CLAIRE BISSEKER | Red tape remains as reform momentum increases

The consensus among big business is that the government’s flagship delivery unit, Operation Vulindlela, has been making good progress in pursuing economic reform.

However, despite the palpable sense of momentum, aided by President Cyril Ramaphosa’s decisive state of the nation address (Sona), the overall regulatory environment remains too restrictive to reignite investment and growth.

According to Business Leadership SA’s (BLSA’s) latest quarterly reform tracker, the business community feels “cautiously optimistic”, with almost half of respondents noting the positive effects of reforms over the past 12 months.

Of the 245 reform deliverables tracked by the BLSA, 34 have been completed, 19 halted and 192 remain in progress. There have been notable improvements in terms of fixing the logistics system and clearing visa-processing backlogs, among other things.

However, buried on the last page of the tracker report is the worrying line that “the broader private sector environment is perceived as deteriorating, largely due to regulatory burdens and misaligned policies”.

Pushed on what this means, Krutham, the economics consultancy that compiled the report for BLSA, said qualitative feedback from respondents underscores “deep-seated frustration” with the broader economic environment.

Respondents cited the following major barriers to progress: poor co-ordination between government entities, underfunded implementation, a rising regulatory burden, perceived anti-business rhetoric and persistent corruption, particularly at ports and borders.

The Bureau for Economic Research (BER) business surveys have found that respondents battle with the same issues. Despite some improvement on the margin, these hurdles hold back sentiment from tipping into positive territory, which is needed to fuel investment.

Some direct quotes from the 23 large BLSA firms surveyed are sobering:

• “Red tape keeps rising and energy is a perfect example — as business and [the] public adapt to new ways, government finds ways to squeeze and make transitions difficult.”
• “We need [a] more concerted drive towards addressing the reforms as our economy isn’t growing at the pace we need it to.”
• “Law enforcement in terms of illicit trade is a huge problem. Ports are a disaster.”
• “We are still seeing rampant corruption and inefficiency at border posts which impact[s] the efficiency of freight movement.”
• “Reforms are gradually taking effect. Some effects can be felt in a meaningful manner; others are frustratingly slow. The frustration is mostly on the municipal level [and] that is likely playing a large role in keeping the private sector from investing.”

The bottom line is that while business appreciates the reform effort, particularly in tackling the electricity and logistics crises), the cumulative effect of an unresponsive bureaucracy, weak enforcement and slow policy execution is a system that overregulates and underdelivers. As such, it continues to suffocate investment, growth and competitiveness.

Contrast this to the red tape President Javier Milei is cutting through in Argentina, where he is slashing public spending, privatising state-owned enterprises and deregulating the economy.

Milei is carrying out one of the most dramatic economic restructurings in modern Latin American history, and it seems to be working: hyperinflation has been tamed, growth is rebounding in a V-shaped recovery, and poverty has declined dramatically.

One can only wonder what a crusading reformer such as Milei would make of SA’s drip-drip approach to reform. Writing recently in The Economist, Milei called for a radical rethink on government meddling, noting “more often than not it is the government itself that blocks entry [to new markets] with licences, quotas, exclusive rights or administrative barriers”.

In a comment that seems particularly apposite to SA, he notes “regulators traditionally hold a monopoly on regulation and quickly develop a tendency to abuse their authority — they pile on requirements, ask for documents unrelated to any alleged market failure and impose endless delays”.

To solve the problem in Argentina he has allowed regulated and unregulated segments to coexist in the same market, trusting consumers to choose the option that adds the most value. The result in the market for several financial instruments has been a blossoming of the unregulated component, leading to fee compression in the regulated component. This has forced the regulator to become more reasonable and less bureaucratic.

“Free markets — the core of the deregulation agenda — made the world rich, massively reducing poverty in just two centuries,” Milei concluded. “It is time to double down on our trust in capitalism. Let us get the government out of the way and give people back their freedom, stolen from them by politicians and regulators.”

Ricardo Hausmann, the former Venezuelan planning minister who is now director of the Harvard Growth Lab, made a similar point in a recent editorial in the same magazine. He argued that at the heart of Venezuela’s collapse after Nicolás Maduro came to power in 2013 was a systematic dismantling of rights and freedoms.

As rights vanished, so did security and investment, leading to the largest economic contraction yet recorded in peacetime. His key message is that to turn Venezuelan oil (or, in SA’s case, platinum and other minerals) into wealth requires long-term investment. “For that, legal certainty — enforceable contracts, clear taxation and predictable rules governing concessions — is a must.”

Venezuela’s chief lesson is simple, Hausmann wrote: “Prosperity does not come from oil, decrees or even benevolent rulers, but from rights. Rights create private property and security. They allow people to invest and innovate. Restore rights and society can recover.”

Milei and Hausmann offer sage advice to SA as it tries to leverage structural reform to trigger a virtuous cycle of rising confidence that ignites faster fixed investment that in turn spurs job creation.

Certainly, reforms are starting to take hold in SA — on the back of sustained fiscal discipline and the shift to a lower inflation target, bond yields are falling and investors are starting to see the potential in our economy. But pace is everything.

SA is not an example of what reforming zeal looks like. It could be, but only if every reform in the president’s Sona is carried out with a sense of urgency. We have a narrow window of opportunity and we need to act now.

• Bisseker, a former Financial Mail assistant editor, is economics writer and researcher at the Bureau for Economic Research.