South Africa’s new President Cyril Ramaphosa has much to do. There are some short- and long-term fixes that can get the continent’s second largest economy back on track.
In the short term
One of the biggest victims of Jacob Zuma’s near ten-year rule has been South Africa’s institutions. Everything from the finance ministry to the tax authorities have seen their interests gradually aligned with the governing parties. Sorting them all out will take time, but there are some steps that can be taken quickly. For instance, clearing out the boards of state owned enterprises like Eskom and putting in place new business plans. This would send a clear message that the years of patronage are over.
Next week’s budget is an opportunity for early progress. Ramaphosa will want to stabilize the debt-to-gross domestic product (GDP) ratio, which is over 5%. One estimate suggests the government should look to raise R215 billion ($185 billion) through cuts in expenditure and raising taxes. He has enough political capital now to take these measures without too many problems. Look out for changes to value-added tax (VAT) in particular.
Ramaphosa could also address the embattled mining sector. Mining companies feel the Black Economic Empowerment restrictions (BEE), a set of government measures to address the economic inequalities of apartheid, as set out in the Mining Charter are too onerous.
They argue that the restrictions make it hard for investors to judge the cost of capital. If they are right then that could free up capital investment into some projects, like in the coal sector, that could be started promptly.
In the long term
Land reform has been much debated in recent years with various attempts to give the country’s black majority greater land rights. Much of the emphasis has been on ancestral land traditionally occupied by the country’s indigenous tribes.
But South Africa’s population has rapidly urbanized, so many people are not actually domiciled anywhere near their ancestral lands. Shifting the debate from this rural land to urban areas would shrewd. Fundamentally, it makes economic sense: giving people assets, which they can borrow against and use to take part more fully in the economy.
So shifting the focus from rural to urban, to registering your title to where you live or run your business, could be sensible. It could give people a greater stake in their communities and could be used as security for borrowing and investment. Some people are already talking about this, but notably not in the African National Congress (ANC).
Tackling unemployment will take time but has to be a priority. One possibly challenging step would be to find some way of working around the new minimum wage. It is too high to encourage employment intensive light manufacturing like garment making to operate in the country. These are the kinds of industries that have helped the rapid economic development of emerging Asian countries.
Scrapping the minimum wage would be a political challenge too far, but one solution may be to set up special economic zones excluded from it.
The state already pays employees lower wages than the minimum in certain areas like road cleaning, as a means of just putting people to work. This principle could be extended to the private sector, with the necessary worker protections in place.
The new President’s list of tasks is daunting. Labor reform alone could easily take the two terms that the new President is limited to. His biggest challenge, certainly in the short term, may be to take on the vested interests of his own party. But progress can be made.
Eskom is not far off where it needs to be in terms of generating capacity, the budget is an opportunity to potentially score some quick positivity about how South Africa’s institutions can be improved in the next year.
Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks may be enhanced in emerging markets countries.
Image credit: Lui Siu Wai/Xinhua/Alamy Live News