tag:theconversation.com,2011:/us/topics/malusi-gigaba-19118/articlesMalusi Gigaba – The Conversation2018-12-10T14:06:58Ztag:theconversation.com,2011:article/1083482018-12-10T14:06:58Z2018-12-10T14:06:58ZRamaphosa is missing an economic policy. What needs to be in it<figure><img src="https://images.theconversation.com/files/249417/original/file-20181207-128220-104revm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">South Africa needs a new economic policy that envisages an overhaul of the power utility Eskom, which can't keep the lights on. </span> <span class="attribution"><span class="source">EPA/Nic Bothma</span></span></figcaption></figure><p>As the entrails of the era under South Africa’s former president Jacob Zuma continue to be <a href="https://www.timeslive.co.za/news/south-africa/2018-11-28-i-refused-to-revoke-glencore-mining-licence-ngoako-ramatlhodi/">exposed</a> each day before a <a href="https://www.sastatecapture.org.za/">commission</a> set up to investigate corruption, so the country witnesses the consolidation of the political project spearheaded by the new head of state Cyril Ramaphosa. </p>
<p>But a key piece of the puzzle is missing: Ramaphosa’s government doesn’t have an economic policy. All that’s been forthcoming is a <a href="https://www.fin24.com/Economy/ramaphosa-stimulus-package-it-has-been-heard-before-chamber-20180923">stimulus package</a>, plus two summits – one on <a href="http://jobssummit.co.za/">jobs</a>, the other on <a href="https://www.politicsweb.co.za/politics/r290bn-in-investment-pledges-secured--the-presiden">investment</a>. Do these add up to an economic policy?</p>
<p>The answer is no. Here’s why. </p>
<p>I agree with South African economist Duma Gqubule <a href="https://www.facebook.com/permalink.php?story_fbid=442638039594767&id=100015457235674">that the stimulus package</a> is a mix of short-term stimulus measures and longer-term structural transformation measures, without doing justice to either. The short-term measures don’t include the usual elements of a stimulus package such as lower interest rates and increased spending. And the longer-term structural transformation measures, such as the infrastructure investment programme, is nothing new. </p>
<p>More importantly, the longer-term vision ignores the changing nature of the global economy. This is being transformed by three factors: new inform
ation and communication technologies, the renewable energy revolution and the recomposition of work as old jobs fall away and new ones created. </p>
<p>South Africa urgently needs a coherent economic policy that takes account of these realities. This can’t be driven by an industrialisation strategy that relies on 20th Century capital intensive sectors like mining, chemicals, pharmaceuticals and the military. Many are in decline. Take coal mining: mines are being closed as countries switch to renewable energy which is now cheaper than fossil fuels in nearly 100 countries, including in South Africa. <a href="http://www.ren21.net/wp-content/uploads/2018/06/17-8652_GSR2018_FullReport_web_final_.pdf">Investment in renewables in 2017</a> was R280 billion, twice what was invested in fossil fuels and nuclear combined in that year. </p>
<p>And the new policy musn’t be written only by economists, as in the past. Economists <a href="http://www.markswilling.co.za/2018/12/keynote-address-to-4th-global-change-conference-polokwane-3-december-2018/">need to work with South Africa’s scientists</a>. </p>
<p>South Africa has dug itself into a deep hole. Ramaphosa’s efforts to root out corruption are a good – but not sufficient – first step to getting the economy onto a sound footing.</p>
<h2>The history</h2>
<p>The recent <a href="https://www.timeslive.co.za/politics/2018-11-13-breaking--gigaba-resigns-as-home-affairs-minister/">resignation</a> of Home Affairs Minister Malusi Gigaba from government should not be underestimated. It was on his watch, as head of several ministries, that the influential <a href="https://www.iol.co.za/news/politics/who-are-the-guptas-2080935">Gupta family</a>, which sits at the centre of the country’s <a href="https://pari.org.za/betrayal-promise-report/">web of corruption</a>, secured a free hand to “capture” key state owned enterprises. He, together with other ministers, agreed to participate in a political project that resulted in a silent coup that effectively marginalised and hollowed out the African National Congress (ANC). The goal was to capture and <a href="https://www.news24.com/SouthAfrica/News/gordhan-culture-of-integrity-needed-to-turn-around-soes-report-20181028">repurpose state institutions</a>. </p>
<p>Gigaba represents a generation that has done okay under the ANC since 1994, but want to do a whole lot better by grabbing their share of key sectors. They gambled on the alliance with the Zuma-Gupta network. And burnt their fingers.</p>
<p>Zuma was elected president of the ANC at its <a href="https://mg.co.za/article/2007-12-18-zuma-is-new-anc-president">Polokwane conference in 2007</a> on the back of a wave of discontent. Black business was no longer willing to hang onto the coattails of white business; trade unions were fed up with limited state intervention; the ANC was unhappy with the centralisation of power in the presidency; and provincial leaders felt snubbed.</p>
<p>After some years of dithering, what became known from 2014 onwards as <a href="https://theconversation.com/the-odd-meaning-of-radical-economic-transformation-in-south-africa-73003">“radical economic transformation”</a> was in fact a strategy to <a href="http://www.dti.gov.za/financial_assistance/docs/BI_Policy2015.pdf">build a black industrial class</a> by using the procurement spend of around R200 billion by the country’s state owned enterprises. </p>
<p>In theory, not a bad strategy. After all, this is a way of using state resources to build real assets owned by black people. As <a href="https://www.businesslive.co.za/bd/national/2018-07-12-scathing-report-on-the-governments-failure-to-address-inequality-released/">recent research</a> showed, 90% of all assets are owned by 10% of the population, most of whom are white.</p>
<p>To operationalise the strategy speedily it was necessary to circumvent the legal framework. For that, brokers who were prepared to take the risks were needed. And so, enter the Guptas. A host of politicians were drawn into the web as well as South African and global businesses, including <a href="https://www.iol.co.za/business-report/companies/kpmg-to-lay-off-400-people-after-numerous-scandals-15301363">KPMG</a>, <a href="https://www.reuters.com/article/us-mckinsey-safrica/mckinsey-overhauls-south-africa-office-after-graft-scandal-idUSKBN1JY0ZM">McKinsey</a>, <a href="https://www.timeslive.co.za/sunday-times/business/2018-03-08-germanys-sap-paid-r1286-million-to-gupta-linked-entities/">SAP</a>, <a href="https://mybroadband.co.za/news/business/264813-contract-between-transnet-and-gupta-linked-t-systems-under-the-spotlight.html">T-Systems</a> and <a href="https://www.biznews.com/global-citizen/2018/09/03/bain-sorry-sars-r50bn-tax-revenue-hole">Bain</a>. </p>
<h2>Chicken and egg: investment and growth</h2>
<p>During the recent investment summit Ramaphosa grandly announced that the <a href="https://www.moneyweb.co.za/news/south-africa/sa-raises-55-billion-so-far-in-investment-pledges/">“investment strike”</a> was over. </p>
<p>But many economists, such as Professor Adrian Saville, <a href="https://www.tandfonline.com/doi/abs/10.1080/10220461.2015.1023342">argue</a> that investment never drives growth. Instead, investment follows growth. </p>
<p>In theory, heavy state investment in infrastructure (as promised in the stimulus package) is a good thing. But what matters is the type of infrastructure and how private investment is crowded in, without flipping into privatisation (which has its own set of challenges). For example, the <a href="http://www.markswilling.co.za/wp-content/uploads/2018/03/Published-version_MSSI-Briefing-Paper_10_SA_2018-1.pdf">massive investment</a> in renewable energy (over R200 billion) since 2011 would not have happened if the state did not reduce risk by providing guarantees for the loans. </p>
<p>Given South Africa’s vast array of state owned enterprises, which includes the power utility Eskom as well as the national airline SAA, it’s obvious the country needs an economic policy that prioritises their investments. Yes, most need to be cleaned up and refinanced. But that is not enough. Radical thinking needs to be applied to entities such as Eskom, which has requested a <a href="https://www.fin24.com/Economy/eskom-wants-state-to-absorb-r100-billion-debt-bday-reports-20181205">R100 billion bailout</a>. </p>
<p>It’s role could be redesigned entirely. But a plan for a complete overhaul would be best served by merging the country’s best economic and scientific thinking. Together, they could generate an economic policy that puts energy at the centre. In line with global trends, this would need to be renewable energy because <a href="https://journals.sagepub.com/doi/abs/10.1177/0160449X18787051">it creates more jobs</a>, is distributed across small towns rather than concentrated in a few industrial nodes, and can drive a new job-creating industrialisation strategy.</p>
<p>In short, South Africa needs a policy that drives growth and positions South Africa for the 21st Century. For such a policy to work the country will need an effective and capable state. And the great divide between science and economics must be bridged.</p><img src="https://counter.theconversation.com/content/108348/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Mark Swilling receives funding from the National Research Foundation. He is a Non-Executive Director of the Development Bank of Southern Africa. </span></em></p>South Africa needs a policy that drives growth and positions if for the 21st Century.Mark Swilling, Distinguished Professor of Sustainable Development, Stellenbosch UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/929402018-03-08T14:17:17Z2018-03-08T14:17:17ZCan Ramaphosa centre the ANC and quell opposition parties?<figure><img src="https://images.theconversation.com/files/209526/original/file-20180308-30979-kg74rk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">South African President Cyril Ramaphosa in parliament.</span> <span class="attribution"><span class="source">Brenton Geach/EPA</span></span></figcaption></figure><p>These are early days for the new <a href="https://mg.co.za/article/2018-03-01-ramaphosa-plays-the-hand-he-was-dealt">Cyril Ramaphosa-led government</a> in South Africa. Two crucial and inter-related strategic challenges face the new President: to consolidate support within the African National Congress (ANC), and to consolidate the ANC’s position as the dominant party in time for the 2019 national elections, seeking to reverse the decline it had experienced under Jacob Zuma.</p>
<p>Dealing with internal ANC issues is the most difficult and the foundation for the others. Zuma is <a href="https://theconversation.com/zumas-time-is-up-but-what-does-it-mean-for-south-africa-91873">out of power</a>, and will not be back. Even though his departure will weaken their capacity to work as a coherent force, it will <a href="https://theconversation.com/the-zuma-regime-is-dead-but-its-consequences-will-linger-for-a-long-time-92066">take time</a> to dismantle the alliance that made up disparate elements he built around him. </p>
<p>Ramaphosa has started the job by <a href="https://mg.co.za/article/2018-02-26-cyril-ramaphosa-cabinet-reshuffle-reaction-anc-da-eff-ifp">removing</a> the most obvious symbols of Zuma’s alliance with the <a href="http://www.bbc.com/news/world-africa-22513410">Gupta family</a> who stand accused of being the major perpetrators of <a href="https://qz.com/825789/state-capture-jacob-zuma-the-guptas-and-corruption-in-south-africa/">state capture</a>. These include former ministers such as <a href="http://ewn.co.za/Topic/Communications-Minister-Faith-Muthambi">Faith Muthambi</a> who ran public administration and <a href="http://ewn.co.za/Topic/Mosebenzi-Zwane">Mosebenzi Zwane</a> who had been given the minerals portfolio. Both became notorious through combining incompetence and corruption, and have no independent power based within the ANC. </p>
<p>Others who had some internal support were demoted into less prestigious and powerful positions – <a href="http://www.huffingtonpost.co.za/2018/02/26/bathabile-dlamini-for-women-what-the-actual-hell-say-tweeters_a_23371557/">Bathabile Dlamini</a> who has been made minister of women and children and <a href="https://mg.co.za/tag/malusi-gigaba">Malusi Gigaba</a> who is back at home affairs come to mind. </p>
<p>Picking fights carefully so as not to tackle all adversaries simultaneously is a wise political strategy. Having won with a small margin does not allow him to go ahead with massive purges, an unwise course of action in any event.</p>
<p>As far as trying to forge the ANC into a cohesive force again, Ramaphosa’s real challenge remains closer to the ground. Among local ANC members and representatives an entrenched ethos sees positions of power as key to material benefit and jobs for relatives, friends and political allies. Tackling this is not going to be easy and it’s not clear that Ramaphosa will be able to do it – certainly not in the immediate term.</p>
<h2>ANC as the dominant party?</h2>
<p>His urgent task is to address the <a href="https://theconversation.com/jacob-zumas-demise-is-bad-news-for-south-africas-opposition-parties-91771">electoral challenges</a> posed by the two main opposition parties, the Democratic Alliance (DA) and the Economic Freedom Fighters (EFF). Both cater to different constituencies disillusioned. </p>
<p>The DA’s main policy platform focuses on good governance and rational management. The EFF’s on <a href="https://www.fin24.com/Opinion/is-julius-malemas-eff-a-nation-builder-or-a-wrecking-ball-20180307">radical social change</a>. Their shared opposition to the ANC has made them strange bedfellows in a number of key municipalities, thus removing the ANC from power. But this has already begun to unravel in the wake of Ramaphosa’s ascendancy. In <a href="https://www.dailymaverick.co.za/article/2018-03-04-nelson-mandela-bay-effs-attempt-to-remove-trollip-ushers-in-a-new-unstable-era-for-coalition-politics/#.WqEhVWpubIU">Nelson Mandela Bay</a> the EFF has withdrawn support for the DA, its dominant coalition partner. More political shifts like this may take place in preparation for the next elections.</p>
<p>Ramaphosa can undercut the DA threat by his (re-)appointment of reputable and fiscally-responsible people. He has already done so in the National Treasury with <a href="https://theconversation.com/ramaphosa-has-chosen-a-team-that-will-help-him-assert-his-authority-92538">Nhlanhla Nene</a> and at public enterprises with <a href="https://www.fin24.com/Economy/pravin-gordhan-back-this-time-as-minister-of-public-enterprises-20180226">Pravin Gordhan</a>. And eliminating blatant cases of nepotism and corruption will also <a href="https://www.businesslive.co.za/bd/opinion/2018-03-01-why-a-complacent-da-could-lose-cape-town-to-anc/">steal DA votes</a> for the ANC.</p>
<p>But tackling the EFF is a more complicated task, as illustrated by the recent reemergence of the land issue, which is now the <a href="https://m.news24.com/SouthAfrica/News/if-you-see-a-beautiful-piece-of-land-take-it-malema-20170228">its clarion call</a>. Can this issue affect the ANC’s electoral prospects? What seems to be Ramaphosa’s strategy in the face of this potential threat? </p>
<p>Land isn’t a new issue, having been a material and symbolic <a href="http://www.sahistory.org.za/topic/land-act-dispossession-segregation-and-restitution">concern for centuries</a>. Colonial conquest and settlement centred on the acquisition of land by force, which played a crucial role in driving indigenous people into the labour market in the 19th and 20th centuries. Addressing the consequences of the <a href="http://www.sahistory.org.za/topic/natives-land-act-1913">1913 Natives Land Act</a> was a formative experience for the ANC, which had been <a href="http://www.sahistory.org.za/topic/anc-origins-and-background">created</a> in the previous year, and remains a challenge to this day. </p>
<p>Land dispossession entrenched the distinctive feature of the South African economy: <a href="http://www.sahistory.org.za/archive/the-migrant-labour-system">migrant labour</a> as the foundation for black deprivation and white prosperity. </p>
<p>In 1994 a <a href="http://www.sahistory.org.za/article/land-restitution-south-africa-1994">land restitution process</a> was put in place by the newly elected ANC government. But it hasn’t met the intended targets for a number of reasons. These have included bureaucratic inefficiency, inadequate support structures for small-scale farmers (in financing, marketing, skill development), conflicts among beneficiaries, corruption and limited interest due to the meagre political weight of claimants.</p>
<p>While it is clear that the cost of land due to the need to offer compensation is not the main problem hampering land reform, it has become symbolic of the obstacles facing the process. When the ANC <a href="https://www.businesslive.co.za/bd/national/2018-02-27-parliament-adopts-effs-land-claims-motion-but-anc-seeks-amendments/">joined</a> the EFF in parliament in referring the compensation clause for review, it recognised that opposing the motion would be risky, allowing the EFF to speak on behalf of land-hungry people. </p>
<p>It showed that the land conundrum is <a href="https://m.news24.com/Columnists/MaxduPreez/real-action-on-land-needed-to-counter-extreme-eff-rhetoric-20180306">electorally dangerous</a> for the ANC.</p>
<p>On the other hand, supporting the motion but amending it to conform to other imperatives (stable economy, increased agricultural production, food security) could keep the ANC ahead of the political challenge while retaining its ability to shape the outcome of the review to suit its general policy direction. </p>
<p>Meeting the challenges from the opposition parties will strengthen the ANC’s dominance and Ramaphosa’s control internally. The internal and external challenges could therefore be met in an integrated way. In a sense, this would allow it to return to the position it had enjoyed during Nelson Mandela’s tenure, exercising hegemony over state and society. </p>
<p>But the road is still long and full of obstacles.</p><img src="https://counter.theconversation.com/content/92940/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ran Greenstein does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Meeting the challenges from the opposition will strengthen the ANC’s dominance. How well its new leadership copes will become clearer over the next few months.Ran Greenstein, Associate Professor of Sociology, University of the WitwatersrandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/925382018-02-27T15:19:14Z2018-02-27T15:19:14ZRamaphosa has chosen a team that will help him assert his authority<figure><img src="https://images.theconversation.com/files/208119/original/file-20180227-36680-1x0i4mv.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">President Cyril Ramaphosa during the late night announcement of his new cabinet. </span> <span class="attribution"><span class="source">Elmond Jiyane, GCIS</span></span></figcaption></figure><p><em>South Africa’s new president, Cyril Ramaphosa, <a href="https://www.news24.com/Analysis/graphic-all-the-changes-ramaphosa-made-to-cabinet-20180227">has announced</a> his cabinet. As widely expected, he either fired or demoted almost all cabinet ministers implicated in corruption or considered incompetent who served under Jacob Zuma. In their stead Ramaphosa appointed his dream team to key ministries, bringing back former finance ministers Nhlanhla Nene and Pravin Gordhan both of whom had been fired by Zuma. But, contrary to expectations, he kept some ministers widely believed to have made a hash of their jobs. Politics and Society editor Thabo Leshilo asked Keith Gottschalk for his perspective.</em></p>
<p><strong>Is the new Cabinet fit for purpose - is it better equipped to do what needs to be done?</strong></p>
<p>This was a major shuffle, affecting two-thirds of ministers, more than most analysts had expected. </p>
<p>The new cabinet is undoubtedly better than the one that served under Zuma. The ministers incriminated in subverting procurement procedures for the benefit of the <a href="https://mg.co.za/tag/gupta-brothers">Guptas</a>, or at best, above their level of competence, have vanished. The Guptas’s were allied to Zuma and were at the heart of corruption and <a href="https://www.news24.com/SouthAfrica/News/FULL-TEXT-Statement-by-Public-Protector-on-Nkandla-Report-20140319">state capture </a> in the country.</p>
<p>The independence and competence of Gordhan, who has come back to serve as minister of Public Enterprises, and Nene who returns to the finance minister post, are welcome and will be well received by the markets. The appointment of <a href="https://www.gov.za/about-government/contact-directory/grace-naledi-mandisa-pandor-ms">Naledi Pandor</a> to Higher Education and Training is a good fit. Her views and temperament match with the vice-chancellors of higher education institutions.</p>
<p>Ramaphosa appointed two former ministers to their previous jobs: <a href="https://www.pa.org.za/person/derek-andre-hanekom/">Derek Hanekom</a>, who was fired by Zuma, is back running tourism and <a href="https://www.ft.com/content/f45af228-1a10-11e7-a266-12672483791a">Malusi Gagaba</a>, who relinquished the finance ministry, has been put back in charge of Home Affairs. An obvious posting for Nkosazana Dlamini-Zuma, who ran against Ramaphosa for the position of president of the African National Congress, would have been her former portfolio in international relations. Instead she has become a minister within the presidency.</p>
<p>The country is onto its eleventh minister responsible for energy since 1994. This time the post has gone to <a href="https://www.gov.za/about-government/contact-directory/jeffrey-thamsanqa-radebe-mr">Jeff Radebe</a>. Each of the previous incumbents lasted an average of 2.4 years. </p>
<p>In future the revolving door of ministers, directors-general and deputy directors general will need to end.</p>
<p>Before then, there will be at least one more shuffle and pruning when, as Ramaphosa has <a href="https://www.timeslive.co.za/politics/2018-02-16-ramaphosa-promises-to-cut-bloated-cabinet/">indicated</a>, the cabinet and the number of state departments are cut back. </p>
<p>It is a rule of thumb in political science that the poorer a country, the bigger its cabinet. The USA’s includes the Vice President and the heads of <a href="https://www.whitehouse.gov/the-trump-administration/the-cabinet/">15 executive departments</a>. South Africa’s is <a href="https://www.gov.za/about-government/leaders/profile/1083">35</a>, up from 30 <a href="http://www.sahistory.org.za/article/1994-cabinet">under Nelson Mandela</a>.</p>
<p><strong>What does all this augur for the future, and Ramaphosa’s success?</strong></p>
<p>Politics, except under a dictatorship, involves negotiating trade-offs with those with whom you have to negotiate, not only with those you would like to have as your allies. A winner only wins because he or she has formed a coalition of factions which outnumbers the rival coalition of factions.</p>
<p>Ramaphosa had to do some fancy footwork. This is because there’s broad consensus that his narrow victory over Nkosazana for the presidency was solely due to the intervention of the premier of Mpumalanga David Mabuza who ordered his followers to switch their votes at the last minute. Ramaphosa squeaked through. And, notwithstanding Ramaphosa’s preference for Pandor as his deputy, Mabuza won the necessary backing. Ramaphosa announced Mabuza’s appointment as deputy president of the country as part of his cabinet announcement. (Convention has it that the president and deputy president of the ANC serve as president and deputy president of the country.)</p>
<p>Making Dlamini-Zuma a minister within the presidency is clearly also a gesture of inclusivity to the anti-Ramaphosa faction.</p>
<p>Overall, Ramaphosa has a cabinet that forms a team he can work with, and that will help him assert his authority. As he <a href="http://www.thepresidency.gov.za/press-statements/president-ramaphosa-announces-changes-national-executive">said</a> in announcing it:</p>
<blockquote>
<p>These changes are intended to ensure that national government is better equipped to implement the mandate of this administration and specifically the tasks identified in the State of the Nation Address.</p>
</blockquote><img src="https://counter.theconversation.com/content/92538/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Keith Gottschalk is an ANC member, but writes this in his professional capacity as a political scientist.</span></em></p>Overall South Africa’s new president has a cabinet that forms a team with whom he can work.Keith Gottschalk, Political Scientist, University of the Western CapeLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/923582018-02-27T08:16:53Z2018-02-27T08:16:53ZSouth Africa: Ramaphosa administration lacks a long-term perspective<figure><img src="https://images.theconversation.com/files/208004/original/file-20180227-36696-1jm28o7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">South Africa's president Cyril Ramaphosa needs to formulate a long term strategy for economic growth with an eye on the 2019 elections. </span> <span class="attribution"><span class="source">GCIS</span></span></figcaption></figure><p>South African president Cyril Ramaphosa’s <a href="http://www.thepresidency.gov.za/speeches/state-nation-address-president-republic-south-africa%2C-mr-cyril-ramaphosa">state of the nation address</a> and the <a href="http://www.treasury.gov.za/documents/national%20budget/2018/speech/speech.pdf">budget speech</a> delivered by Finance Minister Malusi Gigaba – who was <a href="http://ewn.co.za/2018/02/26/watch-live-ramaphosa-reshuffles-his-cabinet">removed</a> from the job less than a week later – had something in common: they both lacked an animating narrative. And they both looked backwards rather than forwards.</p>
<p>Ramaphosa pinned his hopes on the <a href="https://www.gov.za/issues/national-development-plan-2030">National Development Plan</a> which was released six years ago, suggesting that he has not had much time to think about long-term economic recovery. </p>
<p>Gigaba’s budget speech was defined by the bad legacy of former president Jacob Zuma. The parlous state of governance and weak leadership of the economy has been costly to the economy. Essentially, South Africans are bearing the cost of poor leadership. </p>
<p>Both addresses didn’t leave a sense that there has been much reflection on the years ahead, the depth of the economic malaise gripping South Africa, and the storms that lie beyond the <a href="https://www.news24.com/SouthAfrica/News/newsmaker-2019-elections-results-will-be-credible-20171015-2">2019 general elections</a>. </p>
<p>The budget contained desperate increase in taxes, and some piecemeal allocations to various <a href="https://www.fin24.com/Budget/above-inflation-adjustments-to-social-grants-20180221">social causes</a>. But citizens were left with no clarity on what the future will look like. This includes the new character of government, the structure of state-owned enterprises, and long-term development commitments of the current administration.</p>
<p>Trying to formulate a long-term strategy a year before the elections is a tough act, especially since the mind of a politician tends to be constrained by short-term considerations and desire for popularity. But if the administration under Ramaphosa is going to be successful, this is precisely what it has to do – craft a sensible and bold long-term strategy for economic recovery.</p>
<h2>Tensions and interests</h2>
<p>In the medium-term, the effects of the budget will be felt by public-sector workers, who are likely to be squeezed hard during wage negotiations. As Gigaba indicated, one of the cost containment measures that government will pursue is limits to public sector wage increase.</p>
<p>Negotiations for a three-year framework are <a href="https://www.businesslive.co.za/bd/opinion/2018-01-18-public-service-wage-outcome-will-set-the-tone-for-other-sectors/">currently underway </a>. Depending on what the outcome is – and they are likely to last until June 2018 – they may very well complicate the proposed budgetary framework.</p>
<p>Some progress has been made in the negotiations between the government and the public-sector unions. But they are still at different positions on what the wage increase, over and above inflation, should be for the next three years. Unions are demanding consumer price index +3%, while government is offering consumer price index +1.5% for employees at lower levels. </p>
<p>This means that the public sector wage bill will increase. The only question is by how much.</p>
<p>On the positive side, major items in government spending remain those that matter to the poor. For example, R792bn has been allocated to basic education, R668bn to health and R528bn to social grants. </p>
<p>The budget has always included commitments that address issues of equity. This was true in Gigaba’s budget too. But, in the absence of a long-term plan for economic leadership, this too may come under threat once the general elections are out of the way.</p>
<p>There are other re-distributive measures targeted at constituencies that are important to the governing party. The R57bn allocation for free higher education may have been unplanned, but it helps government to stem any <a href="https://theconversation.com/feesmustfall-the-poster-child-for-new-forms-of-struggle-in-south-africa-68773">#Fees MustFall</a> protests that might snowball into rolling mass protests on the eve of the elections. </p>
<p>The largesse extended to business start-ups to the tune of <a href="https://mg.co.za/article/2018-02-21-gigaba-budgets-r21-billion-for-small-business">R2.1bn</a>, and allocations to black producers in agriculture are all aimed at giving government a powerful platform to project its developmental credentials. </p>
<p>There are clearly tensions in the budget, with strong pressure to curtail public spending and to increase taxes on the one hand, while maintaining a pro-poor and developmental face on the other hand. This works in the short-term, but without a credible recovery plan the future looks foggy.</p>
<p>Further, what’s missing are clear plans to introduce greater efficiency in the public sector given that a lot of wastage happens across different spheres of government – as shown by various reports of the Auditor General –- as well as in state-owned enterprises. </p>
<p>Merely alluding to reform of these entities doesn’t help when there is no clear strategy on how government will shake things up – or by when. The statements by both Gigaba and Ramaphosa are too broad, and lacking a concrete plan on the reform of the public sector and state-owned entities.</p>
<h2>Need for decisiveness</h2>
<p>A major confidence-boosting action that should have been signalled in the budget speech is the need to reduce the <a href="https://theconversation.com/why-south-africa-would-do-well-to-fire-all-its-deputy-ministers-58809">bloated cabinet</a>. Even though this is unlikely to generate significant savings, it would signal government’s commitment to lead by example in cutting fat. Indeed, Ramaphosa has alluded that he will cut the size of the government. What is important is how government is restructured to trim the fat while also positioning it for effective execution. </p>
<p>Some ministries under Zuma were created to accommodate various factional interests within the ANC rather than to enhance the delivery capacities of the state. Similarly, diplomatic missions were a trove for politically connected cronies. These need to be reduced drastically to send a clear message about the priorities of government. </p>
<p>A great deal of work awaits Ramaphosa to get the country moving beyond the budget vote. He has little time to solve some of the major challenges facing the country, ranging from governance to socio-economic challenges. He can ill-afford to spend an inordinate amount of time consulting and building a consensus. South Africa is in the middle of a storm, and that requires some decisive steps (and risk taking). He should not spend too much time in the boardroom. As the former US secretary of state <a href="https://books.google.co.za/books?id=jNusCAAAQBAJ&pg=PA37&lpg=PA37&dq=Robert+Gates:+Leader,+firestorm,+powerpoint&source=bl&ots=d3uhId9uA7&sig=CB9x9ZVHMzZX3p9UXK4OcXlbB1g&hl=en&sa=X&ved=0ahUKEwic6uL5gLzZAhUMDsAKHblpB0YQ6AEIJjAA#v=onepage&q=Robert%20Gates%3A%20Leader%2C%20firestorm%2C%20powerpoint&f=false">Robert Gates put it</a>, </p>
<blockquote>
<p>A leader placed in charge of an organisation facing a firestorm should reach for a hose, not a PowerPoint.</p>
</blockquote><img src="https://counter.theconversation.com/content/92358/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Mzukisi Qobo does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Both the state of the nation address and budget speech didn’t leave a sense that there has been much reflection on the depth of the economic malaise gripping South Africa.Mzukisi Qobo, Deputy Chair: SA Research Chair on African Diplomacy and Foreign Policy, University of JohannesburgLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/922912018-02-23T09:17:08Z2018-02-23T09:17:08ZUnpacking the latest tax hikes in South Africa<figure><img src="https://images.theconversation.com/files/207625/original/file-20180223-108110-3bswct.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p><em>South Africa’s <a href="http://www.treasury.gov.za/documents/national%20budget/2018/">2018 budget</a> seemed to be all about tax hikes. The most significant was the first increase in Value Added Tax (VAT) since 1993 from 14% to 15%. Sibonelo Radebe asked Muneer Hassan to make sense of the tax increases.</em></p>
<p><strong>What is your general impression of the budget speech?</strong></p>
<p>The 2018 budget was predictable in that it was similar to previous years – expenditure rose, funded by an increase in taxation. What was notably different in this year’s budget is that the issue of fruitless and wasteful expenditure was in the spotlight. One new measure being proposed on this front is that state owned entities will be denied tax deductions for expenditure or losses that are classified as fruitless and wasteful. </p>
<p>To minimise the annual increase in budgeted expenditure, a reduction in cabinet expenses amounting to R85 billion over the next three years is proposed. This is a positive proposal which shows a serious intent by government to cut expenses where possible. It can also be taken as a hint that not only a cabinet reshuffle, but also a possible reduction in the cabinet number count, is on the cards.</p>
<p><strong>What is your impression around the key tax announcements?</strong></p>
<p>I was not surprised by the one percentage point increase in the VAT rate. South Africa is in a way catching up with other countries in the Organisation of Economic Cooperation and Development (OECD). Their average VAT rate is <a href="http://www.oecd.org/tax/tax-policy/tax-database.htm#VATTables">around 19%</a>. And most African countries have a <a href="https://www.crowehorwath.net/uploadedfiles/mu/additional-content/home/africa%20vat%20guide%202016.pdf">higher than 14%</a> VAT rate. </p>
<p>It was also not surprising that the VAT rate was raised rather than personal income tax. South Africa has seen a decline in collections from personal income taxes over the past few years. This has been attributed to job losses, lower bonus payments and moderate wage settlements. This suggests that the personal income tax front may have reached a ceiling.</p>
<p>The VAT rate increase is further justified in that 30% of the wealthy taxpayers <a href="http://www.treasury.gov.za/documents/national%20budget/2018/review/Chapter%204.pdf">contribute 85%</a> of total VAT collections. </p>
<p>And to shield those on the bread line from the increase, social grants were adjusted by more than inflation. </p>
<p>The concept of multi-VAT rate, differentiated rates for different items, was on the cards. But the idea was dropped because it was considered unfeasible – it would need additional enforcement to work properly and there is also a view that it could have created legal uncertainty. </p>
<p>Instead of multi-VAT rates, the budget proposed an increase in duties on luxury goods such as cars, smart phones and so on through the current <em>ad valorem</em> excise duties. These items are largely consumed by wealthier people.</p>
<p><strong>What are the main drivers of these tax developments?</strong></p>
<p>The main driver was the need to fund the tax revenue shortfall which stands at R48.2 billion for the current (2017/18) financial year, slightly lower than the projected amount of R50.8 billion. The reason for the shortfall is due to lower than expected tax revenue collections, which is directly affected by the employment numbers, company results and consumer spending. </p>
<p>In addition government is struggling with ever increasing debt-service costs due to slowing economic growth and against rising social expenditure needs. The budgeted debt-service costs for 2018/19 is R180 billion. Goverment’s borrowing space has shrunk. Sovereign debt has skyrocketed towards unsustainable levels over the past few years. </p>
<p>The tax policy proposals are designed to raise R36 billion in additional revenue. The increase in the VAT rate will bring in an extra R22 billion.</p>
<p><strong>From a tax perspective, were there any missed opportunities?</strong></p>
<p>I expected more relief for small businesses particularly on the ease of administration for these taxpayers. Small businesses of today are big businesses of tomorrow. Unlocking the potential of small business is therefore a vital stimulus to the growth rate.</p>
<p><strong>Any other thoughts?</strong></p>
<p>I think this budget was largely about increasing taxes through indirect taxes. The increases in VAT, fuel levy, environmental taxes, <em>ad valorem</em> excise duties are all indirect taxes. This leads to the tax burden being placed ultimately on the end consumer. In my opinion this is the easiest way to increase taxes without introducing additional administrative costs.</p><img src="https://counter.theconversation.com/content/92291/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Muneer Hassan owns shares in MHTax Consulting (Pty) Ltd. </span></em></p>A revenue shortfall of about R50 billion has pushed the South African government to hike Value Added Tax (VAT) among other taxes.Muneer Hassan, Senior Lecturer in Tax, University of JohannesburgLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/922452018-02-22T11:25:10Z2018-02-22T11:25:10ZEfforts to get South Africa’s economy moving are no more than a patch up job<figure><img src="https://images.theconversation.com/files/207463/original/file-20180222-152372-x8679p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">South African finance minister Malusi Gigaba could have done better in his 2018 budget speech.</span> <span class="attribution"><span class="source">Reuters/Mike Hutchings</span></span></figcaption></figure><p>Its obvious that the South African government approached the <a href="http://www.treasury.gov.za/">2018 budget</a> from an extremely tight spot and with limited options. The country has been staring at the perfect storm of low economic growth and widening fiscal deficits set against huge expectations and needs. These include <a href="https://www.ujuh.co.za/south-africa-relies-on-new-taxes-to-fund-fee-free-higher-education/">fee-free higher education</a> for poor students, troubled state-owned enterprises and a growing base of the unemployed.</p>
<p>The saving grace may have been the recent <a href="https://theconversation.com/why-ramaphosas-moment-of-hope-is-built-on-a-fragile-foundation-92043">change in presidency</a> from the disastrous Jacob Zuma to the promising Cyril Ramaphosa. The new president has triggered a wave of optimism and there are signs that the economy is <a href="https://citizen.co.za/business/business-news/1829217/sas-economic-growth-forecast-revised-upward/">picking up</a>. This will be needed if Treasury is to find a way of closing a revenue gap of R48.2bn.</p>
<p>The focus by Malusi Gigaba, the minister of finance, on free education, developing industrialists and small to medium sized enterprises are to be welcomed. But one gets the sense that without the right policies in place, this is just more of the same. </p>
<p>Assuming that government is able to achieve the expenditure reduction of R85 billion, fund the R57 billion earmarked for higher education via increased <a href="https://theconversation.com/south-africas-finance-minister-played-the-tax-cards-he-had-left-wealth-and-vat-92230">Value Added Tax</a> (VAT) and marginal adjustments to personal income tax, the question remains; has it addressed the real reasons why the country has been limping along. It all sounds like a patch up job to me.</p>
<p>The increase in VAT from 14% to 15% is bad news, despite the promised offsets through social grants. VAT is generally known to be <a href="https://www.ujuh.co.za/south-africas-tax-system-and-the-reform-agenda-for-2015-and-beyond/">a regressive tax</a> which means it tends to hit the poor people the hardest.</p>
<p>On top of this, the budget just didn’t go far enough. Perhaps the finance minister was caught up in the euphoria of Ramaphosa’s widely welcomed <a href="https://theconversation.com/why-ramaphosas-moment-of-hope-is-built-on-a-fragile-foundation-92043">state of the nation address</a>. Gigaba’s speech didn’t do enough to highlight the consequences of not doing what needs to be done. He had a great opportunity to set the path, but there wasn’t an integrated outline as to what is needed, and how the changes proposed will be implemented in a way that makes sure they complement each other. </p>
<p>He had the chance to set the vision, but didn’t.</p>
<h2>Thin on detail</h2>
<p>The budget is very thin on detail. The power utility Eskom is clearly a great concern as reference to this was highlighted quite early on in the budget speech. The minister said:</p>
<blockquote>
<p>we have demonstrated our resolve by strengthening Eskom’s board and management with highly capable, ethical and credible leadership. </p>
</blockquote>
<p>Other than a brief mention of South African Airways (SAA), Gigaba made no reference to other stressed state owned enterprises such Passenger Rail Agency of South Africa and Denel. I was expecting more detail on how government plans to sort out the state owned enterprises mess.</p>
<p>The debt situation is frightening. The debt-service cost projections have gone up from R163.155 million in 2017/18 to R213.859 million in 2020/21. Even though he acknowledged that government debt is on an unsustainable path, he didn’t provide a clear outline about how the stabilisation of gross debt-to-GDP at 56.2% of GDP in 2022/23 will be achieved. This is just a case of kicking the can down the road.</p>
<h2>The fate of state owned enterprises</h2>
<p>Gigaba made a bold statement when he said:</p>
<blockquote>
<p>State-owned enterprises are expected to fund their own operations. </p>
</blockquote>
<p>The only clue as to how this will be achieved is that government would help them develop robust turnaround plans. </p>
<p>Gigaba also mentioned that non-core assets could be sold, strategic equity partners brought in or possible injections of direct capital. </p>
<p>This is all well and good. But the minster wasn’t clear about the time frame, who will drive the process or how it will be done. The lack of detail doesn’t inspire confidence that there is real political will to address the dire situation of state owned enterprises. </p>
<p>Gigaba did touch on the systemic issues like the unacceptably high levels of corruption. But he did not do so credibly enough. He didn’t demonstrate loudly and clearly that the government wouldn’t tolerate any more <a href="https://www.ujuh.co.za/state-of-capture-public-protectors-report/">transgressions</a> in the running of public funds. </p>
<p>The fact that he has a <a href="https://citizen.co.za/news/south-africa/1789778/gigaba-the-catalyst-behind-a-multibillion-rand-civil-claim-against-eskom-zuma-guptas/">cloud hanging over</a> his head does not help the situation. One can’t help but wonder if his proposals can be taken seriously. </p>
<p>What people want to see is the minster drawing a line in the sand and making it abundantly clear that it can no longer be crossed. As the person who controls the public purse, this message should have been loud and clear.</p>
<h2>Next steps</h2>
<p>Ramaphosa has the opportunity to assemble the most respected cabinet this country has ever known. The various summits that he is calling for – such as the one on jobs – and the social compact he’s intent on securing are absolutely essential to kick start South Africa on a growth path that is able to realise inclusive economy and socioeconomic transformation.</p><img src="https://counter.theconversation.com/content/92245/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Owen Skae does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>South Africa’s 2018 budget does not go far enough. Perhaps finance minister, Malusi Gigaba was caught up in the euphoria of the widely welcomed state of the nation address by Cyril Ramaphosa.Owen Skae, Associate Professor and Director of Rhodes Business School, Rhodes UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/922232018-02-21T16:55:44Z2018-02-21T16:55:44ZNo more mercy for bad behaviour at South Africa’s state owned companies<figure><img src="https://images.theconversation.com/files/207312/original/file-20180221-132680-xnoxi4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">South Africa's Finance Minister Malusi Gigaba arrives to deliver his budget address.</span> <span class="attribution"><span class="source">Reuters/Mike Hutchings</span></span></figcaption></figure><p><em>South Africa’s <a href="http://www.treasury.gov.za/documents/national%20budget/2018/">2018 national budget</a> was presented amid growing concern about the financial sustainability of key state owned enterprises such as the power utility Eskom and South African Airways. Sibonelo Radebe asked Misheck Mutize and Sean Gossel to set out what the budget means for them.</em></p>
<p><strong>What is your general impression of the budget speech?</strong></p>
<p>Coming on the back of the <a href="https://theconversation.com/why-ramaphosas-moment-of-hope-is-built-on-a-fragile-foundation-92043">state of the nation address</a> presented by the new President Cyril Ramaphosa, the 2018 national budget has renewed hope about the future of the country’s economy. Combined with the pledge by Ramaphosa to root out the ills bedevilling state owned enterprises, there is optimism that South Africa’s economy is turning the corner.</p>
<p>There were signs of the rebound from the numbers presented by the minister – even though there’s still huge weakness in the economy. Last year’s economic growth projection has been revised, up from 0.7% to 1% and growth in 2018 is projected at 1.5% rising to 2.1% 2020. Of course the country needs much more robust growth than this. The hope is that things will improve with the interventions promised by the new president.</p>
<p>It was a tough budget, especially for the poor. But the tax hikes and other measures are necessary given the need to narrow a R42 billion revenue shortfall, which was widened by the need for a funding solution for fee free higher education. </p>
<p>Overall the budget presented a solid step towards arresting the fiscal deficit and stabilising government debt. Fiscal prudence is painful. But it’s necessary to save the country from further downgrades, and from sliding deeper into debt. </p>
<p><strong>What do you think about the treatment of state owned enterprises?</strong></p>
<p>Finance minister Malusi Gigaba underscored the commitment to dealing with patronage, corruption and incompetence in state owned enterprises. (This is rather <a href="https://www.news24.com/SouthAfrica/News/is-gigaba-mr-state-capture-20170528-2">ironic</a> as he has been fingered as one of the architects of state capture as the opposition vocally pointed out before the speech got underway). Nevertheless, this must be commended. The looting and mismanagement has caused a great deal of damage to the economy as well as business confidence.</p>
<p>The message is that there will be no mercy for misbehaviour in this space. Time has also run out for those who justified mediocrity in parastatals. Gigaba’s statement that state-owned companies are expected to fund their own operations must also be welcomed. Although similar calls have been made in the past, this time there may be political will.</p>
<p>This means that the government’s limited resources can now be allocated to other more important things. Hopefully the emphasis will shift towards finding long-term solutions to the country’s ills. </p>
<p><strong>What must happen to get state owned enterprises right?</strong></p>
<p>It is refreshing that the new president has indicated his commitment to appointing qualified and experienced people to lead state owned enterprises. This is a welcome substitute for the disastrous policy of cadre deployment – the practice of appointing people to state owned enterprises largely for their political connections.</p>
<p>But it’s also time the government actively reconsidered its interest in state owned enterprises. The cost of maintaining ownership has become too high. Over the past 24 years state owned monopolies have been the site of gross inefficiencies and high social costs which in turn have hampered the economy’s performance. The time is ripe for the government to begin unpacking monoliths such as Eskom, Transnet and the Passenger Rail Agency of South Africa in preparation for partial privatisation or public listings on the stock exchange. </p>
<p>The options would be to either partially privatise the entities, or to open up the space for private players to buy equity stakes. Government might in fact be considering these options given Gigaba’s comment that: </p>
<blockquote>
<p>In the coming year, government may be required to provide financial support to several state owned enterprises which could be done through a combination of disposing of non-core assets, strategic equity partners, or direct capital injections.</p>
</blockquote>
<p>It is good that the minister mentioned these refinancing options. But there’s still talk of government support and guarantees for several state owned enterprises. </p>
<p><strong>What general advice would you give to the new administration following this budget?</strong></p>
<p>As the government goes about meeting the spending cuts it announced (by R85.7 billion) over the next three years and increasing revenue by R36 billion this year, it urgently needs to wean state owned enterprises from the fiscus. Opening the public sector to participation by private players would be the optimal way to go about this. </p>
<p>Allowing these enterprises to continue operating as monopolies in key sectors will simply allow inefficiencies and market distortions to continue. We would argue that the unions and politicians that have campaigned against privatisation have exaggerated the negative impact on the poor. <a href="https://hbr.org/1991/11/does-privatization-serve-the-public-interest">Evidence</a> from other countries suggests that introducing private ownership doesn’t necessarily lead to massive job losses nor expensive services. </p>
<p>The new administration should depoliticise the issue and face the reality that state owned enterprises need an immediate and realistic response to save both the economy and the fiscus. Without that, the government will not be able to wean them from guarantees and bailouts, and their failure will be eminent.</p>
<p>We would also urge the government to follow up on the promise to hold corrupt public servants to account and to ensure tender processes aren’t abused by closing loopholes in public procurement.</p><img src="https://counter.theconversation.com/content/92223/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Sean Gossel receives funding from the University of Cape Town.</span></em></p><p class="fine-print"><em><span>Misheck Mutize does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>South Africa’s 2018 national budget makes it clear that the slumber and corruption that has hampered state owned enterprises must come to an end.Sean Gossel, Senior Lecturer, UCT Graduate School of Business, University of Cape TownMisheck Mutize, Lecturer of Finance and Doctor of Philosophy Candidate, Graduate School of Business (GSB), University of Cape TownLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/922302018-02-21T16:34:59Z2018-02-21T16:34:59ZSouth Africa’s finance minister played the tax cards he had left: wealth and VAT<figure><img src="https://images.theconversation.com/files/207321/original/file-20180221-132663-8vf3yd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">When the going gets tough, taxes go up.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p><em>South Africa’s <a href="http://www.treasury.gov.za/documents/national%20budget/2018/">2018 national budget</a> came with a raft of tax increases indicating the country’s desperation to address a growing gap in its public finances. These include a hike in Value Added Tax from 14% to 15%. Sibonelo Radebe asked Lee-Ann Steenkamp to highlight the key tax developments.</em></p>
<p><strong>What is your general impression of the budget speech?</strong></p>
<p>I’m cautiously optimistic. In his own words, the minister of finance Malusi Gigaba noted this was a tough but hopeful budget. The budget speech echoed the theme of rebuilding and restoration set out in President Cyril Ramaphosa’s <a href="https://theconversation.com/why-ramaphosas-moment-of-hope-is-built-on-a-fragile-foundation-92043">state of the nation address</a>.</p>
<p><strong>What is your impression around the key tax announcements?</strong></p>
<p>Given the increases in personal income taxes in previous years major tax instruments have reached their limit in being used to raise revenue sustainably. As a result the minister only had two options to work with – focusing on wealth transfer taxes and Value Added Tax (VAT). </p>
<p>The result was that estate duty and donations tax rates were increased from 20% to 25% (with certain thresholds applying). And the VAT rate was increased from 14% to 15%. This won’t be a popular choice for the trade unions. But the <a href="http://www.taxcom.org.za/">Davis Tax Committee</a>, set up by government to assess ways of improving the country’s tax policy, showed that a VAT adjustment would have the least detrimental effect on economic growth and employment over the medium term. In addition, the negative impact on poor households is mitigated by the zero-rating of basic foodstuffs.</p>
<p><strong>What are the main drivers of the tax developments?</strong></p>
<p>The tax proposals are designed to increase revenue collection. And the impending sugar tax (now called a health promotion levy) and carbon tax show that environmental and health considerations have begun to play a role in tax policy.</p>
<p>Overall, the tax policy measures are designed to raise R36 billion in additional revenue in the 2018/19 financial year. These measures are aimed at reducing the budget deficit and funding fee free higher education and training for students from poor households.</p>
<p><strong>Were there any missed opportunities from a tax perspective?</strong></p>
<p>To create more certainty for tax planning it would have been helpful if the minister had explicitly said something about the introduction of a wealth tax. The <a href="https://www.businesslive.co.za/bd/economy/2017-04-25-davis-committee-to-mull-wealth-tax/">Davis Committee</a> looked into the efficacy of a wealth tax. The options would be charging it as a land tax, as an annual net wealth tax or as a national tax on the value of property (over and above municipal rates). </p>
<p>A wealth tax raised on the value of land would be complex. For example, it can’t be assumed that all private land owners are wealthy individuals. In the same vein, a national tax on the value of property would suffer similar shortcomings to an annual land tax. Thresholds would have to be used as well otherwise ownership would be used as a proxy for wealth.</p>
<p>An annual wealth tax would also be extremely complex and would probably lead to increased compliance and enforcement costs for the South African Revenue Services. This raises the question: would the cost be worth the additional tax revenue? We don’t know. What’s clear is that further in-depth research is required by the Davis Tax Committee, followed by a broad public consultation process. </p>
<p>At the very least the finance minister should have highlighted the issue in his speech. Policy transparency goes a long way in assuring investors (and taxpayers) that their money is in safe hands.</p>
<p><strong>Any other thoughts?</strong></p>
<p>The minister admitted that corrupt and wasteful expenditure by the government had eroded taxpayers’ trust in the state. This is a good starting point. But we’ve heard acknowledgements like this before, with very little (if any) progress afterwards. </p>
<p>The next few months will be crucial to see how the promises made by Ramaphosa will play out. Hopefully the governance and accountability of the South African Revenue Services will get immediate attention.</p><img src="https://counter.theconversation.com/content/92230/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Lee-Ann Steenkamp is affiliated with the South African Institute of Tax Professionals (SAIT).</span></em></p>The South African budget speech echoed the theme of rebuilding set out by President Cyril Ramaphosa in his state of the nation address.Lee-Ann Steenkamp, Senior lecturer, University of Stellenbosch Business School (USB), Stellenbosch UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/922212018-02-21T16:00:27Z2018-02-21T16:00:27ZSouth Africa’s budget: first steps towards a recovery, but at what cost?<figure><img src="https://images.theconversation.com/files/207294/original/file-20180221-132680-hysur8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">South African Finance Minister Malusi Gigaba is trying to spearhead a more stable economic landscape.</span> <span class="attribution"><span class="source">Reuters/Mike Hutchings</span></span></figcaption></figure><p>The <a href="http://www.treasury.gov.za/documents/national%20budget/2018/speech/speech.pdf">2018 Budget</a>, presented by Finance Minister Malusi Gigaba in Parliament, lays out the painful consequences of the country’s public finances for South Africans.</p>
<p>The National Treasury’s proposal of an increase in Value Added Tax (VAT) – a tax applied to most items consumers buy – from 14% to 15% is the most dramatic of these consequences. Because it’s a tax paid by all citizens, putting it up by 1 percentage point raises concerns about the negative effects on the poorest households. </p>
<p>The Budget also proposes that tax brackets for the highest-earning 1 million taxpayers will not be adjusted for inflation, which effectively increases income taxes for these taxpayers.</p>
<p>Another sign of the distress the country’s finances are in came in the form of proposed cuts to government infrastructure spending, especially at local and provincial government level. The need for expenditure cuts is exacerbated by the fact that the budget supports former president Jacob Zuma’s commitment to provide <a href="https://www.news24.com/SouthAfrica/News/zuma-announces-free-higher-education-for-poor-and-working-class-students-20171216">free higher education</a> for a greater number of students. The minister said that the policy would be phased-in, with the Budget indicating that the cost rises from R12bn to R24bn over the next three years. But there are reasons to believe the cost <a href="https://theconversation.com/free-higher-education-in-south-africa-cutting-through-the-lies-and-statistics-90474">could be higher</a>. </p>
<p>Whether measures announced by Gigaba will stave off a downgrade of South Africa’s local currency debt by the one remaining rating agency remains to be seen. While the ascension of Cyril Ramaphosa to <a href="http://ewn.co.za/2018/02/15/watch-live-ramaphosa-to-be-sworn-in-as-sa-president">the presidency</a> has provided hope that pressure on public finances will be reduced by the state being better managed, it will take years to significantly improve the current situation.</p>
<h2>A substantial shift</h2>
<p>In October last year Gigaba painted a grim picture of South Africa’s public finances in the 2017 <a href="http://www.treasury.gov.za/documents/MTBPS/2017/mtbps/FullMTBPS.pdf">Medium Term Budget Policy Statement</a>. With an expected R50bn shortfall in tax revenue he indicated that national debt would increase rapidly – contrary to repeated earlier promises to “stabilise” debt levels. </p>
<p>The 2018 Budget reflects a substantial shift from this position. The new plan is to return to a strategy of “debt consolidation”: reducing the speed at which national debt increases relative to the size of the economy, so that within a few years it begins to decline. </p>
<p>Debt will still increase to levels higher than promised in numerous previous budgets, but significantly slower than suggested in October. Reducing the rate at which the government borrows requires raising more money from taxes and decreasing planned government expenditure. But this is even more difficult to do because of Zuma’s announcement of “free higher education” – which happened after the medium term budget statement. </p>
<p>Essentially, expanded free higher education means a combination of more taxes, more spending and more borrowing.</p>
<h2>Some notable proposals</h2>
<p>It is important to remember that, <a href="https://www.parliament.gov.za/storage/app/media/PBO/act-9-2009-money-bill-amendment-procedure.pdf">by law</a>, the budget is actually a set of proposals – even though the National Treasury and Minister of Finance almost always get their way. The <a href="https://theconversation.com/explainer-the-nitty-gritty-of-south-africas-annual-budget-72901">proposals are only fully legally binding once they have been approved by Parliament</a>. If citizens are not happy with certain proposals there are still opportunities in Parliament to challenge them. </p>
<p>Some of the proposals that deserve attention are: </p>
<p><strong>1. The impact of VAT increase:</strong> Of all the major taxes available, VAT is the least “progressive”. It is paid to a much greater extent by the poor and vulnerable than personal income tax or corporate tax. It is arguably for this reason, in the context of South Africa’s <a href="https://theconversation.com/south-africa-needs-to-fix-its-dangerously-wide-wealth-gap-66355">high rates</a> of income and wealth inequality, that VAT has <a href="https://www.pwc.co.za/en/assets/pdf/vat21-september-2012.pdf">not been increased</a> since 1994. </p>
<p>The increase has been defended on the grounds that other options (personal and corporate income tax) are increasingly strained and VAT is the least harmful to economic growth. The claim about economic growth is debatable: it depends on assumptions about how the economy works. And although the budget claims that social grants have been increased to try and offset the negative impact, the overall effect remains unclear. It seems likely that most poor households will experience additional hardship.</p>
<p><strong>2. Free higher education:</strong> The budget repeatedly states that the costs of Zuma’s free higher education announcement “remain uncertain”. This is strange and probably reflects the fact that Zuma violated normal budget protocol by almost unilaterally announcing the policy change without adequate consultation or analysis of the likely costs. Nevertheless, it is surprising that the budget does not provide more detail.</p>
<p>The budget indicates additional government expenditure of R12.4 billion in 2018/19, increasing rapidly to R20.3 billion in 2019/20 and R24.3 billion in 2020/21 as the policy is rolled out beyond just first year students. But these numbers look optimistic. Treasury does not explain what it has assumed about the number of students needing support and how much support will be provided.</p>
<p><strong>3. Expenditure cuts:</strong> The budget proposes R85 billion in cuts to planned government spending over the next three years. It’s hard to tell what the implications of spending cuts really are just from looking at the numbers and explanation in the budget. Nevertheless, a couple of things are clear. </p>
<p>Firstly the cuts affect infrastructure spending in particular: about R40 billion is cut. In some ways this is understandable. But it’s also dangerous because these decisions seem, for now, less harmful than they really are. That’s because South Africa’s economic and social infrastructure is already a matter of concern and the additional negative consequences of underspending will only be noticed years down the line.</p>
<p>Secondly the cuts are targeted at provincial and local government: R28 billion will be cut in grants given to local and provincial governments for various infrastructure programmes. This is also concerning given the importance of service delivery at these levels.</p>
<h2>The gaps</h2>
<p>The National Treasury needs to provide more information on why the decision was taken to increase VAT, and what the implications are likely to be. This is important because the move raises concerns about the effects on poorer and more vulnerable South Africans.</p>
<p>A detailed explanation of the likely costs of the proposed policy to expand free higher education also needs to be provided. The absence of this information raises concerns about whether Treasury has allocated enough money for this policy and, if not, whether universities may be left to deal with the consequences of insufficient funding for students who have been promised free higher education.</p>
<p>Finally, the attitude of the National Treasury in recent budgets has been that provinces and municipalities simply need to become more efficient and must fulfil their obligations with fewer resources. But what if that’s not possible? The Treasury can’t wash its hands of the negative consequences of cuts to critical areas of service delivery.</p>
<p>In conclusion, the Budget represents progress since last year when Zuma and his cabinet effectively sat on their hands and refused to take any difficult decisions. At least proposals have now been made to stabilise the national debt. Whether they represent the best solutions to our public finance challenges is a matter for public debate.</p><img src="https://counter.theconversation.com/content/92221/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Seán Mfundza Muller has received funding support from the Heinrich Böll Foundation and is part of an European Union-funded project to build the capacity of South African civil society to engage with legislatures. In these and related projects he advises various civil society groups on public finance issues.</span></em></p>Whether measures announced by Gigaba will stave off a downgrade of South Africa’s local currency debt by one remaining rating remains to be seen.Seán Mfundza Muller, Senior Lecturer in Economics and Research Associate at the Public and Environmental Economics Research Centre (PEERC), University of JohannesburgLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/901192018-01-16T10:17:33Z2018-01-16T10:17:33ZWhy the drought levy tabled by Cape Town’s mayor is unfair<figure><img src="https://images.theconversation.com/files/202060/original/file-20180116-53320-188duqk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Cape Town's Muizenburg beach. Water shortages in the city hasn't deterred tourists.</span> <span class="attribution"><span class="source">EPA/Nic Bothma</span></span></figcaption></figure><p><em>Since publication, the City of Cape Town has withdrawn the proposal for a drought levy.</em></p>
<p><a href="https://www.businesslive.co.za/bd/opinion/2018-01-09-blame-game-wont-solve-cape-towns-water-crisis/">Day Zero</a>: the dreaded day when Cape Town’s taps are expected to run dry has been moved <a href="http://ewn.co.za/2018/01/11/day-zero-could-be-moved-forward-again">forward to 21 April</a>. That is, unless residents reduce usage even further and the long awaited alternative sources, like desalination plants, come on stream. </p>
<p>These saving grace projects are running <a href="http://coct.co/water-dashboard/">behind schedule</a>, although drilling on the <a href="https://www.news24.com/SouthAfrica/News/drilling-on-cape-flats-aquifer-starts-as-cape-town-dams-dry-up-in-drought-20180111">Cape Flats Aquifer</a> has at last started. These essential projects are expensive and someone has to foot the bill. Enter the proposal tabled by Mayor Patricia De Lille for <a href="http://www.capetown.gov.za/City-Connect/Have-your-say/Issues-open-for-public-comment/comment-on-the-drought-charge/Comment%20on%20the%20drought%20charge">a drought levy.</a></p>
<p>The levy is being proposed because the dramatic drop in water usage has meant a large shortfall in projected revenue. The city’s estimated water budget deficit ballooned to <a href="https://www.businesslive.co.za/bd/opinion/2017-12-05-patricia-de-lille-temporary-drought-charge-would-help-stave-off-the-arrival-of-day-zero/">R1.7bn</a> for the 2017 - 2018 financial year, based on consumption figures for October 2017.</p>
<p>To offset this shortfall, the Mayor has proposed an additional, temporary fix in the form of <a href="http://www.capetown.gov.za/City-Connect/Have-your-say/Issues-open-for-public-comment/comment-on-the-drought-charge/Comment%20on%20the%20drought%20charge">a drought levy</a>. If given the go ahead by the country’s Finance Minister Malusi Gigaba, the levy would come into force on 1 February. It’s expected to raise one billion rand annually for the four years it’s proposed to run.</p>
<p>The other hurdle the levy has to clear is that it needs to be approved by Cape Town’s City Council. Internal politics in the Democratic Alliance, South Africa’s main opposition party that also governs Cape Town and the Western Cape Province, might scupper it. The <a href="https://m.news24.com/SouthAfrica/News/da-executive-calls-on-its-cape-town-councillors-to-vote-against-partys-own-drought-levy-20180111">Democratic Alliance executive</a> has done an about-turn on its own proposal and called on its councillors to vote against it.</p>
<p>Whatever the outcome, I believe that the levy is a bad idea. The main reasons are that it will be punitive (contrary to the mayor’s claim that <a href="https://www.timeslive.co.za/news/south-africa/2017-12-05-drought-levy-is-about-our-survival-de-lille-tells-capetonians/">it won’t be</a>) because it will penalise people who have made an effort to save water. It will also punish those who have invested in installing water saving measures in their homes.</p>
<h2>The workings of the levy</h2>
<p>The proposed levy would be based on property values and calculated at between 10% and 11% of the rates portion of the municipal account. The charge would affect owners of properties valued at more than R400 000, and business properties valued at more than R50 000. </p>
<p>On the face of it, the monthly charge doesn’t seem excessive. After all, the city does need extra major water infrastructure, as well as ongoing funding for basic services like sanitation. But the drought levy is unfair because it’s based on property values and not on water use. After all, a person in a R2m home may use less water than a person residing in a R400 000 home – yet has to fork out more for the drought levy. So, instead of serving as a consumption charge like normal rates, the drought levy is in fact a punitive tax - something that is severe and people will struggle to pay. </p>
<p>To add insult to injury, many Capetonians have incurred huge costs by installing water efficient devices, grey water solutions and rainwater harvesting tanks – all at their own expense. No tax savings or rebates were offered by the city. These water saving items could also increase the value of the property, possibly making the levy higher. Rather than a drought levy, would it not be more sensible to increase the cost of water and penalise high consumers? </p>
<p>Alternatively, the city could redirect funds from its overall <a href="https://citizen.co.za/news/south-africa/1783624/cape-chamber-calls-on-city-to-make-r17-bln-saving-amid-drought-crisis/">R44 billion budget</a> to cover the shortfall.</p>
<h2>The complications</h2>
<p>Cape Town is in a difficult position. The city was declared a <a href="https://www.iol.co.za/capetimes/news/city-update-on-drought-crisis-local-disaster-declared-8071456">local disaster</a> area in March 2017 with the aim of invoking emergency procurement procedures and obtaining emergency funding. But the national government has dragged its feet. </p>
<p>The Department of Water and Sanitation has been accused of <a href="https://theconversation.com/cape-towns-water-crisis-driven-by-politics-more-than-drought-88191">neglecting its constitutional duties</a> by flouting the principles of <a href="http://www.justice.gov.za/legislation/constitution/SAConstitution-web-eng-03.pdf">cooperative governance</a>. Helen Zille, premier of the Western Cape, has also stated that the department has no money for capital infrastructure because of <a href="https://www.dailymaverick.co.za/opinionista/2017-10-30-the-cape-water-crisis-faqs-and-honest-answers/#.WliIbrzXbcs">irregular, fruitless and wasteful expenditure</a>.</p>
<p>Another challenge facing the city is that the levy might in fact be <a href="https://www.outa.co.za/cape_town_drought_levy/">illegal</a> because it could be in contravention of the <a href="http://www.ffc.co.za/docman-menu-item/legislation/630-municipal-fiscal-powers-and-functions-act-no-12-of-2007">Municipal Fiscal Powers and Functions</a> as set out in the Constitution. The local government might have overstepped its legislative authority by fulfilling a national obligation – imposing a levy – which should rest with the Department of Water and Sanitation.</p>
<p>However, none of these reasons give the city the right to pass the buck to already overburdened taxpayers. As the blame game continues to rage, the Democratic Alliance’s executive has instructed its city councillors to vote against the levy when it comes under consideration at the next council meeting at the end of January. Their reason? The levy would “create an undue burden on ratepayers”. </p>
<p>Now is not the time to penalise property owners for investing in alternative water technologies and for heeding the city’s call to save water. The drought levy could break the trust between the public and local government, and ultimately result in a rates boycott. Whether this crisis is due to climate change, poor planning, bad politics or a combination thereof, a drought levy may well be the straw that breaks the thirsty camel’s back.</p><img src="https://counter.theconversation.com/content/90119/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Lee-Ann Steenkamp is affiliated with South African Institute of Tax Professionals (SAIT).</span></em></p>A drought levy is being proposed for water scarce Cape Town. The levy is facing wide opposition and there are claims it’s punitive and punishes those trying to save water.Lee-Ann Steenkamp, Senior lecturer, University of Stellenbosch Business School (USB), Stellenbosch UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/863672017-10-26T17:46:48Z2017-10-26T17:46:48ZSouth Africa’s finance minister fails to come up with the goods<figure><img src="https://images.theconversation.com/files/192112/original/file-20171026-13378-1284fyq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">EPA/Stringer</span></span></figcaption></figure><p><em>Given the gloomy political and economic environment in South Africa a great deal was expected from Finance Minister Malusi Gigaba’s first <a href="http://www.treasury.gov.za/documents/MTBPS/2017/">budgetary statement</a>. The Conversation’s Sibonelo Radebe asked Owen Skae to rate the medium term budget statement</em></p>
<p><strong>What are your general impressions of the speech?</strong></p>
<p>The minister’s opening remarks were encouraging but in the final analysis, nothing profound came out of his speech. </p>
<p>The reference to a famous line Ben Okri’s poem was inspiring: </p>
<blockquote>
<p>You can’t remake the world without remaking yourself. </p>
</blockquote>
<p>By quoting the line the minister gave the impression that he and his team have been through a thorough introspection which is sorely needed given the <a href="https://theconversation.com/britains-labour-party-and-south-africas-anc-why-the-stark-contrast-of-fortunes-85000">state and direction</a> of the ruling African National Congress (ANC) and the country. Corruption is steadily and surely eating away the future of South Africa.</p>
<p>Some say the minister did do some <a href="https://theconversation.com/gigaba-lays-bare-south-africas-economic-woes-will-it-be-enough-to-trigger-change-86374">introspection</a>. But his speech was vague and lacked the critical elements of taking responsibility and offering solutions. He offered little detail about how the country will get on the path to the kind of sustainable economic growth it so sorely needs.</p>
<p><strong>What are the biggest challenges facing the country coming out of the speech?</strong></p>
<p>South Africa’s problems are well known. Economic exclusion and unemployment tops the list. They can only be solved by significantly growing the economy. But I couldn’t find any detail about how the country is going to address these critical areas.</p>
<p>Growth prospects remain gloomy as captured in the minister’s own words. He revised 2017 economic growth downwards from 1.3% to 0.7%. And his projection shows growth remaining below the 2% mark over the next three years. This is far below the required growth of about 6% for the country to push back poverty and unemployment.</p>
<p>Poor economic performance is obviously symptomatic of deeper issues. But he didn’t tackle them. For example, there was a lack of urgency to deal with allegations of state capture, which has involved attempts by powerful individuals and groups to shape South Africa’s political and economic landscape through corrupt relationships and deals to benefit their own private interests. He also resurfaced the nuclear power deal. This will just make the rating agencies nervous.</p>
<p>His rhetoric around state owned enterprises is not convincing. We’ve heard it before. I’m afraid the old mantra ‘seeing is believing’ will guide many when it comes to his promise of fixing these troubled enterprises.</p>
<p>The minister did speak of a Youth Employment Service and a R1.5 billion small to medium enterprise development fund. But frankly speaking this doesn’t even begin to touch sides of what needs to be done. </p>
<p>He also faces the dual problem of declining revenue and increasing expenditure. This medium term budget projected a R50.8 billion tax revenue shortfall for the 2017/18 period which was described as “the largest downward revision since the 2009 recession”.</p>
<p>And he’s already dipped into the contingency reserves to recapitalise troubled state owned enterprises, South African Airways and the South African Post Office. And he faces an ever increasing demands for social expenditure.</p>
<p>So, there is talk of the disposal of assets. But why partially sell the crown jewels of Telkom and leave the problematic entities like power utility Eskom and South African Airways to further burden the taxpayer. That just fuels the view of cynics who believe government isn’t really committed to making the tough decisions the minister alluded to.</p>
<p><strong>What do you think of the handling of educational funding matters?</strong> </p>
<p>I was half expecting the minister to announce something significant around the funding of education given the developments of the past few years. But he said almost nothing that will change the destructive course that the country’s education system finds itself in.</p>
<p>There was the routine statement about how allocation to the education sector is “the fastest growing element of expenditure over the medium term”. The allocation moves from R77 billion this year to R97 billion for the 2020/21 financial year. This increase looks significant but it doesn’t even begin to address the problems at hand – in particular the funding of higher education against a mass of students who can’t afford to pay their fees. </p>
<p>The problem has escalated because of a <a href="https://www.timeslive.co.za/news/south-africa/2017-10-24-two-years-and-counting-university-fees-frustration-mounts/">lack of leadership</a> with government pussy footing around the issue. One can only conclude that government has no way of handling this hot political potato and has resorted to the poor tactic of kicking the can down the road.</p>
<p>All the minister said was that further announcements would be made in the 2018 Budget.</p>
<p>But this is no comfort for higher education institutions. They now have to approach next year with no idea about how they’re going to address the growing gaps in their financial forecasts. </p>
<p>In my view this should be South Africa’s greatest priority, especially as the student voices are being raised about this. I’m not getting the sense that government appreciates the gravity of the situation.</p><img src="https://counter.theconversation.com/content/86367/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Owen Skae does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>South Africa’s finance minister Malusi Gigaba failed to impress when presenting the eagerly awaited 2017 medium term budget.Owen Skae, Associate Professor and Director of Rhodes Business School, Rhodes UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/863742017-10-25T18:52:44Z2017-10-25T18:52:44ZGigaba lays bare South Africa’s economic woes: will it be enough to trigger change?<figure><img src="https://images.theconversation.com/files/191880/original/file-20171025-25502-1cypf98.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">South African Finance Minister Malusi Gigaba kicked the can of change down the road during his medium term budget speech. </span> <span class="attribution"><span class="source">Reuters/Rogan Ward</span></span></figcaption></figure><p>Wittingly or unwittingly, South Africa’s Finance Minister Malusi Gigaba’s medium term budget policy <a href="http://www.treasury.gov.za/documents/MTBPS/2017/default.aspx">statement</a> places him – and champions of the market economy inside and outside the African National Congress – in a strong position and opens the way for real economic change. Whether the opportunity is taken is, of course, another matter.</p>
<p>Gigaba revealed that the government’s revenue shortfall is two thirds higher than expected, spending is growing, as is the deficit which will not, as promised, stabilise next financial year. And growth projections are down from a poor 1.3% to a negligible 0.7%. </p>
<p>The minister announced no new measures which are likely to turn the situation around and another set of ratings agency downgrades seem inevitable. This is partly because the agencies take their cue from domestic economists and business people, all of whom see a downgrade as inevitable. The only rational response is surely that the economy is in a downward spiral and that the minister cannot or will not do anything about it.</p>
<p>Perhaps. But there is another way of looking at the speech which sees many of these negatives as potential economic game changers.</p>
<p>One reason for seeing an opportunity for change is that the speech provides more than enough grounds to begin two of the tasks which must be confronted if the economy is to turn around in a sustainable way. It provides a powerful lever for everyone who wants to resist patronage projects. And the scale of the problem does send a signal to all economic actors that a sense of crisis – the acknowledgement that the economy must change course if it’s to grow and include more people – is needed and that negotiations to change the economy are essential. </p>
<h2>Watershed moments?</h2>
<p>Gigaba’s speech made it clear that the argument that money is simply not available is now an understatement. One casualty might be the <a href="https://www.iol.co.za/business-report/zuma-possibly-targeting-a-nuclear-revival-with-cabinet-reshuffle-11609739">nuclear power project</a> on which President Jacob Zuma and his faction seem to have set their hearts. There have been suggestions that Zuma’s primary objective in his most recent cabinet reshuffle was to insert a loyal person into the energy portfolio so that he could make the <a href="http://www.huffingtonpost.co.za/2017/10/23/david-mahlobo-appointed-energy-minister-on-putins-instructions_a_23252038/">nuclear deal</a> happen. </p>
<p>Gigaba is now signalling that there is no money for the project and so the reshuffle’s purpose may have been undone.</p>
<p>And the argument for structural change, not mere tweaking, is much stronger now than before the speech. The harsh realities he explicitly set out mean that any finance minister who wanted to shut the door on patronage, begin cleaning up state owned enterprises and kick-starting talks with other key players, such as the private sector, is in a very powerful position. This could open the way for bargaining between all the economic interests on how to grow the economy and open it up to those who are excluded.</p>
<p>It does not mean that Gigaba will take the opportunity. The fact that he kicked the can of change down the road during his speech, proposing no new plans for change – and that he has already granted South African Airways a bailout – seem to show that his apparent desire to please everyone leaves him ill-equipped to take any of the steps suggested here.</p>
<p>But, if we assume – as many people who observe him do – that Gigaba’s chief goal is to advance his political career, the numbers he quoted today suggest that he is unlikely to do that unless he can show that he did something to change the realities he described. It’s possible that the minister knows that these realities won’t change unless he takes some decisive steps. </p>
<h2>Stage set for trade-offs?</h2>
<p>The speech offers no solutions but it can hardly be accused of ignoring or concealing the problem. On the contrary, Gigaba made a great deal of his refusal to “sugar coat” the problem. Insisting that South Africans must know how bad it is, he added that citizens needed to understand the “challenges” because only then</p>
<blockquote>
<p>(will) we … know what to do … as well as what trade-offs must be made in the public interest. </p>
</blockquote>
<p>That sounds very much like an attempt to set the stage for some unpopular decisions and for engaging with key economic actors on what trade offs should be made. Clearly, a minister who hopes to please as many people as possible is not going to initiate major changes without very solid backing – the speech may well have been an attempt to get that backing. </p>
<p>So Gigaba could be trying to set the stage for a process in which the awful state of the economy enables him to gain support from key economic actors to introduce the “trades off” he promised. </p>
<p>Of course, the minister may have no plans to use his leverage in this way. But, if so, the speech may have provided an important lever to those who would want him to do so. It clearly was an invitation to private economic interests to engage. </p>
<p>If businesses take Gigaba up on the offer, they may well find themselves in a more powerful position than they imagined, given the state of public finances and of the economy. They certainly have economic reality on their side and, since the minister is not zealously attached to either of the African National Congress factions, he may well be inclined to support them if the alternative seems likely to promise his political ruin.</p>
<p>The speech showed that the economy is in crisis – it needs to change direction if it’s to serve the country’s needs. Whatever the minister decides to do, its effect will depend on how those in society who have an interest in that change choose to react. The stakes are clearly too high for them to fold their hands and wait for the minister to act.</p><img src="https://counter.theconversation.com/content/86374/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Steven Friedman does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>South Africa’s finance minister’s medium term budget speech offered hope of potential economic game changes. But will he be bold enough to make them?Steven Friedman, Professor of Political Studies, University of JohannesburgLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/863732017-10-25T18:27:53Z2017-10-25T18:27:53ZSouth Africa’s finance minister admits situation is grave: but offers no solutions<figure><img src="https://images.theconversation.com/files/191877/original/file-20171025-25502-ldfp48.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">South Africa's Finance Minister Malusi Gigaba has been forthright in recognising the crises facing the country.</span> <span class="attribution"><span class="source">EPA/Stringer</span></span></figcaption></figure><p>The first <a href="http://www.treasury.gov.za/documents/MTBPS/2017/default.aspx">mid-term budget</a> delivered by South Africa’s newish Finance Minister Malusi Gigaba was always likely to be judged largely on three issues: whether he was able to inspire confidence, what the government plans to do with the crises at the various state owned enterprises and whether he would pronounce definitively on its commitment to firming up a nuclear deal with Russia. </p>
<p>Whatever else Gigaba said was likely to be regarded as extra. </p>
<p>On balance, he did reasonably well on the confidence issue. He spoke clearly and with assurance, even with authority. To be sure, he delivered a lot of flannel. He reminded South Africans of the promises of the National Development Plan and the government’s commitment to Vision 2030; he spoke about the iniquities of the maldistribution of wealth and inequality and the government’s commitment to redistribution; he deplored “the challenges” (that overused word) faced by state owned enterprises, the high level of concentration in the private sector and the need to make the economy more globally competitive. And he inevitably he hailed the urgent need for “radical socio-economic transformation”. Words, words, words, one might say. </p>
<p>Against that, Gigaba’s speech was forthright in recognising the immediate crises facing the country. While stressing the importance of economic growth, he indicated that growth was expected to fall to 0.7% per annum, down from a previous somewhat less miserable estimate of 1.3%. </p>
<p>He recognised that the budget deficit was expected to increase from 4.3% from 3.1%. And he conceded that with lower economic activity government revenue was going to fall: indeed, the consolidated government deficit would climb to 60% of GDP by 2022. </p>
<p>Against these grim statistics, he stressed the need for greater tax morality, expenditure cuts, greater efficiency in government’s supply chain management and increased vigour in fighting corruption in state owned enterprises. And he even managed to say all this without smirking. </p>
<p>While it was important that he made it clear that the government recognises the mess the economy is in, he was extraordinarily light on detail about how it intended to clear it up. </p>
<p>The ratings agencies will doubtless be pleased that Gigaba announced no hike in corporation tax. For its part the African National Congress and its alliance partners would have been equally pleased that he announced no rise in Value Added Tax, which would hit the poor hardest. By the same token, he left it unclear – save by vague commitments to cutting costs – how the increasing gap between revenue and expenditure is to be tackled.</p>
<h2>Raiding the piggy bank</h2>
<p>The biggest news in Gigaba’s speech was his announcement that the government intends to sell a portion of its shares in Telkom to enable a recapitalisation of South African Airways and the South African Post Office. Many would say that he was left with little choice. While he thanked the banks for not pulling the plug on the airline by not demanding repayment of their loans, his raiding of Telkom’s piggy bank was an acknowledgement that no-one else was going to risk their money. </p>
<p>He also addressed the crisis in state owned enterprises by highlighting governance issues. This included the appointment of new boards for the airline as well as the state broadcaster and the need for them to recruit efficient managers and to tighten up governance and accountability. </p>
<p>Fine words, but equally, this was no announcement of the government drawing back from its notion of state owned enterprises as key drivers of the “developmental state”. Their current crises had obscured much that they had achieved, he said, such as the development of a pool of competent state managers. </p>
<p>Many would say that it’s a pity that their competence is not more evident.</p>
<p>If Gigaba said just enough to indicate that the government intends to do something to address the problems faced by state owned enterprises, the most glaring gap in his speech was any firm indication of how to tackle the cesspit of corruption that the state power utility Eskom has become. </p>
<p>Far worse than that were his weasel words about any prospective nuclear deal. </p>
<p>Speculation is rife that President Jacob Zuma is determined to sign off a deal to build nuclear power stations with the Russian nuclear agency, Rosatom, as quickly as possible – a deal which many reckon would bankrupt the country. Yet Gigaba chose not to calm the market’s nerves but to remain as vague as possible. Very deliberately, he chose to repeat a previous statement by Zuma that the signing of any nuclear deal would take estimates of the potential supply and demand for energy into full consideration, and would only proceed on the basis of “affordability”. Nobody is likely to believe that.</p>
<h2>No sign of a change in direction</h2>
<p>So, what’s to be made of this first substantive effort by Gigaba? The good news is that he didn’t try and obscure the grim financial situation that the government is facing. </p>
<p>But the bad news is that despite the waffle about the need for “radical socio-economic transformation”, there was nothing in his speech to indicate that the government is considering a significant change in direction. </p>
<p>Yes, there was the commitment to selling Telkom shares, but that was merely akin to selling the family silver to keep the household finances afloat for a little bit longer. Apart from that, there was no real suggestion that the government will start doing things differently. And there was no indication about how it intends to close the steadily increasing deficit.</p><img src="https://counter.theconversation.com/content/86373/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Roger Southall receives funding from the National Research Foundation. </span></em></p>South Africa’s finance minister was honest about the problems facing the country. But he made no real suggestions that the government will start doing things differently.Roger Southall, Professor of Sociology, University of the WitwatersrandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/863622017-10-25T17:13:52Z2017-10-25T17:13:52ZLatest budget underscores desperate state of South Africa’s finances<figure><img src="https://images.theconversation.com/files/191868/original/file-20171025-25544-mk8ea5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Running out of options. Finance Minister Malusi Gigaba speaks after delivering his medium term budget.</span> <span class="attribution"><span class="source">REUTERS/Sumaya Hisham</span></span></figcaption></figure><p>South Africa’s 2017 medium-term budget policy <a href="http://www.treasury.gov.za/documents/MTBPS/2017/">statement</a> represents a watershed moment in the post-apartheid economic and fiscal position. The best thing that can be said about it, is that it was at least frankly honest about the situation the country is facing. Arguably, there was no choice. The country has reached a situation where it’s no longer possible to spin the notion that public debt is under control.</p>
<p>In <a href="http://www.treasury.gov.za/documents/MTBPS/2016/default.aspx">recent years</a>, South Africa’s National Treasury has desperately, and creatively, tried to avoid making deep cuts to government expenditure, or imposing drastic revenue raising measures on citizens. It did this while still convincing investors and credit ratings agencies that public finances would stabilise.</p>
<p>But the 2017 medium term budget makes it clear that the project has essentially reached the end of the road. The notion that national debt will stabilise has now effectively had to be abandoned. South Africa’s latest finance minister, Malusi Gigaba, effectively gave up on the debt targets set out by Pravin Gordhan a year ago when he stated that net national debt as a percent of GDP should stabilise at 47.9% by 2019/20. Gigaba announced yesterday that this is expected to be 49.1% by the end of this fiscal year, increasing to 53.9% by 2019/20. </p>
<p>This is a clear sign that any attempt to stabilise debt has failed. A further ratings downgrade is now highly likely. And it will be worse than the last one which only affected foreign currency debt. Gigaba’s budget proposals are likely to lead to a downgrade of the country’s local denominated debt, which will increase government borrowing costs and could lead to significant capital outflows. Even without a downgrade the medium term budget reveals that debt service costs are expected to increase from 11% of total expenditure to 15% over the next few years.</p>
<p>Without higher revenue, that means less money to spend on government’s constitutional obligations and policy commitments. Unfortunately, the gloomy story is largely driven by a massive shortfall in revenue collection of R50.8 billion. So attempting to avoid these consequences through taxation is not looking like a feasible option. </p>
<p>In the current political environment, even the best case scenario is grim. In fact the country’s finances could worsen even further if the outcome of the governing party’s elective conference in December doesn’t see a return to good governance and responsible fiscal management.</p>
<h2>Slippery slope since 2008</h2>
<p>In the years since the global <a href="https://www.economist.com/news/schoolsbrief/21584534-effects-financial-crisis-are-still-being-felt-five-years-article">financial crisis</a> that started in 2008, the government allowed expenditure to increase faster than growth and revenue. This was done with the hope of offsetting the short-term effects of the crisis and getting the country back onto a stable path of significant economic growth. </p>
<p>That led to a rapid increase in national debt relative to the size of the economy. But the failure of the economy to recover – due in part to political instability, bad decision making and poor governance – meant that this approach became unsustainable. </p>
<p>In the last few years successive national budgets have walked a tightrope in trying to contain the growth in debt. Planned spending has been reduced, while some tax rates have been increased and new tax instruments introduced. Amid all these manoeuvres, dramatic cuts to government expenditure, or wide-reaching increases in taxes, have been avoided. </p>
<p>Efforts to arrest fiscal decline were sabotaged by the <a href="https://theconversation.com/south-africas-jacob-zuma-is-fast-running-out-of-political-lives-80009">removal</a> of Gordhan in March this year. His removal meant that the institutional reputation of the finance ministry was compromised and, since it was this that had kept the country’s credit ratings intact despite increasing fiscal pressure, the country’s foreign denominated debt was <a href="https://theconversation.com/what-a-downgrade-means-for-south-africa-and-what-it-can-do-about-it-75704">downgraded</a> to “junk” (sub-investment grade).</p>
<h2>Storm clouds on the horizon</h2>
<p>As if the picture wasn’t gloomy enough, numerous risks to the fiscal projections and proposals loom on the horizon. South Africa’s president Jacob Zuma continues to sit on the higher education funding report, causing further instability at universities. That leaves open the possibility that more money for university students may be needed at short notice. </p>
<p>And the finances of various state owned enterprises are teetering, requiring increasing government support to prop them up. Since Gigaba took over the ministry he has taken R5.2 billion from the R6 billion “contingency reserve” – which is meant to be used for emergencies, or other unforeseeable events, such as natural disasters – to prop-up South African Airways. This broke with commitments to fund bailouts using revenue from asset sales. The medium term budget cements this breach – funds used to prop up the airline will not be replaced with funds from asset sales.</p>
<p>But the most menacing risk is the power utility Eskom, which is propped up by R350 billion in debt guarantees, but faces rising infrastructure costs, stagnant electricity demand and successive corruption scandals linked to state capture. Due to the scale of the commitments to Eskom, it will be impossible to contain the negative consequences if its lenders start refusing to rollover its debt. </p>
<h2>No political will</h2>
<p>Reading between the lines of the medium term budget, there is evidently no political will at the highest levels – the president and his cabinet – to do the right thing. The only reduction in planned expenditure is a cut to the contingency reserve. But responding to rising debt by reducing money for future emergencies is emblematic of the reluctance to take braver decisions like cutting the bloated, pointless ministries seemingly introduced by Zuma to employ his political cronies and their associates.</p>
<p>South Africa’s public finances are in dangerous territory and very difficult decisions will have to be taken before the 2018 budget if the situation is going to be stabilised. This will require politicians and civil servants who are competent and dedicated to the public interest to make bold decisions. Without such leadership the resultant trajectory will undermine the ideals and objectives of the post-apartheid era for many years to come.</p><img src="https://counter.theconversation.com/content/86362/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Seán Mfundza Muller received support from the Heinrich Boell Foundation to attend the Medium Term Budget Policy Statement, and provides advice to various civil society organisations and initiatives on public finance issues.</span></em></p>South Africa’s 2017 medium term budget reveals a growing gap between revenue and expenditure which places the country in a highly vulnerable financial state.Seán Mfundza Muller, Senior Lecturer in Economics, University of JohannesburgLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/856432017-10-18T15:05:18Z2017-10-18T15:05:18ZWhat’s at stake in South Africa’s new finance minister’s first budget<figure><img src="https://images.theconversation.com/files/190602/original/file-20171017-30394-eijha0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Reuters</span></span></figcaption></figure><p><em>There’s a great deal hanging on South Africa’s 2017 medium term budget policy <a href="http://www.treasury.gov.za/comm_media/press/2017/2017091801%20Media%20Advisory%20MTBPS%202017.pdf">statement</a>. Three factors are at play: there is political turmoil around the governing African National Congress, the country’s economy is performing poorly and this is the first budgetary statement from the new Finance Minister Malusi Gigaba. The Conversation Africa’s Sibonelo Radebe asked Jannie Rossouw to layout his expectations.</em></p>
<p><strong>What keeps you up at night in relation to this medium term budget?</strong></p>
<p>The single most worrying factor is the lack of economic growth South Africa faces. Growth has <a href="https://tradingeconomics.com/south-africa/gdp-growth-annual">slowed down</a> significantly in recent years and the economy flirted with <a href="https://mg.co.za/article/2017-06-07-sas-in-a-recession-heres-what-that-means">recession</a> after shrinking during the last quarter of last year and the first quarter of this year. The economy did <a href="https://www.iol.co.za/business-report/breaking-news-south-africa-moves-out-of-recession-11086750">bounce back</a> into positive growth during the second quarter but the outlook remains unimpressive. Only 0.5% growth is expected for 2017 and less than 2% over the medium term. </p>
<p>Owing to this lack of growth, <a href="https://theconversation.com/the-lesser-known-and-scarier-facts-about-unemployment-in-south-africa-83055">unemployment</a> is on the increase – it now stands at a staggering 27% – while government revenue is under pressure. It also implies that the government’s burden on the economy (for instance total government debt as percentage of gross domestic product, or<a href="http://www.treasury.gov.za/documents/mtbps/2016/mtbps/MTBPS%202016%20Full%20Document.pdf">Debt/GDP ratio</a>) will increase. </p>
<p>Government’s debt to GDP ratio is currently <a href="http://www.treasury.gov.za/documents/mtbps/2016/mtbps/MTBPS%202016%20Full%20Document.pdf">budgeted</a> to level out around 50%. This is to be welcomed because any increase in the ratio increases the interest burden. </p>
<p>But if slow growth and revenue shortfalls persist, government debt will increase. The debt to GDP ratio will be on its way to 65% of GDP in the medium term. </p>
<p>And should the combination of low growth and growing government expenditure continue after the period of this medium term statement (2017/18 - 2020/21), the debt/GDP ratio might be on its way to 100%. This projection really stresses one of the most worrying factors that has to be addressed in this statement: Limiting the level of government debt before it reaches this level. </p>
<p>In other countries where this level has been exceeded, severe adjustments had to be forced on their economies. Take the <a href="https://tradingeconomics.com/ireland/government-debt-to-gdp">Irish Republic case</a>. Remuneration levels and employment numbers in the civil service had to be cut dramatically to deal with the <a href="http://cpsu.ie/the-cuts/">Irish government debt crisis</a>.</p>
<p><strong>There is a new finance minister in place and he comes with shifting political dynamics. How do you rate him and what do you expect from him?</strong></p>
<p>It is difficult to rate the new minster, given that he’s only been in the job since April and the fact that he has not yet tabled his first budgetary statement. The only statement against which his performance can really be assessed is the <a href="http://www.huffingtonpost.co.za/2017/07/13/governments-economic-growth-action-plan-gigabas-speech-in-f_a_23027748/">14-point plan</a> he announced in July 2017.</p>
<p>We’ll be watching the medium term statement for his report back on progress in implementing it.</p>
<p>But Gigaba comes with worrying political dynamics, including accusations that he is party to <a href="http://www.fin24.com/Opinion/connecting-the-dots-on-gigabas-state-capture-project-20171009">corruption</a>. </p>
<p>And its difficult to separate him from the history of bad policy options of the African National Congress which has delivered the prevailing lacklustre economic performance. The fiscal crisis facing South Africa is a direct result of these policies. </p>
<p><strong>How significant is the medium term budget policy statement?</strong></p>
<p>It’s very important as it provides an overview of government’s plans for expenditure and for raising revenue over the next three years. A three year view is significant because it provides insight into planned government expenditure and indicates expected tax increases that South African taxpayers have to face. It also informs decisions of the credit rating agencies about South Africa’s fiscal stability.</p>
<p>The statement forms the basis of the <a href="http://www.treasury.gov.za/documents/national%20budget/default.aspx">annual budget</a> of government revenue and expenditure that is tabled in Parliament in February each year. </p>
<p>The statement is the first formal opportunity after the tabling of the annual budget where the government reports on the actual performance of revenue raised in comparison to budgeted revenue and of actual expenditure in comparison to budgeted expenditure.</p>
<p>This reporting by government gives an early indication of expectations for the main budget in February. For instance, if government revenue is underperforming, the expectation is that taxes will be increased the following February. Indeed a tax increase might materialise in this medium term statement.</p>
<p><strong>What in you view will be key focus areas in this medium term statement?</strong></p>
<p>As South Africa’s economic growth is currently lower than the forecast used for the <a href="http://www.treasury.gov.za/documents/national%20budget/default.aspx">2017/18 fiscal year</a>, tax collection has come under pressure. A <a href="http://www.fin24.com/Economy/gigaba-faces-r50-billion-budget-shortfall-economist-20170901">revenue shortfall</a> is expected for this fiscal year. The medium term statement is when the size of the shortfall will be formally disclosed.</p>
<p>Given expectations of a substantial shortfall, South Africans should brace themselves for substantial tax increases in the main budget in February 2018. The fiscal crisis might even be so serious that the government might decide to divert from previous practice and announce tax increases in this medium term statement.</p>
<p>Like any other government in the world, it raises revenue through taxes and use this revenue to fund its expenditure. If expenditure exceeds revenue, the difference must be borrowed, which adds to the level of government debt, or expenditure must be cut. </p>
<p><strong>One of the biggest budgetary headaches is the ailing state owned enterprises. What should be done?</strong></p>
<p>Government is really throwing good money after bad by using public money to bailout <a href="https://www.businesslive.co.za/bd/companies/transport-and-tourism/2017-08-23-secret-gigaba-plan-to-rescue-bankrupt-saa-exposed">ailing</a> state owned enterprises. I have said a long time ago that South African Airways should simply be <a href="https://theconversation.com/south-africa-must-free-itself-from-the-burden-of-owning-a-national-airline-64004">given away</a>. This is a much cheaper option for the taxpayer instead of never ending bailouts. The South African government should reassess its holding of state owned enterprises and close, sell or give away those that are no longer financially viable. Such action will remove a large financial burden on the South African taxpayer.</p><img src="https://counter.theconversation.com/content/85643/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jannie Rossouw is a C3-rated researcher and receives funding from the National Research Foundation (NRF). He is also a concerned South African taxpayer. </span></em></p>South Africa waits with bated breath for the 2017 medium term budget policy statement from new Finance Minister Malusi Gigaba, as it might reveal key signals of where economic policy is headed.Jannie Rossouw, Head of School of Economic & Business Sciences, University of the WitwatersrandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/840782017-09-18T16:20:11Z2017-09-18T16:20:11ZState owned enterprises shouldn’t be used as pawns in South African politics<figure><img src="https://images.theconversation.com/files/186178/original/file-20170915-8071-ce6kx6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">South Africa's finance minister, Malusi Gigaba, has had to look towards selling off state owned assets to plug a fiscal hole</span> <span class="attribution"><span class="source">REUTERS/Rogan Ward</span></span></figcaption></figure><p>State owned enterprises are vital to many economies, but are particularly vital to those seeking economic development.</p>
<p>This is true in South Africa too. Which makes it odd that the South African government – and much of the policy debate – never sees any value in trying to work out what role they should play in growth and development.</p>
<p>Finance Minister Malusi Gigaba’s interest in <a href="http://www.fin24.com/Companies/Industrial/gigaba-could-target-pics-r14bn-telkom-stake-for-massive-saa-bailout-20170721">selling off</a> government shares in telecommunications group Telkom, to bail out South African Airways is the latest example of a trend in which state owned enterprises are seen as useful pawns in government plans but not as national assets whose use should be thought through carefully.</p>
<p>The importance of South African state owned enterprises was spelled out in a 2015 Organisation for Economic Cooperation and Development <a href="https://www.oecd.org/corporate/south-africa-state-owned-enterprise-reform.pdf">policy brief</a>. It estimated that their revenues correspond to 8.7% of the country’s gross domestic product. They also, it found, play a vital role in providing services:</p>
<blockquote>
<p>The population’s access to water, electricity, sanitation and transportation is almost entirely dependent on the state, operating through corporate vehicles. They are concentrated in strategic sectors – infrastructure, transport, energy and water – and are “among the main sources of employment” in cities.</p>
</blockquote>
<p>The Organisation for Economic Cooperation and Development might also have mentioned that State owned enterprises are also a key source of racial change. According to the <a href="http://www.labour.gov.za/DOL/documents/annual-reports/Commission%20for%20Employment%20Equity%20Report/2016-2017/commission-for-employment-equity-report-2016-2017">2016/17 report</a> of the Commission for Employment Equity, black people occupy just under 75% of top management jobs in state owned enterprises – black Africans 57%. In the private sector, the figure is 24.5 % - only 10.8% are black African.</p>
<p>Given this, one might expect that the government would make it a priority to work out what the most appropriate role for parastatals is in the economy’s development. But it isn’t a priority – nor has it ever been. </p>
<h2>Rule of short termism</h2>
<p>State owned enterprises have been seen as a route to private investment, enrichment for the connected or a site for political battles but never as a key element in the development mix. </p>
<p>In fairness, private interests have shown no great interest in debating the role of state owned enterprises either. They have preferred taking sweeping positions for or against privatisation. But, given state owned enterprise’s role in governance, government should take the lead in thinking through what State owned enterprises should do.</p>
<p>The reality is different. Gigaba’s interest in selling off government holdings in state owned enterprises has much more to do with pressures for patronage than placing privatisation back on the agenda some 15 years after president Thabo Mbeki was forced to <a href="http://ewn.co.za/2016/03/21/Mbeki-GEAR-programme-was-meant-to-save-SA-from-debt">ditch</a> it. It would be a strange turn if appeasing demands for public money revives a market friendly option which Mbeki had to abandon. And it certainly would not suggest a government committed to finding a development role for state owned enterprises.</p>
<p>It seems that the Mbeki government wanted to sell off shares in state owned enterprises not because it had a considered view that this would achieve the goals parastatals were designed to serve. The <a href="http://ewn.co.za/2016/03/21/Mbeki-GEAR-programme-was-meant-to-save-SA-from-debt">motive</a>, rather, seemed to be to enhance private investor confidence and state revenues. Many might support these goals. But neither has to do with a long-term view on the contribution these enterprises could make to the economy.</p>
<h2>A balancing act</h2>
<p>Nor has Gigaba revived privatisation because he and his advisors have thought through the role for state owned enterprises which his predecessors ignored. He is, rather, trying to balance the two pressures he has faced since he became minister earlier this year. </p>
<p>On the one hand, he does not want to become the latest finance minister to face <a href="http://www.fin24.com/Economy/live-can-dudu-myeni-legally-be-allowed-to-be-saa-chair-20170913">pressure</a> for not giving a state owned enterprise what it needs. On the other, he does not want to preside over a second round of rating <a href="https://theconversation.com/public-enterprises-played-a-big-part-in-south-africas-credit-ratings-downgrade-75745">downgrades</a> because he spent money the government did not have. The only way to square the circle is to sell off shares in one state owned enterprise (Telkom) to pay for the bailout in another, South African Airways. The government’s stake in Telkom is over <a href="https://www.moneyweb.co.za/news/companies-and-deals/telkom-cautions-shareholders-over-government-sale-talk/">39%</a>.</p>
<p>It’s hard to see how this strategy is sustainable. The South African Airways <a href="http://www.fin24.com/Economy/live-can-dudu-myeni-legally-be-allowed-to-be-saa-chair-20170913">bailout</a> request will not be the last. And it’s clearly not workable to keep on selling off national assets whenever state owned enterprises want cash injections. </p>
<p>Nor is this likely to protect the minister from political flak. There is sure to be principled opposition to the strategy and patronage politicians will also notice that the prospective piggy bank is being sold off and will rebel.</p>
<p>But even if Gigaba does manage to bring off the trick, it’s obvious that this move has everything to do with balancing political pressures and nothing to do with a development strategy. </p>
<p>Between Mbeki’s strategic retreat and Gigaba’s strategic balancing act, state owned enterprises have not been quiet backwaters. They have been, and still are, key battlegrounds in the war between the ruling party factions as officials and politicians in its patronage group try to turn them into vehicles for making deals and accumulating goodies while their opponents try to stop them. </p>
<p>Lately, this battle has been played out in parliament – first over the <a href="http://www.news24.com/SouthAfrica/News/sabc-inquiry-adopts-final-report-20170224">South African Broadcasting Corporation</a>, now over state owned power utility <a href="https://businesstech.co.za/news/government/178243/leaked-emails-show-exactly-how-the-guptas-captured-eskom-report/">Eskom</a>. South African Airways has been a battleground throughout and other state owned enterprises have been quieter sites of <a href="https://theconversation.com/corrupt-state-owned-enterprises-lie-at-the-heart-of-south-africas-economic-woes-79135">conflict</a>. </p>
<h2>Economy pays the price</h2>
<p>This trench warfare, in which both factions seeking control of the ANC make gains after pitched battles but neither ever wins the war, may shape the future of the ANC and government’s role in the economy. But again, the issue here is a political fight for power, not considered positions on the role of state owned enterprises.</p>
<p>The economy pays an obvious price for this failure to care about their development role – missed opportunities for growth and the exclusion of many who go without wages and salaries. But, given the factionalised nature of politics, which is likely to continue, it is unrealistic to expect serious thinking from the politicians on the role that state owned enterprises can play in growth and inclusion.</p>
<p>This makes it urgent that private interests take this issue much more seriously, replacing the stereotyped debate with considered proposals for change. State owned enterprises are too important to be relegated to pieces on a chessboard. But nothing is likely to change until everyone with an interest in the economy’s future develops ideas on how state owned enterprises fit in and presses politicians to take notice.</p><img src="https://counter.theconversation.com/content/84078/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Steven Friedman does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Privatisation talk in South Africa shows how state owned enterprises are being used as tools for enrichment by the connected and less as key elements of development.Steven Friedman, Professor of Political Studies, University of JohannesburgLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/838222017-09-11T19:59:17Z2017-09-11T19:59:17ZSouth Africa needs to sober up to save itself from sickly state-owned enterprises<figure><img src="https://images.theconversation.com/files/185465/original/file-20170911-1336-jvnh8u.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">South Africa needs to decide if it will continue to waste public money on its national carrier, or incur the costs of letting SAA go bankrupt.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p><em>The South African government is said to be seriously considering selling its stake in telecommunication firm, Telkom, <a href="https://www.businesslive.co.za/bd/companies/transport-and-tourism/2017-08-23-secret-gigaba-plan-to-rescue-bankrupt-saa-exposed/">in order to save the troubled South African Airways (SAA)</a>. This has brought back debates about what is the right thing to do around the country’s state owned enterprises. Sibonelo Radebe asked Seán Muller to weigh up the options.</em></p>
<p><strong>What does financial support to SAA actually involve?</strong></p>
<p>There are two basic forms of assistance government has provided to <a href="https://theconversation.com/south-africa-must-free-itself-from-the-burden-of-owning-a-national-airline-64004">SAA</a>. The first “government guarantees”, in which the Treasury provides a guarantee to support SAA’s borrowing from private lenders. These guarantees mean that if SAA is unable to pay its debt costs or repay the full loan when required, the Treasury must pay. As of February 2017, SAA held <a href="https://www.timeslive.co.za/sunday-times/business/2017-08-07-gigabas-bid-to-stall-repayment-of-r69bn-saa-loans/">R19.1 billion</a> in government guarantees. These pose a risk to public finances, but strictly speaking do not require any funds immediately.</p>
<p>The second type is a “cash injection”, where Treasury directly transfers cash to SAA. This is what is more commonly known as a “bailout”. </p>
<p>In the current case the lines between these two forms of support are blurred. One of Treasury’s reasons for giving SAA cash is apparently to prevent it defaulting on all debt that is called in by SAA’s creditors.</p>
<p><strong>Is selling a Telkom stake and redirecting the money towards saving SAA a good idea?</strong></p>
<p>There are two aspects to this question. First, is injecting more public money into SAA a good idea? Second, is selling government’s stake in Telkom a good idea? </p>
<p>It is hard to see the case for putting further public money in SAA. At various points it may have made sense to do this in order to stabilise SAA as a public enterprise, or prepare it for large scale privatisation. However, this scenario has been repeated so many times that the argument is no longer credible. </p>
<p>Of course, the government has an obligation to prevent the harm that would result from a state-owned enterprise going bankrupt. The direct effects via SAA’s operations, and indirect effects on the economy and investor sentiment in relation to state owned enterprises, could be severe. The <a href="https://theconversation.com/south-africa-must-free-itself-from-the-burden-of-owning-a-national-airline-64004">failure</a> to implement a successful turnaround strategy at SAA, which appears to be linked to the determination to keep <a href="https://citizen.co.za/news/south-africa/1426649/gordhan-to-fire-saa-chair-dudu-myeni-today/">Dudu Myeni</a> as board chair, has placed South Africans in a bind: either the country wastes public money, or it incurs the costs of letting SAA go bankrupt.</p>
<p>With regards to Telkom, it is useful to remember that government previously committed to only bailout state-owned enterprises using funds raised through the <a href="https://www.ujuh.co.za/nene-2015-medium-term-budget-policy-statement/">sale of state assets</a>. There are two advantages of this approach. First, it focuses minds on the consequences of state owned enterprises failure – as is happening in the case of SAA. Second, it means that the main national budget is not affected, so Treasury can still meet its commitments like the planned budget deficit.</p>
<p>But there is no good case for bailing out SAA. At best, it is simply to avoid an even worse scenario in which SAA’s guarantees are called in by creditors. Wherever the money comes from, the social cost is significant and arguably unjustified.</p>
<p>Some have suggested that there are additional costs because Telkom is now a <a href="https://www.businesslive.co.za/bd/companies/telecoms-and-technology/2017-06-05-telkom-rewards-shareholders-as-net-profit-jumps/">profitable</a> enterprise and represents a government success story, but this is <a href="https://mybroadband.co.za/news/business-telecoms/209176-telkoms-adsl-monopoly-crippled-ecommerce-in-south-africa.html">debatable</a>. South Africa’s ICT development has been unsatisfactorily slow and arguably one reason is that government’s stake in Telkom meant that it ended up protecting a firm with monopoly power in fixed line infrastructure. </p>
<p>Contrary to an increasingly popular narrative, the fact that Telkom has become profitable by moving into the mobile space and slashing employment does not make it either a privatisation, or a state ownership, success story. From this perspective, government selling its stake could be a good thing for ICT development in the medium to long run.</p>
<p><strong>What does the consideration say about ANC’s attitude towards privatisation?</strong></p>
<p>There is an obvious tension between the claim that SAA cannot be privatised, while effectively privatising government’s remaining stake in Telkom. Such <a href="http://www.politicsweb.co.za/documents/economic-transformation-anc-discussion-document-20">inconsistencies</a> are characteristic of ANC policy in the last two decades. This is partly due to differences within the alliance and partly the result of policy incoherence, along with a failure to act on advice and implement decisions. </p>
<p><a href="https://www.gov.za/sites/www.gov.za/files/Executive%20Summary-NDP%202030%20-%20Our%20future%20-%20make%20it%20work.pdf">The National Development Plan</a> and the Presidential <a href="https://www.gov.za/documents/report-presidential-review-committee-prc-state-owned-entities-soes">Review</a> Committee on State-Owned Entities both provided fairly clear direction, but many recommendations appear to be inconvenient for the president and those around him – who appear to see state owned enterprises as vehicles for personal enrichment rather than economic development.</p>
<p><strong>Clearly the Telkom model works. Should it be replicated?</strong></p>
<p>It is actually not at all clear that the Telkom model “works” in the sense of advancing economic growth and development in the broader public interest. It was <a href="http://www.sciencedirect.com/science/article/pii/S0308596105000467">arguably the wrong model</a> for the country’s ICT sector. </p>
<p>However, even if it had been the right model for that sector, simply replicating it would be a bad idea. State ownership, privatisation and regulation strategies need to take into account the characteristics of particular sectors. What works for telecoms will be different to what works for energy or for airlines.</p>
<p><strong>And what do you make of the state of Eskom?</strong></p>
<p>The state of <a href="http://www.eskom.co.za/IR2017/Pages/default.aspx">Eskom</a> is of grave concern. Load shedding and price increases, combined with more energy efficiency options for businesses and consumers, have led to much lower electricity demand than originally forecast. </p>
<p>Meanwhile, Eskom is bringing <a href="https://www.dailymaverick.co.za/article/2016-07-07-medupi-kusile-and-the-massive-costtime-overrun/">massive</a> new coal power stations online that have vastly exceeded their original budgets. The result is that Eskom faces a “<a href="http://www.heraldlive.co.za/business/2017/07/17/eskom-denies-facing-funding-crisis/">death spiral</a>” where it needs to increase prices to prop up revenue and bolster its finances, but doing so leads to customers reducing demand (through increased efficiency and implementing alternative options like decentralised solar power). </p>
<p>Eskom holds up to <a href="http://www.treasury.gov.za/documents/national%20budget/2017/">R350 billion in government guarantees</a> and is in an increasingly precarious situation. If one adds the lingering possibility of an unnecessary and ill-advised nuclear deal into the mix, the fear is that Eskom could end up in a similar state to SAA now. </p>
<p>SAA may be a waste of public funds, but the threat it poses can probably be contained. That would not be true of Eskom. The main debate between many analysts now is not whether a crisis is looming but whether there remains any chance of avoiding it, given repeated failures to make and implement critical policy decisions.</p>
<p><strong>And so, what should happen to SAA and Eskom?</strong></p>
<p>In the absence of a clear developmental mandate for SAA, and it being repeatedly bailed out with public money that could be better used elsewhere, the objective must be to minimise the cost of SAA to citizens: if privatisation is the best option then so be it. Eskom is a much more strategically critical enterprise and its problems are more complex, so privatisation would just create a range of different problems. Each state owned enterprises requires tailor-made solutions but one thing they all require is basic good governance, which is not currently in place.</p><img src="https://counter.theconversation.com/content/83822/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Seán Mfundza Muller previously worked for the Parliamentary Budget Office, during which time he conducted analysis of, and provided advice to members of parliament on, the financing of state-owned enterprises.</span></em></p>There is no good case for bailing out South African Airways, it’s simply a matter of avoiding a potentially catastrophic debt default.Seán Mfundza Muller, Senior Lecturer in Economics, University of JohannesburgLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/828602017-09-05T14:44:17Z2017-09-05T14:44:17ZObsession with growth won’t help South Africa’s economic recovery<figure><img src="https://images.theconversation.com/files/184552/original/file-20170904-17292-rj9c0l.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Unemployed South African workers wait for scarce jobs as the economy struggles to create employment. </span> <span class="attribution"><span class="source">EPA/NIC BOTHMA</span></span></figcaption></figure><p><em>Faced with a growing economic crisis, South Africa’s new Finance Minister, Malusi Gigaba, has come up with a <a href="http://www.treasury.gov.za/comm_media/press/2017/2017071301%20Government%E2%80%99s%20inclusive%20growth%20action%20plan.pdf">14 point plan</a> to turn the country’s economic fortunes around. Sibonelo Radebe asked Mohammad Amir Anwar to assess the plan.</em></p>
<p><strong>How do you rate the recovery plan?</strong></p>
<p>It’s still early days but one thing is clear. The plan was put in place as a response to the <a href="https://theconversation.com/what-a-downgrade-means-for-south-africa-and-what-it-can-do-about-it-75704">credit rating downgrades</a> experienced in the second quarter of 2017. It comes with a greater focus on monetary and fiscal frameworks, a slippery area which has served <a href="https://theconversation.com/why-south-africa-should-undo-mandelas-economic-deals-52767">neo-liberal agendas</a> in the post-1994 South Africa.</p>
<p>Instead of focusing on policies that allow redistribution of wealth and creating sociopolitical and economic opportunities for those who were left out of the system, successive ANC governments have been obsessed with neo-liberal dictates which have served to <a href="http://www.sahistory.org.za/sites/default/files/file%20uploads%20/professor_jeremy_seekings_nicoli_nattrass_classbookos.org_.pdf">maintain</a> apartheid inspired economic structures.</p>
<p>It’s unfortunate that Gigaba is still toeing the neo-liberal line despite all his political <a href="http://ewn.co.za/2017/06/30/gigaba-says-drastic-measures-needed-to-growth-sa-s-economy">rhetoric</a>, including a call for <a href="https://mg.co.za/article/2017-05-09-mps-grill-gigaba-on-radical-economic-transformation">radical economic transformation</a>. </p>
<p>This neo-liberal approach assumes that economic growth is the sole criterion to put the country back on the right track. This <a href="https://theconversation.com/growth-is-dying-as-the-silver-bullet-for-success-why-this-may-be-good-thing-78427">obsession with growth</a> means that the focus is on short-term fiscal and monetary issues to gain the confidence of investors in the economy. Testament to this are the short deadlines of the plan and the accompanying narratives. These include <a href="http://www.huffingtonpost.co.za/2017/07/13/governments-economic-growth-action-plan-gigabas-speech-in-f_a_23027748/">references</a> to reforms that “would support both businesses and consumer confidence, thereby laying the foundation for an economic recovery”.</p>
<p>It would seem that not much thinking has gone into changing the underlying structures of the economy for the long-term. </p>
<p><strong>What are the most positive elements of the plan?</strong></p>
<p>The minister has spoken about including different stakeholders in the recovery plan, which seems to be a good approach. South Africa’s history of segregation needs to be met with inclusive policies. Public consultations with key stakeholders and consensus must be key to any recovery plan.</p>
<p>The plan to tackle non-performing <a href="https://www.businesslive.co.za/rdm/business/2017-03-24-sinking-fast-the-perilous-state-of-sas-six-big-state-owned-companies/">state-owned enterprises</a> is very encouraging. But reckless recapitalisation by injecting public money into non-performing entities will only divert government resources, which could otherwise be used to help poor and marginalised people. </p>
<p>Government should realise that fixing troubled state-owned enterprises requires deep restructuring of the way they are operated and led. Boards that are part of the problem in terms of incompetency and corruption must be dissolved and reconstituted. Corrupt officials must be held accountable. Enhancing public-private partnership in some enterprises can also eliminate inefficiencies. </p>
<p>Another positive is that each of the 14 points and sub-points came with a deadline. This can focus the mind and ensure that work gets done. South Africa has seen many plans in the past come and go with no results.</p>
<p>But some of the dates are far too ambitious. For example, Gigaba speaks of finalising the Minerals and Petroleum Development Act amendment process by December 2017. This deadline is too tight and could result in low levels of participation. This will defeat the objective of getting stakeholder buy-in.</p>
<p><strong>What are the most critical things that are missing from it?</strong></p>
<p>Not enough attention has been given to job creation. The South African economy has for a very long time experienced <a href="http://www.economist.com/node/16248641">jobless economic growth</a>. This meant that the country’s jobless rate remained stubbornly high for many years. Recent figures of unemployment touching <a href="https://www.bloomberg.com/news/articles/2017-06-01/south-africa-jobless-rate-rises-to-14-year-high-in-first-quarter">27.7%</a> are indeed worrying. Youth unemployment is said to be <a href="http://data.worldbank.org/indicator/SL.UEM.1524.ZS">52%</a>. Any plan that addresses only economic growth without the creation of job opportunities will be found wanting.</p>
<p>The South African government’s priority should be to boost employment, by focusing on sectors that can easily generate jobs. I welcome the suggestion to boost the small, medium and micro-enterprises sector by giving them a share in public procurement. Small enterprises have been recognised for their potential to <a href="http://www.tandfonline.com/doi/full/10.1080/0376835042000325697?needAccess=true&instName=University+of+Oxford">aid</a> sustainable economic development and to create jobs.</p>
<p>The plan does not give details of overhauling the most important sectors of the economy: mining and agriculture. These sectors are key to generating growth and employment and can be used to drive economic transformation and empower communities that are at the margins of the economy.</p>
<p>For this to happen, the South African government needs to adopt radical approaches that include new and sustainable ways of doing business and redistribution of land.</p>
<p>There is a strong case for government to ensure that mining companies reinvest in workers and local economies. This can be done through investment in education of workers and forming business linkages with local companies that enable technology and knowledge transfer for a <a href="http://www.tandfonline.com/doi/full/10.1080/03056244.2017.1333412?needAccess=true&instName=University+of+Oxford">viable industrial transformation</a>. Unemployed mine workers (and farm workers too) should be given new kinds of vocational training and education to help them find work elsewhere.</p>
<p><strong>How do the ANC’s internal power struggles affect the plan?</strong></p>
<p>The ANC’s leadership is in disarray. Intra-party fighting has led to opposing factions being formed, with each propagating its own <a href="http://www.huffingtonpost.co.za/2017/04/27/ndz-vs-cr17-battle-for-the-anc-underway_a_22058354/">economic vision</a>. This increases the likelihood that a new crop of ANC leaders will change policy. Constant reshuffling and changes in key government positions can seriously affect policy plans and lead to uncertainty about the future. </p>
<p>A new leader will have to bring cohesion into an already fractured party, encourage all members to unite and work for a better South Africa and, most importantly, tackle corruption both in and outside party circles.</p><img src="https://counter.theconversation.com/content/82860/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Mohammad Amir Anwar does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>South Africa’s recently announced economic recovery plan failed to break away from the cumbersome neo-liberal line.Mohammad Amir Anwar, Post-doctoral Research Fellow, University of OxfordLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/831672017-09-04T15:41:21Z2017-09-04T15:41:21ZHow South African business can help government fix the economy<figure><img src="https://images.theconversation.com/files/183977/original/file-20170830-29224-1kdzd3z.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>What business is willing to say to itself is as important, as what it says to government. Which is why the document, a contract with society, released by an organisation representing big business, <a href="https://www.ujuh.co.za/south-africas-big-business-embarks-of-fight-back-political-campaign/">Business Leadership SA’s Contract with South Africa</a> may be setting a new tone not only on how business deals with government but also how major economic actors deal with the economy’s problems.</p>
<p>When most commentators are asked how South African business should respond to government, the common response is that it should <a href="https://businesstech.co.za/news/government/172211/how-businesses-can-fight-back-against-the-sa-governments-junk-policies/">complain</a>, loudly and in public. This view has no doubt firmed since the March <a href="https://theconversation.com/south-africa-has-lost-a-key-line-of-defence-against-corruption-what-now-75549">cabinet reshuffle</a> damaged the economy and denouncing “white monopoly capital” became a refrain of the ANC’s patronage faction. Business, as the argument goes, should stand up for itself even if that means offending government.</p>
<p>But, while this approach makes great headlines and makes many people feel better, it does little or nothing to advance business interests or fix the economy. </p>
<p>Those who want business to shout at government seem to assume that this country has no history. But it does, and it is a history in which business is associated – and not only in the minds of patronage politicians - with the minority privilege which apartheid ensured. No one would use the phrase <a href="https://theconversation.com/white-people-in-south-africa-still-hold-the-lions-share-of-all-forms-of-capital-75510">“white monopoly capital”</a> if it did not seem to describe the world in which many black business and professional people feel that they live.</p>
<p>This makes the relationship between business and government more difficult than in most other countries. It also means that politicians cannot afford to be seen to be ordered about, by business. After all, what better way to confirm that “white monopoly capital” rules us all than to insist that business people tell politicians off in public? </p>
<h2>Yelling is not the solution</h2>
<p>Yelling at government is not helpful to the economy because it keeps alive the myth that its difficulties are caused by government alone. But, as very mainstream figures such as International Monetary Fund deputy MD <a href="https://www.businesslive.co.za/bd/opinion/columnists/2016-07-27-economy-bridled-by-high-number-of-excluded/">David Lipton</a> have pointed out, the fault is not government’s alone. Other economic actors, including business, have also contributed to the problem.</p>
<p>If businesses want a healthier economy, they need to look at what they can change as well as what the government can fix. This will undermine the “white monopoly capital” claim by showing that businesses are willing to change what they do as well as asking the government and other interests to change.</p>
<p>This is precisely what Business Leadership SA’s contract seeks to do. It feels as strongly about the “white monopoly capital” slur as others. It’s chief executive officer, Bonang Mohale, said at the contract’s launch that it hoped to undo the legacy “of the ugly and deceitful white monopoly capital campaign (which) sought to blame business for all the problems that beset this country”. He said the campaign was “dishonest”; it “tried to deflect from the real issues of state capture”. It had severely damaged business’s reputation. </p>
<p>All of this is music to the ears of the “give government a proper scolding” school. The key difference is that the organisation seeks to counter the campaign not simply by denouncing it but by <a href="https://theconversation.com/business-needs-to-change-and-stop-blaming-others-for-south-africas-ills-64942">taking responsibility</a> for fixing the problems which made the campaign possible in the first place. </p>
<h2>Problem is not just government</h2>
<p>The contract recognises that <a href="https://theconversation.com/south-african-business-must-own-up-to-its-part-in-the-corruption-scandals-81905">corruption</a> is a two-way process. It vows to root out corruption in the private sector too and wants companies to sign an integrity pledge, to fight corruption.</p>
<p>It also commits to fighting economic exclusion by creating jobs, encouraging and empowering senior black leadership, building skills, investing in communities and supporting small businesses.</p>
<p>Only after making these commitments does the organisation’s document say something about government. It says it cannot achieve these goals on its own. The government “must also step up” and create the conditions necessary for the country and economy to succeed.</p>
<p>This approach is more likely to dispel the “white monopoly capital” campaign than one which yells at the government. While those who coined the slogan will not be impressed, it’s not them to whom businesses are talking. Their audience is the tens of thousands of South Africans who have no axe to grind but want the economy to offer opportunities to more people. </p>
<p>The contract recognises the problem that undermines the image of large businesses as arrogant vehicles of power. By showing that they are sensitive to economic exclusion and those who suffer it offers to do something to solve the problem.</p>
<h2>Conversation is the key</h2>
<p>The document also creates opportunities for <a href="https://theconversation.com/hard-bargaining-not-another-magic-plan-will-get-south-africas-economy-growing-82471">mending the economy</a> by opening the way to a bargain between government, business and other economic interests. This is the essential route to change because none of the economic interests are strong enough to impose their favoured solution on the others.</p>
<p>By spelling out in broad terms a willingness to change, the contract enables politicians and government officials who do want to negotiate change to begin a discussion on the specifics. This promises to restart the <a href="https://theconversation.com/hard-bargaining-not-another-magic-plan-will-get-south-africas-economy-growing-82471">conversation</a> between government and business which was beginning to blossom during the later days of Pravin Gordhan (former finance minister) and Mcebisi Jonas (former deputy finance minister) at National Treasury.</p>
<p>It also makes negotiation possible by taking the three steps all the parties need to take to create a negotiation climate:</p>
<ul>
<li>it acknowledges that the economy needs to change, </li>
<li>spells out what business is willing to do to change it, and </li>
<li>what it expects in return. </li>
</ul>
<p>This opens the way for the other parties to do the same – if they do, the negotiations will have effectively begun and a way out of the economy’s dead end will be possible.</p>
<p>Business Leadership SA’s contract is hardly guaranteed to succeed. In the past, initiatives which depended on business and other economic interests making changes ran aground because business leaders, like the other negotiators, lacked the muscle to take those they represent with them. </p>
<p>It is not at all clear how many businesses are willing to follow Business Leadership SA’s approach. Nor is it clear if government and labour, whose participation is crucial, are willing and able to respond with their own bargaining positions.</p>
<p>What is clear is that the economy’s revival depends on the business strategy for change.</p><img src="https://counter.theconversation.com/content/83167/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Steven Friedman does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>South African business can beat back the toxic ‘white monopoly capital’ title by doing things differently and not by shouting from roof tops.Steven Friedman, Professor of Political Studies, University of JohannesburgLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/824712017-08-16T16:23:09Z2017-08-16T16:23:09ZHard bargaining, not another magic plan, will get South Africa’s economy growing<figure><img src="https://images.theconversation.com/files/181991/original/file-20170814-12098-1i26bjz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">South Africa's Finance Minister, Malusi Gigaba, needs more than the 14-point plan to revive the economy.</span> <span class="attribution"><span class="source">REUTERS/Rogan Ward</span></span></figcaption></figure><p>Finance ministers in today’s South Africa should be judged not by whether they have plans to rescue the economy themselves, but by their plans to get others to help them to do it.</p>
<p>South Africa’s new finance minister Malusi Gigaba recently unveiled a <a href="http://www.treasury.gov.za/">14-point plan</a> to revive the economy. He did this as part of his campaign to restore trust in the economy, partly damaged by the cabinet reshuffle in which he replaced a minister respected in the market place. </p>
<p>The plan has not achieved the desired effect – credit ratings <a href="http://ewn.co.za/2017/07/20/fitch-raises-red-flags-over-gigaba-s-14-point-plan">agencies</a> and <a href="https://theconversation.com/profiles/lorenzo-fioramonti-176997">commentators</a> have rejected it, labelling it a restatement of existing government commitments which will do little or nothing to grow the economy.</p>
<p>On one level, the complaint is accurate. Gigaba’s plan, like the governing African National Congress’s economic discussion <a href="https://theconversation.com/the-anc-isnt-ready-to-radically-transform-the-south-african-economy-75004">document</a>, fails to move out of the rut which currently hobbles the economy. It, too, assumes that the solution lies in doing what is currently being done better rather than in doing things differently.</p>
<p>In particular it has nothing to say about how to include millions who are shut out of the mainstream economy. It’s difficult to see how South Africa’s economy can achieve sustained growth until and unless this problem is addressed.</p>
<p>On another level, the complaint that Gigaba did not come up with a plan which will rescue the economy misses the point – that, given the balance of power in South Africa, no government plan could rescue the economy on its own. Government promises to revive the economy should be judged not on whether they tell the country that the government – on its own – has come up with a cure, but on whether it has a credible plan for ensuring that all the key economic actors play a role in negotiating change.</p>
<h2>Bargaining is the key</h2>
<p>Those who expect the government to solve the economic problems on its own believe, of course, that government created them on its own. In this view, South Africa’s economy worked well until politicians came along and damaged it. All that’s needed is for politicians to behave differently and the economy will again function as it should.</p>
<p>But growth levels are too low to offer a better life to all, and other obstacles which ensure that South Africans do not all enjoy rising living standards, didn’t emerge when the current president took office or even in 1994, when the governing party took over the reins. To take one example: unemployment began rising in the 1970s, a quarter century before apartheid ended. The economy has always excluded most people – what we see now continues patterns set decades ago.</p>
<p>The government obviously does have a role in addressing these problems. But it’s not the only source of the problem and so it cannot be the only source of a solution. Some of what business or labour or the professions or educational institutions do is also responsible for the problem. And so they all need to become part of a solution by changing some of what they do.</p>
<p>While this picture of all the parties coming together to work out solutions sounds attractive, getting them to the table is difficult. And finding solutions will be even harder because they are deeply divided on what the problems are, and so on what the solutions may be. </p>
<p>Any particular idea for change will force one or other party to give up something in order to reap dividends later. Naturally, they all think that the others should do the sacrificing. </p>
<p>So a process which placed the economy on a sustainable path would require some hard bargaining and would need to continue for quite some time. It’s this bargaining process, not a magical government formula, which will place the economy on a new growth path.</p>
<h2>Rebuilding trust</h2>
<p>The government clearly has a key role in triggering the process of bargaining. This is precisely what the National Treasury seemed to be doing under Gigaba’s predecessor, <a href="https://theconversation.com/firing-of-south-africas-finance-minister-puts-the-public-purse-in-zumas-hands-75525">Pravin Gordhan</a>. </p>
<p>Its attempts to stave off a downgrade by ratings agencies began an <a href="http://m.fin24.com/fin24/Economy/gordhan-to-showcase-sas-phenomenal-positives-to-rating-agencies-20170324">exchange</a> between government, sections of business and labour which may have developed into a negotiation about change. The chief priority for Gigaba – or any other finance minister – is to revive the process which ended when the <a href="https://theconversation.com/firing-of-south-africas-finance-minister-puts-the-public-purse-in-zumas-hands-75525">cabinet reshuffle</a> destroyed the trust which made it possible.</p>
<p>Gigaba’s plan does contain two points which might begin the revival. One is a commitment to a <a href="http://www.treasury.gov.za/comm_media/press/2017/2017071301%20Government%E2%80%99s%20inclusive%20growth%20action%20plan.pdf">financial sector summit</a>, the other a promise to resume talks on a <a href="https://www.iol.co.za/news/politics/new-mining-charter-will-be-a-disaster-for-industry--da-9806482">mining charter</a>. </p>
<p>Both may well fall short of what is needed. The summit idea repeats a flaw in government thinking on bargaining with business which has been evident for decades. It assumes that deep –rooted problems can be solved, and deep divisions healed, by a grand summit which gets the parties into a conference venue for a few days to hammer out a joint declaration. </p>
<p>This has been tried repeatedly and, each time, the declarations sounded good but were ignored. This is hardly surprising: precisely because the divisions are deep, they cannot be bridged at one event. Change is likely to need a process – not a summit. This should take as long as needed and concentrate on reaching agreement on what can be agreed, and building from there.</p>
<p>It is possible, however, that both initiatives could be the start of a productive process in which parties will be willing to negotiate changes which entail giving something up provided they get something in return. This is far more likely if this process too is not left to government alone. </p>
<p>Gigaba’s plans for negotiation may be improved, and so may move the economy towards growth which includes many more people. But only if commentators and interest groups treat them with the same seriousness they now reserve their hopes for a magic government plan to save the economy.</p><img src="https://counter.theconversation.com/content/82471/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Steven Friedman does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>South Africa needs to restore trust and effective bargaining mechanisms between key stakeholders to revive the ailing economy.Steven Friedman, Professor of Political Studies, University of JohannesburgLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/821792017-08-09T17:08:26Z2017-08-09T17:08:26ZSouth Africa’s economic recovery plan has a bit of everything - but no vision<figure><img src="https://images.theconversation.com/files/181351/original/file-20170808-22965-1qvsg4b.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The country needs a new economic strategy that puts small businesses at the core of the development strategy</span> <span class="attribution"><span class="source">REUTERS/Siphiwe Sibeko</span></span></figcaption></figure><p><em>South Africa’s new finance minister Malusi Gigaba has unveiled a <a href="http://www.treasury.gov.za/">14 point plan</a> designed to help the country fix its declining economic fortunes. Sibonelo Radebe of The Conversation Africa asked Lorenzo Fioramonti to weigh up the plan.</em></p>
<p><strong>How do you rate the recovery plan?</strong></p>
<p>The minister’s plan seems to want to include a bit of everything, from private sector’s involvement in struggling state owned enterprises to bringing down banking costs. </p>
<p>But unfortunately the plan has no vision. It’s a set of bullet points for day-to-day management of the status quo, which has been improperly presented as a ‘recovery plan’. Rather than having so many short-term action points that are unlikely to change the current economic predicament, I would like government to be much more outspoken about the structural conditions that are undermining sustainable and equitable development. </p>
<p>The plan looks a bit like a shopping list, lacking a coherent vision for the country. They seem mostly motivated by the short-term imperative of avoiding further credit downgrades and reducing the risk of skyrocketing deficit.</p>
<p><strong>What are the most encouraging points of this plan?</strong></p>
<p>I think it’s positive that government intends to tackle state owned enterprises and I’m sympathetic to the idea of leveraging public procurement to support small, medium and micro-enterprises (SMMEs). </p>
<p>I also welcome the indication of clear deadlines to achieve certain targets, but I’m very doubtful most of them will be met, especially given the volatility of the current political scene as well as the scale of corruption. </p>
<p>The emphasis placed on reforming state owned enterprises (SOEs) is a positive factor. But reforming SOEs means more than recapitalising them at every turn: it means establishing new governance rules for government and powerful economic interests. That’s much harder to achieve. </p>
<p><strong>What are the most critical things that are missing from it?</strong></p>
<p>The first priority is to support SMMEs not only through better procurement policies, but also by levelling the playing field in an economy that has been traditionally designed to support large corporate conglomerates, whether in mining, banking and or retail. </p>
<p>SMMEs must be better integrated into value chains. But if these remain dominated by big business, then small companies will only receive marginal profits, even when they are actually responsible for most of the production. To complement this value chain integration, we need policies that prioritise SMMEs in accessing public tenders directly and play a more leading role in delivering services on their own or through collaborative networks with other small businesses, thus outcompeting large corporations in some areas. </p>
<p>It is relatively easy to support the creation of black-owned big businesses, as our Black Economic Empowerment policies have done. But this will not transform the economy, let alone generate the kind of growth government keeps promising. </p>
<p>To do that, the country needs a new economic strategy that puts small businesses and especially artisanal production at the core of the development strategy, including building the necessary skills and entrepreneurial capacity. <a href="https://www.oecd.org/cfe/smes/2090740.pdf">Research</a> shows that SMMEs are the main drivers of growth and the best creators of jobs across the globe. </p>
<p>South Africa needs fewer shopping malls and more local markets. It needs more <a href="https://www.gibs.co.za/programmes/the-centre-for-leadership-and-dialogue/pages/social-entrepreneurship-programme.aspx">social entrepreneurs</a> and fewer CEOs. It needs less mining of natural deposits, which generates enormous <a href="https://cer.org.za/news/harvard-report-highlights-human-rights-costs-of-south-african-gold-mining">costs for society and the environment</a> to the advantage of large mining conglomerates, and more collection of metals and minerals lying in our landfills (the so-called e-waste), which can be effectively performed by SMMEs and artisans.</p>
<p>Against this backdrop, it’s high time we ask whether some state owned enterprises shouldn’t be completely overhauled rather than partially privatised. In fact, privatisation will simply replace a form of state-led monopoly with one driven by the private sector. </p>
<p>What the country needs is the end of monopolies, at least whenever possible. The state power utility Eskom is a case in point. The future is about <a href="https://mg.co.za/article/2016-07-29-00-aab-inaugurates-microgrid-in-south-africa-boosting-renewables-and-power-reliability">distributed energy systems</a>, whereby each and every firm and household can produce energy through renewable sources and exchange it through the grid. </p>
<p>In such a context, South Africa will no longer need a giant power utility. It will need an agile managing organisation facilitating exchanges across society, just like the Internet, which is managed by a <a href="https://www.icann.org/resources/pages/welcome-2012-02-25-en">non-profit</a> as a public good and no private or public entities own it – hence the concept of <a href="http://www.internetsociety.org/policybriefs/networkneutrality?gclid=Cj0KCQjw5arMBRDzARIsAAqmJezTm0o3hq9m2O9XKKswBfVEGejyi0wQeB0ryZIfDu5qxN7nwLxzJlgaAvOqEALw_wcB">‘net neutrality’</a>. </p>
<p><strong>How should key stakeholders, business, labour, civil society relate to it?</strong></p>
<p>I think many people are extremely suspicious of this government’s intentions. This is a pity because the country desperately needs cooperation in its development policy.</p>
<p>The lack of an overarching vision means that key stakeholders will probably continue promoting their sectoral interests, rather than uniting for a new social and economic ‘compact’. What the country needs is a nation-wide debate on where it wants the economy to go. </p>
<p>Does South Africa simply want to go back to the previous years, during which high economic growth co-existed with all sorts of social ills, from the AIDS pandemic to rampant inequality? Or does it want to move forward to a different economy, which can increase not only private profits but also social and environmental wellbeing, as I describe in my book _<a href="http://panmacmillan.co.za/catalogue/wellbeing-economy/">Wellbeing Economy: Success in a World Without Growth</a>? </p>
<p><strong>How do you see the chances of economic recovery going forward?</strong></p>
<p>I have indicated many times that <a href="https://theconversation.com/growth-is-dying-as-the-silver-bullet-for-success-why-this-may-be-good-thing-78427">low growth is the new normal</a>. We will not experience high growth rates in the next decade or so. </p>
<p>Potentially, this new normal will last for the entire century. So, any promise that growth is around the corner is simply delaying our capacity to innovate.</p>
<p>Rather than thinking about ‘big’ costly infrastructure, South Africa needs an integrated focus on how to optimise the use of resources it already has and minimise those forms of production and consumption that wreak havoc with the environment, ultimately costing so much money to the state and society.</p>
<p>Supporting small businesses and artisans requires fewer funds than subsidising large corporations. Small-scale interventions can bring more lasting benefits and activate positive feedback loops. </p>
<p>South Africa needs a new approach to service delivery founded on <a href="http://neweconomics.org/2008/07/co-production/">‘co-production’</a>, involving communities directly, thus creating opportunities to develop much needed artisanal jobs at the local level. </p>
<p>For this to happen, however, the country needs leadership. And I don’t see any of that coming out of the ruling party at present. To be honest, I don’t see much of that in the opposition parties either. Perhaps it will be happening at the local level, through some new initiatives by mayors, local businesses and civil society.</p><img src="https://counter.theconversation.com/content/82179/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Lorenzo Fioramonti does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>South Africa’s 14 point plan to achieve economic recovery lacks detail and vision of how the country is going to get itself out the prevailing economic crisis.Lorenzo Fioramonti, Full Professor of Political Economy, University of PretoriaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/820272017-08-08T19:43:45Z2017-08-08T19:43:45ZWhy South Africa shouldn’t turn to the IMF for help<figure><img src="https://images.theconversation.com/files/181015/original/file-20170804-2386-ro9o9n.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Two men sit at the roadside in the hope of being offered work. South Africa's unemployment is moving towards 30%.</span> <span class="attribution"><span class="source"> EPA/NIC BOTHMA</span></span></figcaption></figure><p>The view that South Africa should look towards the International Monetary Fund (IMF) to be rescued from the unfolding economic meltdown seems to be <a href="https://theconversation.com/south-africa-should-consider-help-from-the-imf-to-fix-its-economy-81701">growing by the day</a>. It has been touted in the most unlikeliest of places. Even the new Finance Minister Malusi Gigaba, a proponent of the so-called <a href="http://www.fin24.com/Economy/mps-grill-gigaba-on-radical-economic-transformation-20170509">radical economic transformation</a>, has expressed willingness to <a href="https://www.timeslive.co.za/sunday-times/business/2017-06-30-gigaba-may-need-to-seek-outside-help-to-get-economy-going/">engage the IMF</a>.</p>
<p>There is no doubt about the seriousness of South Africa’s economic crisis. The country entered a technical recession after the economy contracted in the fourth quarter of last year and <a href="https://theconversation.com/south-africas-in-a-recession-heres-what-that-means-78953">first quarter of this year</a>. Unemployment seems to be rising towards <a href="https://tradingeconomics.com/south-africa/unemployment-rate">the 30% mark</a>. </p>
<p>And global credit rating agencies are uneasy about South Africa’s economic prospects. After a spate of <a href="https://www.thesouthafrican.com/moodys-downgrades-south-africa-to-one-notch-above-junk/">downgrades early this year</a>, they have <a href="https://businesstech.co.za/news/banking/189281/sa-central-bank-under-increasing-political-pressure-moodys/">threatened further downgrades</a> which will take the country deeper into junk status.</p>
<p>While the South African situation is getting more desperate, which calls for desperate measures, the idea to turn to the IMF is a bad idea and must be dismissed. There are a number of reasons why I think this is the case.</p>
<p>First, historical evidence suggests that IMF administered rescue programmes are actually a <a href="https://www.cato.org/publications/speeches/why-imf-should-not-intervene">recipe for disaster</a>. They worsen rather than rescue the situation.</p>
<p>Second, to suggest that South Africa’s problems are financial in nature is a <a href="https://theconversation.com/how-corruption-is-fraying-south-africas-social-and-economic-fabric-80690">dangerous misdiagnosis</a>. It will distract the government from <a href="http://mobius.blog.franklintempleton.com/2017/03/16/south-africa-key-issues-and-challenges/">the critical issues</a> it needs to address which have little to do with the finances. </p>
<p>Third, one of the main driving factors of the current economic predicament is a loss of investor confidence. This is linked to other factors like policy uncertainty, political instability within the ruling party and mismanagement of public resources mixed with corruption. An IMF bailout won’t address these problems.</p>
<p>And lastly, hopping onto the IMF programme would disturb the country’s commitment to reforming the global multilateral financial world. South Africa is part of the BRICS bloc which is grooming a new and perhaps alternative multilateral development finance institution called <a href="https://theconversation.com/the-brics-plan-for-a-new-world-order-begins-with-a-bank-29251">New Development Bank</a>. If anything, South Africa must look to BRICS if it needs financial rescue. </p>
<p>I believe that the solutions to the country’s economic crisis are within. It needs internal discipline to address them – not an external force.</p>
<h2>Bad record</h2>
<p>The IMF does not have a good historical record. A view of the many countries which have subjected themselves to the IMF doesn’t inspire confidence. Instead of bailing out countries, it has created a list of countries suffering from debt dependency.</p>
<p>Of all the countries across the world that have been <a href="http://www.zerohedge.com/news/2013-07-06/41-imf-bailouts-and-counting-%E2%80%93-how-long-entire-system-collapses">bailed out by the IMF</a>:</p>
<ul>
<li><p>11 have gone on to <a href="https://www.cato.org/publications/congressional-testimony/international-monetary-fund-challenges-contradictions">rely on IMF aid</a> for at least 30 years </p></li>
<li><p>32 countries had been borrowers for <a href="https://www.cato.org/publications/congressional-testimony/international-monetary-fund-challenges-contradictions">between 20 and 29 years</a>, and </p></li>
<li><p>41 countries have been using IMF credit for <a href="https://www.cato.org/publications/congressional-testimony/international-monetary-fund-challenges-contradictions">between 10 and 19 years</a>. </p></li>
</ul>
<p>This shows that it’s nearly impossible to wean an economy from the IMF debt programmes. Debt dependency undermines a country’s sovereignty and integrity of domestic policy formulation. The debt conditions usually restrict pro-growth economic policies making it difficult for countries to come out of recession.</p>
<p>IMF’s poor record is partly influenced by the policy choices that it imposes on countries it funds. The IMF policy choices for developing countries, known as a <a href="http://www.whirledbank.org/development/sap.html">structural adjustment programme</a>, have been <a href="http://www.e-ir.info/2015/03/01/conditional-development-ghana-crippled-by-structural-adjustment-programmes/">widely condemned</a>. The main reason is that they insist on austerity measures which include; cutting government borrowing and spending, lowering taxes and import tariffs, raising interest rates and allowing failing firms to go bankrupt. These are normally accompanied by a call to privatise state owned enterprises and to deregulate key industries. </p>
<p>These austerity measures would cause great suffering, poorer standards of living, higher unemployment as well as corporate failures. The current technical recession would be magnified into a full-blown crisis, leading to even greater shrinking of investment. </p>
<h2>South Africa and the IMF</h2>
<p>South Africa has always been aware of the dangers of taking IMF money. In December 1993, five months before the country became a democracy, the National Party government, under the guise of transitional executive committee, signed an <a href="http://www.news24.com/elections/opinionandanalysis/how-mandelas-anc-sold-out-the-economic-struggle-20140422">IMF loan agreement</a>. </p>
<p>When the African National Congress (ANC) came to power after the elections in April 1994 it walked away <a href="http://www.news24.com/elections/opinionandanalysis/how-mandelas-anc-sold-out-the-economic-struggle-20140422">from the IMF offer</a>. Its concern was mainly that the IMF would undermine the sovereignty of the newly established democracy by imposing inappropriate, policy choices that would have further <a href="https://www.nelsonmandela.org/omalley/index.php/site/q/03lv01508/04lv01530/05lv01531.htm">harmed poor people</a>.</p>
<p>Over the past 23 years South Africa has stayed away from the IMF. There is no reason to change this. In fact there are more reasons today for South Africa to maintain its position.</p>
<h2>The BRICS factor</h2>
<p>South Africa is set to assume the rotational chair of the BRICS bloc in 2018. The BRICS bloc was formed, in part, to challenge, the dominance of western Bretton Woods institutions – the IMF and the World Bank. </p>
<p>It would be politically naive and economically counterproductive for South Africa to give itself to the IMF. It would undermine South Africa’s integrity and tarnish its place within the BRICS bloc. And it would undermine the idea that the BRICS’ New Development Bank can offer an alternative to the Bretton Woods institutions.</p>
<p>BRICS promises to yield real economic benefits to South Africa because it can leverage trade between the member countries as well as public and private investment from within the bloc. </p>
<h2>A better way to deal with the crisis</h2>
<p>Advancing any financial assistance to South Africa without addressing the current bad policies would not address the current economic turmoil. Rather, it would result in the country sliding deeper into debt.</p>
<p>And any assistance would be entrusted to a government that has created the crisis because of imprudent policies. The result would be an extension of the crisis because the pressure would have been taken off the government leaving the architecture of the meltdown intact. </p>
<p>What needs to happen is that policymakers need to turn their minds to the real problems. This can simply be done without a bailout.</p><img src="https://counter.theconversation.com/content/82027/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Misheck Mutize does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The idea that South Africa must look towards the International Monetary Fund to rescue itself from the prevailing crisis must be dismissed.Misheck Mutize, Lecturer of Finance and Doctor of Philosophy Candidate, Graduate School of Business (GSB), University of Cape TownLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/817012017-07-31T15:40:26Z2017-07-31T15:40:26ZSouth Africa should consider help from the IMF to fix its economy<figure><img src="https://images.theconversation.com/files/180185/original/file-20170728-23805-rg43no.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">shutterstock</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>The prognosis that the <a href="https://theconversation.com/south-africas-in-a-recession-heres-what-that-means-78953">South African economy</a> is in dire straits is pretty obvious even to the untrained eye. The solution to the country’s present predicament is also pretty much understood. The International Monetary Fund (IMF) has recently produced a comprehensive <a href="http://www.imf.org/en/Publications/WEO/Issues/2017/07/07/world-economic-outlook-update-july-2017">view</a> which deserves to be considered.</p>
<p>The IMF identifies three key ailments as causes of the country’s <a href="https://theconversation.com/south-africa-can-expect-zero-growth-its-problems-are-largely-homemade-62943">anaemic economic growth</a>. These are low consumer and investor <a href="https://tradingeconomics.com/south-africa/business-confidence">confidence</a> and policy uncertainty. </p>
<p>Continued slow growth should be a matter of grave concern and ought to be treated as an emergency. </p>
<p>Thus far the short and medium term <a href="http://www.imf.org/en/Publications/WEO/Issues/2017/07/07/world-economic-outlook-update-july-2017">outlook</a> suggests that growth outcomes will continue to be pedestrian. What is even more worrying is that over the past four years global economic growth has gained momentum, suggesting that the solution to South Africa’s vanishing growth lies in the country. </p>
<p>The new minister of finance, Malusi Gigaba, recently hinted that South Africa may be compelled to seek <a href="https://www.timeslive.co.za/sunday-times/business/2017-06-30-gigaba-may-need-to-seek-outside-help-to-get-economy-going/">assistance</a> from the IMF. I think the conditions are right for serious consideration of the proposal even though IMF programmes are not very popular with politicians. </p>
<p>There are a number of reasons for this. Requests for IMF assistance suggest that those who manage the domestic economy have failed. The fund’s programmes also come with clearly defined milestones, often described as “conditionalities”. But in most instances, these are well-intentioned and aimed at success. </p>
<p>It’s better to enter an IMF programme early before the situation becomes frantic. As medical doctors might argue, it is easier to deal with an ailment in the earlier stages before it reaches an advanced stage.</p>
<h2>Desperate situation</h2>
<p>The alternative to asking for help now would be continued poor growth outcomes which would have serious social and economic costs. </p>
<p>The country’s poor economic growth record spawned a number of problems. </p>
<p>A shrinking economy means tax revenue shortfalls. The fiscal policy response would be higher taxes or bigger budget deficits.</p>
<p>And then again, interest payments, the fastest growing government expenditure item, would grow even faster. Already, about 11 cents out of every rand goes into <a href="http://www.treasury.gov.za/documents/national%20budget/2017/review/FullBR.pdf">servicing public debt</a>.</p>
<p>As the economy shrinks, more and more income would have to be spent on interest payments. Government’s ability to provide a social safety net in the form of social grants and other services, like education and health care, would be much more constrained. The service delivery <a href="http://ewn.co.za/2017/05/19/opinion-protesters-echo-global-cry-democracy-isn-t-making-lives-better">protests</a> that have become increasingly the norm would become even more widespread as the fiscus comes under serious strain. </p>
<p>Ultimately, the brigade of the unemployed would bear the brunt. Of course, the employed would also suffer because slow growth affects incomes.</p>
<p>Low and anaemic growth dries out consumer confidence. Job losses and subdued growth in incomes as a result of poor growth outcomes and prospects chips away at consumer confidence. </p>
<p>South Africa’s growth performance post 2008 has been very low. Over the past 10 years, the economy recorded an average of <a href="http://data.worldbank.org/country/south-africa">2% growth per year</a>. If this continues it will take more than 30 years to double average incomes in South Africa. </p>
<p>But if the country can increase growth to 5% as projected by the <a href="http://www.gov.za/ISSUES/NATIONAL-DEVELOPMENT-PLAN-2030">National Development Plan</a>, it would take only 14 years to double average income. The higher the growth rate the shorter the time required to double incomes and bring people out of poverty. </p>
<h2>Investor confidence deficit</h2>
<p>The investor confidence deficit is largely as a result of ever increasing political risk, policy uncertainty and <a href="https://theconversation.com/south-africas-jacob-zuma-is-fast-running-out-of-political-lives-80009">wrangling</a> in the ruling party and lately revelations of alleged <a href="https://theconversation.com/how-corruption-is-fraying-south-africas-social-and-economic-fabric-80690">looting</a> of public funds by the political elite. </p>
<p>But not everything’s broken. The performance of the country’s <a href="https://www.brandsouthafrica.com/south-africa-fast-facts/news-facts/wef_global_competitiveness">monetary authorities</a> in the management of monetary policy is admirable. </p>
<p>Where there appear to be lapses is the asset and liability management of the National Treasury. And here, the <a href="https://theconversation.com/corrupt-state-owned-enterprises-lie-at-the-heart-of-south-africas-economic-woes-79135">massive losses</a> of state owned enterprises readily come to the fore. </p>
<p>This is a blot on the canvas of fiscal policy management. And the much touted structural reforms that are required haven’t been forthcoming because the government lacks the capacity to formulate and implement the appropriate policies. In fact, even if it designed the correct ones, the investor community has little faith in its ability to carry them through. </p>
<p>Hence, the need for an IMF programme. </p>
<h2>The IMF has the solution</h2>
<p>An arrangement would achieve a number of objectives.</p>
<p>Firstly, the fund could help the country formulate policies that would unblock the problems that continue to inhibit economic growth and job creation. The mere adoption of an IMF programme would help address the question of policy uncertainty. </p>
<p>Secondly, the IMF is well placed to provide foreign exchange loans, bringing stability in the rand foreign exchange rate market. This in turn would improve investor confidence, leading to more investment in the country. Economic growth would pick up and there’d be an improvement in consumer confidence. </p>
<p>An IMF programme would send a clear and unassailable signal to investors that the country was committed to pursuing a given set of policy options. And it would make the commitment appear credible.</p><img src="https://counter.theconversation.com/content/81701/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Matthew Kofi Ocran receives funding from the NRF. He is also affiliated with Nelson Mandela University as a Research Associate.</span></em></p>The International Monetary Fund’s view of how to fix South Africa’s economy deserves to be seriously considered.Matthew Kofi Ocran, Professor of Economics, University of the Western CapeLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/760402017-04-17T08:30:30Z2017-04-17T08:30:30ZThe markets can stomach a captured Treasury but South Africa’s poor will suffer<figure><img src="https://images.theconversation.com/files/165114/original/image-20170412-25888-1a4ahdc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">South Africa's cabinet reshuffle saw Malusi Gigaba become finance minister and Sifiso Buthelezi his deputy.</span> <span class="attribution"><span class="source"> REUTERS/James Oatway</span></span></figcaption></figure><p>The formal economy might find it a lot easier to live with a (partly) <a href="https://theconversation.com/firing-of-south-africas-finance-minister-puts-the-public-purse-in-zumas-hands-75525">captured</a> national treasury than many might imagine. This is bad news for people living in poverty who would then lack friends in high places to resist the capturers.</p>
<p>In trying to restore calm, after the <a href="https://theconversation.com/firing-of-south-africas-finance-minister-puts-the-public-purse-in-zumas-hands-75525">firing</a> of Finance minister Pravin Gordhan and his deputy Mcebisi Jonas, the spin doctors of the governing party, the African National Congress, say the markets will adjust. They point out that the appointment of previous finance ministers also spooked the markets, only to attract something close to hero worship once they settled in. Thus the new minister of finance, <a href="http://www.ujuh.co.za/zumas-cabinet-reshuffle-points-to-the-rise-of-malusi-gigaba/">Malusi Gigaba</a>, would also come to be loved by the markets.</p>
<p>Just about no-one believes them. Their reassurances do not gel with the understanding of everyone opposed to the change and even some who welcome it. The change in minister is widely seen not as the replacement of one politician by another but as the capture of the Treasury by a faction which is interested not in the health of the economy but in using public money to feed the <a href="https://theconversation.com/why-state-capture-is-a-regressive-step-for-any-society-56837">patronage networks</a> of a connected few.</p>
<p>At issue is far less the policies the new Treasury leadership will proclaim than the likelihood that they will relax controls which hamper patronage politicians and connected businesses. And so it’s widely assumed that the economy is now to be laid waste by <a href="https://theconversation.com/after-the-downgrade-south-africa-should-copy-brazil-and-impeach-its-president-75706">looting</a> which will place the market economy in great danger.</p>
<p>It’s hard to argue against much of this account. The only plausible reason for Gordhan and Jonas’s removal is their campaign to prevent public resources and state-owned enterprises serving particular private interests. There would be little point in courting a ratings downgrade and other upheaval unless the purpose was to ensure that Treasury didn’t stand in the way of those interests who Gordhan and Jonas were frustrating.</p>
<p>But the rest of the story is not self-evident. In principle, the view that the ‘captured’ Treasury leadership is certain to lay waste the marketplace and make war on the owners of capital may be far less obvious than it seems. The marketplace and a Treasury which gives a helping hand to special interests may tolerate each other far more readily than we are being led to assume.</p>
<h2>The economy will be hurt</h2>
<p>Before the argument is drowned in a wave of indignation, it’s important to stress exactly what this may mean. The new Treasury leadership is not the victim of prejudice. It’s likely to remove barriers to particular businesses and politicians which have prevented them <a href="https://theconversation.com/why-state-capture-is-a-regressive-step-for-any-society-56837">profiting</a> from the public purse. This will weaken the economy and delay movement towards much-needed changes. Even if a captured Treasury really wanted to discuss vitally necessary economic reforms, it’s unlikely that either business or labour would trust it enough to join the dance. </p>
<p>But, while the new leadership will not take the economy forward, it could serve its special interests while keeping in place enough of the current framework to enable markets to continue operating much as they do now. </p>
<p>Gigaba and his deputy Sifiso Buthelezi won’t stay there long unless they remove some of the obstacles which have frustrated the patronage faction. But they could choose to do this in a way which keeps the market economy ticking over much as it does now. Whether they can pull this off is unclear. But it’s far from impossible.</p>
<h2>Market and patronage can coexist</h2>
<p>There is a myth behind the expectation that a captured Treasury is certain to devastate the formal economy. The myth is that market economies function effectively only when everyone plays by the rules. In reality, market economies can co-exist with all manner of favouritism, patronage and even dodgy dealing.</p>
<p>Consider the <a href="http://www.theglobeandmail.com/report-on-business/international-business/asian-pacific-business/south-koreas-chaebol-problem/article24116084/">South Korea experience</a> which shows how markets can tolerate patronage politics. Every head of state who presided over the Korean economic miracle was jailed for corruption. The apartheid economy is another example of how markets can co-exist with a limited, but fairly high level, of <a href="http://www.sahistory.org.za/article/despite-1994-political-victory-against-apartheid-its-economic-legacy-persists-haydn-cornish-">patronage</a>.</p>
<p>One of the great ironies of the last years of apartheid is that left critics consistently denounced its ‘monetarist’ adherence to fiscal discipline when it was really awash with spending, much of it linked to connected insiders, which aimed to buy apartheid out of trouble. Formal business may have opposed this, but also lived with it far more easily than it might care to admit.</p>
<p>Therefore, the new political leadership can choose to be captured in a strategic way. They can give connected interests some of what they want while making sure that the basic financial architecture is kept in place. They may well ensure that business learns to live with them and adjusts to what they are doing.</p>
<p>A captured Treasury which operates in this way wouldn’t be trusted by business. But they might well put up with each other – and make deals with each other – to ensure that the economy keeps running. Decades ago, David Yudelman, then a Wits academic, published an important <a href="https://www.questia.com/library/3024101/the-emergence-of-modern-south-africa-state-capital">book</a> on this subject. It showed that, even when business and government dislike each other, they need each other and find ways to cooperate to keep the market economy afloat. If the new Treasury leadership plays its cards competently, it could prove him right yet again.
To many, this argument will seem too optimistic. It is, in reality, deeply pessimistic.</p>
<h2>The poor are on their own</h2>
<p>Whatever the capture of Treasury does or doesn’t do to the formal marketplace, it’s sure to make life even more difficult for the poor. The <a href="https://theconversation.com/the-real-risks-behind-south-africas-social-grant-payment-crisis-73224">social grants scandal</a> shows clearly how easily patronage politics produces arrangements in which the poor are sacrificed so that the insiders can enrich themselves. </p>
<p>Since the poor are also politically weak, the new Treasury is unlikely to worry much about them when it gives the green light to patronage deals.
Last time there was an attempt to capture the South African Treasury, poor people were saved because the organised interests in the market economy united to stop this. </p>
<p>But, if the new Treasury leadership do manage to respect the core market rules while turning a blind eye to insider deals which its political masters need, the poor are likely to find themselves once again on their own, as they so often are - left to their own devices while the economic insiders continue to look after their own interests.
The markets may just find a captured Treasury less of a threat than they imagined. The poor are unlikely to have any such luck.</p><img src="https://counter.theconversation.com/content/76040/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Steven Friedman does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>A captured South African Treasury is bad news for the country’s poor but the view that the capture is a natural enemy of the market economy is a myth.Steven Friedman, Professor of Political Studies, University of JohannesburgLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/757172017-04-06T09:20:29Z2017-04-06T09:20:29ZDowngrade: a wake-up call for South Africa to revisit key economic policies<figure><img src="https://images.theconversation.com/files/164251/original/image-20170406-6397-i29ju2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">South Africa's new Finance Minister Malusi Gigaba.</span> <span class="attribution"><span class="source">Reuters/James Oatway</span></span></figcaption></figure><p>South Africa is digesting the news of Standard & Poor’s (S&Ps) <a href="http://www.fin24.com/Economy/full-statement-sp-cuts-sa-to-junk-status-fears-political-risks-20170403">downgrade</a> of its state debt held in foreign currency following President Jacob Zuma’s March cabinet <a href="https://theconversation.com/stakes-for-south-africas-democracy-are-high-as-zuma-plunges-the-knife-75550">reshuffle</a>. As the country deals with that blow, two other credit rating agencies (Fitch and Moody’s) will soon hold forth. </p>
<p>Even if these agencies’ biases and competence <a href="http://debt-issues.blog.rosalux.de/files/2012/11/Bond-Berlin-paper-on-debt-and-uneven-development-in-contemporary-South-Africa.pdf">should be questioned</a>, it’s likely that further downgrades will lead to a meltdown of the currency.</p>
<p>This scenario would mirror the events of 1985 when then President PW Botha delivered his <a href="https://theconversation.com/south-africa-is-on-a-cliff-edge-just-as-it-was-in-1985-53094">crazed Rubicon Speech which caused</a> a $13 billion default. The foreign debt/GDP ratio hit 40%. Today it is nearly 50%. Botha was compelled to impose exchange controls. </p>
<p>As Zuma goes for broke, the main task ahead for South Africans is to renew the ideological debate over how to protect the currency and kick-start the economy – sensibly and without corruption.</p>
<p>The National Treasury and South African Reserve Bank could initiate a long overdue era of redistribution, racial justice and radical economic transformation. They would need to impose tighter exchange controls to protect the currency, lower interest rates, harness the power of state owned enterprises but without the recent corruption, and increase strategic state spending. </p>
<p>The new Finance Minister Malusi Gigaba <a href="http://ewn.co.za/2017/04/01/finance-minister-malusi-gigaba-radical-transformation">promised</a> to pursue at least one of these at his first press conference after being sworn in. He said that one of his key focus areas would be <a href="https://www.ft.com/content/b7f0766c-16cf-11e7-a53d-df09f373be87">to accelerate “radical economic transformation”</a>. Cynics might point out that he made his comments on April Fool’s Day. </p>
<h2>State owned enterprises</h2>
<p>Similar <a href="http://mg.co.za/article/2014-04-23-soapbox-radical-economic-change-should-be-the-focus-of-this-election">false promises</a> of transformative infrastructure left the country <a href="https://mg.co.za/?article/2014-05-02-soapbox-gigabas-pleasing-infrastructure-promises-soon-to-be-broken-in-durban">disappointed</a> during Gigaba’s role as Minister of State Enterprises between 2010 and 2014. Instead, he bought into the mania for mega-projects which either didn’t work or rewarded carbon-intensive multinational corporations: </p>
<ul>
<li><p>Eskom’s <a href="http://www.dailymaverick.co.za/article/2015-09-29-op-ed-chancellor-house-the-focus-of-hitachis-19m-sec-settlement/#.WAvyusmMSvk">corrupt</a> and <a href="https://www.dailymaverick.co.za/article/2017-04-02-op-ed-eskoms-electricity-surplus-and-self-inflicted-death-spiral/#.WOG3gmclGQw">unnecessary</a> <a href="http://www.fin24.com/Economy/Eskom/water-scarcity-and-pivot-away-from-carbon-riles-medupi-kusile-20160114">Medupi</a> and <a href="https://www.businesslive.co.za/bd/opinion/2016-12-14-cancelling-part-of-kusile-could-save-millions-and-advance-renewables/">Kusile</a> coal-fired power plants. </p></li>
<li><p>Its <a href="http://www.biznews.com/sa-investing/2016/09/23/eskom-unveils-plan-to-pay-for-nuclear-power-plants/">desired</a> R1 trillion in nuclear plants apparently <a href="https://www.businesslive.co.za/rdm/politics/2017-01-18-zuma-the-guptas-and-the-russians--the-inside-story/">pre-contracted</a> (liability-free) from <a href="http://www.news24.com/SouthAfrica/News/russian-nuclear-deal-places-massive-liability-on-south-africans-20170225?">Moscow’s Rosatom</a>. </p></li>
<li><p>Transnet’s climate-frying facilitation of an R800 billion <a href="http://www.mqa.org.za/sites/default/files/Sector%20Skills%20Plan%202015%20-%202016.pdf">plan</a> to export 18 billion tons of coal from Limpopo, Mpumalanga and KwaZulu-Natal and a <a href="https://www.pressreader.com/south-africa/the-mercury/20161114/281754153900981">R250 billion</a> Durban port-petrochemical expansion. </p></li>
<li><p>PetroSA’s R80 billion <a href="http://mg.co.za/article/2011-03-11-mthombo-a-white-elephant-in-the-making">Mthombo refinery</a>.</p></li>
<li><p>World Cup stadiums <a href="http://www.bbc.com/sport/0/football/14348193">now recognised</a> as white elephants after <a href="http://www.reuters.com/article/soccer-leaders-safrica-idUKLDE6951AC20101006">initial assurance</a> they would not be. Thankfully one of Pravin Gordhan’s last acts as Finance Minister was to halt <a href="https://www.dailymaverick.co.za/opinionista/2016-12-05-durban-should-quit-as-commonwealth-games-host-city/">the ridiculous</a> R6.4 billion Durban 2022 Commonwealth Games. </p></li>
</ul>
<p>Sports events aside, these mega-projects are mainly the foibles of state-owned enterprises which S&P singled out on Monday as its second reason – after political hijinks – for the rating <a href="http://www.fin24.com/Economy/full-statement-sp-cuts-sa-to-junk-status-fears-political-risks-20170403">downgrade</a>. </p>
<p>Of <a href="https://theconversation.com/public-enterprises-played-a-big-part-in-south-africas-credit-ratings-downgrade-75745">particular concern</a> are government guarantees used to underwrite public enterprise liabilities which the rating agency forecasts will reach R500bn by 2020. </p>
<p>If instead of mega-projects, Eskom and Transnet built renewable energy and cheap commuter rail transport, for example, radical economic transformation would make South Africa much more sustainable. But that would require a 180-degree turnaround.</p>
<h2>Why South Africa needs exchange controls</h2>
<p>Since Zuma won’t reverse either the cabinet reshuffle or his patronage tendencies, tighter exchange controls are the only way to prevent a debilitating raid on the currency. </p>
<p>Once two rating agencies downgrade South Africa’s local currency debt, the country will be dropped from the Citibank’s World Government Bond Index. As Sygnia’s Magda Wierzycka <a href="https://www.businesslive.co.za/bd/opinion/2017-04-06-will-downgrades-intensify-or-reverse-treasurys-neo-liberal-ideology/">warns</a>:</p>
<blockquote>
<p>If our rand-denominated debt is rated as junk by S&P and Moody’s, South Africa will be dropped from the index. Immediately on that happening, approximately $10-billion, or R137-billion, will flow out of the country.</p>
</blockquote>
<p>That could tempt the South African Reserve Bank to rapidly raise interest rates to protect the rand and restore financial inflows. Higher rates give investors a return needed to offset risk. It has taken drastic action like this before. In 1998 Governor Chris Stals <a href="https://books.google.com/books?isbn=1842773933">raised rates</a> by 7 percentage points within two weeks, as the currency crashed from R7/$ to R10/$. </p>
<p>Instead, a different strategy is needed to deter financial predators and gain the space to lower interest rates: <a href="https://theconversation.com/south-africa-needs-tougher-exchange-controls-before-junk-status-hits-68085">tighter exchange controls</a>. </p>
<p>South Africa already has some in place. Pension funds and other institutional investors must retain 75% of their assets in the domestic market. By <a href="http://www.biznews.com/sa-investing/2016/12/07/exchange-controls-junk/">all accounts</a> this saved South Africa during the last financial meltdown in 2008. </p>
<p>But more controls are needed. Foreign financiers are a fickle group. French bank Societe Generale, for example, recently <a href="http://www.fin24.com/Economy/political-risk-bring-it-on-say-investors-in-sa-debt-20170403#cxrecs_s">increased</a> its rand assets in search of high interest rates. Currently only two countries <a href="http://www.economist.com/indicators">are paying</a> more on 10-year government bonds than South Africa (8.9%) – Venezuela and Brazil.</p>
<p>With rates that high, financial markets are bound to be buoyed by speculative “hot money.” South Africa has the power to stop this from happening. It could, for example, penalise corporations and wealthy residents for taking money out. A similar arrangement, known as the “fin rand” existed between 1985 and 1995.</p>
<h2>Well-directed state spending</h2>
<p>Capitalism’s greatest-ever economist, John Maynard Keynes, <a href="https://www.mtholyoke.edu/acad/intrel/interwar/keynes.htm">insisted</a> that under circumstances of global financial volatility and economic stagnation, not only should exchange controls be imposed. Localised production and greater state spending would be necessary to overcome the private sector’s unwillingness to invest.</p>
<p>The danger everyone recognises, though, is that if Zuma’s new team did abandon fiscal austerity, it would not use additional resources wisely to support economy, society and environment: higher social grants, #FeesMustFall on university tuition, basic-needs infrastructure, reduction of women’s burdens, or a climate justice transition, as a few examples. </p>
<p>In any case, Gigaba has <a href="https://www.bloomberg.com/news/articles/2017-03-31/south-africa-s-gigaba-says-he-will-work-within-fiscal-framework">committed</a> to continuing the austerity drive. He aims to lower the 2019 budget deficit to just 2.6% of GDP: </p>
<blockquote>
<p>I will work within the fiscal framework as agreed by government and parliament. There will not be any reckless decisions.</p>
</blockquote>
<p>The problem for South Africa is that a mild-austerity fiscal framework was tried by Gordhan and failed to restructure the economy or boost growth. </p>
<p>Most neoliberals supporting austerity are expressing schadenfreude – happiness at someone else’s misfortune – because the downgrade is a good stick with which to whip Zuma. They aren’t particularly concerned about economic transformation, poverty or racial inequality.</p>
<p>Nor is Zuma apparently concerned about the economic risks the downgrade has just imposed on all South Africans - his first priority is political survival. </p>
<p>In the days ahead, an ideological debate is desperately needed to sort out society’s options. But the debate would need to transcend the current quagmire caused by both Zuma’s corruption and National Treasury’s capture by the ratings agencies.</p><img src="https://counter.theconversation.com/content/75717/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Patrick Bond does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>An ideological debate is desperately needed to sort out options South Africa could pursue to find a way out of its economic morass.Patrick Bond, Professor of Political Economy, University of the WitwatersrandLicensed as Creative Commons – attribution, no derivatives.