The Harvard Growth Lab on why South Africa is stagnating

The Harvard Growth Lab published a paper asking why ‘three decades after the end of apartheid, the economy is defined by stagnation and exclusion, and current strategies are not achieving inclusion and empowerment in practice‘. The authors suggests this reflects collapsing state capability. The report points to a lack of meritocracy in public appointments, counterproductive ideologically-driven policies and active discouragement of local authority or private sector resolution to problems. Despite lofty goals such as transforming the economy and including the excluded, government development policies have hurt millions to protect a few.

It is worth quoting from the paper directly about the fundamental explanations for South Africa’s stagnation:

  • ‘State capacity has collapsed across many government functions that are essential for a functioning economy’
  • ‘urban planning regulations and zoning policies prevent dense, affordable housing in desirable locations and consequently limit both formal and informal employment’

The collapse of state capacity to provide electricity is the main reason for South Africa’s accelerating de-industrialisation and weakening international competitiveness. Hausmann et al (2022) attribute 40% of South Africa’s post-global financial crisis slowdown to the collapse of utilities.

Government rules disincentivise private sector participation in key areas of the economy (such as electricity transmission and storage). The paper attributes the 17 year delay for government to remove the prohibition on private participation in electricity generation to ideological gridlock that halts decision-making. This gridlock, in large part, reflects a lack of political opposition to the ANC that implies little incentive to address problems. The report states that ‘the collapse in state capacity has policy and political causes and will not be resolved without significant change and bold leadership.’

On the other hand, government rules incentivise urban sprawl, which discriminates against job creation and efficient service provision. The report argues that low population density and long commutes raise transportation costs and reservation wages. For example, Shah (2022) estimate that direct commuting costs are 17% of net wage income, compared to a total cost (which includes the time cost) of an average of 57% of net wage income.  The study suggests transport costs to work represent over than 35% of labor income for the lowest lowest income quintile, compared to below 10% for the highest quintile. Low density and high dispersion has also meant that government’s Rapid Transit systems were not appropriate for South African cities.

Preferential procurement is highlighted as key cause of South Africa’s stagnation. The paper suggests that government suffered from ‘the mistaken belief that preferential procurement rules could be imposed on complex organizations, such as the network industries, at little cost.’ Instead, the report suggest that ‘these rules have …  in many cases — overburdened critical public organizations.’ The report argues that procurement policies in South Africa distort markets, raise costs and create opportunities for patronage (think about the rise of ‘tenderpreneurs’). The report cites Migro (2011) who shows, for example, that the Preferential Procurement Policy Framework Act implies a  27% premium in the transport department, 28% in agriculture and public works, and 62% in sports, arts and culture. The report also cites an IMF note that presented National Treasury estimates that procurement policy reforms could save as much as  “20 percent of the cost of goods and services procured (3 percent of GDP)”.

The report bemoans the ‘endemic use of state-owned enterprises for political patronage’.  The patronage network created by black economic empowerment and procurement policies to transform society now resists any changes to the status quo.

Because South Africa’s growth malaise is driven by ‘persistent and worsening domestic supply-side constraints’, this ‘has meant that demand stimulus measures via fiscal policy have proven ineffective or even counterproductive’. The paper argues fiscal multipliers have been negative – which means that fiscal policy has been actively weighting on growth by crowding out investment by raising the economy’s cost of capital. This is in line with fiscal multiplier estimates we summarised in an earlier post.

The report notes that grants ‘compensate people for their exclusion’ rather than draw them into the economy. But if higher grants and fiscal stimulus is not the answer to raising growth and reducing poverty, then what is? The paper instead provides a laundry list of practical measures to remove barriers to growth, stimulate investment and create employment. These include:

  1. ‘Relaxing preferential procurement rules’
  2. ‘clear rules for all market participants that eliminate conflicts of interest and prevent discriminatory treatment’
  3. regarding electricity, ‘appoint a reform and unbundling sherpa/Czar to push implementation’ and
  4. on municipal governments, ‘reassign responsibility for electricity and water distribution to geographically efficient regulated monopolies’
  5. ‘Gradual civil service reform to replace the reliance on cadre deployment’ and shift to ‘merit-based employment’
  6. ‘Establish clear markets that allow for societal capabilities to help fill supply gaps in network industries (rather than selling assets through privatization)’
  7. Reform of building and zoning regulations to encourage densification
  8. ‘Revival of passenger rail’ and formalisation of minibus taxi system
  9. ‘Create and expand markets for business partnerships through supporting investments in hard infrastructure (i.e., roads) and soft infrastructure and services (information systems for matching, partnership advising)’
  10. ‘Redirect industrial policy away from import substitution for a limited and stagnant domestic market and instead target industries’ that ‘have the potential to grow by supplying the global market’
  11. ‘Reduce administrative delays and costs of business visas’ to encourage tourism and attracting global talent
  12. ‘Leverage SASOL’s technological strengths to
    develop green fuels’, develop ‘mining strategies for critical minerals’, and ‘strengthen R&D support policies for green technologies’

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