs faster implementation across power, freight, passenger transport and water & sanitation sectors, building on the country’s previous successes in telecommunications and aviation.
SA’s poor economic performance stems from complex issues, but meaningful progress requires restructuring the state, especially the current transfers system, which does not follow international best practices. While policymakers acknowledge this, urgent and decisive reforms are now needed.
Morisset is World Bank lead economist for SA.
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