I recently watched a presentation by Prof Haroon Bhorat of the University of Cape Town and Sygnia that dealt with SA’s dismal growth record and possible positive solutions for the future.
In my opinion, Bhorat is one of the clearest thinkers in SA and has an exquisite ability to cut through the economic noise and distil the essence of the good, bad and indifferent in the local economy.
For the past 30 years, the SA economy has vastly underperformed its emerging market (EM) peers, and especially those EMs at similar stages of development. The reasons are both political and fiscal, but chief among them is that SA has never managed to provide large-scale low-wage manufacturing jobs. This, in turn, is due to the premature deindustrialisation in the economy.
In an attempt to alleviate poverty, the government has thrown a lot of money at social assistance through social grants to households. Bhorat believes it would make more sense to spend more on wage subsidies, for example, to try to get more people employed.
There is undoubtedly too much of an emphasis on consumption in SA and not nearly enough on capital investment. Additionally, the fiscal burden of providing such widespread social assistance is becoming prohibitive. Debt-to-GDP ratio is uncomfortably high, and debt is increasingly being used to finance social assistance spending.
He also points out that there are large pockets of excellence in SA society, which should not come as a surprise in such an unequal society. But rather than chasing away these pockets of excellence they should be encouraged to create more job opportunities throughout the economy.
Even where SA appears to have done reasonably well superficially, for example the degree of cellphone penetration, when considering the so-called second-order effects of technology it becomes clear that South Africans suffer from what is called “internet poverty”.
In other words, even though South Africans may have the hardware for internet transactions the cost of data is prohibitively expensive, especially in comparison with many other EMs. Internet service providers need to seriously re-examine their prices for individual and corporate consumers. A potential solution might have appeared in the form of Elon Musk’s Starlink, were it not for the government’s insistence that Starlink give up 30% of its equity to a BEE partner.
These second-order effects are also to be found in education, housing, transport and many other areas.
But possibly the most profound way to make serious inroads into SA’s chronically high unemployment rate is to encourage the informal sector to expand. Bhorat calculated that in other EM economies, at similar stages of development, the ratio of formally employed to informally employed to unemployed is roughly 45:45:10. But in SA’s case the ratio is a very different 50:16:34. Thus, by encouraging the informal sector, it should be possible to greatly increase the number of people employed and take them out of the unemployment figures.
The reasons for a such a vastly different informal sector are many and varied but include lots of unnecessary bureaucracy in the granting of licences at municipal level. But by suppressing the informal sector, as SA has done for many years, the country is missing a great opportunity to cut its pernicious rate of unemployment rapidly and sustainably.
Bhorat has calculated that if SA could achieve similar levels of informal activity to its comparable EM peers, its 2019 unemployment rate of 26% would fall to only 7%.
I have only touched on a few salient points in this column. Bhorat’s presentation is, in my opinion, a seminal piece that shows elegantly that SA’s not insignificant low-growth trap and chronically high unemployment could be tackled effectively with application of some lateral thought processes.
SA’s economy is now at a crossroads. Its economic problems, while profound, are certainly not intractable. And, by looking at the situation differently, it may well be possible to solve many of them quickly and efficiently.
• Gilmour is an investment analyst.
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